22 June 2022

UNEP FI: Carbon pricing policy instruments need a radical redesign and competent implementation

... a new position paper by the UN-convened Net-Zero Asset Owner Alliance argues that carbon pricing must be supported by a mix of policy instruments including international coalitions to provide predictable price signals to businesses and ensure a just and equitable transition for consumers.

Ahead of the G7 Leaders’ Summit in Berlin (26-28 June), a new position paper by the UN-convened Net-Zero Asset Owner Alliance argues that carbon pricing must be supported by a mix of policy instruments including international coalitions to provide predictable price signals to businesses and ensure a just and equitable transition for consumers.

Carbon pricing has the potential to accelerate the low-carbon transition across a wide range of sectors, markets and businesses. But blunt, poorly designed instruments can have regressive impacts, such as carbon leakage across borders and a disproportionately negative impact on lower income earners when revenues are poorly distributed,  the Alliance warns.

The five guiding principles offered by the paper [see Notes to Editors] call for enabling conditions to build momentum for effective carbon pricing, ratcheting up the share of global GHG emissions that are covered by pricing mechanisms. Best practice in carbon pricing design includes international cooperation in the form of ‘climate clubs’, effective CBAMs (Carbon Border Adjustment Mechanisms) to limit freeriding, pricing systems that have appropriate coverage and ambition, and complementary policies such as higher investment in abatement R&D and the removal of fossil fuel subsidies that counteract carbon prices. .

Predictable price signals create stable and reliable incentives for investors, companies and consumers to adopt or develop low-emission technologies and practices. Meanwhile, market stability measures, such as the binding price corridor proposed by the Alliance last year, minimise price volatility.

Günther Thallinger, Board Member, Allianz SE and Chair, UN-convened Net-Zero Asset Owner Alliance, said:

“The sharp rise in energy prices is putting enormous stress on households and the business sector. Continued government support and relief is needed to bridge these difficult times. Yet, in addition to better managing the near term, we also need to better position ourselves to avoid this happening again in the future.

Accelerating the shift to net zero is essential in this regard. Structural change will need policy incentive, such as carbon pricing. These take time to implement and should not be delayed. This report sets out five design principles for the challenging times that we live in.”

If designed well, carbon pricing policy can not only drive decarbonisation in the real economy, but also minimise the negative distributional impacts on communities and households, thereby enabling a more just and equitable transition. Revenue recycling, for example, can be used to subsidise energy bills or help reskill workers in emission-intensive sectors.

Governments should also promote international cooperation on carbon pricing in several ways, including through the mechanisms outlined under Article 6 of the Paris Agreement, ETS linking and climate clubs. Positive incentives may include knowledge and technology sharing, financing and trade gains, while penalties could include CBAMs.

UNEP FI

© UNEP