96602 CARBON PRICING WATCH 2015 An advance brief from the State and Trends of Carbon Pricing 2015 report, to be released late 2015 At a glance – recent key carbon pricing as illustrated in Figure 2. Together, the carbon pricing instruments in these jurisdictions cover about half of their developments emissions, which translates into approximately 7 GtCO2e, Globally, 2014 was the warmest year on record1 and or about 12 percent of annual global GHG emissions.6 temperatures are now 0.8°C above pre-industrial levels.2 This figure represents a threefold increase over the past Even at this relatively low level of warming, the earth decade.7 is showing the impact—more frequent occurrences of The total value of the emissions trading schemes (ETSs) extreme heat and extreme precipitation, a drying trend in reported in the State and Trends of Carbon Pricing 2014 drought-prone regions, and increased tropical cyclone report was about US$30 billion (US$32 billion to be activity in the North Atlantic.3 The Intergovernmental Panel precise). Despite the repeal of Australia’s Carbon Pricing on Climate Change (IPCC) says that we need to reach Mechanism in July 2014, and mainly due to the launch zero net emissions by 2100 to stabilize climate change of the Korean ETS and the expansion of GHG emissions around the 2°C target above pre-industrial temperatures, agreed to by governments as the maximum acceptable coverage in the California and Quebec ETSs, the value amount of global warming.4 Carbon pricing is an essential of global ETSs as of April 1, 2015 increased slightly to piece of the path toward this decarbonization. about US$34 billion. In addition, carbon taxes around the world, valued for the first time in this report, are about Overview US$14 billion. Combined, the value of the carbon pricing Significant progress in carbon pricing has been made mechanisms globally in 2015 is estimated to be just over the last ten years, as displayed in Figure 1. In 2015, under US$50 billion.8 about 40 national and over 20 subnational jurisdictions, representing almost a quarter of global greenhouse 6 These numbers are revised on a regular basis to reflect updates gas emissions (GHG),5 are putting a price on carbon, in GHG emissions in each jurisdiction, changes in the design and coverage of existing carbon pricing instruments, inclusion of new 1 Temperature records began in 1880. Source: NOAA National Climatic instruments, and availability of data. Thus, these latest figures and the Data Center, Global Analysis - Annual 2014, accessed April 28, 2015, ones from previous reports are not necessarily comparable. https://www.ncdc.noaa.gov/sotc/global/2014/13. 7 In 2005, carbon pricing instruments covered 4 percent of annual 2 Source: World Bank, Turn Down the Heat: Confronting the New global GHG emissions. This figure has increased to 12 percent in Climate Normal, 2014. 2015. 3 Source: World Bank, Turn Down the Heat: Confronting the New 8 The estimated total value for ETS markets is based on each ETS’s Climate Normal, 2014. allowance volume for 2015, or the latest year available, multiplied by the 4 Source: World Bank, Decarbonizing Development: Three Steps to a allowance price on April 1, 2015. The estimated total value for carbon Zero-Carbon Future, 2015. taxes is based on official government budgets for 2015 where available, 5 The GHG of 39 national and 23 subnational jurisdictions represent or otherwise on the GHG emissions covered multiplied by the nominal about 23% of global emissions. carbon price on April 1, 2015. 2 Figure 1. Regional, national, and subnational carbon pricing initiatives: share of global emissions covered9 xxx9 9 Only the introduction or removal of an ETS or carbon tax is shown. Emissions are represented as a share of global emissions in 2012. Annual changes in global, regional, national, and subnational GHG emissions are not shown in the graph 3 Figure 2. Summary map of existing, emerging, and potential regional, national and subnational carbon pricing instruments (ETS and tax)10 xxx10 10 Carbon pricing instruments are considered “implemented” or “scheduled for implementation” once they have been formally adopted through legislation. 