Jump Starting Innovation from Carbon-Pricing Revenues

Leaders from business and government joined the dialogue on carbon pricing revenue at the “Innovating to Meet the Climate Challenge” event in New York City on Sept. 21.

“It is most important to use this approach to change the structure of the economy,” said Laura Tuck, vice president of sustainable development at World Bank.

“The economy and the environment go together,” said Catherine McKenna, member of Parliament for Ottawa Centre. She said 80 percent of Canadians currently live or will live in a jurisdiction that has a price on carbon. While Ontario and Quebec have cap-and-trade systems, the province of Alberta operates under a carbon tax.

Revenues can enhance productivity across the economy by reducing the capital cost of renewable energy, enabling investments in different sectors and addressing corporations’ carbon portfolios, panelists said.

Following the Carbon

Efficient carbon pricing reduces greenhouse gas emissions while generating revenues. Proceeds from carbon taxes and cap-and-trade schemes are commonly allocated to tax-policy reforms, public-service investments, and climate-finance initiatives, Tuck said.

In 2015, global revenues from carbon pricing generated $26 billion, said Lance Pierce, the moderator and president of Carbon Disclosure Project North America.

Despite progress, climate mitigation efforts are not happening at the pace and scale required to maintain global warming at a tolerable threshold, said World Bank President Jim Yong Kim.

“To limit warming below 2°C, we must follow the carbon, and this will require an unprecedented level of innovation.”

In doing so, a key challenge is ensuring that low-and-middle-income nations pursue emissions reductions. Incentives include providing cost-competitive renewable energy, “greening” the financial sector, and monitoring the Asian energy transformation.

“The green bond market will be worth $80-100 billion by the end of 2016,” Kim said, suggesting that using the $100 billion climate fund to buy down interest on loans could help favor the use of renewable energy sources.

“There’s no reason for the price of solar to exceed that of coal. In addition, solar can be installed much faster,” Kim said, pointing out Vietnam’s 9 c/kWh coal plant versus 12-13 c/kWh for solar.

Earmarking Government Services

Governments worldwide are proactive in pricing emissions. Over 40 countries and 20 city and state provinces, accounting for almost a quarter of all greenhouse gas emissions, have a carbon-pricing system in place, Tuck said.

Carbon pricing is accelerating in low and middle-income countries as well. Mexico, Colombia, and Chile are in the process of developing carbon markets, while Côte d’Ivoire and Ethiopia are assessing the feasibility of introducing a carbon price, Tuck said.

Programs can be revenue-neutral, drive clean technology development in the form of tax credits and accelerated depreciation, or finance public expenditures such as health and infrastructure, Tuck said. Countries can choose how to spend the revenues. Revenue-neutral carbon pricing uses the funds collected to offset taxpayers’ contributions. For example, it can lower personal income and business taxes.

McKenna said carbon pricing should be dynamic, with taxes gradually increasing and caps gradually decreasing.

David Heurtel, Quebec’s minister of sustainable development, environment and the fight against climate change, said the province is engaging in “infra-national government” leadership. In 2014, Quebec and California linked their cap-and-trade systems, with the province of Ontario set to join in 2017.

“By far, $1.2 billion in revenues have been generated from credit auctions,” Heurtel said. The funds are reinvested in 150 different practices such as energy efficiency. But Quebec is legally obligated to invest two-thirds of its cap-and-trade revenue in the transportation sector.

Electric vehicles, eco-friendly school buses and trucks, and the aviation industry are the cornerstones of revenue investments.

“We are now focusing on the development of the entire value chain,” Heurtel said. Revenues are being reinvested in the electric vehicle charging station industry and in the lithium battery industry.

Revenues, innovation and legislation must complement each other, Heurtel said.

Heurtel helped Quebec with its Zero Emissions Vehicle (ZEV) mandate to develop the EV sector. Quebec has an $8000 rebound rate subsidy on EVs. A recent partnership with Peugeot-Citroen should drive more growth in the EV market.

“Government policies alone set the signal. Then, businesses must step up and figure out ways to save money, make money, innovate, and create jobs,” McKenna said. 30 Canadian companies recently joined the Carbon Pricing Leadership Coalition.

Heurtel said the role of transparency regarding carbon-pricing revenues makes a difference. “It’s important to let the citizens know where their money is going and what the benefits are.”

Creating a Massive Opportunity for the Private Sector

Businesses see carbon pricing as an actionable platform, Pierce said.

The latest CDP report on business carbon pricing shows a 26-percent increase in the number of companies disclosing a carbon price compared to the previous year, continuing the rise of carbon pricing used in internal management.

A carbon price can reveal hidden risks and opportunities in a company’s operations and supply chain, Pierce said. Some, like Microsoft, are championing their own internal financing schemes.

“Climate-smart investments are a trillion dollar opportunity for the private sector to cut greenhouse gas emissions,” Kim said.

Feike Sijbesma, CEO of Royal DSM and co-chair of the Carbon Pricing Leadership Coalition, was one of the earliest advocates for carbon pricing. Royal DSM applies an internal calculation of €50 per ton CO2e (carbon dioxide equivalent) during project evaluation.

“Companies are mostly judged on the profits they make, rather than their contribution to society and to the planet – but we must anchor the latter into our economic system,” Sijbesma said.

To prompt more action from businesses, Sijbesma listed “fossil-fuel subsidies and government uncertainties” as barriers that need to be overcome. He recommended that governments help support the energy transition by allocating revenue streams for displaced workers, or for reducing taxes.

“We have to build sustainability into a paradigm that CEOs understand, such as ‘costs and revenues,’” said Anirban Ghosh, vice president of sustainability at the Indian conglomerate Mahindra & Mahindra.

“Carbon pricing is a tool that helps to reduce the carbon footprint and generate green revenue,” Ghosh said. Mahindra uses its green revenues toward “green buildings, energy efficiency, solar power, and micro-irrigation.”

Regarding the future prospects of carbon pricing and business strategy, Ghosh said evaluating the carbon intensity of corporations’ portfolios is pivotal.

Supporting Economies

Carbon-pricing revenues are a unique opportunity to foster economic growth driven by clean energy, panelists said.

Countries considering the options can obtain resource support from World Bank’s initiatives such as the Partnership for Market Readiness, Transformative Carbon Asset Facility, and its FASTER principles for successful carbon pricing.

Note: Online video of this event is available from the World Bank.

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