Can the G20 agree a global carbon price?

Following its landmark corporate tax agreement, can the G20 do the same for carbon pricing?

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2 minute READ

Afsaneh Beschloss

Founder and CEO, RockCreek

When G20 leaders meet in Rome later this week, they will review progress made in the four months since they last gathered and agree on priorities and actions for the coming year. An unexpected success in 2021 was the agreement by more than 130 countries on a global minimum corporate tax rate. The G20 can build on this success and agree to develop a global carbon price, which could provide a powerful impetus to achieve net-zero carbon emissions by 2050.

The net-zero goal is ambitious and time is running out. Global investment firm RockCreek estimates that reaching net-zero by 2050 will require more than US$3 trillion of investments per year, while according to the UN emissions must drop 7.6 per cent every year from 2020 to 2030 to meet the 1.5°C Paris Agreement target. Two of the most effective mechanisms are setting a limited, multi-year carbon budget or setting a carbon price that represents its social cost and escalates over time. No G20 member country is presently in line to meet their Paris commitments and none has yet succeeded in setting a hard carbon limit. A global carbon price, however, could work.

But can it be agreed quickly enough? The global tax agreement was preceded by a long period of research and consensus-building by the OECD. The OECD can build on this success to help achieve a global carbon price, but the process must be shorter. A shorter timeframe would be feasible as much academic work has already been done on carbon pricing and there is real-world evidence on price levels from emissions trading systems (ETS) in the EU and elsewhere. 

Many of the objections to an agreed carbon price confuse it with a carbon tax.

The price of carbon in the EU’s ETS recently climbed above US$50/ton but carbon offset pricing can vary widely. Some institutional investors already use an implicit price of US$30-US$40/ton, while China’s newly launched ETS prices carbon at around US$8/ton. Meanwhile, an academic controversy has developed over the best way to calculate a carbon price. According to economists Nicholas Stern and Joseph Stiglitz, a social cost of carbon at the upper end of the $50-100/ton range by 2030 is consistent with the Paris Agreement’s targets. Any international negotiation on a carbon price must take account of this diversity of opinion and experience. The answer could be to agree on a lower initial price, which would be subject to periodic review by the G20 as evidence accumulates and modelling improves.

An agreed minimum carbon price would encourage reduced carbon emissions across all sectors, not just those covered by emissions trading. The two systems could also work together as adjusting the underlying parameters of ETS prices would help drive them towards the agreed minimum price. A global carbon price would be more effective – and arguably fairer – than the border adjustment taxes proposed by the EU and elsewhere, which can be protectionist and reduce trade. Indeed, a global minimum carbon price would remove the need for border adjustment taxes. It would also be an economic market signal. There is demand for a global minimum carbon price among some investors because it would bring clarity to the expanding voluntary carbon offset market by providing a simple ‘floor’ for the value of carbon offsets. It could also be used by companies to evaluate investment decisions, as is already done by Temasek in Singapore and BP in the UK. 

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Many of the objections to an agreed carbon price confuse it with a carbon tax. While there are good economic arguments for taxing carbon, there are too many cultural and political differences to expect an international agreement on tax policies. For example, British Columbia passed North America’s first carbon tax in 2008, whereby poor people and small businesses pay less than the wealthy. Yet attempts to introduce a similar tax just south of the US-Canada border, in the state of Washington, failed in 2017. An agreed global carbon price can help incorporate the social cost of carbon in investment decisions by companies as well as consumption decisions by households looking to reduce their carbon footprints. Governments too could use it as a benchmark in designing regulations to achieve what a carbon tax would. 

A global agreement on a minimum carbon price would send a powerful signal that countries can work together and are serious about driving fundamental changes to support climate goals. And there is a lot at stake. Without concrete action, the World Bank’s latest Groundswell report estimates that climate change could force 216 million people to migrate within their own countries by 2050. G20 leaders succeeded on the landmark global corporate tax agreement; now the world is counting on them to succeed again.