4 New regional, national, and subnational carbon pricing Finally, the political decision to replace Australia’s Carbon Pricing Mechanism with the Direct Action Plan, initiatives which retains offsetting but does not impose a cap on Notable developments in 2014 include the GHG emissions, and the further delay in linking the EU’s implementation of the pilot ETSs in Hubei and Chongqing and Switzerland’s ETSs, highlight the evolving nature of in China, carbon taxes in France and Mexico11 and the carbon pricing instruments as they are further aligned passing of carbon tax legislation in Chile. with broader national priorities. In addition, two new carbon pricing instruments entered Corporate carbon pricing into force on January 1, 2015: the Korea’s ETS and A number of policy makers in both developed and Portugal’s carbon tax. developing countries, together with business leaders, Existing regional, national, and subnational carbon continue to voice their support for the critical role of carbon pricing in achieving a global decarbonized pricing initiatives economy.13 The role of the private sector in carbon As new carbon pricing instruments emerge, already pricing is growing, with businesses increasingly existing national and regional instruments have been engaging on the topic. In addition, the adoption of further developed and refined. While industry protection an internal carbon price in business strategies is and the allocation of carbon pricing revenue spending spreading, even in regions where carbon pricing have been important topics in the carbon pricing has not been legislated. Currently, at least 150 discourse, structural reform is the top priority of the companies are using an internal price on carbon.14 European Union (EU) ETS agenda, the debate on These companies represent diverse sectors, the Market Stability Reserve (MSR)12 having reached including consumer goods, energy, finance, industry, consensus on a 2019 start date. manufacturing, and utilities. In addition, California and Québec successfully linked their ETSs and expanded their GHG emissions Looking ahead coverage to include transport fuels. China continued Carbon pricing will continue to be used as an instrument its preparations for the introduction of a national ETS, to reduce GHG emissions. This is underscored by which is expected to be launched in 2016. It will be several Intended Nationally Determined Contributions part of China’s mitigation strategy to reach its target (INDCs), which explicitly indicate that carbon pricing will of emissions peaking around 2030. In the meantime, be an element of their mitigation strategy. Furthermore, China’s seven pilot schemes have expanded in scope the EU has confirmed that its ETS will be the key and are exploring possibilities of cooperation with other instrument used to achieve its 2030 emission reduction regions. target. 11 For further details on France’s and Mexico’s carbon taxes, please refer to World Bank, State and Trends of Carbon Pricing, May 2014. 12 In February 2014, the European Commission decided to temporarily postpone the auctioning of EU ETS allowances, a process also known 13 The World Bank Group is supporting these developments with as “back-loading.” Following this change, the focus of the EU ETS initiatives such as the Carbon Pricing Leadership Coalition (CPLC) and structural reform agenda shifted to the need for greater price stability the Partnership for Market Readiness (PMR), among others. and predictability through flexibility of allowance supply in the EU ETS. 14 Source: CDP, Global Corporate Use of Carbon Pricing: Disclosures The proposed MSR was designed to achieve this goal. to Investors, 2014. 5 International carbon pricing update Clean Development Mechanism/Joint Implementation The declining market trend for Kyoto credits—Certified Advances at the international level have been modest. Emission Reductions – (CERs) and Emission Reduction The key objectives of the 20th Conference of the Parties units (ERUs) – continued in 2014. To date, EU ETS (COP20) to the United Nations Framework Convention on installations have used 1.45 billion CERs and ERUs20 Climate Change (UNFCCC), in December 2014, were (i) to help with their compliance obligations, or 90 percent to decide what information is required in the INDCs and of the total 1.6 billion allowed by the EU ETS between (ii) to consider the elements of the draft negotiation text in 2008 and 2020. The former number represents about preparation for COP21 in Paris. On both fronts, progress 60 percent of total Kyoto credits issued so far.21 The has been limited and the lack of pre-2020 ambition total residual demand for Kyoto credits between 2015 remains a challenge. The Doha Amendment to the Kyoto and 2020 in existing carbon pricing initiatives (such as Protocol is currently not legally binding since to date it the EU ETS) is expected to be minimal. On the other has been ratified by only 31 of the required 144 Parties.15 hand, the potential supply for the same period is still high.22 The lack of future demand is likely to lead to a Rather than formulate detailed requirements for the substantial reduction in the supply of credits,23 thereby content of the INDCs, the agreement reached in Lima preventing any significant price recovery from the made a series of recommendations.16 