Carbon pricing in 2016

Given that 2016 marked the first full year of climate policy development after COP21 in Paris and was the year in which leaders lined up to sign and then ratify the Agreement, one might have expected a deluge of new carbon pricing policy initiatives. Rather, the picture was mixed, although there were some notable advancements. Three stood out in particular;

1. The Chinese government confirmed that 2017 would see the start of its nationwide emissions trading system. This will supersede the various regional pilot systems and should emerge as the largest ETS in the world once it is up and running. The system is likely to commence in the second half of this year, probably at the start of Q4.
2. The Canadian Government announced that carbon pricing would apply on an economy wide basis from 2018 onward. This could be implemented at provincial level, but if not the Federal Government would intervene and apply it through a taxation based mechanism. For provinces with an explicit price-based system, the carbon price should start at a minimum of $10 per tonne in 2018, and rise by $10 per year to $50 per tonne in 2022. Provinces with cap-and-trade need: (i) a 2030 emissions reduction target equal to or greater than Canada’s 30 percent reduction target; (ii) declining (more stringent) annual caps to at least 2022 that correspond, at a minimum, to the projected emissions reductions resulting from the carbon price that year in price-based systems.
3. The international aviation industry announced an offset mechanism to limit growth in commercial aviation emissions, effectively bringing a carbon price into that sector.

There were other developments and in the map below Australia has moved from blank to a light shade of green. This is because its Safeguard Mechanism started. It will require Australia’s largest emitters to keep emissions within baseline levels such that the country’s other efforts to reduce emissions (e.g. the Emissions Reduction Fund) aren’t eclipsed by emissions growth from existing facilities. The safeguard will apply to around 140 large businesses that have facilities with direct emissions of more than 100,000 tonnes of carbon dioxide equivalence (t CO2-e) a year. This will cover around half of Australia’s emissions. The entity with operational control of a facility will be responsible for meeting safeguard requirements, including that the facility must keep net emissions at or below baseline emissions levels. The mechanism will apply broadly to a variety of business entities, including corporations, partnerships, trusts, and local councils. Baselines will reflect the highest level of reported emissions for a facility (hence the light green) over the historical period 2009 to 2014 Entities with a baseline can comply by ensuring emissions are below that level or by buying Australian Carbon Credit Units.

But the year was not entirely marked by positive progress. In particular, there was the resounding defeat of Washington State’s Initiative 732, which sought to implement a tax on carbon emissions in exchange for cuts to existing taxes. Washington State rejected the idea of a carbon tax by 59 percent to 41.

So we end 2016 with some 23% of greenhouse gas emissions (including China) covered by some form of carbon pricing (Source: World Bank: State and Trends of Carbon Pricing 2016), operating at an average level of something like US$10 per tonne of carbon dioxide. It has taken 20 years to reach this point, with the Kyoto Protocol marking the starting point. To even match the market based Oceans outlook offered by the Shell New Lens Scenarios, carbon pricing needs to cover some 80% of the global economy at a level of $30 or more by 2036, i.e. in under 20 years. That scenario reaches net zero emissions within this century, but has been assessed by MIT as having the impact of limiting warming of the climate system to around 2.7°C, somewhat above the ambition of the Paris Agreement despite the net-zero outcome.

One can only conclude that much remains to be done in 2017 and beyond.

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“The New Lens Scenarios” and “A Better Life with a Healthy Planet” are part of an ongoing process – scenario-building – used in Shell for more than 40 years to challenge executives’ perspectives on the future business environment. We base them on plausible assumptions and quantification, and they are designed to stretch management thinking and even to consider events that may only be remotely possible. Scenarios, therefore, are not intended to be predictions of likely future events or outcomes, and investors should not rely on them when making an investment decision with regard to Royal Dutch Shell plc securities.

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