In the past 2021, all countries have been actively responding to the climate crisis. In its sixth assessment report, the United Nations Intergovernmental Panel on Climate Change (IPCC) emphasized that excessive emissions of greenhouse gases will lead to global warming . At the end of 2021, leaders of the world gathered at the 26th United Nations Climate Conference to reach a consensus on gradually phase out coal-fired power generation and abolish subsidies for inefficient fossil fuels, and established international carbon market rules. But there is a huge gap between the commitments of countries and the level of realization of existing policies. Against the backdrop of rising prices of energy commodity and the outbreak of the new crown pneumonia epidemic, the determination of carbon prices is extremely challenging.
World Bank 2022 carbon pricing status
and trend report interpretation
Author: China Financial Case Center, Wudaokou School of Finance, Tsinghua University Qi Zhiping
Carbon pricing is a policy tool, and governments can price greenhouse gas emissions by creating a fiscal incentive to reduce gas emissions. Incorporating climate change costs into economic decision-making can encourage changes in production, consumption and investment models, thereby supporting low-carbon growth. On this basis, the World Bank released a report on the status and trends of carbon pricing in 2022 in May this year. The interpretation of the report will be divided into three parts, which will be explained from three aspects: carbon tax , carbon trading, and carbon credit.
1
Carbon Tax
Carbon Tax is a policy tool for the government to charge greenhouse gas emissions. It is a fiscal incentive policy to reduce greenhouse gas emissions. Under the carbon tax system, the price of carbon is set by the government, and under price incentives, the emission reduction standards are determined by the market.
Direct carbon pricing method Global coverage is low
In 2021, the direct carbon pricing method covers fewer global greenhouse gas emissions than in previous years. The reason is that major greenhouse gas emitters focus on integrating existing carbon pricing tools, while many countries are considering new carbon pricing tools.
As of April 2022, there are 68 carbon pricing mechanisms in operation around the world, and another 3 plans are about to be put into use; including 37 carbon taxes and 34 carbon emission trading systems. Currently, about 23% of global greenhouse gas emissions are covered by an operating carbon pricing mechanism, similar to the coverage in 2021.
Judging from last year's trend report, there are only four newly implemented carbon pricing mechanisms in the world, and more jurisdictions plan to take measures to implement or expand carbon pricing. In addition to the introduction of carbon pricing mechanisms by Austria , Indonesia and Washington State , plans to introduce carbon pricing mechanisms, Israel, Malaysia and Botswana have also announced their intention to develop a new carbon pricing mechanism, while Vietnam outlined the steps to establish carbon emission trading system . Some other jurisdictions in Africa, Central Europe and Asia will continue to assess the potential of implementing carbon pricing mechanisms.
The International Maritime Organization (IMO) is currently considering implementing market-based measures to reduce greenhouse gas emissions from international shipping. In 2018, the IMO promised to halve the greenhouse gas emissions from international shipping by 2050 on the basis of 2008. At the 26th UN General Assembly on Climate Change, the Climate Vulnerability Forum (CVF) issued the Dhaka-Glasgow Declaration in which approximately 50 developing countries called on IMO member states to impose mandatory greenhouse gas taxes on marine fuels.
The potential carbon revenue is huge, and total carbon revenue is expected to reach between $1 trillion and $3.7 trillion by 2050, or $40 billion to $60 billion per year. Strategic use of these carbon revenues could be key to accelerating the decarbonization of the shipping industry and ensuring a fair transition between countries to zero-carbon shipping.Although the carbon tax rate is rising, it is still generally low.
Carbon tax increased in 2021 and early 2022. Although the increase is lower than the price of the carbon trading system, it has reached a record level. In 2021, the carbon tax rate increased by about US$6/ton of carbon dioxide on average, and further increased by US$5/ton of carbon dioxide by April 1, 2022. Most carbon tax jurisdictions have increased their carbon tax compared to the previous year. Some jurisdictions have hit record carbon taxes, including British Columbia, Canada and other Canadian provinces, Ireland , Latvia , Liechtenstein , South Africa, Switzerland and Ukraine.