As of May 15, currently historically low prices. Furthermore, carbon 2015, Andorra, Canada, the EU, Gabon, Liechtenstein, market actors continue to exit the market.24 Mexico, Norway, Russia, Switzerland, and the United States – together accounting for approximately 30 In order to support the CDM and Joint Implementation percent of global GHG emissions – had submitted their (JI) through these difficult market conditions, recent INDCs. Based on preliminary findings by some market policy decisions have focused on the streamlining of analysts, further dialogue may be needed to make the project procedures and methodologies,25 the promotion INDCs consistent with a 2°C pathway. Several existing of voluntary CER cancellations,26 and new procedures INDCs explicitly indicate that carbon pricing will be an for voluntary deregistration of projects. As to the latter element of their mitigation strategy. In addition, Mexico’s item, if a project has been deregistered from the CDM, INDC stipulates that the emission reduction commitment it can seek alternative financing by generating offsets in could increase from 25 to 40 percent, subject to a national schemes, such as the offset mechanism used global climate agreement that asks for, among other by pilot ETSs in China.27 things, carbon pricing mechanisms implemented internationally.17 Results-Based Finance The Results-Based Finance (RBF) approach provides a In February 2015, the Ad Hoc Working Group on the project with financial support after its emission reductions Durban Platform for Enhanced Action (ADP), released the have been duly verified. Some RBF programs purchase negotiating text18 for an agreement at COP21, building on compliance emission reduction units, including CERs and the output of the Lima talks. The role of carbon markets in a future agreement is open for discussion, with six options proposed in this text.19 These range from explicit 20 Source: European Commission, Updated information on exchange definitions of market mechanisms, including definitions of and international credit use in the EU ETS, May 4, 2015, http:// an ETS and an enhanced Clean Development Mechanism ec.europa.eu/clima/news/articles/news_2015050402_en.htm 21 As of April 1, 2015, 2.4 billion CERs and ERUs had been issued. (CDM), to descriptions of accounting rules alone, to no Source: UNEP DTU CDM Pipeline, accessed April 30, 2015. provisions at all for market mechanisms. Formal talks on 22 Based on data obtained from Thomson Reuters Point Carbon and the negotiating text will resume in Bonn in June 2015. CDC Climat for the State and Trends of Carbon Pricing 2014 report, full potential for CER and ERU issuance between 2014 and 2020 was estimated at 3.5-5.4 GtCO2e. Also, UNEP DTU Partnership estimates total issuance of CERs until 2020 to be about 11 GtCO2e (nominal 15 As of May 15, 2015, the following Parties had ratified the Doha value). Source: UNEP DTU CDM Pipeline, accessed April 30, 2015. Amendment: Bangladesh, Barbados, Brunei Darussalam, China, 23 Projects incur operational and regulatory costs to generate credits. Comoros, Congo, Djibouti, Ecuador, Grenada, Guyana, Honduras, Without a strong signal of demand for those credits, project developers Indonesia, Kenya, Liechtenstein, Marshall Islands, Mauritius, Mexico, are expected to reduce or discontinue their mitigation activity in some of Micronesia, Monaco, Morocco, Namibia, Nauru, Norway, Palau, Peru, those projects. Singapore, Solomon Islands, South Africa, Sudan, Tuvalu, and United 24 For example, SGS withdrew from the validation and verification Arab Emirates. Source: Doha Amendment to the Kyoto Protocol, business in June 2014; in April 2015, Standard Bank closed its carbon accessed May 15, 2015, https://treaties.un.org/Pages/ViewDetails. desk, and Bunge announced it would close Climate Change Capital. aspx?src=TREATY&mtdsg_no=XXVII-7-c&chapter=27&lang=en. 25 Source: IETA, Lima COP20 Summary, 2014; Thomson Reuters, Year 16 Source: Center for Climate and Energy Solutions, Outcomes of the in Review and Outlook: Asia on the Rise, January 2015. UN Climate Change Conference in Lima, 2014. 26 Source: Thomson Reuters, Same Same but Different - Progress within 17 Source: Mexico, INDC, 2015. Reach in Lima COP? December 9, 2014. 18 Source: UNFCCC, Negotiating Text, February 25, 2015. 27 Source: Thomson Reuters, Same Same but Different - Progress 19 Source: UNFCCC, Negotiating Text, February 25, 2015. within Reach in Lima COP? December 9, 2014. 6 Figure 3. Prices of existing carbon pricing instruments28 xxx28 28 Prices on April 1, 2015. 