Climate economists and major energy firms believe that the price of carbon should be raised to incentivize greater investment in carbon capture technology and renewable energy innovation. As, without setting a minimum carbon pricing scheme at the international level or introducing carbon taxes, companies are not being incentivized enough to pledge or meet net-zero carbon goals by 2050.
The CEO of Exxon Mobil, Darren Woods, stated in an interview that he thinks direct air capture, through the incorporation of carbon capture and storage (CCS) technologies in oil and gas operations is “the holy grail.” He added, “if you can overcome some of those technology hurdles, get your cost down, you’ve got a technology then that can address this in a very cost-efficient way.” Exxon estimates the CCS market could be worth as much as $4 trillion by 2050.
At present, the price of captured and stored carbon currently stands at $50 per tonne, but Woods believes this figure should be at least $100 per tonne. He believes an increase in the price of carbon would help to incentivize clean energy innovations, encouraging companies to invest more heavily in CCS technologies.
Similarly, the OECD and other international organizations have been urging governments to increase the cost of carbon for several years. A carbon tax could drive companies to reduce their carbon emissions through investment in CCS technologies and renewable energy operations.
In 2015, OECD Secretary-General Angel Gurría stated “We need an effective price on carbon emissions if we want to tackle climate change. Unfortunately, implementation of the polluter pays principle is woefully lacking”. He added, "While lower-end estimates put the damage from emitting 1 tonne of CO2 at EUR 30, 90 percent of all emissions from energy use are priced at less than that when we look at 41 countries representing 80 percent of world energy use. Moreover, 60 percent of emissions are not subject to any price whatsoever. We cannot continue like this if reducing greenhouse gas emissions in a cost-effective manner is a true policy objective.”
And despite big promises following the COP26 climate summit, the price of carbon has increased minimally in many places, with many governments avoiding carbon taxes, particularly in the face of global oil and gas shortages. At a time when a green transition seems more necessary than ever, as countries around the globe fight to secure their energy security, the global reliance on fossil fuels is becoming increasingly evident. Governments could spur the development of renewables through a carbon tax, but they are also asking companies to boost oil and gas production to fill the gap that occurred following international sanctions imposed on Russian energy.
In addition, governments fear a loss of international competitiveness should they raise the price of carbon, as high-value industries such as steel and chemicals would be hit hard.
In 2021, the IMF recommended the introduction of an international carbon price floor (ICPF) agreement, where the world’s biggest carbon emitters would have to pay a floor price of between $25 and $75 per tonne of carbon depending on their level of economic development. The agreement would have to consider existing carbon pricing regulations in member countries and adjust the tax accordingly.
Some governments have taken steps toward increasing carbon prices, but some of the world’s biggest emitters have yet to do so, demonstrating how effective the introduction of an ICPF agreement could be. In Europe, there is a carbon market under the European Union’s Emissions Trading Scheme (ETS), where a regulated market was established to encourage member states to act on climate policies. In April, the trading price of carbon dioxide emissions stood at $87 per metric tonne, increasing significantly from just over $15 a tonne in 2020 during the pandemic. However, there is no such system in the U.S. and several other high carbon-emitting countries.
A Reuters poll of climate economists in 2021 found that many experts believe the average global price of carbon per tonne should be set at $100 to incentivize companies and countries to achieve net-zero carbon emissions goals by 2050. This would also help meet the Paris Agreement target of less than 1.5-2 degrees Celsius of warming. Higher carbon prices are viewed by many as essential for a successful transition away from fossil fuels to renewable alternatives, as such, the IMF has suggested an average carbon price of $75 per tonne by 2030. Although climate economists believe this target to be too low to achieve the goals set out in the Paris Agreement and the COP26 climate summit.
Both oil majors and climate economists seem to agree that the only way to incentivize carbon-cutting and drive the transition toward green energy is to introduce an international carbon pricing scheme or carbon taxes, particularly for the highest carbon-emitting countries. While this has already been seen in some parts of the world, such as in the European Union region, many powers are failing to act on something that might make the difference between meeting or failing to achieve Paris Agreement targets.
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By Felicity Bradstock for Oilprice.com
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