Critical Design Features for Effective Carbon Pricing

In the context of the current geopolitical situation and the energy crisis, the International Chamber of Commerce (ICC) recognises the imperative for governments to make short-term interventions to safeguard energy security and affordability. However, business is clear that effective climate action must be mainstreamed in the long-term economic response to both the Ukraine crisis and the lasting effects of the Covid-19 pandemic.

At our current trajectory, global temperatures will rise 3.2°C by the end of this century according to the Intergovernmental Panel on Climate Change (IPCC) latest reports. The most recent United Nations Climate Change report shows countries’ increased climate mitigation efforts, but also underlines that current national plans remain insufficient to meet the Paris Agreement goals.

Carbon pricing has long been recognised as a cost-effective means to reduce greenhouse gas (GHG) emissions and achieve countries’ Nationally Determined Contributions (NDCs). While not the ultimate solution, carbon pricing is increasingly considered as an important part of the toolkit available to policymakers to achieve current NDCs at the least cost, scale up much needed investment for climate mitigation and adaption efforts and encourage greater ambition in the future.

Predictable, effective and smartly designed carbon pricing as well as a coherent and consistent international approach are critical to unlocking the full environmental and economic benefits of market-based policies. The ten key carbon pricing principles that ICC launched at COP26 in Glasgow in 2021 set out an essential foundation for the convergence required to meet this goal.

ICC, as the institutional representative of 45 million companies, reaching more than 170 countries, and as the official UNFCCC Focal Point for Business and Industry, has a key role to play in contributing business perspectives to ongoing developments in this space and, in particular, at COP27, where governments will grapple with many of these challenges.

It is for this reason that ICC has drawn on the experience of its extensive global network of members to develop further work on the smart design of carbon pricing mechanisms, which should provide a helpful basis for governments to draw from when developing and implementing national systems to reduce carbon emissions.

A technical working group focused more specifically on the practical elements and design features for carbon pricing mechanisms, also taking into account further technical discussions on Article 6 of the Paris Agreement and its operationalisation. In that context, it examined five case studies to determine key design features that governments could consider when developing effective carbon pricing mechanisms. These case studies include Canada, New Zealand, the European Union Emissions Trading System (EU ETS), Indonesia and South Africa.

ICC engaged with various stakeholders, including government and business representatives and academia, and carefully assessed the selected case studies through the lens of the foundational ICC Carbon Pricing Principles and with a view to determine key design features and their significance for governments seeking to implement new carbon pricing mechanisms or improve existing measures.

This approach enabled ICC to align isolated design features with the ICC Carbon Pricing Principles, identify features that provide needed investment incentives and are effective at driving emissions reductions, and determine areas for further reflection. The insights in this report provide additional, concrete best practices to consider when designing pricing instruments.