A new IHS Markit report highlights shortcomings in the G20 approach to carbon pricing and other market mechanisms. The world's largest economies have made market-based mechanisms a central feature of their climate change mitigation strategies. Carbon pricing, subsidy management, and fiscal incentives are being used by the Group of 20 (G20) countries to varying degrees, but the current implementation of these mechanisms is unlikely to result in sufficient emission reductions to realize the Paris Agreement objectives.
- Carbon pricing mechanisms, including carbon taxes and emission trading systems, are falling well short of levels needed to achieve low-emission cases. It has been suggested that the global economywide carbon price needed to achieve emission reduction targets consistent with the Paris Agreement is between US$40 and US$80 per metric ton of carbon dioxide (CO2) by 2020. By contrast, the average carbon price across the G20 today is US$16 per metric ton of CO2.
- Fossil fuel subsidies act as negative emission price signals. Public sector subsidy support to lower fossil fuel cost profiles can counteract market-based mitigation mechanisms. G20 governments have been slow to make the changes to existing fossil fuel subsidy regimes promised over the past decade, but alone, removing fossil fuel subsidies would be insufficient to reach current greenhouse gas emission targets.
- Subsidies for low-carbon technologies can complement other market-based mechanisms for mitigation. Changes to tax rates, deductions, or exemptions reduce the cost of low-carbon alternative technologies. These incentives can help support the price signal from existing policies, but without additional mitigation policies in place, fiscal incentives cannot close the gap between the other market-based mechanisms, like carbon prices and target levels.
This new report builds on IHS Markit's expanded coverage of climate-related policies and measures. With negotiations to finalize the implementation of the 2015 Paris Agreement continuing and governments developing new and more comprehensive climate change mitigation strategies, it has never been more important for energy producers and consumers to have a clear sense of what types of regulations are in place and where new policies may impact operational and investment decision making.
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