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The cost of carbon
Understand the impact of carbon pricing on the commodities sector
Carbon pricing is coming. Is your business ready?
Carbon pricing is the mechanism by which governments capture the external costs of carbon emissions, such as the result of heat waves and droughts or flooding and sea level rise, and tie them to the original emitters. Due to the spread of carbon pricing schemes (see the carbon regulation map below) and the inevitable rise of the price of carbon, the commodities sector — the highest emitting industry in the world — is now faced with discontinuing high-emission activities, reducing emissions or continue business as usual and pay an increasing price for their emissions. This unavoidable trend is disrupting the economics of global supply chains and is the main factor in your organization’s carbon risk.
The impact of carbon pricing
Additional costs in a $110 per tonne carbon price scenario, compared to 2019 commodity prices [Wood Mackenzie, 2020, Frank et al 2017]
Carbon regulation map
Carbon pricing initiatives adopted through legislation
United Kingdom
Argentina
Australia
Austria
Belarus
Belgium
Brazil
Canada
Chile
China
Czech Republic.svg)
Denmark
Finland
France
Germany
Greece
India
Indonesia
Iran
Italy
Japan
Kazakhstan
Mexico
Netherlands
New Zealand
Norway
Philippines
Poland
Russia
Singapore
South Africa
Spain
Sweden
Switzerland
United Arab Emirates.svg)
United Kingdom
Ukraine
United States
VietnamThe government of Argentina implemented a carbon tax (official name: Impuesto al dioxido de carbono) on January 1, 2018 for most liquid fuels, replacing previous fuel taxes. The revenue is designated to multiple beneficiaries, including the National Housing Fund, the Transport Infrastructure Trust, and the social security system, among others. For fuel oil, mineral coal, and petroleum coke, the tax rate became operational from the beginning of 2019, at 10% of the full tax rate, and will increase annually by 10 percentage points to reach 100% in 2028. 100% of this revenue is distributed according to the Federal Revenue Distribution System.
The ERF Safeguard Mechanism came into effect on July 1, 2016, launching a baseline-and-offset system. It intends to ensure that emission reductions purchased by the Australian Government through the ERF are not offset by significant increases in emissions above business-as-usual levels elsewhere in the economy.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
Brazil's National Climate Change Policy, enacted in December 2009, aims to promote the development of a Brazilian market for emissions reductions. As part of its activities under the Partnership for Market Readiness (PMR), the Brazilian government is considering the implementation of market instruments to meet Brazil's mitigation targets and reduce overall mitigation costs. Brazil is assessing different carbon pricing instruments, including an ETS and a carbon tax. The Ministry of Economy is developing design options and conducting comprehensive economic and regulatory impact assessments for both instruments.
The pan-Canadian approach to carbon pricing is a pillar of the Pan-Canadian Framework on Clean Growth and Climate Change. The approach requires all Canadian provinces and territories to have a carbon pricing system in place in 2019 that aligns with the federal standard. A federal carbon pricing backstop system comes into effect, in whole or in part, in 2019 in any province or territory that requested it or that does not have a price on carbon in place that meets the federal standard. The federal backstop system consists of two components: a tax-like component that is a regulatory charge on fuels and a baseline-and-credit ETS for emissions-intensive and trade-exposed industrial facilities called the Output-Based Pricing System (OBPS). All revenues from the federal system are returned to the province or territory where they were collected.
The implementation of the Chile carbon tax and a monitoring, reporting and verification system is designed to be ETS compatible to facilitate the possible implementation of an ETS in the future.
On December 19, 2017, China's National Development and Reform Commission (NDRC) officially launched the national ETS. Building on its experience of successfully piloting carbon markets since 2013, the national ETS' objective is to contribute to the effective control and gradual reduction of carbon emissions in China and the achievement of green and low carbon development.
Accompanying the announcement of the launch of the China ETS in December 2017 was the release of a work plan outlining targets and the roadmap to develop the national ETS. The ETS roadmap consists of two phases: infrastructure development and simulated trading, and deepening and expanding. The infrastructure development phase is focused on completing the legal foundation and market support systems for the China national ETS, including the trading platform, registry, and data reporting systems. In the final deepening and expanding phase, the power sector will be the first sector to have compliance obligations under the ETS, which can be met by trading allowances on the spot market.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
Indonesia is working towards a domestic ETS for the power and industry sectors as one of the policy mechanisms to help meet its NDC targets and foster low-carbon sustainable development. By means of Presidential Decree Number 77 of 2018, Indonesia will establish a public service agency that will manage environmental funds and mechanisms, including its ETS.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The Japan carbon tax (official name: Tax for Climate Change Mitigation) aims to put an economy-wide and fair burden for the use of all fossil fuels based on their CO2 content to realize a low-carbon society and strengthen climate change mitigation.