Figure 1 Some jurisdictions have hit record highs in carbon tax
Most of the known rise in carbon taxes are due to changes in previous plans, such as Canadian provinces and Ireland. In other cases, the revised tax rate is part of broader fiscal reforms such as Norway and Ukraine. Switzerland and Liechtenstein raised the greenhouse gas emission rate in 2022 from CHF 96 CHF 2/ton of CO2 in 2021; this move has attracted strong attention from the market because it is triggered by an automatic adjustment mechanism, which raises the tax rate whenever greenhouse gas emissions do not meet the target.
Other jurisdictions have also established a larger carbon tax price trajectory in the coming years. For example, Singapore proposes to gradually increase the carbon tax in 2024 and 2025, from the current 5 Singapore dollar /ton carbon dioxide to 25 Singapore dollar/ton carbon dioxide, to 45 Singapore dollar/ton carbon dioxide by 2026 and 2027, and to 50-80 Singapore dollar/ton carbon dioxide by 2030.
Although prices for many major carbon pricing mechanisms were rising last year, overall, current prices are still not enough to drive the changes needed to achieve the Paris Agreement goals, or to release investment in fundamental decarbonization pathways. To achieve the goal of keeping global temperature rise to 2 degrees Celsius by 2030, the Senior Carbon Price Committee has identified a carbon price fluctuation range of USD 50 to USD 100 per ton of carbon dioxide as part of a comprehensive climate policy plan. In fact, by 2022, less than 4% of global emissions are covered by direct carbon prices and are higher than the estimated range required by the 2030 target. In addition, the Intergovernmental Panel on Climate Change said that to achieve the goal of temperature increase by no more than 1.5°C, higher prices will need to be set to reduce greenhouse gas emissions to net zero by 2050. A survey conducted by 30 climate economists in 2021 shows that to achieve this goal, the price of carbon must reach US$50 to US$250/ton of carbon dioxide, and the most suitable value is US$100/ton of carbon dioxide.
Most jurisdictions require price increase while adopting a coherent set of complementary policy measures to achieve short-term mitigation goals and long-term net zero strategy.
2
carbon trading
carbon emission trading system is a trading system for carbon dioxide emission rights. The government sets a limit or upper limit on the total greenhouse gas emissions in one or more economic sectors, and distributes tradable emission limits to businesses through auctions or allocations, where each limit represents the right to emit a certain amount of carbon dioxide (usually 1 ton of carbon dioxide). Businesses must pay for the greenhouse gases they emit; if additional requirements are required, they can also choose to purchase additional limits or sell remaining limits. This is also known as the "limit and transaction" system.
Carbon trading price change trend
2021, direct carbon pricing rose to historical highs. This growth is prominently reflected in carbon emission trading systems (especially in developed countries). For example, in the EU and Swiss carbon emission trading systems, California and Quebec markets, the Regional Greenhouse Gas Initiative (RGGI) and New Zealand carbon emission trading markets, all of which are on the rise. Since its launch in mid-2021, the price of the UK carbon emission trading system has also risen sharply.In China's carbon emission trading system, prices rebounded in early 2022 after falling at the end of 2021. In South Korea, by February 2022, carbon trading prices have gradually rebounded to their highest levels. In early 2022, the price of carbon trading system in many countries fell sharply, but the price began to rebound since then. After the outbreak of the Russian-Ukrainian conflict in February this year, the prices of carbon emission trading systems in the EU, New Zealand, the UK and South Korea fell sharply. But the carbon prices in these four systems have begun to rebound.
1 carbon pricing revenue increased significantly, mainly from the carbon emission trading system
Global carbon pricing revenue in 2021 was approximately US$84 billion, an increase of US$31 billion over 2020. As before, the EU carbon trading system generates about 41% of all carbon pricing revenues, and the New Zealand carbon trading system and California's total limit and trading plan also drives the increase in carbon revenue. The revenue generated by the UK and Germany's carbon emission trading systems, which only started operations in 2021, accounts for more than 16% of the total carbon pricing revenue.
