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Use carbon pricing revenues to fund Just Transition, says NZAOA

UN-backed $10trn net-zero alliance also calls for end to fossil fuel subsidies, calling them “perverse incentives”.

The Net-Zero Asset Owner Alliance (NZAOA) has called on governments to use the revenues from carbon pricing to fund the Just Transition in a new position paper on carbon pricing.

The paper, which sets out a series of recommendations to ensure an effective carbon pricing policy, says that more than 40 percent of revenues from carbon pricing flow into the general budget of the jurisdiction levying them.

The $10 trillion net-zero alliance points to California’s requirement that 35 percent of cap-and-trade revenues be allocated to low-income communities and the EU decision to allocate some revenues from its emissions trading system to the modernisation fund as examples of effective funding for the Just Transition. Revenues could also be used to subsidise energy bills or pay for reskilling programmes, the paper suggests.

Alongside ensuring a Just Transition, the paper sets out four other guiding principles for policymakers: appropriate ambition, price predictability, competitiveness and international co-operation. Each principle has a series of sub-recommendations such as the introduction of carbon-border adjustment mechanisms, linking national emissions trading systems under international co-operation, raising ETS caps, and widening the scope of coverage for appropriate ambition.

The number of jurisdictions with carbon pricing instruments has risen rapidly over the past few years, with 68 national and regional carbon taxes or emissions trading schemes now in place, but the paper argues that the pace of growth is still insufficient. It highlights evidence that carbon pricing achieves emissions reduction and stresses that achieving net zero will require a transformation of carbon markets in the coming decades.

The paper also calls for the end of subsidies for fossil fuels, noting that G20 countries committed to phase them out in 2009 but have yet to do so. These subsidies provide “perverse incentives” and result in increased GHG emissions, with several G20 countries taxing carbon but still subsidising the fossil fuel industry.

Günther Thallinger, board member at Allianz and NZAOA chair, said: “The sharp rise in energy prices is putting enormous stress on households and the business sector. Continued government support and relief is needed to bridge these difficult times. Yet, in addition to better managing the near term, we also need to better position ourselves to avoid this happening again in the future.

“Accelerating the shift to net zero is essential in this regard. Structural change will need policy incentives, such as carbon pricing. These take time to implement and should not be delayed.”

The limits of climate action without governmental policy intervention were touched upon by the NZAOA in a recent report on the future of investor engagement. The alliance said: “As companies take steps to decarbonise and start to move up the ever-steepening cost curves, investor requests for additional emission reductions are met with increasing resistance. Without quantifying an exact point on this curve, which would differ even among peers in the same sector, it follows that companies will inevitably hit a boundary where they can no longer justify going further.”

The news comes as a discussion paper from the German Federal Bank warns that the introduction of carbon pricing is initially recessionary as production costs rise, and that benefits from lowered emissions will only materialise in the medium to long term. It also found that carbon border adjustment mechanisms fail to fully prevent carbon leakage and protect “dirty domestic production”.

The findings are based on a model used by the Network for Greening the Financial System, which assumes a uniform carbon price of $30 per tonne today, rising steadily to $400 per tonne in 2100 – a scenario that is considered compatible with limiting global warming to two degrees.