7 ERUs,29 helping to bridge the current lack of demand for GHG emissions by 40 percent with respect to the these units. Other programs not designed for compliance 1990 emission level.35 An ETS bill is currently being markets also use RBF as a direct funding mechanism.30 considered by the Washington State legislature.36 If implemented, this is expected to price carbon at around Regional, national, and subnational carbon US$12 per tCO2e, starting in 2016.37 pricing update On April 13, 2015, Ontario announced its intention to implement an ETS linked to California and Québec’s Carbon pricing has been implemented or is scheduled Cap-and-Trade Programs.38 Ontario also signed a to commence in almost 40 national and over 20 Memorandum of Understanding with Québec to subnational jurisdictions, as displayed in Figure 2. As collaborate on market mechanisms, as well as to shown in Figure 3, the prices observed vary widely and harmonize GHG emissions reporting. Alberta’s Specified reflect the national or regional context of the instrument Gas Emitters Regulation expires on June 30, 2015. No in question. Prices have shown little movement over the announcements have been made on the future of the past year. program. However, the options under consideration Governments commonly use funds raised through include expanding the scope of coverage, raising the carbon taxes and the sale of allowances in ETSs to lower carbon price, and increasing the emission reduction other taxes on businesses and households or to finance requirement. British Columbia’s carbon tax remains at emission mitigation projects. In 2014, it is estimated that the 2012 level of C$30 (US$25) per tCO2e. over US$15 billion31 was raised in government revenue in this manner, a figure 50 percent higher than the US$10.2 Looking ahead, the United States (through its INDC) billion currently pledged to the Green Climate Fund.32 has committed to a 26–28 percent reduction in GHG This highlights the potential to generate significant emissions from the 2005 baseline level by 2025. revenue streams through these means. Individual states have the flexibility to choose their own compliance mechanisms, including emissions trading, Further details on key developments in carbon pricing efficiency measures, and increased deployment of over the past year are presented below.33 renewable energy. The United States Environmental Protection Agency (EPA), under its Clean Power Plan Canada and the United States (CPP), enables emissions trading and other types of In the absence of national carbon pricing instruments cooperation between states by allowing multi-state in Canada and the United States, ETSs are being approaches to compliance. The CPP has received developed in California, Québec, and the Regional support from officials representing the California Cap- Greenhouse Gas Initiative (RGGI) states. The California and-Trade Program and the RGGI. and Québec Cap-and-Trade Programs officially linked up in January 2014, and the first shared auction Chile took place in November 2014. The scope of both In September 2014, the Chilean parliament approved a programs was enlarged in 2015 to incorporate transport carbon tax of US$5 per tCO2. Starting in 2018, this tax fuels. This extended the coverage from about 35 to will be applied to power generators with a thermal plant 85 percent of California and Québec’s total GHG capacity greater than 50 megawatts.39 emissions. Legislators in California are expected to debate the size of the 2050 cap in the 2015 legislative session, which ends in September.34 This follows 35 Source: Office of Governor Edmund G. Brown Jr., Governor Brown California’s announcement of a 2030 target to reduce Establishes Most Ambitious Greenhouse Gas Reduction Target in North America, April 29, 2015, http://gov.ca.gov/news.php?id=18938. 29 Examples include the Carbon Initiative for Development (Ci-Dev) 36 Source: Washington State legislature, Implementing a Carbon and the Pilot Auction Facility for Methane and Climate Change Pollution Market Program to Reduce Greenhouse Gas Emissions., Mitigation (PAF). accessed May 1, 2015, http://app.leg.wa.gov/billinfo/summary. 30 Examples include the Energy+ Partnership, the Nordic Climate aspx?year=2015&bill=1314. Facility, and the Facility for Performance Based Climate Finance in 37 Source: Reuters, Washington Governor Unveils Carbon Latin America, from the Development Bank of Latin America (CAF). Cap-and-Trade Plan, December 17, 2014, http://www. 31 Author’s calculations are based on auction revenue reports of reuters.com/article/2014/12/18/us-washington-carbon-policy- the different ETSs, payments into Alberta’s Climate Change and idUSKBN0JW01G20141218. Management Fund, and the annual budget of governments that have 38 Source: Ministry of the Environment and Climate Change, Ontario carbon taxes in place. government, How Cap and Trade Works, April 13, 2015, http://news. 32 Source: Green Climate Fund, Status of Pledges and Contributions ontario.ca/ene/en/2015/04/how-cap-and-trade-works.html. made to the Green Climate Fund, April 17, 2015. 