Remember the global excitement in 2015 when the Paris Agreement was signed? That day, 176 countries committed to reducing their greenhouse gases (GHG) emissions. However, nowadays, it appears that those measures are not sufficient to keep global warming below 2 degrees Celsius. On the other side, there are countries like Sweden that not only meets but exceeds all expectations. This country used economic instruments, such as carbon taxes to stimulate the development of renewables and energy efficiency, as well as to cut emissions. How can we fill up the gap between most of these 176 countries and success stories like Sweden? What is the Swedish recipe for success? Below, are the main combinations of carbon pricing and economic development “best practices” that countries could follow to achieve better performance on their targets.
2015 | Planting year
2015 was a year full of climate actions – the Paris Agreement was signed, which once had seemed impossible; Solar Impulse 2 made history by completing the first round-the-world solar flight. These events were important for promoting clean technologies and changing the way we do business, but was it enough?
2017 | Harvesting year
2017 became a year of drawing interim conclusions and gathering the first harvest of those efforts. “Like hell it’s nonbinding” – said Trump and withdrew the US from the Paris Agreement.
Because it does not apply legal force for countries to follow their commitments, the Paris agreement relies only on a political and moral will to push forward. While the overall idea of Paris framework will probably work even without the US, it may encourage other countries not to keep their promises. In addition, carbon emissions rose and reached a historically high level of 32.5 gigatonnes (IEA, 2018), which tells us that current efforts are not sufficient and more drastic binding measures are needed.
A broad range of policy can be used to restrain carbon emissions, and economic instruments such as emissions trading and carbon tax have been proven to be the most efficient elements of mitigation strategy in some countries.
Two “Best Practices” to guide policymakers
One example is the Emissions Trading System, launched in the EU in 2005 as a major pillar of its climate policy. It remains the biggest carbon market in the world and allows companies to buy or sell their emission allowance (EC, 2018). The system aimed to cut emissions and promote investment in clean, low-carbon technologies. However, it is apparent that the rules of the game were set in favor of companies.
The price for allowances was so low that it became a mocking policy. To compare, today’s price for carbon in the EU is two times lower than it was in Sweden in 1991, when the country implemented a carbon tax, and eleven times lower than its current price (2018). Carbon price volatility prevents people and companies from investing in clean technologies and energy efficiency. In fact, business as usual became more economically attractive as it makes more financial sense for companies to buy emissions allowance and continue polluting rather than investing in energy efficiency and shifting towards clean technologies.
The Emission Trading System can be an effective economic tool when it has a strict borderline for a carbon price, which is high enough to stimulate energy efficiency and development of clean technologies.
Another cost-effective tool which proved its efficiency for driving sustainable growth is an obligatory carbon tax. Sweden has been using carbon taxation for 26 years and many lessons can be learned from its experience. New tax reform was implemented gradually with a constant increase in the carbon price, which gave time for business to adopt and pressured enough to provide incentives for improving energy efficiency and increase the use of alternative energy sources. Today, Sweden has one of the lowest emission levels in Europe and obtains 57% of its energy from renewable sources.
What can be learned from this example by other countries? Sweden proves that economic development does not correlate with the intensive use of fossil fuels and pricing carbon can spark investments in clean technologies.
Current price for carbon in Sweden is 150 EUR per ton, while European companies pay around 14 EUR and this price is extremely volatile that once dropped even to 0.3 EUR (MarketsInsider, 2018). Such a low price cannot create incentives to move from business as usual towards a low-carbon future.
Today we are losing the battle against climate change. Current policies are not sufficient to lead the transformation. The hope is climate finance with stronger price signals for carbon, which will support the shift towards a low-carbon future. This road goes through a range of policies with the strong political will to support this shift and it has to be done by all countries.
Losing the battle against climate change may give us knowledge and experience essential for winning the war.
If we can imagine it, we can achieve it.
References:
- EC, n.d. EU Emissions Trading System (EU ETS). [Online]. Available at: https://ec.europa.eu/clima/policies/ets_en
- IEA, 2018. Global energy demand grew by 2.1% in 2017, and carbon emissions rose for the first time since 2014. [Online]. Available at: https://www.iea.org/newsroom/news/2018/march/global-energy-demand-grew-by-21-in-2017-and-carbon-emissions-rose-for-the-firs.html
- MarketsInsider, 2018. CO2 European Emission Allowances. [Online]. Available at: http://markets.businessinsider.com/commodities/co2-emissionsrechte