CO2 pricing, the cornerstone of the fight against climate change, still missing from the COP21

Notwithstanding the numerous diplomatic efforts deployed by the French negotiators, the dynamic of the COP21 seems to lose momentum at Le Bourget. Indeed, the fight against climate change generates substantial redistribution inequalities: the consequences of the reduction of CO2 emissions vary greatly depending on the economies. Thus, the likeliness of having the present States negotiating differs depending on the impact of climate change on their economy, their historical responsibility in emitting CO2, their financial dispositions, and the efforts of other countries. However, reconciling these geopolitical challenges is crucial in order to set binding emissions reduction targets at a global level.

Though the main challenge of the COP21 is the fight against climate change, the Conference of the Parties is not the place where the means for reaching the ambitions adopted by the States, be they binding or not, will be discussed. Indeed, leaders will not decide upon the mechanisms of CO2 emissions reduction. Yet, without concrete State intervention for incentivizing emissions reduction, the agreement reached may end up completely inoperative. On the aftermath of the COP21, the issue of CO2 pricing will become inevitable for the States that have not already adopted a tax and/or that do not participate in an emission trading system – these instruments contributing to reduce CO2 emissions in a cost-efficient manner.

The crucial value of a high global carbon price

At a global level, power generation is the most accessible and important area of CO2 emissions reduction, given that 42% of electricity is generated from coal, according to the IEA. Coal plants are however the first electricity source of carbon dioxide emissions. Thus, power generation from coal represents 30% of global CO2 emissions. Substituting coal will not be possible without a meaningful carbon price. In Europe, an average C02 price of 32€/t would enable the replacement of coal by gas, and then by RES if above 50€/t. This level differs across the world depending on the relative prices of energies.
If this price level has an impact for the power sector, it is not sufficient to reduce CO2 emissions in all sectors. As far as the transport industry is concerned for instance, the costs of alternative technologies are preventing from an immediate reduction of emissions. A long-term price signal would nonetheless give market players the possibility to anticipate the evolution of CO2 price and invest accordingly in R&D so as to develop competitive low-carbon technologies.

Beyond these political challenges of redistribution among States, CO2 pricing across the globe will be absolutely essential in the fight against climate change. Clear long-term price-signals applying to all actors are the precondition for a successful CO2 emissions reduction. In this regard, the draft of the agreement presented by the French Minister of Foreign Affairs, Laurent Fabius, on Saturday at the COP21 is therefore not sufficient. Indeed, even if it may include some progress – which will be assessed at the end of week based on the numerous options that remains to be considered – it is regrettable that no framework for consistency, which would enable a worldwide carbon price-signal, was included.