COP26: Carbon Pricing Rising and its Impact on the Energy Sector

Energy

10 Nov

Introduction

“Putting a price on carbon can encourage low-carbon growth and lower greenhouse gas emissions.” – UN Global Compact

Carbon pricing has emerged as a top theme at COP26. At the landmark talks, some high-level leaders are calling for a global carbon price, or carbon price floor, to send a stronger energy transition signal across industries and society.

Carbon pricing charges emitters for the carbon they release into the atmosphere and is one of the most promising tools for reaching global net zero.

This will obviously have far-reaching implications for the energy sector, which currently contributes about 73 percent of global emissions of CO2. If the talks result in global carbon pricing, then oil companies and other traditional energy companies would face a clear financial incentive to decarbonise. The discussions may also lead to greater trading options in the form of carbon credits or offsets.

Types of carbon pricing

The most common types of carbon pricing are:

emissions system (cap-and-trade), which sets a cap for how much carbon can be emitted;
carbon taxes (which is essentially the taxing of greenhouse gasses);
emission reduction funds (ERF) which are currently being used by Canada and Australia by companies generating credits for setting up new initiatives; and
hybrid approaches where governments would implement a variety of these carbon pricing methods.

However, the exact means has not yet been decided.

Will COP26 result in a global carbon price?

The UN has previously supported carbon pricing.

Article 6 of the Paris Agreement could provide a framework for carbon pricing, but the details for implementing this key section of the accord have not yet been finalised or agreed. This article has been discussed for years and will be held as a key measure of success or failure for COP26.

While COP26 does not dictate policy to counties, and cannot set a global carbon price, it can bring together world leaders, recommend that they set a global carbon price, and provide a forum to allow them to discuss it.

How Businesses can Prepare for carbon pricing

To prepare your business for the possibility of future carbon pricing, your first step is to calculate your emissions. These will likely need to be reported in a standardized format.

Once you have an overview of your emissions, you’ll be able to identify hotspots in your emissions profile and begin to transition away from them.

Even if COP26 doesn’t result in newly imposed carbon pricing, knowing your emissions and taking steps to reduce them should be a goal for every company. Therefore, rather than waiting for government mandates and to see whether carbon pricing is implemented, every business should begin policing its own carbon output.