39 Source: Marcelo Teixeira and Andre Grenon, Chile Becomes 33 Countries are listed in alphabetical order. the First South American Country to Tax Carbon, September 27, 34 Source: Environmental Defense Fund, Carbon Market California, 2014, http://uk.reuters.com/article/2014/09/27/carbon-chile-tax- 2015. idUKL6N0RR4V720140927. 8 China At a national level, China has committed to letting its GHG emissions peak around 2030,48 with best efforts Following the start of the pilot ETSs in Beijing, to letting them peak earlier. In addition, details are Guangdong, Shanghai, Shenzhen, and Tianjin in 2013, gradually being revealed on a nationwide ETS, which and in Chongqing and Hubei in 2014, the designs of may be launched by the end of 2016 and be fully some of these schemes are rapidly evolving. Their scope implemented in the course of 2019.49 The general is expanding and their stringency is being heightened. rules of a national ETS were published by the National For example, Shenzhen is planning to expand its ETS to Development and Reform Commission in December include transportation;40 Guangdong is considering to 2014.50 The national ETS should cover power generation, include more industrial sectors, such as buildings and metallurgy and non-ferrous metals, building materials, transport; and in Hubei, 49 new companies are covered chemicals, and aviation.51 Ahead of the national ETS by its ETS.41 Furthermore, Chongqing reduced its cap rollout, various regions – including Gansu, Qingdao,52 at a greater rate than anticipated, lowering the number Hangzhou, and Anhui53 – are seeking to implement their of freely allocated allowances by 7 percent compared own ETSs. to 2013.42 Until March 2015, approximately 17 million allowances worth US$100 million had been traded in all schemes combined.43 EU In February 2014, the European Commission (EC) Over the past year, China has focused on extending decided to temporarily postpone the auctioning of EU emissions trading beyond the seven pilots.44 Guangdong ETS allowances, a process known as “back-loading.” and Shenzhen are exploring a more coordinated Following this change, the focus of the EU ETS’ structural approach to their respective ETS pilots, while Beijing is reform agenda shifted to the need for greater price exploring an inter-regional ETS with Chengde, a city in stability and predictability through the flexibility of Hebei province.45 Furthermore, Shanghai is considering allowance supply in the EU ETS. The proposed Market regional cooperation with Zhejiang, Jiangsu, Anhui, Stability Reserve (MSR) was designed to achieve this Jiangxi, Shandong, and Fujian provinces to exchange goal. Consensus having been reached on a 2019 information and discuss ETS design and operation.46 start date for the MSR, its formal adoption is expected Finally, Beijing, Tianjin, and the Hubei provinces signed following discussions between the EC, the European an agreement to cooperate on GHG mitigation.47 Council, and the European Parliament on the legislative details.54 The other significant change to the EU ETS was 40 Source: Carbon Pulse, Shenzhen Set to Broaden out Emissions the approval of a new carbon leakage list for 2015–2019. Scheme, March 16, 2015, http://carbon-pulse.com/shenzhen-set-to- broaden-out-emissions-scheme/. 41 Source: Carbon Pulse, Hubei to Expand Emissions Trading Scheme, 48 Source: The White House, Office of the Press Secretary, U.S.-China December 3, 2015, http://carbon-pulse.com/hubei-to-expand- Joint Announcement on Climate Change, November 11, 2014, https:// emissions-trading-scheme-state-media/. www.whitehouse.gov/the-press-office/2014/11/11/us-china-joint- 42 Source: Chongqing Municipal Development and Reform announcement-climate-change. Commission, Chongqing Municipal Development and Reform 49 Source: International Carbon Action Partnership, China to Cap Commission issued a notice of 2014 annual Chongqing carbon Emissions from Six Sectors, ETS to Launch 2016, accessed April 28, emissions quotas, March 19, 2015, http://www.cqdpc.gov.cn/ 2015, https://icapcarbonaction.com/news/news-archive/268-china-to- article-1-21088.aspx; Carbon Pulse, Chongqing Cuts Allocation by cap-emissions-from-six-sectors-ets-to-launch-2016. 