New Report Explores G20 Carbon Pricing Experience and Global South Prospects

New Delhi, India - Environmental Defense Fund (EDF) and Observer Research Foundation (ORF) launched the "Navigating Carbon Pricing: The G20 Experience and Global South Prospects” report today. The report delves into the complex landscape of carbon pricing, examining its application within the G20 nations and the potential implications for emerging economies in the Global South.

The report offers a comprehensive analysis of various carbon pricing instruments currently in existence, providing valuable insights into their socio-economic challenges and how they can be most effective in climate change mitigation within both industrialized and emerging economies. By exploring the experiences of G20 nations, it highlights the diverse approaches to carbon pricing and identifies key lessons that can inform effective policy development in other regions.

Carbon pricing mechanisms are evolving as a prominent instrument in the fiscal policy toolkit of governments to reduce emissions as well as augment government revenues. This growth in its wider usage, from its early adoption within European climate policy, mirrors the increasing commitment from major economies, particularly in developing mitigation instruments that can be supportive of domestic mitigation.

“Within this context, the report provides an overview of the experience of carbon pricing across the world. It focuses on the benefits of these instruments, the challenges that impede wider adoption, and the solutions that can lead to the faster uptake of these tools by emerging economies. In particular, two sets of issues can slow down the implementation or impact of carbon taxes or emissions trading systems: lack of capacity to design and implement the instruments, and the need to understand and protect vulnerable communities for potentially negative social impacts of their adoption,” Pedro Martins Barata, AVP, Carbon Markets & Private Sector Decarbonisation at EDF, and the lead author of the report, said.

The report also reviews existing evidence, which indicates that the social impacts of existing carbon pricing regimes have largely been overstated and that, where such impacts are evident, there are design elements that can mitigate and reverse any negative social and income effects of the proposed carbon pricing instruments.

Implementing carbon pricing will need substantial capacities and resources

Further, the report sheds light on ongoing capacity building initiatives aimed at supporting the implementation and enforcement of carbon pricing policies. It identifies best practices and opportunities for collaboration to enhance the effectiveness and equity of carbon pricing frameworks worldwide.

“The report looks at existing capacity building efforts and initiatives and argues for more coordination across initiatives and a focus on sharing lessons across the Global South. This is particularly important given the growing interest and momentum in Latin America, Africa, and Asia on carbon taxes, emissions trading, and crediting mechanisms,” said Hisham Mundol, EDF’s Chief Advisor in India.

The report highlights the gaps in the prevalent capacity building initiatives as:

a) weak coordination between such initiatives resulting into fragmented approach and inconsistent quality standards,

b) lack of sustainability of capacity or no institutionalisation of capacities,

c) lack of efficient stakeholder engagement mechanisms, particularly inadequate engagement of the private sector.

Effective capacity-building efforts require a champion entity within each country that is tasked with the development of a carbon pricing instrument, the report states.

The success of carbon pricing policies relies in part on participating countries’ capacities to embed such approaches within existing domestic policy, legal, regulatory, taxation and finance frameworks. While the infrastructural capacity needs (Registry, MRV, etc.) can be identical across nations, capacity needs for implementing particular policies will need country specific economic analysis, like emissions modelling, stakeholder engagement, market-based policy design, financing, legal frameworks and institutional arrangements.

"Carbon pricing mechanisms are increasingly becoming a prominent tool in the fiscal policy toolkit of governments worldwide, serving to mitigate emissions and bolster government revenues. Within the Indian context, the significance of this report on carbon pricing and the ensuing discussions is particularly noteworthy, especially in light of the Government of India's 2023 amendment to the Energy Conservation Act, which lays the groundwork for the implementation of a domestic Carbon Credit Trading Scheme," Mannat Jaspal, Associate Fellow at ORF, and one of the co-authors of the report, said.

The next wave of carbon markets

While lessons from Global North regarding the social and economic dimensions of carbon pricing are valuable, there is an exciting prospect of South-South engagement in mutual learning and sharing of experience, the report states. Global South will have both challenges and advantages in accelerating their move in the carbon markets space. At one hand these countries will have to overcome the lack of resources, data poverty, issue of incipient electricity and overall energy market liberalisation, lack of access to capital, and focus on universal energy access, while on the other hand Global South economies are growth engines and as they build out their economy and infrastructure, they have the opportunity to do so in low-carbon fashion and break the link between emissions and growth, including through leapfrogging technologies.

For more information or to schedule interviews with the authors of the report, please contact Tejas Patel at tpatel@edf.org

Additional Reading:

Carbon pricing – an important discussion often un-percolated

The concept of carbon pricing essentially means internalising the external costs of carbon emissions. While the attempts to address the environmental externalities dates back to 1920s, its evolution over time has given us the contemporary carbon pricing mechanisms. Of which mandatory carbon pricing is primarily practiced through carbon taxes and cap-and-trade or emissions trading systems.

Though these instruments have gained prominence in recent decades, particularly in response to growing concerns about climate change and the need for low-carbon transition of economies, only a handful of countries could successfully implement these instruments in place, the numbers are much lesser amongst the emerging economies. The first carbon tax was introduced in Finland in 1990 and the first large-scale cap-and-trade system for carbon emissions (EU Emissions Trading System) was established in the European Union in 2005. Yet the three decades of carbon pricing still has limited knowledge in the public domain and limited experiential evidence for diverse economies, particularly the emerging economies. Hence, the case of carbon pricing remains curious and challenging for countries with limited capacities and resources.

Carbon pricing is important and useful for the following benefits:

a) Correcting market failures or enhancing economic efficiency by placing a price on carbon which incentivises entities to reduce emissions,

b) Stimulate investment in low-carbon and energy-efficient developments, and

c) Generate substantial revenue for governments which can be reallocated to support climate-related initiatives and social and economic transitions.

However, these benefits come with a complex tapestry of socio-economic challenges. These ranges from the equity concerns of disproportionate burdening of vulnerable or marginalised populations, to the loss of competitiveness in carbon-intensive industry sectors, or the differential impacts in different geographies, like rural vs. urban or regions with different energy mix or resource profiles, etc. For example, regressivity of a carbon pricing policy can exacerbate energy poverty by trapping the energy-poor households (still relying on traditional biofules) in their current state of lack of access to electricity or improved cooking fuel or transport services. These impacts are highly dependent on the unique features of a given jurisdiction, including economic development status, circumstantial factors, like, the income or energy consumption patterns, regional disparities, and re-investment policies.

Hence, it is crucial for governments to evaluate their national circumstance and complement carbon pricing policies with other fiscal policies and mitigation instruments. The report talks about the tools to address such challenges, like revenue recycling through direct transfer to vulnerable populations or revenue distribution in clean technological or infrastructural investments, etc.