In order to effectively combat climate change, countries around the world have accepted the obligation of decarbonization through the Paris Agreement. As part of this commitment, the Contracting Parties of the Energy Community (EC) should implement carbon pricing mechanisms to encourage the reduction of greenhouse gas emissions. This is particularly important for countries with a high reliance on coal and a lower GDP, as they face unique challenges in transitioning to a low-carbon economy.
Currently, there are two dominant carbon pricing mechanisms in use globally: the Emissions Trading System (ETS) and carbon taxes. The EU ETS, which operates on a cap-and-trade basis, sets limits on total emissions and allows emitters to buy or trade emission allowances. On the other hand, carbon taxes determine a fixed price for carbon emissions in advance.
The successful implementation of carbon pricing requires several factors. Firstly, there needs to be a sufficiently long transition period with free emission allowances to allow for a smooth integration of countries into the EU ETS. If this is not feasible, alternative carbon pricing mechanisms should be considered. Additionally, continuous financial support from the European Union is crucial to ensure the abandonment of coal and facilitate the transition to carbon-free energy technologies.
It is estimated that carbon pricing will be effective in encouraging decarbonization if the price surpasses €50 per ton of CO2. However, currently, only about 5% of global emissions are covered by prices above this threshold, mainly under the EU ETS. This highlights the need for greater adoption of carbon pricing mechanisms globally to accelerate decarbonization efforts.
In May 2023, the EU adopted the Regulation on the Carbon Border Adjustment Mechanism (CBAM), which aims to protect EU producers from import competition from countries without carbon pricing. Importers of goods covered by CBAM will have to pay the difference between the EU ETS price and the emission price in their country of origin. This regulation also has implications for countries in the Energy Community Treaty, as it requires them to align with EU energy and climate regulations.
The success of carbon pricing in the EU can be seen through the expansion of the EU ETS to cover more sectors and the increase in carbon prices in recent years. However, it is important to consider the unique challenges faced by developing countries, particularly those with a high reliance on coal. Support from the EU and the implementation of appropriate carbon pricing mechanisms are crucial for the successful decarbonization of these countries.
Sources:
– Ljubo Maćić, special advisor, Economics Institute