Carbon Pricing: It’s on the move

World leaders will be in Paris today for the official opening of COP 21 - the United Nations Conference on Climate Change—to lay out their plans to tackle climate change and cut greenhouse gas emissions.

Later in the day, a group of leaders and World Bank Group President Jim Yong Kim will call on countries and companies around the world to put a price on carbon pollution as a means of cutting emissions and driving investment in cleaner, greener growth.

The leaders see carbon pricing as providing a triple dividend: It’s good for the environment and people; it raises revenue efficiently, making it possible to reduce more distortionary taxes; and it drives private sector innovation and critically needed investments in clean and low-emission technologies.

To bolster the case for action, the World Bank Group and partners are also formally launching the Carbon Pricing Leadership Coalition at the Paris climate talks. The grouping of government, business and civil society leaders was created last year after the U.N. Climate Summit. The coalition seeks to expand the use of effective carbon pricing policies that can maintain competitiveness, create jobs, encourage innovation, and achieve meaningful emissions reductions.

Today, some 40 governments and 23 cities, states and regions are putting a price on carbon and cover about 12% of annual global greenhouse gas emissions. This coverage represents a three-fold increase over the past decade, and growth continues.

Earlier this year, South Korea launched an ambitious carbon market including 500 facilities in more than 20 sectors. China — the world’s biggest polluter — recently announced plans for a national emissions trading program starting in 2017.

Meanwhile, more than 400 companies around the world report using a voluntary, internal price on carbon in their business plans.

Further evidence of momentum for carbon pricing comes from national plans, known as the Intended Nationally Determined Contributions (INDC), submitted by countries for the Paris talks. More than 90 INDCs include proposals for emissions trading, carbon taxes, and other pricing mechanisms as part of a wide range of action plans by governments to address their particular challenges.

The Paris meeting today will also see the launch of a new $500 million initiative, the Transformative Carbon Asset Facility, to help spur greater efforts to price and measure carbon pollution.

Germany, Norway, Sweden, Switzerland, and the World Bank Group jointly launched the initiative, saying it would pilot new ways to catalyze large cuts in greenhouse gas emissions. TCAF will also help developing countries combat climate change by transitioning to carbon-pricing mechanisms.

TCAF will enable the generation, accounting, and payments for emission reductions at a greater scale, than has been used so far.  It is expected that the new facility’s support will be provided alongside $2 billion of investment and policy-related lending by the World Bank Group and other sources.

TCAF projects and programs could include support for low-carbon policies such as clean energy targets or efficiency standards for industry. The initiative could provide payments to countries who remove fossil fuel subsidies or embark on other reforms like simplifying regulations for renewable energy.

Or the TCAF could help make cities more sustainable by supporting climate-friendly transport and green building codes, as well as by rewarding the use of more efficient lighting, water and waste management

In all of these cases, the TCAF would pay for lowered emissions.

By providing results-based payments – financial incentives for changed behavior – the TCAF ensures that real changes “stick” and are not rolled back with changing priorities.

Similar to the feed-in tariffs in the renewable energy market - which guarantee a certain level of revenue - payments for results have the ability to pave the way for innovative approaches to low-carbon development.  The calculation of the emission reductions will apply rigorous accounting methodologies to ensure measurable, reportable and verifiable results. 

The contributing countries are expected to commit more than $250 million in early 2016 to operationalize the facility.  The TCAF will be open for additional contributions and funders until an initial target of $500 million is reached.  

This target funding will support about 10 programs and is expected to leverage over $2 billion of financing by working with existing investment or policy operations developed with the Bank’s client countries and other partners and international organizations.

The TCAF will play a critical role in testing new ways to reduce emissions and replicating what works. The TCAF’s programs will support critical infrastructure for the development of domestic carbon pricing mechanisms, like carbon taxes or emissions trading schemes. It will demonstrate the institutional, regulatory and technical building blocks needed for getting large scale programs off the ground.

The TCAF is one of the new initiatives that the Bank Group is promoting as a part of its commitment to ambitious action to avoid a 2°C global temperature increase. The initiative is intended to help trigger transformative change – both across cities or whole sectors in areas such as clean transport.