The Kazakhstan Emissions Trading Scheme started with a pilot phase in 2013 as a cap-and-trade system covering CO2 emissions of large emitters. Full enforcement of regulations and trading in the Kazakhstan ETS started in 2014, but the system was temporarily suspended in 2016-2017 to tackle operational issues and reform allocation rules. The Kazakhstan ETS was restarted on January 1, 2018 after legislative changes were made to improve the overall GHG emissions regulation, the ETS operation, the monitoring, reporting and verification system, and to lay the groundwork for the introduction of benchmarking.
On January 1, 2020, the Mexico pilot ETS started operation as part of a two-phase process to gradually establish a fully-fledged ETS for promoting cost-effective emission reductions without harming the international competitiveness of covered sectors. The pilot ETS covers power, oil and gas, and industrial sectors, which account for approximately 40% of the country's GHG emissions. Entities with annual emissions from direct sources greater than 100 ktCO2 during 2016-2018, or in any year from the launch of the pilot, will be covered under the pilot ETS.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The New Zealand Emissions Trading Scheme (NZ ETS) is New Zealand's principle policy response to climate change. Originally designed to cover the whole economy, it has the broadest sectoral coverage of any ETS by including forestry. It aims to support efforts to reduce GHG emissions while maintaining economic productivity. The NZ ETS was conceived as a nested system under the Kyoto Protocol, with full links to international carbon markets. However, as of 1 June 2015, the NZ ETS became a domestic-only system. As indicated by New Zealand's NDC, reestablishing a link to high-integrity international carbon markets will form part of New Zealand's strategy for meeting its 2030 target.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The Singaporean government implemented a carbon tax as of January 1, 2019. The carbon tax will apply to all facilities with annual GHG emissions of 25 ktCO2e or more, with no exemptions. The carbon tax revenue will help support initiatives to address climate change. In the initial implementation of the carbon tax, companies will not be allowed to use international credits against their carbon tax liability, but Singapore remains open to linking its carbon tax framework to other carbon pricing jurisdictions with high environmental integrity.
The South Africa carbon tax came into effect on June 1, 2019. The carbon tax aims to price carbon by obliging the polluter to internalise the external costs of emitting carbon, and contribute towards addressing the harm caused by such pollution.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU climate change policy and is the oldest and still largest ETS for GHGs operating worldwide. Introduced in 2005 and now in its third phase, the system has gone through several reforms and will change again with the start of phase 4 in January 2021.
The Switzerland Emissions Trading System is a mandatory cap-and-trade system. The ETS started in 2008 with a five year phase during which companies could voluntarily join as an alternative to facing the Switzerland carbon tax (CO2 levy on fossil fuels). Starting from 2013, the ETS became mandatory for large energy-intensive industries and medium-sized industries can voluntarily join. Participants in the ETS continue to be exempted from the CO2 levy.
In February 2020, the UK published its approach to negotiating the future relationship with the EU, in which the UK stated that its future carbon pricing initiative will support its net zero by 2050 target. It is also considering a link between any future UK ETS and the EU ETS, like the Swiss-EU ETS linking model. This would allow allowances to be exchanged between both systems. However, fallback options, such as a standalone UK ETS and a long-term carbon tax, are also being considered.
The Ukraine carbon tax was introduced in the Ukrainian Tax Code as an environmental tax on air pollution from stationary sources.
The GHGRP requires reporting of greenhouse gas (GHG) data and other relevant information from large GHG emission sources, fuel and industrial gas suppliers, and CO2 injection sites in the United States.
Vietnam's 'Green Growth Strategy' (2012) pursues the objective of a low-carbon economy and invokes the introduction of market-based instruments. Vietnam is analyzing options for carbon pricing approaches applicable to the country and developing pilot crediting programs for the steel and waste sectors, which could start after 2020. Vietnam is also considering the use of market-based instruments for the waste sector starting in 2020.
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