Though revenues from carbon pricing mechanisms such as carbon taxes exceeded $100bn for the first time in 2023, carbon taxes and emission trading systems still cover only 24% of global emissions, showing little growth over the past four years.
This is according to a report published by the World Bank.
Carbon pricing revenues rose to $104bn (about R2-trillion) last year, the State and Trends of Carbon Pricing 2024 report reads. It found more than half of the revenue collected was used to fund climate- and nature-related programmes.
While traditional sectors such as power and industry continue to dominate, carbon pricing is increasingly being considered in new sectors such as aviation, shipping and waste. The EU’s carbon border adjustment mechanism, currently in a transitional phase, is also encouraging governments to consider carbon pricing for sectors such as iron and steel, aluminium, cement, fertilisers and electricity.
“Carbon pricing can be one of the most powerful tools to help countries reduce emissions. That’s why it is good to see these instruments expand to new sectors, become more adaptable and complement other measures,” said Axel van Trotsenburg, World Bank senior MD.
According to the report, carbon price coverage and price levels are still too low to meet the Paris Agreement goals to keep temperature rise from global warming to well below 2˚C.
In 2017, the High-Level Commission on Carbon Prices concluded that carbon prices needed to be set at between $40 and $80 per tonne of carbon dioxide equivalent (CO2e) in 2020 and reach about $100/tonne by 2030 to be on track to limit temperature rises to below 2ºC.
Very active
“In 2024, only seven carbon pricing instruments, covering less than 1% of global greenhouse gas emissions, reached price levels at or above the inflation-adjusted minimum level of $63 per tonne of CO2e. Further, all existing carbon prices are below the lower carbon price bound set by the Intergovernmental Panel on Climate Change ... the majority of carbon pricing instruments are not ambitious enough to drive the level of change required to meet the Paris Agreement’s temperature goals,” the report reads.
Catiana Garcia-Kilroy, lead securities market specialist at the World Bank, said SA had been very active in using carbon markets as a tool to support decarbonisation through the adoption of a carbon-pricing policy.
The implementation of a carbon tax and the ability for companies to offset a portion of their carbon tax liability has already established a carbon market in SA. A new policy, under the Climate Change Bill, on setting carbon budgets for polluting companies would help evolve the market, Garcia-Kilroy said at a forum on sustainable financing hosted by the International Finance Corporation and the Banking Association SA.
SA introduced a carbon tax in 2019 and the nominal tax rate is now R190/tonne of CO2e, but exemptions and allowances are still in place allowing companies to receive 60%-95% tax allowances. Carbon taxes are expected to increase to R462/tonne by 2030.
“Another advantage for SA is that it has relatively sophisticated players in the financial sector with banks that are very interested in becoming active in carbon trading,” she said.
Increasing the demand for carbon credits would help grow the carbon economy, which can be an important job creator.
The carbon tax regime allows companies to use carbon credits to offset 5%-10% of their tax liability, but the higher the allowable offset, the greater the incentive to grow the carbon market.
One of the challenges for SA, she said, was to develop a robust ecosystem that would lower transaction costs (such as the certification and auditing of carbon credit schemes) and to get better alignment between the different carbon pricing methodologies.
The department of mineral resources & energy has already developed a draft framework for domestic carbon offset standards, which could help reduce transaction costs and make local carbon offset schemes, especially by smaller players such as farmers, more feasible.
“The objective is to have [a carbon trading] ecosystem that is efficient and trustworthy, in which financiers can comfortably finance [projects that generate carbon credits]. We are working with government on assessing what the legal definition of a carbon credit should be, for example,” said Garcia-Kilroy.
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