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Carbon Webinar Session 1-4: Primer on Carbon Pricing

Updated: Nov 24, 2023

On the 5th of July 2023, Climate Governance Malaysia partnered with ERCST (European Roundtable of Climate Change and Sustainable Transition) to host the first session of the ERCST carbon webinar series, an engagement platform where experts converged to discuss the latest trends and developments in the field of carbon pricing and marketplaces, tailored specially for the South East Asian audience.

Datin Seri Sunita Rajakumar, the Chair of Climate Governance Malaysia opened the webinar on carbon pricing and negative externality by emphasizing the urgent need for action in response to the climate emergency and the importance of regulation to address the market failure where emitters profit while society bears the cost.

Dr. Gary Theseira, Council Member of Climate Governance Malaysia briefly elaborated on the concept of assigning value to products and services, noting that certain services, such as power and mobility, are immediately valued when they are unavailable. While pricing is commonly applied to various services and waste management, the invisibility of carbon dioxide and other emissions from fossil fuel combustion makes pricing externalities more challenging.

Our first speaker for the webinar was Michael Mehling, deputy director of the Center for Energy and Environmental Policy Research (CEEPR) at MIT. He explained how carbon pricing involves implementing policies that impose a direct price on carbon dioxide and other greenhouse gas emissions. He was aligned with the view that carbon pricing was the most optimal instrument to address the externality of carbon, although it may not be a perfect solution for all climate change problems.

Mehling described different forms of carbon pricing, including explicit carbon prices such as carbon taxes and emissions trading systems. Carbon taxes involve government-imposed taxes on carbon emissions to internalize the costs of pollution. On the other hand, emissions trading systems set an overall limit on emissions and allow the trading of emissions allowances. Economists find carbon pricing attractive because it ensures that everyone pays no more than the price to comply with the policy in equilibrium. This leads to a pareto-optimal outcome where those who can reduce emissions more cheaply do so, while others pay the price for emissions.

Carbon pricing avoids wasting low-hanging fruit by ensuring that everyone faces the same compliance cost. Other policies may not offer this level of efficiency. Martin Weitzman, an influential Harvard economist, in 1974, highlighted that emissions trading systems could achieve a desired quantity of emissions reduction at a lower cost through pricing mechanisms. John Dales, also an influential Canadian economist, advocated for using emissions trading to address pollution. The Obama administration, specifically the interagency working group, developed new estimates for the social cost of carbon which provide a framework for assigning a monetary value to the long-term damages caused by carbon emissions.

Following that, Andrei Marcu, founder & Executive Director of ERCST, provided his perspective on carbon markets, based on his extensive experience in corporate and international negotiations. Carbon pricing is an effective method to address externalities, particularly in the context of climate change. He supports the fundamental principle of polluters paying for their emissions, as it reflects the economic reality of environmental costs. However, there are ethical considerations, and various approaches to carbon pricing may be applied based on different circumstances and contexts.

In his view, for carbon markets to be successful, there must be clear rules, transparency, and liquidity. This ensures that the market can accurately reflect the scarcity value of carbon and incentivize emission reductions in a cost-effective manner. In tracing the evolution of carbon markets, he explained how carbon markets were modelled after the sulfur dioxide markets, which were established to address the problem of acid rain in the United States.

He also pointed out the various challenges and criticisms faced by carbon markets, particularly regarding their limited scope and the absence of a global carbon price.

He identified the Paris Agreement as a crucial development in international climate policy. The agreement brought together countries from around the world to collectively address climate change and set long-term goals, including agreeing to a goal of keeping global temperature rise well below 2 degrees Celsius above pre-industrial levels. While the Paris Agreement does not explicitly require countries to adopt carbon pricing, it encourages the use of market-based approaches, such as carbon markets and carbon taxes, as part of countries' climate mitigation strategies.

To round out the programme, Chandra Sinha, Lead Financial Specialist at World Bank, highlighted the role of international carbon markets as a means of facilitating international climate finance. Carbon markets are designed as offset programs, to equalize costs across countries and enable greater ambition and cost savings in achieving emission reductions.

The focus was then turned to the voluntary carbon market, which has experienced significant growth but also faces challenges related to integrity. Greenwashing, where corporations rely on cheap credits instead of making sufficient efforts to reduce emissions, is a reputational risk associated with the voluntary market. Efforts such as the Science Based Targets Initiative and the Voluntary Carbon Market Integrity Initiative aim to address these concerns. Supply-side integrity, ensuring that emission reduction credits are additional to project efforts, is another significant issue.

Chandra suggested that proper management of demand-side and supply-side integrity would allow the voluntary carbon market to scale up while complementing compliance markets and helping meet the goals of the Paris Agreement. He highlighted the potential for significant financial products and innovations in climate finance, driven by the growth and regulation of carbon markets, explaining that the World Bank sees carbon markets as a valuable tool for scaling up climate finance and increasing the ambition of climate action.

In his estimation, the growth of the voluntary carbon market would need to expand by 15 times by 2030 and 100 times by 2050 to contribute effectively to meeting the Paris Agreement goals. Corporates have set targets based on this parameter, but this has also led to increased scrutiny and additional challenges, including the risk of greenwashing, where companies may not make sufficient efforts to reduce emissions and instead rely on cheap credits.

In terms of the theoretical cost of marginal abatement to achieve the Paris Agreement, carbon markets have the potential to save up to $300 billion annually and result in an additional 5 gigatons of emission reductions per year. These substantial financial benefits and emission reductions make carbon markets an attractive option for climate action.

Moreover, it's essential to address the fact that developing countries have thus far received only a fraction of the USD 100 billion per year of climate finance resources that developed countries pledged to mobilise at the 2009 COP in Copenhagen. By lowering risks of greenwashing and increasing carbon prices to incentivize emission reductions, more activities can become viable, particularly in developing countries where achieving emission reductions is crucial. Ultimately, the proper regulation and scaling of carbon markets can significantly contribute to meeting the climate goals set by the Paris Agreement.

Kindly click here for the recording and slides

Click here to register for the Carbon Webinar Session 2: Mandatory Carbon Markets


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