World Bank Announces New Carbon Pricing Initiative

By Michael Green

On Tuesday morning the World Bank, along with governments and business leaders, announced a new global initiative: the Carbon Pricing Leadership Coalition. Jim Yong Kim, president of the World Bank, announced the coalition in a statement. Highlighting the pros and cons, Mr. Kim said: “We … recognize carbon pricing is not an easy policy to implement.  Experience, though, shows us that it can deliver dividends.

Economists and businesses have been discussing carbon pricing in the build-up to the COP21 climate talks, but a carbon fee might not be on the negotiating table. Christiana Figueres, executive secretary of the UNFCCC, has said that carbon pricing will likely not be included in the final climate agreement. “We already have a strong carbon price signal,” Figueres said. 

Today, carbon pricing mechanisms already cover around 12 percent of total emissions, with 40 nations and 23 cities, states and regions participating. Even more countries and provinces are stepping forward with their own proposals. But the business community has a different perspective on the issue, with small business as well as some of Europe’s largest oil companies speaking out in support of stronger carbon pricing.

Why are businesses lining up in support of a carbon fee? They know that the world needs a plan to address emissions, and putting a price on carbon is not only cost effective, but also predictable. It sends clear price signals to industries, businesses and consumers about the real costs of climate change, giving them the opportunity and incentives to adjust to a low-carbon economy. A price on carbon provides a transparent and predictable path for investments that will help mitigate climate change.

In the United States, businesses have begun to band together in support for local and national carbon pricing efforts. States including Oregon, Washington, Vermont, New York, Rhode Island and Massachusetts have carbon pricing proposals.

At the national level, U.S. Sen. Sheldon Whitehouse (D – R.I.) has proposed a U.S. economy-wide carbon fee.

“Revenue-neutral carbon pricing isn’t about growing the size of government. Nor does it involve direct regulation,” the senator said when reached for comment. “The idea is so ‘market-based. So, respectful of individual choice, it’s won the support of Greg Mankiw, chair of the Council of Economic Advisers under President George W. Bush and advisor to Mitt Romney during his 2012 presidential campaign.” State Sen. Michael Barrett (D – Lexington) is the sponsor of a carbon pricing proposal in Massachusetts. The proposal has seen wide business support from a diverse range of industries, including the financial sector, technology services, and construction.

To our north, the four most populous Canadian provinces by 2017 will all have some form of a carbon pricing scheme. British Columbia has had one in place since 2008 that has had astounding results, and Quebec in 2014 opted into the California cap-and-trade program. Canada’s most populous province, Ontario, announced this year that it will start its own cap-and-trade program. And even Alberta, home to vast amounts of tar sand oil, just announced its own economy-wide, revenue-neutral price on carbon.

But critics of carbon pricing have concerns over its practicality. For one, calculating an exact price for emissions is complicated. It requires complex environmental and economic models that need to be constantly updated to reflect new information. The countries and businesses use a wide array of estimates: Sweden put it at $168/ton; the U.S. government estimate is $38/ton; and Exxon-Mobil uses $60/ton.

This is why economists suggest a more general approach. Models can assess how a particular price can affect global emissions. Therefore the strategy is then to identify a temperature target and use the price that would reach that goal. But the only way this can be done is if world leaders come together and decide that they want carbon pricing on the table.

Carbon pricing makes sense: It is a simple mechanism that both businesses and consumers can understand. We are still going to need investment and commitments, technology transfer, and a global dialogue to reach our goals. But If we as a global community are going to keep global temperature rise below 2 degrees Celsius, then we need drastic action. A carbon price is not projected to get us all the way there, but it is the single best step we can take towards a climate change free future.

Image credit: Flickr/Moyan Brenn