9 Million Permits in 2014, March 10, 2015, http://carbon-pulse.com/ 50 Source: National Development and Reform Commission, National chongqing-allocates-115-7-million-permits-for-2014/. Development and Reform Commission, People’s Republic of China 43 Source: Tsinghua University, Carbon Finance Innovation in China’s Order: No. 17, October 12, 2014, http://qhs.ndrc.gov.cn/gzdt/201412/ Emissions Trading Pilots, March 12, 2015, http://www.thepmr.org/ t20141212_652035.html. system/files/documents/Carbon%20finance%20innovation%20in%20 51 Source: International Carbon Action Partnership, China to Cap China%27s%20pilots-Duan%20Maosheng-201503.pdf Emissions from Six Sectors, ETS to Launch 2016, accessed April 28, 44 Source: Carbon Pulse, Guangdong close to Launch 600 Million Yuan 2015, https://icapcarbonaction.com/news/news-archive/268-china-to- Carbon Fund, March 17, 2015, http://carbon-pulse.com/guangdong- cap-emissions-from-six-sectors-ets-to-launch-2016. close-to-launch-600-million-yuan-carbon-fund/. 52 Source: Qingdao Municipal People’s Government, Notice on the 45 Source: Beijing Municipal Commission of Development and Reform, Organization and Implementation of Low-Carbon City Qingdao Pilot Regional Committee Held in Beijing and Hebei on Emissions Trading, Carbon Emissions Trading Market Embodiments, September 24, December 19, 2014, http://www.bjpc.gov.cn/gzdt/201412/t8594655. 2014, http://www.qingdao.gov.cn/n172/n68422/n68424/n30259215/ htm. n30259219/140924163750977834.html. 46 Source: Shanghai Municipal Development and Reform Commission, 53 Source: Anhui People’s Government, Anhui Provincial People’s Regional Cooperation Seminar Held on Emissions Trading, accessed Government Office on the Issuance of Anhui 2014-2015 Annual April 28, 2015, http://www.shdrc.gov.cn/second.jsp?colid=551&top_ Energy Saving and Emission Reduction Carbon Development Action id=316&artid=24800. Programs, September 24, 2014, http://www.ah.gov.cn/UserData/ 47 Source: The White House, Office of the Press Secretary, U.S.-China DocHtml/1/2014/12/9/6417463050796.html. Joint Announcement on Climate Change, November 11, 2014, https:// 54 Source: Carbon Pulse, EU Nations Agree to 2019 MSR Start Date www.whitehouse.gov/the-press-office/2014/11/11/us-china-joint- after Czechs Defect, April 29, 2015, http://carbon-pulse.com/eu- announcement-climate-change. nations-agree-to-2019-msr-start-date-french-envoy/. 9 Looking ahead, the EU is committed to reducing Companies can also use Korean offsets, including emissions by at least 40 percent below the 1990 baseline Korean CERs, for up to 10 percent of their compliance level by 2030, through domestic actions.55 The EU ETS obligation. Given that the price of international credits will be the main instrument to achieve its mitigation is much lower than that of Korean Allowance Units target.56 That target will ensure that the EU is on a cost- (KRW9,610, approximately US$9), some demand for effective track towards meeting its objective of cutting Korean CERs is to be expected.60 emissions by at least 80 percent by 2050. The EC is considering revisions to the EU ETS for Phase IV, focusing Mexico on the stability of the carbon market, competitiveness In February 2014, the Mexican Ministry of Energy provisions for industry, and the use of auction revenues. announced the potential development of an ETS in the energy sector. Through its INDC, Mexico committed Kazakhstan to an unconditional reduction of 25 percent of its Full implementation of the Kazakhstan’s ETS started greenhouse gas emissions and short-lived climate in 2014, including enforcement and trading. The pollutant emissions (with respect to business as usual) trading volume was low, with only 35 transactions for the year 2030.61 Mexico also has a conditional representing a total of 1.3 MtCO2e. The average price goal of cutting these emissions by up to 40 percent in of allowances in 2014 was KZT406 (US$2).57 Although 2030, subject to a global agreement addressing topics such as an international carbon price, carbon border the pilot phase was completed in 2013, Kazakhstan’s adjustments, technical cooperation, access to low-cost ETS still faces challenges with monitoring, reporting, financial resources, and technology transfer.62 Mexico’s and verification of GHG emissions, in particular with INDC is part of a broader national climate change policy, the verification process. The Kazakh government is which includes a carbon tax on fossil fuels. looking to develop clearer guidance, formats, and templates for monitoring.58 Other improvements include Portugal efforts to advance electronic reporting, develop and In Portugal, a carbon tax of €5 per tCO2e (US$5 per support the ETS registry, use benchmarking instead of tCO2e) was approved in November 2014, as part of grandfathering as the method for free allocation, and a wider package of green tax reform. This carbon tax investigate the possibility of linking up with existing entered into force on January 1, 2015. It applies to non-EU carbon markets. ETS sectors and covers approximately 26 percent of the country’s GHG emissions. The tax is expected to generate Republic of