At a glance – recent key carbon pricing developments Globally, 2014 was the warmest year on record1and temperatures are now 0.8C above pre-industrial levels.2Even at this relatively low level of warming, the earth is showing the impactmore frequent occurrences of extreme heat and extreme precipitation, a drying trend in drought-prone regions, and increased tropical cyclone activity in the North Atlantic.3The Intergovernmental Panel on Climate Change IPCC says that we need to reach zero net emissions by 2100 to stabilize climate change around the 2C target above pre-industrial temperatures, agreed to by governments as the maximum acceptable amount of global warming.4Carbon pricing is an essential piece of the path toward this decarbonization.OverviewSignificant progress in carbon pricing has been made over the last ten years, as displayed in Figure 1. In 2015, about 40 national and over 20 subnational jurisdictions, representing almost a quarter of global greenhouse gas emissions GHG,5are putting a price on carbon, 1Temperature records began in 1880. Source NOAA National Climatic Data Center, Global Analysis - Annual 2014, accessed April 28, 2015, https//www.ncdc.noaa.gov/sotc/global/2014/13.2Source World Bank, Turn Down the Heat Confronting the New Climate Normal, 2014. 3Source World Bank, Turn Down the Heat Confronting the New Climate Normal, 2014. 4Source World Bank, Decarbonizing Development Three Steps to a Zero-Carbon Future, 2015.5The GHG of 39 national and 23 subnational jurisdictions represent about 23 of global emissions.as illustrated in Figure 2. Together, the carbon pricing instruments in these jurisdictions cover about half of their emissions, which translates into approximately 7 GtCO2e, or about 12 percent of annual global GHG emissions.6This figure represents a threefold increase over the past decade.7The total value of the emissions trading schemes ETSs reported in the State and Trends of Carbon Pricing 2014 report was about US30 billion US32 billion to be precise. Despite the repeal of Australia’s Carbon Pricing Mechanism in July 2014, and mainly due to the launch of the Korean ETS and the expansion of GHG emissions coverage in the California and Quebec ETSs, the value of global ETSs as of April 1, 2015 increased slightly to about US34 billion. In addition, carbon taxes around the world, valued for the first time in this report, are about US14 billion. Combined, the value of the carbon pricing mechanisms globally in 2015 is estimated to be just under US50 billion.86These numbers are revised on a regular basis to reflect updates in GHG emissions in each jurisdiction, changes in the design and coverage of existing carbon pricing instruments, inclusion of new instruments, and availability of data. Thus, these latest figures and the ones from previous reports are not necessarily comparable.7In 2005, carbon pricing instruments covered 4 percent of annual global GHG emissions. This figure has increased to 12 percent in 2015.8The estimated total value for ETS markets is based on each ETS’s allowance volume for 2015, or the latest year available, multiplied by the allowance price on April 1, 2015. The estimated total value for carbon taxes is based on official government budgets for 2015 where available, or otherwise on the GHG emissions covered multiplied by the nominal carbon price on April 1, 2015.An advance brief from the State and Trends of Carbon Pricing 2015 report, to be released late 2015CARBON PRICING WATCH 2015 Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized2xxx99Only the introduction or removal of an ETS or carbon tax is shown. Emissions are represented as a share of global emissions in 2012. Annual changes in global, regional, national, and subnational GHG emissions are not shown in the graphFigure 1. Regional, national, and subnational carbon pricing initiatives share of global emissions covered93Figure 2. Summary map of existing, emerging, and potential regional, national and subnational carbon pricing instruments ETS and tax10 xxx1010Carbon pricing instruments are considered “implemented” or “scheduled for implementation” once they have been ally adopted through legislation.4New regional, national, and subnational carbon pricing initiativesNotable developments in 2014 include the implementation of the pilot ETSs in Hubei and Chongqing in China, carbon taxes in France and Mexico11and the passing of carbon tax legislation in Chile. In addition, two new carbon pricing instruments entered into force on January 1, 2015 the Korea’s ETS and Portugal’s carbon tax.Existing regional, national, and subnational carbon pricing