A major study of the functioning of five major carbon pricing systems has highlighted significant progress made in adopting market-based systems – while pointing to the need to further drive and optimise the design of such policies to accelerate emissions reductions and boost energy security.
The report – launched today by the International Chamber of Commerce (ICC) at COP27 – draws on industry experience operating under carbon pricing schemes in Canada, the European Union, Indonesia, New Zealand and South Africa. In doing so, it seeks to provide a roadmap for policymakers to enhance real-world functioning of market-based climate policies – and progressively drive international convergence amongst the growing patchwork of national regimes.
The report pinpoints four core frictions which typically limit the effectiveness of carbon pricing systems, specifically:
- Excessive complexity – inconsistencies with other climate-related policies or differences in federal and state level carbon pricing regimes ultimately result in increased compliance costs in the real economy.
- Unclear long-term price signals – while it is often appropriate for governments to introduce new regimes with low tax rates on emissions, it is vital for industry to have an indication as to how levies will increase in the future to make relevant investment decisions.
- Limited synergies between compliance and voluntary markets – making better use of high-quality voluntary offset systems could significantly boost mitigation efforts, particularly in jurisdictions that do not have the administrative capacity to implement compliance systems.
- Improving ‘whole of government’ policy coordination – policy makers must be encouraged to elicit positive synergies and ensure consistency between energy, climate, trade and taxation policies.
Wendy Miles KC, co-chair of the ICC task force which developed the report, said: “The ICC Carbon Pricing Principles, released last year in Glasgow, set out a clear baseline for the effective design of market-based policies. Our second phase of work now offers clear tools for policymakers to maximise the impact of carbon pricing mechanisms across different jurisdictions.”
Her ICC co-chair, Anna Theeuwes, continued: “ICC is grateful for the broad level of contributions we received for the report through our diverse and active membership – this represents the importance that carbon pricing continues to have. We hope this cooperation and knowledge sharing continues to bring together relevant insights and fosters an environment of capacity building, which can help to accelerate the introduction of efficient and sustainable carbon pricing mechanisms.”
The report also emphasises that governments may need to give further thought to the design of carbon pricing systems if high energy prices persist – including by examining options to limit disruption to energy systems and cushion the impact on retail consumers.
Raelene Martin, ICC Head of Sustainability, said: “Our report clearly shows the importance of engaging business in the design and optimisation of carbon pricing regimes – with the ultimate aim of achieving global net zero emissions at the lowest possible cost. We hope the ideas set out will serve as a basis for constructive dialogue with governments to strengthen the effectiveness of market-based policies given the urgency of the climate crisis.”
Download the ICC report: Critical Design Features for Effective Carbon Pricing – A Business Perspective.