Task Force 4: Refuelling Growth: Clean Energy and Green Transitions
1. The Challenge
As governments intensify their efforts to limit global warming to 1.5°C above pre-industrial levels while adapting to its impacts and building resilience, accelerating a transition to a low-carbon economy will require a drastic reshaping of global production and consumption patterns. Carbon pricing mechanisms have long been used by governments as a possible instrument in this transition. According to the World Bank Carbon Pricing Dashboard, in 2022, 70 regional, national, or subnational carbon-pricing initiatives were already in place in 47 countries including nine developing countries, covering 23 percent of global greenhouse gas (GHG) emissions.[1] These mechanisms included both carbon taxes and emissions trading schemes (ETS).
While they have contributed to reducing GHG emissions, carbon prices have generally remained significantly lower than the level necessary to meet the Paris Agreement goals. Achieving the objective of net-zero emissions by 2050 set by a wide range of countries will therefore require a steep increase in the price of carbon compared to its past levels.[2] This, however, may imply higher risks of carbon leakage—i.e., increased emissions in jurisdictions with no or less stringent carbon constraints. If GHG reductions at the domestic level are replaced by increased emissions embedded in imported goods, it could affect the competitiveness of domestic industries vis-à-vis foreign competitors as well as national efforts to reduce GHG emissions. In other words, while governments may be ready to impose higher carbon costs on energy-intensive sectors like steel, cement, or aluminium, they will not do so if this simply means shifting emissions to competitors abroad. In the past, this concern was often addressed through the free allowances of emissions in trade-exposed sectors, a move that contributes to reducing the price of carbon.
In recent years, these concerns have prompted calls to level the playing field and preserve ‘competitive equality’ between domestic and foreign products through mechanisms like border carbon adjustment (BCA) mechanisms.[3] Adapting this approach to climate change, several countries have started exploring BCAs. The European Union (EU) approach to climate change mitigation, for example, relies heavily on the so-called