Accelerating the Energy Transition Through Carbon Pricing Instruments


Accelerating the Energy Transition Through Carbon Pricing Instruments

Carbon pricing plays an important role in driving corporate emission reductions. (Source: Medium)

01 July 2021 – by Eric Koons   Comments (0)

The National Paris Agreement has set goals that take serious work to achieve. Carbon pricing is playing a key role in facilitating this transition.  A Carbon pricing instrument can come in various forms and essentially require greenhouse gas (GHG) emitters to pay for their emissions. The tool incorporates both emission levels and the external costs associated with GHG emissions (e.g. crop damage).

The price set on emissions has incentivized companies to transform and reduce their GHG emitting activities. Furthermore, they are also trying to find ways to offset their carbon footprint.

Carbon Emissions: What Are Some Measures That Can Help?

Examples of carbon pricing instruments include emissions trading systems (ETS), carbon taxes, carbon offset mechanisms, results-based climate finance (RBCF), and internal carbon pricing.

Globally, the adoption of carbon pricing has been increasing. This has caused a significant uptick in associated benefits such as emissions reductions and increased government revenues.

In 2020, 61 carbon pricing initiatives were implemented or scheduled for implementation. This is a large difference from the 19 in 2010. This covered 22% of global GHG emissions in 2020.

Graphic of 2019: a significant amount of countries had carbon pricing initiatives in place.
Countries with carbon pricing initiatives as of 2019. (Source: Forbes)

What is Internal Carbon Pricing?

Because carbon policies vary vastly country to country, many companies are taking carbon pricing into their own hands. Internal carbon pricing is a practice that allows companies to put a value per ton of carbon they emit, Internal carbon pricing is not compulsory nor bound to carbon emissions regulations. However, carbon pricing is an important component to think about for future investments and general competition in a lower-carbon future.

Carbon Pricing Instrument Towards Driving a Clean Energy Transition

In Europe, carbon pricing instruments have helped reduce the growth of the coal-fired power sector. Specifically, in 2019 it led to an 8.3% emissions reduction from the sector. That same year, government revenues from carbon pricing initiatives were over USD $45 billion, of which nearly half were dedicated towards environmental and development projects.

Some carbon pricing instruments have been developed to support specific outcomes. Specifically, these focus on health, biodiversity, resilience, water retention, and habitat protection.

Incentivising New Clean Energy Technologies

Carbon pricing instruments also have the benefit of promoting contributions made towards developing and adopting clean energy technologies. In the European Union, when the carbon price was approximately €30/ton, patents for renewable energy technologies and carbon sequestration increased by 30%. Similarly, the state of New York recently adopted a carbon price instrument that has shown similar renewable energy investment trends.

graphic from zurich bank on low-carbon investments

The Challenge Associated with Carbon Pricing

Even though carbon pricing has shown significant success, challenges do still remain.

These challenges mostly relate to carbon leakage, policy alignment issues, and how to effectively spend the revenues generated.

  • Carbon leakage occurs when a GHG emitter relocates their carbon-intensive activities to a location which has relatively less, or no carbon pricing instruments in place.
  • Political challenges include ensuring that the pricing of carbon is efficiently aligned with other existing policies.
  • Revenues can face expenditure challenges related to preferential treatment of groups, lack of clear returns, and carbon price efficacy issues.

To address these challenges, guidance on carbon pricing has been published by the World Bank’s Partnership for Market Readiness for a wide variety of stakeholders.

The Perfect Storm for Clean Energy Investors

Overall, efficient carbon pricing creates benefits and opportunities for an array of stakeholders. Notably, these include governments, businesses, and clean energy investors.

Carbon Pricing and Policy

By incorporating carbon pricing into policy tools, governments can address their GHG-related external costs, increase revenues, and contribute towards their GHG emission reduction goals. Businesses benefit by becoming more competitive with carbon-intensive industries, effectively taking advantage of clean energy-related incentives in their regions. The combined public and private benefits create financing opportunities for clean energy investors, providing carbon offsets and clean energy solutions.

quote on carbon pricing instrument importance

by Eric Koons

Eric is a passionate environmental advocate that believes renewable energy is a key piece in meeting the world’s growing energy demands. He received an environmental science degree from the University of California and has worked to promote environmentally and socially sustainable practices since. Eric’s expertise extends across the environmental field, yet he maintains a strong focus on renewable energy. His work has been featured by leading environmental organizations, such as World Resources Institute and Hitachi ABB Power Grids.

Read more

Related Articles

See all
ASEAN Energy Transition: The Role of LNG
The Role of Coal in Asia
Renewable Energy Growth and Plunging Costs Make the COP28 Target Possible
Tripling Renewable Energy Capacity Is Possible, But 2023 Didn’t Help

Most Popular

See all
Renewable Energy in the Philippines – Current State and Future Roadmap
The Growth of Renewable Energy in Indonesia 2022 – Current State, Opportunities and Challenges
The Proposed Vietnam PDP8 Update and the Risks From the Coal Pivot
Renewable Energy in Bangladesh 2022 – Current Trends and Future Opportunities

Energy Tracker Asia Newsletter

Become a subscriber of our newsletter and get the latest news on investments in coal, gas, and renewable energy in the region.

  • By clicking Sign Up, you consent to receive emails from Energy Tracker Asia. We won’t distribute your email address to any third party at any time. If you are under 16 years of age, please get consent from your parents or guardian first. You can unsubscribe any time. View our Privacy Policy.

  • This field is for validation purposes and should be left unchanged.