It is worth noting that in 2021, China's carbon emission trading system freely allocates all quotas. Although it is the largest emissions trading system in the existing operating system (in terms of emissions covered), it does not generate revenue.
Figure 2 Evolution of global carbon pricing income
Income generated by the carbon emission trading system also exceeded the income generated by the carbon tax for the first time in 2021. Although historically, carbon tax generates more income than carbon emission trading systems; this gap has narrowed in recent years, and in 2021, carbon emission trading systems generate more than two-thirds of total income. This largely reflects the fact that the price of carbon emission trading systems is rising faster than fixed-price tools.
3
carbon credit
carbon credit market is at a crossroads. Strong spontaneous demand and expanded market diversity have driven the market development over the past year. As the market grows, the role of carbon credit in achieving emission targets is receiving increasing attention. To maintain the current growth trend, market participants need to cooperate to set high standards, protect the integrity and reliability of the environment, and deepen liquidity. Specialized governance institutions, financial services and new technology infrastructure are emerging in the market to support the expansion of market size and ensure integrity.
Global carbon credit market structure
Global carbon credit market consists of a variety of supply sources, demand sources and trade frameworks.
supply comes from different types of credit mechanisms, including three categories: international credit mechanism, domestic credit mechanism and independent credit mechanism. The international credit mechanism is a credit mechanism established in accordance with the " Kyoto Protocol " (including the " Clean Development Mechanism , CDM) and the " Paris Convention " and other International Treaty ; the domestic credit mechanism refers to the credit mechanism established by national, regional or at all levels of governments, such as the California Compliance Compensation Plan and the Australian Emission Reduction Fund; independent credit mechanisms, including standards and credit mechanisms managed by non-governmental entities, such as the carbon credit registration non-profit organization Verra and Gold Standard.
Needs are derived from a series of compliance obligations stipulated by international agreements and national laws, as well as voluntary commitments made by companies, governments and other organizations. Most carbon credits tend to attract a range of different types of buyers, meaning few carbon credits match only one source of demand. Four major categories of demand drivers can be roughly identified:
1 is the international compliance markets, which mainly respond to commitments made in accordance with international agreements.
The second is the domestic compliance market (Domestic compliance markets), which are mainly used by enterprises to purchase credit that complies with the obligations stipulated by domestic laws (usually ETS or carbon tax).
The third is the voluntary carbon markets, including entities (mainly private entities) to purchase carbon credits to comply with voluntary emission reduction commitments.
4 is results-based financing (Results-based finance), which refers to the purchase of carbon credits in the carbon market by governments or international organizations to encourage mitigation of climate change or achieve national goals. Results-based financing can also refer to payments for broader returns to emission reductions without any transfer of credit or other ownership.
Driven by the voluntary carbon market, the carbon credit market is growing rapidly
Over the past year, the growth of the carbon credit market has further accelerated, including sharp rises in issuance, trading and prices. The formulation of new carbon market rules at the 26th meeting of the Parties held in Glasgow will help the international compliance market further develop in the coming years. Currently, most market activities are still centered on the voluntary carbon emission market.
Carbon credit market grew by 48% in 2021. Total credit from international, domestic and independent credit mechanisms increased from 327 million to 478 million, the largest year-on-year increase since the peak of carbon credit issuance in 2012. Since 2007, the total carbon credit issuance has been approximately 4.7 billion tons of carbon dioxide equivalent.
Enterprises spontaneously set climate goals and promote market growth
Enterprises spontaneously set climate goals, which is the main force in promoting the continuous growth of carbon credit demand. These goals are committed to achieving ambitious decarbonization goals in the company’s own value chain while compensating or neutralizing residual emissions. However, plans to achieve these goals vary in coverage, timelines and the intended uses of carbon credit.
The rapid increase in corporate spontaneous net zero commitments has increased strong forecasts for demand for carbon emissions. A recent analysis predicts that the demand for carbon dioxide will increase by 15 times by 2030, about 1.5 to 2 tons of carbon dioxide per year, and 100 times by 2050 to about 7 to 13 tons of carbon dioxide per year. Other predictions show similar trends.
