Alongside COP26 Climate Action held the Sustainable Innovation Forum 2021 and Hydrogen Transition Summit. These forums revealed that there is the will out there to act but the most proactive companies are being hampered by the lack of ambition and price certainty of the current carbon pricing regimes such as the Emissions Trading Systems (ETS). Business leaders were stating that what they needed was an economy wide (preferably global, incrementally rising) strong carbon price which would send the right message to business and give the market certainty to enable long term planning of decarbonisation and CCUS….

”The best (thing) governments can do to promote hydrogen is a global carbon tax” Seifi Ghasemi Chairman, CEO and President of Air Products.

A good example of the opinion of business leaders who are pushing for Net Zero in their own companies and the businesses they advise is a recent paper published by the management consulting company Roland Berger which strongly advocates for a high and effective carbon price to render decarbonisation the cost effective policy for manufacturers. They argue for a carbon price of EUR 80-120/t by 2030 and EUR 90-150/t by 2040………

One way to encourage firms to reduce their carbon footprint is through carbon pricing systems, such as the European Union’s Emissions Trading System (ETS) or other cap & trade programs, carbon border adjustments (currently under discussion in the European Union) and specific tax instruments. At present, only 30 or so countries have introduced such mechanisms, covering around 20 percent of all carbon emissions – a figure that is sure to rise in the coming years. But very few of today’s prices in market-based mechanisms are in line with the estimated level required to meet the goals of the Paris Agreement, namely a carbon price of EUR 80-120/t by 2030 and EUR 90-150/t by 2040. This level is currently only seen in the most advanced countries, such as Sweden (EUR 123/t) and Switzerland (EUR 98/t). What would happen if carbon prices were raised to levels in line with the Paris Agreement? What impact would this have on business? To answer those questions, we estimated the “profit at risk” for companies in different industries – automotive, chemicals, energy and utilities, financial services, and so on – if the carbon price were to go up to EUR 100/t. Startlingly, we found that unless they take action, companies in many industries will see up to 50 percent of their profits put at risk. 

Stefan Schaible, Global Managing Partner, Roland Berger, gave a keynote speech at the Sustainable Innovation Forum. Asked to give his opinion on the results of COP26 he stated that it was as expected, not the lowest or the highest step in the right direction. He felt there had been a step change in opinion on the environment, shown by the fact that for the first time the German government included Green party members. There will be continuing pressure to reduce emissions targets step by step but….

“We need action. We cannot go on like this for certain sectors such as energy and transport. Only with carbon at $100 per tonne will profits shrink dramatically or even halve so they (the industry sectors) have to move”.

Another keynote speech was given by Dr Irene Feige, Head of Circular Economy Initiative at BMW group, relating the progress of BMW in creating a circular economy for car manufacture as part of its move to Net Zero and the pitfalls BMW was encountering. Circularity (ie using recycled materials and targeted recycling to at end of life) only rises the price of a car by 2% but it is hard to achieve at scale because the economy is not geared up for well regulated and standardised recycling and carbon free processes are too expensive. She argued that we need a clear signal from politicians with a high enough carbon price in major markets, there should also be more political pressure to introduce carbon pricing systems in most of markets (countries and across economies)…”The signals should be stronger and clearer so we can act now in order to get more circularity into the cars”.

At the Hydrogen Transition Summit Ian Parry (IMF) stated that carbon pricing must cover the bulk of global emissions and would need to be above $100 per tonne to give green hydrogen and biogas the level playing field they need. A spokesman from Drax also concurred that such a carbon price would allow green steel, for instance, to compete with ordinary steel. The most telling argument for adding a Carbon fee and dividend policy came from a spokesman for Mitsubishi at who said that it already makes sense to buy a hydrogen truck in Switzerland (which costs £200 k more than a diesel truck) because of the carbon price!

Interestingly business leaders who generally approve of ETS as a policy, talking in an European Roundtable on Climate Change and Sustainable Transition (ERCST)  webinar on decarbonisation of industries (29/11/21), acknowledged the problems facing the ETS policy now that it is hoping to move beyond the decarbonisation of the energy sector. Despite seeing the need for a higher carbon price to facilitate the adoption of hydrogen for heavy industry and transport, they did not envisage the ETS price could reach the desired level. (The ETS carbon price it has recently been historically high at 70 eur). They argued that the lack of mitigation for the populace (which a Climate Income policy would provide) prevents the ETS price from rising high enough to be an effective mechanism without causing social and economic problems (although they saw the solution to be more regulation and subsidies, which is equally needed but would be more effective with a clear carbon price signal). The ETS carbon price was also acknowledged to lack the certainty to help industries decide how to engage in the transition.

The other elephant in the room for the EU at the moment is that the proposed ETS scheme to cover more emissions by creating a separate ETS for Buildings and Transport is seeing a lot of opposition in the EU, especially from Eastern European countries for the same reasons that the UK government has just done a volte face on the policy, the social costs will be too high! The UK government volte face, interestingly came several weeks after the poorly attended parliamentary debate on the extension of carbon pricing. How would the debate have panned out if the cancellation of the ETS for Transport and Buildings had been announced beforehand? 

The bottom line is that industrialists who are busy trying to get their firms to Net Zero do not feel that the current carbon pricing regimes are strong enough to make decarbonisation the investment safe, cost effective move it should be. The price they want could only be achieved without too high a social cost by implementing Climate Income, as in Canada, Switzerland, soon Austria, Germany and possibly Norway, whose coalition government has produced a white paper on the policy. Apart from Canada all these countries are part of the EU ETS and not only show that it is possible to implement Climate Income alongside the ETS scheme but also that the ETS is considered an inadequate tool to achieve decarbonisation.