Carbon pricing resilient but dwarfed by subsidies, World Bank finds

Nature-based projects are expected to make up a bigger share of voluntary carbon markets in the future.

Government carbon pricing schemes were resilient in the face of headwinds in 2022 but are at insufficient levels for decarbonisation and risk being eroded by subsidies, according to the World Bank’s annual report on the topic.

The World Bank carbon pricing report, published on Tuesday, shows that schemes grew by less than one percent to cover 23 percent of global greenhouse gas emissions over the past year.

However, the “minor increase” in coverage was also because emissions declined the most in jurisdictions with a carbon price already in place, the report said.

Less than five percent of global emissions are subject to carbon prices in the range of $50-100/tonne as of April 2023, which is thought to be the minimum range required to limit global warming to 2C.

The analysis found that most governments did not reverse the ambition of their policies in 2022, going ahead with scheduled tightening measures and committing to strengthen requirements over the coming years. These included a handful of individual European countries, Canada, New Zealand, Singapore and the EU.

World Bank climate change director, Jennifer Sara, especially commended governments for “prioritising” carbon pricing in the face “of economic turmoil and geopolitical instability of this past year”.

At the same time, some effects of direct carbon pricing were cancelled out by rampant fossil fuel subsidies, which hit an all-time high of $1 trillion and beyond over the past year. This dwarfs the record $100 billion or so of revenue raised by the schemes through a carbon tax or a cap-and-trade market in the same period, the report said.

Examples of the latter include the EU Emissions Trading System (ETS), which sets an overall emissions limit and requires polluting companies to purchase additional allowances.

Putting a robust price on carbon is generally considered essential to spur companies to decarbonise, but political and economic considerations have meant that current prices remain too low to drive changes needed to meet the Paris climate goals.

Refinitiv data shows how carbon prices reached record highs in 2022, with the price of permits on the EU’s carbon market averaging more than €80/tonne, up 50 percent from the previous year. An IMF assessment in the same year put the average global carbon price at $6/tonne.

The World Bank separately noted a slowing of growth in voluntary carbon markets, where companies can purchase credits to offset their emissions to meet climate targets, with supply of new credits and demand falling off slightly in 2022.

It drew a link between the slowdown and critical media investigations into carbon offset providers and projects over the past year, saying that challenging economic conditions were “compounded by prominent public criticism of the integrity of some carbon credits and continued uncertainty around best-practice use”.

More than half of the carbon credits issued in 2022 were generated by renewable energy projects, said the World Bank. This was expected to be replaced by a significant expansion of nature-based projects in the future, it added. Renewables will not be eligible for carbon credits financing if they can generate profit independently, and falling costs across this sector has made this increasingly likely.