Korea revenues of over €95 million (US$104 million) in 2015. The Korea ETS entered into force on January 1, 2015, and covers 23 subsectors including steel, cement, Switzerland petro-chemistry, refinery, power, buildings, waste, and aviation. In the first phase – from 2015 to 2017 – ETS In Switzerland, the first two auctions of allowances in its installations will receive a free allocation of 100 percent of ETS took place in May and November 2014. Allowances their average 2011–13 GHG emissions. No auctioning will in these two auctions were sold at two very different take place. There is a perception that the Korean market prices: CHF40 (US$42) and CHF20 (US$21), respectively. is undersupplied, causing Korean companies to be Switzerland and the EU continued negotiations on linking, reluctant to sell their allowances. The latest trading was with a seventh round of talks taking place in March 2015, reported on January 16, 2015.59 aimed at establishing an agreement in the first half of 2015.63 In its INDC, Switzerland signaled its intention to 55 Source: European Union, Intended Nationally Determined use market mechanisms to aid in meeting its pledge to Contribution of the EU and Its Member States, March 6, 2015. cut emissions in 2030 to half of its 1990 emissions level.64 56 Source: European Council, European Council (23 and 24 October 2014) Conclusions, http://www.consilium.europa.eu/uedocs/cms_data/ docs/pressdata/en/ec/145397.pdf. 57 Source: Stock Trading in Quotas Are on the Increase, September 60 Korean CERs have to be cancelled and exchanged into “Korean 8, 2014, http://www.tbc.kz/novosti/birzhevye-torgi-po-kvotam-idut-na- Offset Credits” for compliance purposes. uvelichenie.html.Source: “Stock trading in quotas are on the increase,” 61 Source: Mexico Gobierno de la Republica, Intended Nationally CASPY, September 8, 2014, http://www.tbc.kz/novosti/birzhevye-torgi- Determined Contribution, March 30, 2015. po-kvotam-idut-na-uvelichenie.html. 62 Source: Mexico Gobierno de la Republica, Intended Nationally 58 Source: Aigerim Yergabulova, Kazakhstan Emission Trading Scheme Determined Contribution, March 30, 2015. (KAZ ETS): Status and Challenges of MRV, http://www.thepmr.org/ 63 Source: Federal Office for the Environment, 7th Round system/files/documents/18.0-%20KAZAKHSTAN%20presentation-kaz. of Negotiations for Switzerland-EU Linking of Emissions pdf. Trading Systems, March 26, 2015, http://www.bafu.admin.ch/ 59 Source: Carbon Pulse, Korean Carbon Market Marred by Supply klima/13877/14510/14882/15415/index.html?lang=de. Drought, March 6, 2015, http://carbon-pulse.com/korea-carbon-market- 64 Source: Switzerland, Switzerland’s Intended Nationally Determined marred-by-supply-drought/. Contribution (INDC) and Clarifying Information, February 27, 2015 10 Figure 4. Price range of the average internal carbon price65 disclosed by companies to the CDP Specifically, Switzerland intends to use new market65 Long-term investors are also beginning to realize that mechanisms under the UNFCCC66 (i.e., New Market- climate change can undermine the financial gains of based Mechanisms, or NMMs, and Framework for their portfolio, and they have begun rethinking their Various Approaches, or FVA) to help it reach its target. investment strategies and practices. A report to be released shortly confirms that returns will inevitably be Corporate carbon pricing impacted by climate change and that prudent investors could realize net gains by positioning across and Carbon pricing is now beyond the domain of within sectors and asset classes.69 Leading financial government policy and is becoming an increasingly institutions are responding to climate risk by allocating common tool in business decision making. Last capital and steering financial flows toward low carbon September, over 1,000 companies and investors and “climate safe” activities. For example, the Swedish publicly expressed their support for carbon pricing at pension fund AP4 is decarbonizing its equity portfolio by the New York Climate Summit.67 Private sector firms are tilting it towards more carbon-efficient companies.70 adopting internal carbon prices, even in jurisdictions without legislation to that effect. Globally, an internal Companies adopt an internal carbon price as a strategy carbon price is used by at least 150 companies as to shift investment decisions toward lower-carbon reported by CDP, with disclosed prices ranging from assets and operations. Corporate carbon pricing US$6 to US$89 per ton of CO2e68 (see Figure 4). can also help companies demonstrate their support for effective carbon pricing policies. Governments For many businesses, this is part of a risk management designing a carbon pricing instrument can furthermore strategy to evaluate the current or potential impact of benefit from the lessons learned through corporate a mandated carbon price on their operations. It is also carbon pricing. used as a means to identify and value cost savings and revenue opportunities in low-carbon investments. In summary, the investments needed to transition to a low carbon economy are substantial. With the right price 65 Some companies report that a price range is applied to take and appropriately de-risked investment structure, billions intoaccount projected price increases and that different carbon prices of dollars from the private sector can be unlocked. areused for different jurisdictions. 