South Africa

Global co-operation on carbon pricing can aid recovery from Covid

There has been an understandable focus on the way the Covid-19 pandemic has ravaged Earth’s population, but we must never allow this to let us forget the even more serious potential consequences of uncontrolled climate change.

With unprecedented scientific breakthroughs in developing the many vaccines that are now being deployed against the pandemic, the hope is that it won’t be too long before most countries will be able to return to some semblance of normal life and start rebuilding their hard-hit economies.

Ideally, there must be green post-Covid growth, but how can we use the available measures in the armoury against climate change to accelerate this? The next big climate gathering will be the Cop26 meeting in Glasgow in November, where there will be a lot of conversations about national commitments to curb emissions.

Each country is going through its own process of drawing up carbon reduction targets (the so-called nationally determined contributions, or NDCs) and the underpinning carbon reduction actions to meet the 2015 Paris Agreement target to limit global warming to well below 2°C, and preferably below 1.5°C, compared to pre-industrial levels.

For Cop26 to succeed, this target needs to be reinforced with action by all the key polluting nations. Hopefully, minds can also  be focused on how we can use the Covid-19 recovery to stimulate much lower carbon growth through green finance and government support programmes.

Global co-operation on this scale was given a big boost at the recent Group of Seven summit, when world leaders signed up to an agreement for a minimum global tax rate of 15%, and the response since then has been encouragingly positive. It would help to do away with tax havens and ensure that everyone — especially the elusive multinationals — pays their taxes.

In parallel with this, we have seen the floating of an IMF Climate Notes proposal for a minimum price on carbon (a so-called carbon price floor) for companies and countries with large carbon footprints. If it can gain traction, this measure would ensure better co-ordination among countries in the battle against climate change, with all the major emitters agreeing not to use carbon pricing as a protectionist tool. 

The idea has been stimulated by the EU’s green deal, which plots a path to carbon neutrality but has also raised concerns by Europe’s trading partners that it may become a protectionist tool. Central to concerns will be the implementation of border carbon adjustments — in effect an additional tax (customs duty) on the entry into the EU on products from countries with a high carbon footprint.

Despite the trade distortion impact, it seems this will be allowed by the World Trade Organization as it can be presented as an environmental tax. Despite this, it will hit developing countries more than others, and bear in mind that SA has a very high carbon footprint and would fall victim to this measure.

However, the environmental imperative is compelling for this strategy, and for extending it more widely to all the major industrial nations. The current price of carbon is too low and will need to be raised if the Cop26 discussions are to have any credibility. We will need to put a process in place to increase it globally — not for everybody, but for all those countries and blocs with the means to implement a minimum carbon price, most notably the EU, US and China.

The argument for a floor price for carbon is similar to that of using a minimum global tax rate to tackle the problems of tax havens. If enough large countries pay a minimum carbon price in their markets the effect would be enormous. 

Carbon prices appear both in state-imposed carbon taxes and in the trading system for carbon offsets, where the offset price is market-driven. At present countries all have their own different carbon prices, and there is no harmonisation. This makes the international environment more and more complex for companies to navigate and make investment decisions.

As in SA, other governments set their carbon prices at a country level, but it tends to not be high enough to have the necessary effect on climate change. The IMF’s idea is to get a global agreement on a minimum carbon price across all the signed-up countries. This could stop measures such as the EU’s border carbon adjustments, which are likely to make uncompetitive exporters even more uncompetitive.

President Cyril Ramaphosa’s announcement in July that the threshold for self-generation projects will be raised to 100MW should help firms move to greener and cleaner alternatives to coal. It will certainly help the mining houses, but all this takes time and significant capital.

And what about our main manufacturing hub, the auto industry? How do they as a collective get weaned off reliance on coal-generated electricity? There is a whole long supply chain in this sector, and it’s really complicated to calculate the carbon content of a vehicle as it rolls off the assembly line.

All these complexities and challenges need serious consideration by the larger economies, but should not prevent them from moving towards an agreement on a minimum carbon price. The IMF plan has the big advantage that it needs initially to be adopted by only a small group of big emitting countries — one can count them on the fingers of one hand — and, surely and slowly, you can then crowd in others in over time.

This proposal, if it can win sufficient support, would be game-changing.  A form of carbon crowdfunding? It would put a more reflective price of the costs of emissions on the economy and the climate. Because you are not trying to convince everybody, you have a better chance of getting agreement. You just need to get a group of large players to lead by example — as opposed to the hundreds of countries in the current Cop process, which has taken 26 years to advance to its current stage. 

This idea also promotes transparency across countries.  Currently, each jurisdiction has its own mechanism — with some deploying carbon tax and the others trading instruments — so carbon pricing is getting harder to navigate. According to the World Bank, there are 64 carbon pricing mechanisms implemented at present, with 35 different carbon taxes and 29 trading mechanisms. Unless the IMF plan succeeds, there will even be more individual country mechanisms going forward, which will make the global environment even more complicated.

So, as we plan for a future when Covid-19 is under control and the pressure to tackle climate change intensifies, we must be encouraged and inspired by the move towards a global minimum tax rate and build on this to also embrace a global minimum carbon price. It should be an essential component in the architecture of a safer and greener post-Covid planet.

• Newman is a co-founder of Cova Advisory.

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