COP26 must not forget carbon pricing

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There are no low cost options to tackle climate change. Renewable energy is no cheaper than fossil energy once the price of investment and storage is factored in. Low carbon energy will cost more.

The only way to get the world to shift to this more expensive, low-carbon future is to make fossil fuels more expensive, which means higher carbon pricing.

Such systems usually take the form of taxes on polluter emissions or “cap and trade” systems that limit the amount of emissions that companies can emit before having to pay more.

Convincing the electorate that carbon pricing is the right thing to do will not be easy. Society as a whole will have to bear these additional costs.

The 2021 Emissions Gap Report released by the UN in October was a timely reminder of what we have accomplished and what remains to be done to contain rising global temperatures to 1.5 ° C.

The good news is that more ambitious climate change targets launched since the Paris Agreement in 2015 have brought us closer to the 1.5C target. The gap will be even smaller following India’s pledge at the COP26 summit to set more ambitious climate targets for 2030 and reach net zero by 2070.

Large issuers are also starting to link their ambition to action. China has pledged to stop overseas coal investments, while US President Joe Biden plans to spend more than $ 500 billion on climate measures. In Europe, the EU Fit for 55 proposes legislation to meet the climate ambitions of the continent.

The bad news is that the current commitments and actions are clearly not enough. More decisive action is urgently needed. The world is still on a path of close to 2.7 ° C of global warming by the end of this century.

So what can bring us on the 1.5C road to net zero?

Government policies will play a key role, from carbon pricing to subsidies for renewable energy and other transitional technologies. CRU’s carbon reduction curve suggests that European companies should prepare for CO2 prices of nearly $ 200 per tonne by 2030 if the EU takes its climate change targets seriously.

Switching to renewables is one of the relatively cheaper ways to reduce emissions, even with storage. But make no mistake: renewable energies are no cheaper than fossil fuels once the cost of the initial investment is made. and storage are taken into account.

If we think of other sources of emissions in raw materials – coal in steel, natural gas in ammonia – these sectors cannot just electrify. They need new raw materials and new production processes. Hydrogen is often seen as the silver bullet, but we expect carbon prices to reach well over $ 200 per tonne to spur widespread adoption in steel, and even higher for fertilizers.

The commodities industry is capital intensive. The switch to renewable energy and electrification operations is extremely expensive and takes years, if not decades, to achieve. This is why companies benefit from a predictable political environment. They need clarity around regulations, taxes and interim targets to achieve net zero. In reality, such stability is likely to remain elusive. The current energy crisis is one example.

The financial and private markets will also be the engine of the energy transition. COP26 was the first COP summit where finance played a leading role. Anecdotal evidence suggests that it is becoming increasingly difficult to secure a coal mine in South Africa and more difficult to raise funds for a new pipeline in the United States.

Yet there is still a lot of funding available for fossil fuel projects. This suggests that climate considerations are still not at the center of finance, but, on current trajectories, they could quickly become dominant.

Lack of financing for fossil fuels will increase the cost of financing and ultimately prices. Essentially, it does the job of a carbon price. By raising the price of fossil fuels, it makes renewables and other low-carbon options more viable.

Jumana Saleheen is Chief Economist and Head of Sustainability at Consulting Firm CRU and Paul Butterworth is its Research Director

The Commodities Note is a vsFinancial Times Industry Commentary


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