Ngozi Okonjo-Iweala, the Director-General of the World Trade Organisation (WTO), has urged the adoption of a global carbon price to accelerate progress towards climate objectives.
Despite over 4,500 climate-related measures being formally notified by WTO members since 2009, including direct taxes and regulatory measures, these efforts have fallen short of the goals outlined in the Paris Agreement.
Industries that are both energy-intensive and heavily traded, such as cement, steel, and aluminum, raise concerns about “carbon leakage.” This concept suggests that raising carbon prices in one market may lead to a shift in investment and production to regions where carbon prices are lower or non-existent. The fear is that countries implementing carbon constraints would experience job and industry losses, while global emissions would remain unchanged as polluting production simply relocates elsewhere. To address this, calls for carbon border tariffs have emerged, aiming to subject foreign competitors to the same carbon costs as domestic producers. However, developing countries argue that this approach is unfair, particularly for regions like Africa, which contribute only around 3% of global greenhouse gas emissions.
Currently, more than 60 different carbon pricing schemes are in place globally, covering approximately 22% of total emissions. However, these systems exhibit inconsistencies across regions and sectors, with prices ranging from under US$1 per tonne of CO2 in Ukraine to over US$130 per tonne in Sweden. Achieving a harmonised approach to carbon pricing while avoiding trade friction remains a challenge.
The Stern-Stiglitz Commission on Carbon Pricing estimates that a carbon price of US$50-100 per tonne of CO2 is necessary to meet the targets outlined in the Paris Agreement. Establishing a price within this range would be a straightforward solution towards achieving these ambitions. Therefore, it is essential for leaders at COP26 to prioritise this issue. However, should progress not materialise, the WTO, IMF, World Bank, and OECD have a shared responsibility to collaborate in finding solutions that address the needs of both developed and developing nations, facilitating a fair and practical transition to environmentally sustainable economies.