If the effects of the United Nations Conference on Climate Change (COP26) can effectively coordinate the global voluntary and compliance markets, there will be a demand for 2 tons of carbon dioxide each year by 2030. In most forecast scenarios, growth is expected to be driven by an increase in the number of enterprise net zero commitments, as well as an increase in supply of new technologies and nature-based solutions. The expected increase in demand is reflected in market value, which is expected to grow by 7 to 20% within one year, and the total value will reach US$1.5 to 1.7 billion by 2022.
The imbalance in the growth of the carbon credit market reflects the different buyer preferences
Demand preferences and buyer demand continue to inspire a series of carbon credit alternatives that have different prices and vary in project types, geographical locations and carbon reduction returns. A highlight of this year is the increasing interest in credit product for forest and land use. The price of carbon credits has risen sharply, although the prices of different types of credits vary. In the credit market with an independent credit mechanism, the series of values given by buyers to the characteristics of credit industry, geographical location, year, and the common benefits of credit are different. Although there have been some initiatives to provide standardized contracts in recent years, prices vary greatly, and the contracts provided by trading platforms represent credit in different industries. For example, the evaluation of S&P Global Platts Energy Information shows that carbon pricing based on eliminating greenhouse gas emissions is much higher than carbon pricing based on renewable energy projects.
Due to different buyers' preferences and needs, the heterogeneity in the market is increasing. Against the backdrop of a significant increase in spontaneous commitments, buyers with different priorities and purchase credits are becoming increasingly diverse. Spontaneous buyers determine the diversity of the carbon credit market, and different buyers have different priorities for price, quality, integrity and other characteristics. In the international compliance market, buyer choices are largely limited, as demand comes only from corresponding adjustments to carbon credit, which shows the impact of the decisions of major buyers on the market.
Figure 3 Multi-level decisions by consumers shape diversified market prices
New financial services and technologies are entering the carbon credit market
Fastly growing demand for carbon credit is encouraging new players to enter the market and forcing market participants to find creative ways to adapt to new dynamics. At the same time, fragmentation and natural decentralization of the market continue to pose challenges to ensuring transparency and liquidity.
first, new financial services are introduced. Over the past year, the role of financial roles in the carbon credit market has been significantly enhanced. Financial actors are increasingly involved in the implementation stage of carbon projects, providing project developers with capital and risk hedging mechanisms. Financial institutions that used to rely mainly on equity and grants for early investments are increasingly acting as intermediaries for voluntary carbon credit transactions. In recent years, with the establishment of new carbon trading markets, the merger of the original carbon trading markets, and the entry of other financial entities, the carbon credit market has undergone significant changes. These new players provide a range of services, including trading platforms, derivatives and carbon quality standards. Introducing new price determination mechanisms fundamentally changes the nature of transactions. The prices of standardized contracts are increasingly used as benchmarks, companies have begun to conduct price assessments of different types of carbon credits, and combination auction contracts for carbon credits have emerged.
New participants and financial services are driving the carbon credit market toward greater standardization. However, focusing various projects under a larger type of contract increases risk, blurring the differences between them. A greater degree of standardization will also create opportunities for speculation, which may eventually become the main driver of the growth of the carbon credit market, but will also bring about market volatility.
Second, the development of new technologies in . New technologies, especially those related to blockchain, are shaping the trading practices of the carbon credit market. Although blockchain practice has made progress in recent years, a new phenomenon has emerged in the past year, striving to make the carbon credit market interoperable with decentralized finance. Through virtual currency , smart contracts and other digital technology innovations, decentralized finance allows peer-to-peer financial transactions without a third party.
Magazine Introduction PROFILE
"Digital Finance Observation" is sponsored by Beijing Financial Technology Research Institute. It also relies on the academic and research resources of Tsinghua University Financial Technology Research Institute and Beijing Qingfen New Financial Research Institute. It is an internal targeted publication with in-depth research as its main feature. Through combining theory with practice, we summarize China's practice and expand our global vision, and have in-depth research on the field of financial technology , providing rational and constructive views and opinions from a multi-dimensional perspective for the healthy development of the industry.
Source: Beijing Financial Technology Research Institute
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