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Carbon pricing policy in 2018. Was it a year of progress??

Carbon pricing remains at the centre of most government policy discussions on climate change, but in a year which saw the Intergovernmental Panel on Climate Change (IPCC) give an unambiguous warning on the need for mitigation action, carbon pricing policy development rather stumbled along.

Undoubtedly the highlight of the year was the restoration of the EU Emissions Trading System (ETS) to again become a meaningful mechanism, with prices rising to over €20 as EU growth gained momentum and allowance supply tightening. The recognition that the Market Stability Reserve would be a feature of Phase IV in the 2020s certainly contributed to this. Also in the EU, discussions opened around the need for an EU ETS floor price, following the successful example set by the UK which has seen coal almost vanish from the generation mix since their implementation of such a system.

Singapore also moved forward with the implementation of its carbon tax.

But outside the EU and Singapore it was hard to find any stellar examples of progress, although intent remains high in many jurisdictions. Rather, 2018 was a year troubled by a number of developments in the carbon pricing space;

In between the highs and lows of 2018, there was still progress. China announced further details of its upcoming cap-and-trade system and continues to make progress in implementing their plans and Kazakhstan is now looking to reboot their early system. The very long running discussion on a carbon tax continued in South Africa with the prospect of a system emerging in 2019, although the parliamentary process has yet to conclude.

But this is not the required profile of action for a world that is intent on reaching the goals of the Paris Agreement. That profile was illustrated by the May release of the Shell Sky Scenario which highlighted the extraordinary rate of progress required in this policy area in the 2020s. Whereas in 2020 Sky shows only modest uptake of carbon pricing, reflective of the situation today, by 2030 some form of carbon pricing is covering the bulk of the global economy at a level between $25 and $60 per tonne of carbon dioxide.

Sky Scenario carbon pricing profile (Source: Shell analysis)

Developments in this space need to pick up pace dramatically in 2019, but perhaps the transparency and reporting framework agreed at COP24 will help in that regard. While the Paris rulebook makes no specific demands on governments to implement policy, it will put a spotlight on the actions they choose to take and the mitigation they seek to achieve. Carbon pricing policy ought to see some uptick under such circumstances.

Overview of carbon pricing developments (Source: own analysis)

Note: Scenarios 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. Please read the full cautionary note in http://www.shell.com/skyscenario.
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