66 UNFCCC: United Nations Framework Convention on Climate Change. 67 Source: World Bank, We Support Putting a Price on Carbon, 2014, http://siteresources.worldbank.org/EXTSDNET/Resources/carbon- 69 Mercer, Investing in a Time of Climate Change, 2015, forthcoming. pricing-supporters-list-092114.pdf 70 Source: Global Investor Coalition with support from UNEP-FI and 68 Source: CDP, Global Corporate Use of Carbon Pricing: Disclosures the World Bank Group, Financial Institutions Taking Action on Climate to Investors, 2014. Change, 2014. 11 subnational consensus, which has led to a proliferation Carbon pricing policy design lessons of state or multi-state carbon pricing approaches in the By analyzing carbon pricing instruments, in particular US and Canada, in the absence of national instruments. their success or failure, lessons on design features can Increasingly, an ETS and a carbon tax are being used be had. The evolution over time of these instruments in complementary ways to target emission reductions in reflects these lessons. For example, price stabilization different sectors. For example, the carbon taxes in France measures are a feature of the California Cap-and-Trade and Portugal are applicable to specific non-ETS sectors. Program and the Korea ETS. These were designed to avoid the price volatility experienced by the EU ETS. The Finally, it is apparent that carbon pricing is only one EU ETS is attempting to solve the issue of supply and instrument in a portfolio of approaches that can be used demand imbalance temporarily through back-loading for emissions mitigation. Other policy instruments, such and ultimately through its MSR. as the removal of fossil fuel subsidies, infrastructure investments in transportation and energy, renewable The debate over the choice between an ETS and a energy portfolio standards, and energy efficiency carbon tax has dissipated. The choice depends on the standards, also have an important role to play in circumstances and context of the country, and aligns with achieving emission reductions. Carbon pricing and the broader national economic priorities. In addition, politics various policy instruments will need to operate in tandem are a particularly influential factor in the implementation to address the urgency and scale of the climate change of carbon pricing, as illustrated by the phenomenon of mitigation challenge. Authors: Alexandre Kossoy and Grzegorz Peszko led the World Bank Group team, also consisting of Klaus Oppermann and Nicolai Prytz, which conceptualized this paper. An Ecofys team composed of Alyssa Gilbert, Noémie Klein, Long Lam, and Lindee Wong prepared the paper in collaboration with the World Bank Group.” Definition of carbon pricing: For the purpose of the State and Trends of Carbon Pricing report series, and also applicable to this brief, carbon pricing refers to initiatives that put an explicit price on greenhouse gas emissions. This includes emissions trading schemes, offset mechanisms, carbon taxes, corporate carbon pricing and results- based finance, using a metric directly based on carbon (i.e., price per ton of CO2e). Policies that put an implicit price on carbon, for example removal of fossil fuel subsidies, fuel taxation, support for renewable energy, and energy efficiency certificate trading, are not included as they are outside the scope of the series and this brief. © 2015 International Bank for Reconstruction and Translations – If you create a translation of this work, Development / The World Bank 1818 H Street NW, please add the following disclaimer along with the Washington DC 20433 attribution: This translation was not created by The World Telephone: 202-473-1000; Internet: www.worldbank.org Bank and should not be considered an official World Some rights reserved Bank translation. The World Bank shall not be liable for 1 2 3 4 17 16 15 14 any content or error in this translation. 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Doi: 10.1596/978-1-4648-0268-3 ISBN (electronic): 978-1-4648-0268-3 License: Creative Commons Attribution CC BY 3.0 IGO DOI: 10.1596/978-1-4648-0268-3