We live in a world that prices everything, don’t we?
We have chosen such a system. This is how we have established the order.
Economic concerns have brought pricing until today. We priced it to create the economy. On the other hand, we have started to destroy some things while creating the economy.
Environmental resources are at the top of what we destroy. In other words, life is actually coming. We are destroying life.
When we realised that we were destroying life, we started to think whether we could take environmental resources under the protection of the economy. Ironically, but it is so… We decided to ask for help from the economy again to stop the destruction we caused while growing the economy.
We came across the concept of “Carbon Pricing”.
What is Carbon Pricing?
It is an economic instrument.
It is a tool that determines the externalities of greenhouse gas emissions, i.e. the costs imposed on the public (damage to plants, health costs due to heat waves and droughts, property loss due to rising sea levels and floods, etc.) and links these costs to the source through pricing. It is usually applied by placing a price on the amount of carbon dioxide emitted.
Could such a price on carbon be beneficial? Yes, it can. It could place the burden of the damage caused by greenhouse gas emissions on those responsible for those emissions. Those responsible for these emissions could then start looking for ways to avoid them.
Instead of telling emitters who will need to reduce their emissions and where and how, a carbon price notification to emitters could enable them to make that decision themselves. Questions such as “how will they transform their activities, how will they reduce their emissions, or how much will they pay if they continue to emit?” could become their questions. Only in this way, some argue, can environmental goals be achieved by finding a flexible solution that is least costly to society.
Putting an adequate price on greenhouse gas emissions can be an important step towards internalising the external costs of climate change. In this way, it may be possible to shift financial investments towards the development of innovative clean technologies.
There seems to be a consensus in both governments and business that carbon pricing will play an important role in the transition to a carbon-free economy. For governments, carbon pricing is seen as a necessary tool in climate policy to reduce emissions. It is also an important revenue stream for an economy struggling with budgetary constraints… Businesses use carbon pricing to assess how mandatory carbon fees will affect their operations. They also use it as a tool to identify potential climate risks and revenue opportunities. Long-term investors use carbon pricing to analyse the potential impact of climate change policies on their investment portfolios. In this way, they can reassess their investment strategies and shift their investments to low-carbon or climate-resilient activities.
Carbon pricing can be done in different ways. Practices that are directly proportional to the greenhouse gas emissions produced are known as direct pricing instruments. Carbon taxes, emission trading systems (ETS) and carbon credit mechanisms are in this group. However, in some geographies (such as Argentina, Mexico, Uruguay), carbon taxes are applied at different rates among fuels. This example is closer to indirect carbon pricing, as there is carbon pricing that is not compatible across fuels.
The price placed on greenhouse gas emissions is usually expressed in tonnes of carbon dioxide equivalent (tCO2e). When different carbon pricing approaches are evaluated, emission trading systems offer certainty on environmental impact but flexibility on prices. Prices are uncertain. A carbon tax, on the other hand, offers certainty in the carbon price but uncertainty in the environmental impact.
In other types of carbon pricing, we see offset mechanisms, outcome-based climate finance and endogenous carbon pricing created by institutions.
In order to decarbonise economies, it is critical to accelerate greenhouse gas emission reductions and reduce mitigation costs. In order to support policies and legal regulations in the fight against climate change, international organisations adopt and support carbon pricing approaches.
Major Carbon Pricing Methods
Emissions Trading System (ETS)
In these systems, emitters can purchase emission units to meet their emission targets. Emission units can be traded. Organisations can either take mitigation measures or buy emission allowances from the carbon market in order to reach their emission targets with the lowest costs. The decision of organisations is related to the costs of these two options. Emissions trading systems create a market price for emission allowances by creating a supply and demand balance. There are two models in emission trading systems: “cap and trade” and “base and credit” models.
In the “cap and trade” model, a limit is imposed on emissions within the ETS. Emission allocations are made by considering this limit. Emissions below the cap are usually allocated free of charge.
In the “base and credit” model, base emission levels are set for each of the organisations. Credits are given to organisations that reduce their emissions below this level. These credits can be sold to other organisations that exceed their emission levels.
Carbon Tax
A carbon tax sets a price by defining an explicit tax rate based on the carbon content of fossil fuels or the greenhouse gas emissions they emit. The main difference from ETS is that the rate of emission reduction cannot be known in advance. In addition, the carbon price is fixed, not variable.
Credit Mechanism
The credit mechanism identifies the greenhouse gas reductions achieved from project or programme-based activities and enables them to be sold within or outside the country. These mechanisms issue carbon credits according to a calculation protocol or by creating their own registration systems. These credits can be used to meet obligations under international agreements or national policies on greenhouse gas mitigation.
Results-Based Climate Finance
This approach is a funding approach. Payments are made as predefined climate change-related outputs are achieved and verified. These programmes aim to purchase verified reductions in greenhouse gas emissions, while at the same time reducing poverty, facilitating access to clean energy, and achieving health and social benefits.
Endogenous Carbon Pricing
Internal carbon pricing is a tool used by an organisation to guide decision-making processes related to climate change impacts, risks and opportunities. Some organisations may use prices from mandated markets in their internal pricing. Some may include prices that differ by region or possible future price increases in their calculations.
The carbon pricing option for governments is determined by national circumstances and political conditions. Among mandatory carbon pricing initiatives, the most common models are emissions trading systems and carbon taxes. Sometimes it is possible to see hybrid models where these two models are used together.
Greenhouse gas emissions can also be indirectly priced. For example, removing fossil fuel subsidies and taxing energy are examples of indirect pricing.
Carbon Pricing in Turkey
The Carbon Border Adjustment Mechanism which is one of the important packages within the European Green Deal Fit For 55 Package, will require the calculation of the embedded carbon of certain products to be exported to Europe starting from certain sectors and the payment of a tax-like financial price according to the amount of embedded carbon. Turkey has been making preliminary preparations to develop an emissions trading system in line with this regulation for some time.
In the near future, we will be talking about the carbon market in our country, how the cost of a tonne of carbon is determined in the markets, how it compares with the prices in Europe, and whether sectors are taking emission reduction measures.
Carbon markets will determine the price of carbon and the size of the decarbonisation steps to be taken by the sectors!