Leaders attending COP26 will deliberate on the creation of a framework for global cooperation on carbon markets. The EU Emissions Trading System (ETS), initiated in 2005, became the world’s first international carbon market scheme. Presently, 64 carbon pricing arrangements are in operation, with China’s domestic ETS, launched this year, covering 30% of its emissions and being the largest in the world.
COP26 is increasingly viewed as a pivotal moment, but leaders face challenges in connecting carbon markets due to competing domestic responsibilities and managing the new costs imposed on businesses. Critics argue that existing carbon pricing mechanisms have failed to incentivise emission reduction measures, mainly due to weak pricing, inadequate market design, and extensive exemptions. Approximately 80% of global emissions remain unpriced, and the global average price stands at a mere US$3 per tonne. Only 3.76% of emissions are covered by a carbon price exceeding US$40 per tonne, prompting experts to suggest doubling this figure to drive change.
A global carbon pricing approach is considered a potential solution as it could mitigate the risk of carbon leakage while also raising manufacturing standards and accelerating the adoption of clean energy worldwide. Supporters argue that it would enable countries struggling to meet their nationally determined contributions (NDCs) to purchase emissions reductions from nations surpassing their climate pledges. According to the International Emissions Trading Association (IETA), such cooperation under Article 6 could lead to potential cost savings of US$250 billion per year by 2030.
Establishing such a system presents challenges, such as preventing double-counting of credits between trading countries. Moreover, linked carbon markets tend to witness price equalisation, with the lower-priced system being influenced by the higher-priced one—an aspect that emerging markets might find unpalatable.
If a comprehensive trading framework cannot be achieved, some experts believe that agreeing on a globally accepted carbon price floor could be a positive outcome. This approach, deemed politically easier to implement than a universal carbon tax, has been proposed by the International Monetary Fund (IMF). The IMF suggests a three-tier price floor arrangement of US$75 per tonne for advanced economies, US$50 per tonne for high-income emerging markets, and US$25 per tonne for low-income emerging markets. The IMF estimates that, coupled with existing policies, this approach could help achieve a 23% reduction in global emissions below the baseline by 2030.
While carbon taxes or emissions trading schemes can provide research and development funding or support to the poorest nations for decarbonisation, reaching a consensus on a global tax mechanism will be challenging. Pursuing a global carbon price necessitates aligning countries with diverse geopolitical, commercial, and economic interests. Some experts believe that if a resolution is not reached at COP26, the opportunity for a comprehensive carbon pricing solution may be missed.
