WASHINGTON, DC/BOGOTÁ – The science is clear: to avoid the most damaging effects of climate change, the world must reach net-zero greenhouse-gas emissions around mid-century. That means reducing human-caused GHG emissions to the lowest levels possible, and balancing any remaining emissions by permanently removing an equivalent quantity of GHGs from the atmosphere. Thereafter, the world must ensure that GHG removal exceeds emissions.
Achieving net zero will require a fundamental transformation of global energy and industrial systems, transport, and infrastructure, as well as of agriculture, forestry, and land use. The next 10-15 years are critical. While the world has many ambitious long-term climate targets, it lacks strategies to put the right investments and policies in place.
Moreover, effective and sustainable emissions reduction should also contribute to broad economic development, including by protecting workers, local communities, and human rights. The world should not reach net zero at the expense of vulnerable groups, but rather in a way that ensures a just transition for them.
The good news is that many countries, business leaders, and investors are stepping up. As of June 2021, 31 countries and the European Union have formally committed to net-zero targets, and more than 100 have proposed or are considering one. Almost 1,500 major corporations have set science-based emissions targets. And 160 banks, asset managers, and asset owners – with a combined portfolio worth more than $70 trillion – have pledged to achieve net-zero emissions by 2050.
The challenge now is to fulfill net-zero commitments with clear pathways and verifiable intermediate targets. An effective strategy, such as the one recommended by the World Bank’s Carbon Pricing Leadership Coalition Task Force on Net Zero – representing national governments, the private sector, and civil society, and co-chaired by us – must include robust safeguards to ensure accountability and transparency.
The task force underscores how carbon pricing can help to give public- and private-sector efforts the level of ambition needed to reach net zero. Although carbon pricing – including through emissions-trading systems (ETS), carbon taxes, and international carbon markets – is not a silver bullet, it can be a powerful tool in advancing a green transition.
Our panel identified several factors that can promote effective efforts to achieve net-zero targets. The first is planning and transparency. Clearly defined short- and medium-term (5-15 year) objectives are needed to identify and prioritize the specific sectoral and technological transformations required, and to drive immediate action and investments. Governments and the private sector should also each adopt separate emissions-reduction and removal targets. This would bolster accountability by enabling the evaluation of each component, whereas a blended metric of progress might hide insufficient efforts to reduce emissions.
The second factor is appropriate placement of carbon pricing within a broader green-development toolkit. Even when adopting explicit carbon prices is difficult, governments and firms should promote internal or shadow carbon pricing when evaluating investment decisions. This tool is crucial to support the right investment and infrastructure choices when implementing overall and sector-based net-zero strategies.
But carbon prices alone will not do the trick, and complementary policies are needed to reduce emissions in some sectors. Efficiency standards – regarding energy in buildings or fuel in vehicles, for example – may be more effective in lowering emissions in industries that are not responsive to carbon price signals, or where monitoring and controlling emissions sources is difficult. Short-term government subsidies or investments in research and development may be appropriate to support technological transformation in sectors where emissions-reduction options are not available or are particularly expensive.
Governments can also use complementary policies to reduce any negative effects of carbon pricing on particular groups, and to help distribute climate investments and benefits equitably. Revenues from carbon taxes or emissions-allowance auctions can finance climate investments in vulnerable communities, job training, or cash transfers to offset increases in the prices of energy, products, and services.
Third, carbon prices will need to be set much higher than they are currently, and increase over time, in order to drive the reduction and removal required to reach net zero. This applies to the use of internal carbon pricing for decision-making, as well as to the carbon price under a tax or ETS in countries that use these schemes.
Fourth, in a world where all countries are striving to achieve net zero, international carbon credit markets can play a crucial role in increasing the ambition of both buyers and sellers. But governments and businesses should aggressively cut their own emissions before investing in reductions and removals elsewhere. Any investments they make in carbon credits should complement, not replace, their emissions-reduction efforts.
International credit markets can also support investments in transformative emissions-reduction and removal technologies in developing countries. Credit investments should help to protect local environments, and obtain buy-ins from affected and vulnerable communities.
New models for international carbon markets that incorporate these broader objectives are starting to emerge. One such example is the LEAF (Lowering Emissions by Accelerating Forest finance) Coalition. Backed by a number of governments and companies, LEAF provides conventional carbon markets with additional demand- and supply-side guardrails, including for protecting local communities.
Lastly, rigorous measurement, reporting, and tracking of emissions reduction and removal are crucial to ensure both accountability regarding commitments and real benefits to the atmosphere. Rules for crediting reduction and removal funded through international carbon markets toward buyers’ net commitments must prevent double counting. The same emissions cannot count toward the net-zero commitments of both buyers and sellers.
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