Reflections on decarbonization and carbon pricing in the present picture

Given the current price of allowances in the EU ETS (around €60/CO₂tonne), coal plants are basically already out of the market, relatively faster than what attainable through command and control. Such price also significantly increases the cost of gas power generation, and even though gas prices are expected to decrease, the decarbonization trend in the power sector is trusted to be robust thanks to a combination of factors. The main global challenges at present times remain installing enough renewable capacity and achieving grid stability. Research works show that even building gas plants for the exclusive sake of grid stability does not appear to be cost-effective compared to batteries and demand/response systems.

A transparent use of revenues from carbon pricing can help raising social acceptance, especially when referring to taxation instruments. Yet, the most efficient use of such revenues is country-specific. Concerning subsidies phase out, a non-negligible degree of complexity arises when specifying the subsidies to make decisions on which should stay subsidized and which should phase out.

Accounting for subsidies results in a negative net global carbon price. Governments’ efforts can only be accounted for as serious once this price becomes positive. The objective of WCP is to contribute into making it progressively less negative.

Measures to promote carbon pricing should not be analyzed without linking those to measures to promote a carbon border tax, especially in the industrial and agricultural sectors. However, the first-best is to identify mechanisms to enhance international cooperation. In fact, applying a border adjustment mechanism is relatively more complex in countries employing non-pricing carbon policies and investing in technology. Producing research work on such topic would also be useful for countries more oriented through pricing mechanisms/policies. In fact, to evaluate pricing versus non-pricing instruments is not trivial and requires reliable metrics.

It is necessary to focus on coordination among different instruments and initiatives for carbon pricing and the EU should be having a leading role in this, taking inspiration from the environmental leap produced in the post-covid recovery to replicate a similar leap in the fiscal system. WCP will also focus on redistributive issues, social inclusion and prevention of regressive effects.

The Scientific Committee of WCP