Carbon pricing is crucial to save planet

By Philippe Le Houérou, IFC CEO

There is no Planet B: Project finance must assign a cost to fossil fuels

The impacts of the changing climate are becoming increasingly evident, especially for the most vulnerable people in the world. We must limit the carbon and other greenhouse gases released into the atmosphere to keep global warming below 2 degrees Celsius, as outlined in the Paris Agreement. There is no Plan B because, as President Emmanuel Macron, the French president, has said, “There is no Planet B.”

One powerful way to effectively fight global warming is to use carbon pricing more systematically in investment project selection. By applying a price to the use of fossil fuels, we will be fully reflecting the costs to society, shift the burden of responsibility to those who generate the emissions, and encourage innovations for cleaner growth.

At IFC, we have piloted carbon pricing for the past 18 months, and starting this past May we have been applying a carbon price to all project finance investments in the cement, chemicals, and thermal power sectors.

Guided by the Report of the High-Level Commission on Carbon Prices, we have set a price on carbon in these sectors at $40–80/metric ton of carbon dioxide equivalent in 2020, rising to $50–100 in 2030, and continuing in a similar trajectory beyond then. Projects in lower-income countries will be subject to prices at the bottom end of the range and projects in middle income countries will use carbon prices at the upper end.

As global leaders gather next week in New York at the One Planet Summit, organized by the Government of France and the United Nations, we must acknowledge that this is just a start. We must come together with our colleagues from other Multilateral Development Banks to embed carbon pricing in our development impact calculations and the projects that we invest in. We must encourage low-carbon innovations and tools, and urge others to follow our lead.

For instance, we see great opportunity for positive impact with banks and other financial institutions, which can amplify climate finance and carbon risk management through their own investment decisions. We believe that if companies start using carbon pricing in their investment decisions, this will reflect the costs of climate change and lead to minimizing climate risk exposure. This could help pivot investments away from high-carbon emitting projects and spur more investments in climate-smart alternatives.

Some have argued that imposing carbon pricing will impede economic progress. But in several developed countries, we’re finding that this hasn’t been the case.

As of now, 51 carbon pricing initiatives, including 15 in emerging markets, have been implemented or are scheduled for implementation, covering 20 per cent of global emissions. Developed countries have shown that carbon taxes do not hamper economic growth. Sweden, for instance, has had the world’s highest carbon tax for over two decades, currently set at $139 per tonne, while maintaining an average annual growth rate of almost 3 per cent over this time. That’s higher than the OECD average growth rate during this period.

In emerging markets, carbon pricing initiatives are too new to evaluate, but many have been launched. One example is Colombia, which recently established a carbon tax of about $5 per tonne for fuels derived from petroleum and gas, which represent about 24 per cent of the country’s total greenhouse gas emissions. It has projected that the tax will generate about $220m per year and help reduce over 4.3m tonnes of carbon dioxide between 2017 and 2030.

A second example is Chile, which also has placed a carbon tax of $5 per tonne starting last year, covering 39 per cent of national emissions with a focus on heat and power in the electricity and industrial sectors. The government received more than $190m in revenue from the tax this past April.

We are now working with our partners at the Carbon Pricing Leadership Coalition, which includes industry experts and business managers, to help spread the use of carbon pricing in banking and construction.

IFC itself is actively engaging with our clients on many climate-related issues. We strongly believe, though, that the specific step of putting a price on carbon will create more climate business opportunities and accelerate progress in emerging markets toward a low-carbon future. Remember, there’s no Planet B, only this one.

This article was originally published on the Financial Times Beyondbrics.