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Imposing a price on carbon sends a financial signal to investors that low-carbon investments are valuable today and will be even more valuable in the future
Philippe Le Houérou is chief executive of International Finance Corporation (IFC).
At the United Nations climate conference in Madrid, governments failed to establish new commitments on key priorities. But on the sidelines of the conference, nearly 1,200 businesses and cities reached a landmark agreement: committing to net zero targets by 2050.
A growing number of global businesses are leading the transition toward a low-carbon future. And a common belief of these businesses is that there is one key action that governments can take to slow global warming: assigning a cost to fossil fuels by putting a price on carbon. Pricing carbon pollution creates a critical market signal that helps reduce emissions by driving investments in clean, more efficient technologies.
In other words, it pays not to pollute.
Critics argue that a price on carbon will curb economic growth and hurt competitiveness, especially in emission-intensive and trade-exposed sectors such as cement and steel. Taxing carbon, they caution, could lead to ‘carbon leakage,’ where carbon-intensive industries transfer production to other countries or regions with fewer restrictions.
I disagree. There is a way to put a price on carbon and preserve competition in the marketplace.
In September, the High-Level Commission on Carbon Pricing and Competitiveness issued a report stating that putting a price on carbon neither limits economic and industrial growth, nor encourages big polluters to flee to other jurisdictions.
In fact, pricing carbon can increase investment opportunities and lead to the development of new industries while allowing competition to flourish, found the commission, which includes CEOs from leading global companies, former senior government officials, and academics.
Led by Anand Mahindra, Chairman of the Mahindra Group, and Feike Sijbesma, CEO of the Dutch nutrition and chemicals giant, Royal DSM, the commission examined the concerns of businesses surrounding carbon pricing and lessons learned in the design and implementation of carbon pricing policies around the world.
They discovered that carbon pricing has no more of an impact on the decision to invest or locate than other factors, including corporate tax rates, wage rates, the availability of labor and energy prices.
In addition, they found that risks to global competitiveness can be mitigated by smart, stable, and tailored policy packages, such as tax reductions and technology assistance focused on emerging sectors.
So, how does this look in practice?
In Sweden, which has the world’s highest carbon tax at $139 per tonne, the country’s economy has soared in tandem with the decline of greenhouse gas emissions. When the Swedish government introduced a carbon tax in 1991, it did so alongside a significant reduction in the marginal tax rates on energy, capital and labor. It also invested in climate-friendly mass transit and district heating. Between 1990 and 2015, the country’s GDP increased by 75 percent, while greenhouse gas emissions declined by 26 percent. In 2019, the country ranked 8th on the Global Competitive Index.
Imposing a price on carbon sends a financial signal to investors that low-carbon investments are valuable today and will be even more valuable in the future. In British Columbia, a carbon tax implemented in 2008 led to the creation of a new clean technology sector that now comprises over 200 companies and generates $1.7 billion in revenues.
Emerging markets also see promise in using carbon pricing to help transition to cleaner alternatives. South Africa recently introduced the first carbon tax in Africa, and in 2018, Kazakhstan relaunched its Emissions Trading Scheme following a major restructuring to account for a drop in global oil prices.
IFC and our clients are ahead of the game. We are “future proofing” our businesses by applying an internal carbon price and uncovering new business opportunities.
The window for action is closing, and business leaders and governments must act now by adopting long-term carbon pricing policies. In Madrid, the World Bank Group, in partnership with multiple governments, unveiled an ambitious new initiative, the Partnership for Market Implementation, to help 30 countries and jurisdictions implement carbon pricing and market instruments.
Carbon pricing has proven to be an effective tool in unlocking the potential of the private sector. The experience of other countries, including Canada, South Africa and Sweden, offers proof that it works.