EU Finally Gets Serious About Carbon Pricing — as Rest of the World Fails, Asia, Africa and Middle East to Suffer Most (1)

–Regions most to blame for the climate crisis, the EU and the U.S., have least to lose

By Mathew Carr

June 7-8, 2021 (LONDON): Europe is finally beginning to get serious about carbon pricing across its economy.

While the region has a reputation for ambitious moves to cut greenhouse gas, even its policies have had major holes.

Now it seems to be moving further ahead, even though as a region it appears to have less to lose from the climate crisis than other regions in terms of economic production.

Here is how it’s filling in some of its gaps:

Hole 1. Carbon prices currently only cover selective industries.

In a document detailing Germany’s position on a green package of EU measures to be published July 14, the region’s biggest economy backed the European Commission’s plan to impose CO2 prices on transport and heating in buildings through a separate system to the EU’s existing carbon market, according to Reuters (see link in notes).

The EU carbon market currently covers emissions from most factories and power stations and some airline flights — less than half of the economy.

“The long term goal should be to have a uniform cross-sector carbon price in the EU,” the document said.

Berlin this year imposed a national CO2 levy on suppliers of heating and transport fuels, set at an initial 25 euros per metric ton.

Note that Germany is set for elections in September, which could change the direction of its energy and climate policies leading up to the UN climate talks set for November in Glasgow.

Hole 2. Europe’s giving away free carbon allowances.

Germany is also backing an end to free carbon permits for airlines, Reuters reported.

Most non-power-sector emitters in Europe have received allowances for free, with environment group Carbon Market Watch and CE Delft arguing that means they’ve received more than 50 billion euros of extra profits in the 2008-2019 period.

The region is still near the beginning of the end of free allowances across the board. Power generators are currently the main group of companies that have to pay for all their allowances, because there isn’t yet a global electricity market so “leakage” of economic activity to regions with weaker climate policy is unlikely in that industry.

See this Carbon Market Watch chart and link in notes.

The EU is shifting the way it protects industry as it plans to install a carbon border adjustment mechanism (CBAM) from 2023 — which will require importers to pay for the cost of emissions embedded in products.

For the aviation sector, given that airlines have been net buyers of allowances, the
additional profits from cost pass-through and the use of international credits have been
outweighed by the need to buy allowances, CE Delft said. The sector therefore did not experience
additional profits as the industry did – the total balance was a 150 million euro loss on
participating in the EU emissions trading system.

For the future, several developments may result in a change in the additional profits.
On the one hand, additional profits will be lower as the possibility to use cheaper
international credits has ceased and the total number of free allowances will be reduced in
Phase 4 which effectively reduces the additional profits. On the other hand, the higher CO2
prices and the possible instalment of a CBAM, if not accompanied with an abolishment of
free allocation, will result in higher additional profits
“: CE Delft

Hole 3. Carbon prices are not high enough, but they’re getting there

EU carbon prices have surged past 50 euros a ton this year after trading below 10 euros for much of the past 17 years. See this chart for the past two years in euros per ton, from exchange group ICE, as of June 7.

Carbon prices need to be about $160 (131 euros) a ton globally during the next 10 years to keep temperatures from rising 1.5C, according to consultancy Wood Mackenzie.

High carbon prices incentivize the shift away from fossil fuels by protecting clean investments from competition from projects fueled by coal, oil or natural gas.

What’s at stake for the world

Global economies will see a loss of trillions of U.S. dollars because of the climate crisis ― if leaders do not take more ambitious action to tackle the problem, according to charity Oxfam’s analysis of research by the Swiss Re Institute.

Oxfam called on G7 leaders, who are meeting in the U.K. later this week, to cut carbon emissions more quickly and steeply. Rich countries are most to blame for the climate crisis.

While economies are expected to bounce back from the short-term effects of the pandemic, the effects of climate change will be seen every year, Oxfam said.

Swiss Re modelled in April how climate change is likely to affect economies through gradual, chronic climate risks such as heat stress, impacts on health, sea level rise and agricultural productivity. “All of the 48 nations in the study are expected to see an economic contraction, with many countries predicted to be hit far worse than the G7.”

For example, by 2050: India, which was invited to the G7 summit, is projected to lose more economic activity than average from its economy, signalling poor countries have even more to lose if the below-2C-target is missed.

Europe and North America have much less to lose. The chart below shows ASEAN nations could avoid a 25% loss of GDP in 2048 should the world keep temperature gains to well below 2C vs a rise of 2.6C (see notes). Europe and North America’s would avoid a loss of 5% or less, according to the data:

(Updates with Europe and North America have less to lose.)

NOTES:

For Reuters story, see link: https://www.reuters.com/business/environment/germany-backs-carbon-pricing-eu-climate-policy-overhaul-document-2021-06-06/

Carbon Market Watch: https://carbonmarketwatch.org/publications/the-phantom-leakage/

CE Delft : https://carbonmarketwatch.org/wp-content/uploads/2021/06/CE_Delft_Additional_Profits_ETS.pdf

Swiss Re link — you need to fill in the form to download the full report: https://www.swissre.com/institute/research/topics-and-risk-dialogues/climate-and-natural-catastrophe-risk/expertise-publication-economics-of-climate-change.html

ASEAN: Association of Southeast Asian Nations

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