Critical Design Features for Effective Carbon Pricing – A Business Perspective

What is carbon pricing and why is it considered important in the path to net zero emissions?    

Carbon pricing is an approach to reducing carbon emissions that uses market mechanisms to pass the cost of emitting on to emitters. The two principal carbon pricing mechanisms are carbon taxes and Emission Trading Systems (ETS). The goal is to discourage the use of carbon dioxide–emitting fossil fuels to protect the environment, address the causes of climate change, and meet national and international climate agreements. 

Putting a price on carbon represents an important way for governments to drive emissions reduction. As a result, carbon pricing is gaining momentum globally with over 60 carbon pricing systems in existence, and studies showing that 80% of countries have expressed interest in using international market mechanisms to meet their climate targets. However, this broad range of carbon pricing systems has created a fragmented international climate policy landscape, compounded by administrative complexity.  

 What is needed for carbon pricing to be more effective?  

• Getting the design of carbon pricing instruments right offers the potential to achieve a major win-win situation for climate and the real economy. 
• Predictable, effective and smartly designed carbon pricing as well as a coherent and consistent international approach are key to unlocking the full environmental and economic benefits of market-based policies.  
• Well-designed carbon pricing instruments give a clear signal of climate change mitigation and adaptation costs to stimulate reduced emission activity. 

What has ICC done to support governments and policymakers in their approaches to carbon pricing? 

At the United Nations climate summit COP26 in Glasgow in 2021, ICC released ten key carbon pricing principles that make the case for a more coherent and harmonised approach to carbon pricing globally and set out an essential foundation for the convergence required to meet this goal.  

In a second phase of its work in 2022, ICC further examined existing domestic carbon pricing systems, focusing more specifically on preferred policies and the composite design features within those policies. They can provide the strong and long-lived investment incentives needed and drive emissions reductions. 

The report – launched at COP27 – draws on industry experience operating under carbon pricing schemes in Canada, the European Union, Indonesia, New Zealand and South Africa. In doing so, it seeks to provide a roadmap for policymakers to enhance the real-world functioning of market-based climate policies – and progressively drive international convergence among the growing patchwork of national regimes. The report outlines critical design features of the two main carbon pricing mechanisms, carbon tax and ETS, for governments to consider as they implement or improve national systems.