Exploring G20 carbon pricing journey and prospects in the Global South

Today, the Environmental Defense Fund (EDF) and Observer Research Foundation (ORF) unveiled the report titled 'Navigating Carbon Pricing: The G20 Experience and Global South Prospects.' This comprehensive document explores the intricate realm of carbon pricing, scrutinising its implementation in G20 nations and its potential impact on emerging economies in the Global South.

The report conducts a thorough analysis of various existing carbon pricing instruments, offering valuable insights into the socio-economic challenges associated with them and their optimal effectiveness in mitigating climate change in both industrialised and emerging economies. By delving into the experiences of G20 nations, the report sheds light on the diverse approaches to carbon pricing and extracts key lessons that can guide the development of effective policies in other regions.

Carbon pricing mechanisms are gaining prominence as a crucial tool in the fiscal policy arsenal of governments, serving to both reduce emissions and bolster government revenues. The report underscores the evolving nature of these mechanisms, noting their initial adoption in European climate policy and highlighting the growing commitment from major economies, especially in developing mitigation instruments that align with domestic mitigation goals.

“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 from 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:

• weak coordination between such initiatives resulting in fragmented approach and inconsistent quality standards,
• lack of sustainability of capacity or no institutionalization of capacities,
• 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 government 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 its move into the carbon markets space.

On 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.

FAQ: Understanding carbon pricing and its implications

Q1: What is carbon pricing, and why is it considered an important discussion?

A1: Carbon pricing involves internalizing the external costs of carbon emissions. Despite efforts dating back to the 1920s, contemporary carbon pricing mechanisms, primarily through carbon taxes and cap-and-trade systems, have gained prominence. However, successful implementation remains limited, especially among emerging economies.

Q2: How has carbon pricing evolved over time?

A2: The evolution of carbon pricing includes the introduction of the first carbon tax in Finland in 1990 and the establishment of the EU Emissions Trading System in the European Union in 2005. Despite three decades of development, knowledge about carbon pricing remains limited, particularly for diverse economies.

Q3: Why is carbon pricing important, and what benefits does it offer?

A3: Carbon pricing is crucial for correcting market failures, stimulating investment in low-carbon developments, and generating revenue for governments to support climate-related initiatives and economic transitions.

Q4: What challenges are associated with carbon pricing?

A4: Carbon pricing comes with socio-economic challenges such as equity concerns, loss of competitiveness in carbon-intensive industries, and differential impacts based on factors like geography, energy mix, and resource profiles. For instance, regressive policies can worsen energy poverty for households relying on traditional biofuels.

Q5: How can governments address the challenges associated with carbon pricing?

A5: Governments should evaluate their national circumstances and complement carbon pricing with other fiscal policies and mitigation instruments. The report suggests tools like revenue recycling through direct transfers to vulnerable populations or investments in clean technologies and infrastructure.

Q6: What does the report recommend for effective carbon pricing implementation?

A6: The report emphasises the need for governments to tailor carbon pricing policies to their unique circumstances, considering economic development status, regional disparities, and reinvestment policies. Tools such as revenue recycling and targeted investments are proposed to address challenges and ensure a balanced approach.