Paris, We Have a Problem: World’s Largest Economies Not Getting Policy Mix Right to Avoid Worst of Climate Change, IHS Markit Says

Carbon-pricing mechanisms, including carbon taxes and emission trading systems, are falling well short of levels needed to achieve low-emission targets

HOUSTON (September 24, 2018) – Despite potentially game-changing shifts in energy use and supply patterns during the coming decades, the world may not be able to reach a sufficiently low emissions pathway by 2050 to avoid the worst of climate change because the incentives provided by policies in leading economies are insufficient, according to new climate and carbon analysis from business information provider IHS Markit (Nasdaq: INFO).

“The world’s largest economies have made market-based mechanisms—including carbon pricing, subsidy management, and fiscal incentives – a central feature of their climate-change mitigation strategies. However, our research indicates that the current implementation of these mechanisms is unlikely to result in sufficient emission reductions to realize the Paris Agreement* objectives,” said Anna Mosby, senior climate and carbon analyst at IHS Markit, and lead author of the IHS Markit Climate and Carbon Insight, entitled: G20 Price Signals Insufficient to Reach Paris Agreement Goals. “Carbon-pricing mechanisms, including carbon taxes and emission-trading systems, are falling well short of the levels needed to achieve low-emission targets.”

It has been suggested that the global economy-wide carbon price needed to achieve emission-reduction targets consistent with the Paris Agreement is between U.S. $40 per metric ton and U.S. $80 per metric ton of carbon dioxide (CO2) by 2020. However, by contrast, the average carbon price across the Group of 20 (G20)** largest economies today is U.S. $16 per metric ton of CO2, IHS Markit said.

“By these estimates, the average G20 carbon price will essentially need to triple to get the reductions within the acceptable range,” Mosby said. “Based on our IHS Markit survey of the G20 members, it appears the world’s largest economies, with the sole exception of Russia, are increasingly incorporating market-based mechanisms in their climate-change mitigation policies, but countries are clearly still searching for the right mix of tools to meet the agreed greenhouse-gas (GHG) emission targets. We just don’t see that happening at a pace that will bring the desired results by 2020, in part because there are some price barriers that exist in the form of fossil-fuel subsidies, which act as negative-emission price signals,” Mosby said.

Public-sector support to lower fossil-fuel cost profiles can counteract market-based mitigation mechanisms, Mosby said. “G20 governments have been slow to make the changes to existing fossil-fuel subsidy regimes during the past decade. However, just removing fossil-fuel subsidies would be insufficient to reach GHG emissions targets,” Mosby said.

Subsidies for low-carbon technologies can complement other market-based mechanisms for mitigation, IHS Markit said. Changes to tax rates, deductions, or exemptions reduce the cost of low-carbon alternative technologies. These incentives can help support the price signal from existing policies, but without additional mitigation policies in place, fiscal incentives cannot close the gap between the other market-based mechanisms, like carbon prices and target levels, IHS Markit said.

The approach of G20 governments toward carbon pricing has varied to date, and it is notable that the implementation of a carbon-pricing mechanism is not correlated with economic activity such as GDP or gross national income per capita, IHS Markit said.

“On the contrary, the popularity of such market-based mechanisms among G20 countries seems to be more related to fossil-fuel production,” said Steven Knell Ph.D., director, climate and carbon research at IHS Markit, and an author of the IHS Markit study. “Countries where the most emission-intensive fossil fuels, specifically coal and oil, make up a higher percentage of domestic energy production do not typically have carbon-pricing mechanisms in place. While Canada is a notable exception, the likes of Brazil, India, Indonesia, Russia, Saudi Arabia, and the United States do not have emission-trading systems or carbon taxes and have not announced an intention to implement these mechanisms,” Knell said.

The IHS Markit report follows the annual update of the business information provider’s long-term (to 2050) scenario views of energy markets and associated greenhouse-gas emissions (GHGs). The three scenarios – “Rivalry” (which presents the IHS Markit “base-case”), “Autonomy,” (which models a revolutionary change in energy demand and supply patterns), and “Vertigo” (which models perennial uncertainty and geopolitical/economic upheaval), are each based on a plausible and integrated narratives or storyline, including the future use of market-based mechanisms for climate- change mitigation. These storyline scenarios envision a different set of challenges and opportunities regarding the future paths of geopolitics, global economic growth, government policy and consumer behavior and the impact these will have on the role of oil, gas, coal, wind, solar and other primary fuels in the future energy mix at a regional, country and sector level.

Carbon prices figure in these scenarios, but IHS Markit expects it will be closer to 2030 before carbon price signals approach the levels associated with the Paris Agreement pathway. “Clearly, across all scenarios we modeled, there is much work to be done by the G20 to get close to the emissions targets set in Paris,” Knell said.

*Paris Climate Agreement entered into force in October 2016, and was adopted by 197 parties, including all members of the G20.

**G20: Group of 20 countries include Argentina, Australia, Brazil, Canada, China, the E.U., France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the U.K. and the U.S.

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