Pricing carbon – a missed opportunity

As delegates convened for the annual UN Conference of the Parties (COP) climate summit in Bonn last month a new report from an international team of scientists estimated that 2017 emissions increasing by 2%, the first increase in three years. Increased coal usage is the key emission driver, catalysed by low reservoir levels in China reducing hydro output and higher natural gas prices in the US. And 2017 may not be an emissions blip, with the International Monetary Fund predicting global 2018 economic growth on a scale not seen since 2011. With 80% of new global energy infrastructure being fossil fuel plant there remains significant potential for further emissions growth.

Asia has long placed the emission reduction onus on the west, but in the two decades since Kyoto the mantra that the west should address its emissions integrity and not hinder the economic potential of the developing economies by levying emission constraints has morphed into an increasingly devalued platitude. Asia has started to address its climate integrity with all countries submitting their Nationally Determined Contributions as part of the UN Paris agreement, yet these NDCs risk being more aspiration than achievement without an effective process to reduce emissions.

As an historic observer of new market practices in North America and Europe, Asia is likely little wiser on the optimum process to reduce emissions. Market-based mechanisms, championed as an efficient reduction mechanism, have not proved their value with EU and US market derived carbon prices below $10/tonne inadequate as a financial penalty for emissions production.

Similarly in China, where the seven pilot emission trading schemes produced an average carbon price of just $3/tonne in November, while the launch of a national trading scheme is set to be delayed. China’s eagerly awaited national cap and trade programme, ambitiously announced at the 2015 UN Paris summit and expected to be formally launched by the year end, now looks like being a simulation process for the first two years with no real trading or compliance obligations. The first compliance deadline will likely be deferred until mid 2020 to cover annual 2019 emissions. With these delays, the recent government decision that financial institutions and intermediaries would be barred from participating at launch, and the acceptance that only those provinces that were technically prepared would have to participate in the scheme, its downgrading to a simulation process is not surprising. But it also raises a bigger question; are market-based schemes the correct approach to reducing emissions?

Singapore’s government, which will introduce a carbon tax in January 2019, rejected a market-based approach to pricing carbon, arguing that a tax would be simpler to implement and provide greater price certainty and transparency than a cap and trade scheme. For Southeast Asia’s most pro- trading economy to reject emissions trading reinforces a growing view that trading alone is an ineffective carbon pricing mechanism.

But Singapore’s planned carbon tax is also unlikely to provide the necessary financial incentives to reduce emissions output. While the actual tax level will not be confirmed until 2018 it is known that it will be uniform with a rate of S$10 – 20/tonne, which will add less than S$5/MWh to tariffs. If Singapore’s government is sincere in wishing to incentivise reduction it needs to impose a progressive tax that increases annually and correlated with emission output, similar to tax levels on auto emissions.

With the apparent delay to actual carbon trading in China, and another year until Singapore’s carbon tax is introduced, both governments could do worse than follow the carbon price debate in Germany, Europe’s largest economy and dependent on coal- fired generation, with growing calls for introduction of a carbon price if it wants to meet its 2020 emissions reduction target.

Last month an independent commission chaired by professor Andreas Löschel of Münster University concluded the price of carbon as set by the EU ETS is too low to enable a structural shift away from carbon- intensive coal-led generation in favour of natural gas plants. Citing the example of the UK, where a minimum carbon price has made coal uncompetitive with natural gas, the panel says that implementing a German carbon price would also improve the competitiveness of low-carbon generation compared to conventional fossil fuel plant with the resultant increase in wholesale power prices also reducing the burden of the renewable energy surcharge to consumers.

On their own, neither trading nor taxation provide an equitable solution to carbon pricing; trading is based on government set caps that create temporary demand while taxation can be too subjective. But in combination, and within a transparently regulated market, a hybrid trading-taxation model could provide an equitable carbon pricing process and an effective financial incentive. Such a model could work well in Asia, where most governments seek market control but are also sufficiently pragmatic to accept the need for market-related pricing transparency to attract the foreign investment required to maintain economic development and improve social prosperity.

Over a decade of carbon trading and taxation experience in Europe and North America has failed to produce the optimum carbon pricing model, but there is an opportunity for Asia to provide some carbon pricing direction given its dependency on fossil fuels, its rich renewable resources, its heightened climate risks, and its need to maintain robust economic growth.

China’s emission trading ambitions started with such promise, with seven pilot schemes offering different market options, but it may now be another victim of aspiration bowing to risk-averse state control, while Singapore could have put forward a progressive carbon tax with the flexibility to evolve into a traded instrument. If Asia is to develop a secure and sustainable energy infrastructure it needs carbon pricing. It is therefore disappointing that the two Asia economies that could have developed a forward-looking carbon pricing model that learned from, and improved on, the previous decade’s experience have so far failed to deliver. 

Jeremy Wilcox is managing director of the Energy Partnership*, an independent Thailand-based energy and environment consulting firm.