While momentum for carbon pricing was building well before COP21, the Paris Agreement undoubtedly marked a tipping point in global support for using a price on carbon to help cut emissions. Indeed, on the last day of the summit 18 countries, including the US and Germany, signed a New Zealand-led declaration in support of carbon markets. BusinessGreen recently reported that the UK is working with China to help it develop a carbon trading system compatible with the EU’s Emission Trading System. Initiatives like this should significantly boost investor confidence in future emissions trading schemes.
After all, many organisations already recognise carbon pricing as an important tool for tackling climate change. Lots of companies integrate a shadow carbon price into their existing business and project plans, particularly in the power and infrastructure sectors, and this is only likely to grow. As more and more companies put a price on carbon, its value as a proxy for more cost-efficient project and business outcomes is made ever clearer.
A gradual increase in the shadow price of carbon is also likely to unleash more investment in low-carbon technology and other innovations, particularly in the renewables sector. A report published last month by Bloomberg New Energy Finance anticipated a sharp rise in investment into low-carbon technologies over the next decade as countries work to achieve the targets that fall out of the Paris Agreement, estimating investment opportunities in new renewables power generation at $12.1tr. In the run-up to COP21 a wave of new initiatives focused on the rapid scaling and deployment of renewable energy were introduced, many led by global philanthropists or world city mayors including Paris mayor Anne Hidalgo and former New York mayor Mike Bloomberg. These funds are already having an impact, with new renewable projects emerging in Africa.
While international finance institutions, development banks and national development agencies are shifting their lending policies to align with the principles of the Paris Agreement, individual businesses and cities are also making significant moves to become more energy independent. This will create a more favourable investment landscape for low-carbon infrastructure such as renewables and clean energy storage. While some of these initiatives are already taking place, others will take a year or two more to come to fruition as commitments made in country-specific Intended Nationally Determined Contributions make their way into new national policies and regulations.
Crucially, industry and cities need the fiscal support – whether through financial incentives from domestic governments or through an increase in carbon pricing – to bring down the cost of deployment.
While the UK government has stated its commitment to creating the right environment for business to invest in clean, affordable and secure energy, further detail on how the UK will meets its COP21 commitments, particularly regarding the role of renewables, is yet to emerge. Such details will need to be forthcoming given the challenge of plugging the energy gap before nuclear new build comes on stream and the proposed decommissioning of coal-fired power stations by 2025. The COP21 final outcome provides an opportunity to revive low-carbon approaches in the UK, but to attract investment the country must create a stronger enabling environment. All too often energy policy is affected by political uncertainty, so a long-term approach to energy planning will be essential.