By Rolf de Vos ,Policy Design & Evaluation, Ecofys

This article originally appeared on Ecofys and is republished with permission.

In the run-up to Paris 2015, Rolf de Vos examines efforts to see broad implementation of global carbon pricing policies.

The World Bank Group and the OECD, with support from IMF, are stepping up efforts to see broad implementation of global carbon pricing policies. “Nothing short of an economic transformation is required”, World Bank and OECD argue. Last week during the Climate Week in New York, they launched the FASTER Principles for Successful Carbon Pricing, along with the publication of the yearly State and Trends of Carbon Pricing report. The launch comes amid growing calls from industry to put carbon pricing higher on the agenda of the Paris Climate Summit, advocating such an economic transformation. Rolf de Vos assesses the value of the FASTER Principles.

The FASTER principles launched by the World Bank and OECD, with input from IMF, are essentially a checklist for those designing or restructuring carbon pricing policies, based on lessons learned from existing policies. They should make it easier for policymakers across the world to set up effective carbon pricing systems. But the initiative also sends a powerful message to decision-makers at the Paris Climate Summit in December that carbon pricing should take centre stage in an agreement.

The launch of FASTER comes at a time when there is growing chorus from business and industry in favour of carbon pricing. For instance, a report published today by CDP shows that presently 437 have established internal carbon pricing systems—three times more than in 2014. Also remember the call from industry at the Paris Business Climate Summit in May. With such strong support from both business and international organisations, the Paris Summit could well become the starting point of a tremendous expansion of carbon pricing.

EXPERIENCES

Over the last decade, countries have learned quite a few lessons from their experience with carbon pricing schemes. The most prominent experiences are emissions trading systems and taxes in places like the European Union, British Columbia, Denmark, Sweden, and the United Kingdom. At present, as reported in the State and Trends of Carbon Pricing report from the World Bank and Ecofys, some 12% of all global carbon emissions are subject to carbon pricing measures, established in 62 national and sub-national jurisdictions. Not all systems have the impact that is required, because prices are in general too modest to make a real difference. The aggregate market value of these schemes is almost $ 50 billion ($34 billion in emission trading and $14 billion in carbon taxes).

A broader implementation of carbon pricing will not only cover a larger part of the world (including emerging and even developing economies), but may also lead to higher prices. And the broader the coverage, the more companies in different countries have a level playing field.

Based on the experiences up till now, the World Bank Group and OECD have drawn up the FASTER Principles for Successful Carbon Pricing, where Faster is an acronym of:

• Fairness
• Alignment of Policies and Objectives
• Stability and Predictability
• Transparency
• Efficiency and Cost-Effectiveness
• Reliability and Environmental Integrity

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These are essentially a tool or checklist for policymakers and business to ensure a proper design of carbon pricing schemes.

Fairness is about putting the burden on the (historical) emitters. Potential risks of adverse impacts should be avoided, for instance impacts on vulnerable groups in society or on industries suffering from unfair competition.

Alignment is the principle that indicates the need to synchronise carbon pricing with other policies, e.g. in supporting R&D and innovation, eradicating fossil fuels subsidies (which may be seen as ‘carbon rewarding’ instead of ‘carbon pricing’) and non-climate policies that may support or undermine low-carbon developments in the economy.

Stop-and-go policies are the worst nightmare for an investor. Therefore, long-term Stability and Predictability are required to provide investors with a clear prospect on how they can earn back their investments. A stable increase of carbon prices over time will be a stronger incentive for low-carbon project development than an initial high price level. Nevertheless, some flexibility will be needed to adapt to unexpected economic or technological developments.

Transparency is the best way to provide confidence in carbon pricing and public support. This works in two ways: transparency in the introduction of a policy requires clear communication and exchange of ideas with the relevant stakeholders. And as soon as the system is established, monitoring data are needed to verify impacts.

Ultimately, carbon pricing intends to achieve a low-carbon economy at low costs. Hence, Efficiency and (Cost)Effectiveness are the economic backbone in the design of carbon pricing systems. They allow all stakeholders to choose their own ways, while imposing the costs at the right places. Revenues from taxes or auctioning emission allowances can be used for further stimulation of low-carbon activities.

Finally, Reliability and Environmental Integrity are a prerequisite, because the system should be comprehensive (no free riders) and progress should be measurable. The design of the carbon pricing instrument is very important in this respect, not least to yield other benefits for the environment or for society (jobs!).

EVIDENCE

The FASTER Principles may look like just another clever marketing trick, but they are based on solid evidence from concrete cases all over the world. Many specific evidence cases and details are shown as an example in the report, such as British Columbia’s carbon tax, the EU-ETS (where quite some lessons have been learned, both good and bad) and smaller tax schemes in the whole world.

As I argued in my previous blog post, carbon pricing is an essential tool for policymakers to trigger investment in decarbonisation, in addition to voluntary business initiatives. Putting a price on carbon emissions improves the business case for low-carbon solutions. Moreover, it prevents ‘free riders’ which are unavoidable in voluntary business sector initiatives. This is also why the frontrunners in business sectors are in favour of carbon pricing.

Thus, carbon prices are an important way to connect policy with business, by reinforcing voluntary initiatives with binding measures. One could imagine a process beyond Paris in which policymakers and business reinforce each other’s ambitions. Such an upward spiral is required to keep the world below the 2°C threshold.