initiativesAs new carbon pricing instruments emerge, already existing national and regional instruments have been further developed and refined. While industry protection and the allocation of carbon pricing revenue spending have been important topics in the carbon pricing discourse, structural re is the top priority of the European Union EU ETS agenda, the debate on the Market Stability Reserve MSR12having reached consensus on a 2019 start date. In addition, California and Qubec successfully linked their ETSs and expanded their GHG emissions coverage to include transport fuels. China continued its preparations for the introduction of a national ETS, which is expected to be launched in 2016. It will be part of China’s mitigation strategy to reach its target of emissions peaking around 2030. In the meantime, China’s seven pilot schemes have expanded in scope and are exploring possibilities of cooperation with other regions. 11For further details on France’s and Mexico’s carbon taxes, please refer to World Bank, State and Trends of Carbon Pricing, May 2014.12In February 2014, the European Commission decided to temporarily postpone the auctioning of EU ETS allowances, a process also known as “back-loading.” Following this change, the focus of the EU ETS structural re agenda shifted to the need for greater price stability and predictability through flexibility of allowance supply in the EU ETS. The proposed MSR was designed to achieve this goal.Finally, the political decision to replace Australia’s Carbon Pricing Mechanism with the Direct Action Plan, which retains offsetting but does not impose a cap on GHG emissions, and the further delay in linking the EU’s and Switzerland’s ETSs,highlight the evolving nature of carbon pricing instruments as they are further aligned with broader national priorities.Corporate carbon pricingA number of policy makers in both developed and developing countries, together with business leaders, continue to voice their support for the critical role of carbon pricing in achieving a global decarbonized economy.13The role of the private sector in carbon pricing is growing, with businesses increasingly engaging on the topic. In addition, the adoption of an internal carbon price in business strategies is spreading, even in regions where carbon pricing has not been legislated. Currently, at least 150 companies are using an internal price on carbon.14These companies represent diverse sectors, including consumer goods, energy, finance, industry, manufacturing, and utilities. Looking aheadCarbon pricing will continue to be used as an instrument to reduce GHG emissions. This is underscored by several Intended Nationally Determined Contributions INDCs, which explicitly indicate that carbon pricing will be an element of their mitigation strategy. Furthermore, the EU has confirmed that its ETS will be the key instrument used to achieve its 2030 emission reduction target.13The World Bank Group is supporting these developments with initiatives such as the Carbon Pricing Leadership Coalition CPLC and the Partnership for Market Readiness PMR, among others.14Source CDP, Global Corporate Use of Carbon Pricing Disclosures to Investors, 2014.5International carbon pricing update Advances at the international level have been modest. The key objectives of the 20th Conference of the Parties COP20 to the United Nations Framework Convention on Climate Change UNFCCC, in December 2014, were i to decide what ination is required in the INDCs and ii to consider the elements of the draft negotiation text in preparation for COP21 in Paris. On both fronts, progress has been limited and the lack of pre-2020 ambition remains a challenge. The Doha Amendment to the Kyoto Protocol is currently not legally binding since to date it has been ratified by only 31 of the required 144 Parties.15Rather than ulate detailed requirements for the content of the INDCs, the agreement reached in Lima made a series of recommendations.16As of May 15, 2015, Andorra, Canada, the EU, Gabon, Liechtenstein, Mexico, Norway, Russia, Switzerland, and the United States – together accounting for approximately 30 percent of global GHG emissions – had ted their INDCs. Based on preliminary findings by some market analysts, further dialogue may be needed to make the INDCs consistent with a 2C pathway. Several existing INDCs explicitly indicate that carbon pricing will be an element of their mitigation strategy. In addition, Mexico’s INDC stipulates that the emission reduction commitment could increase from 25 to 40 percent, subject to a global climate agreement that asks for, among other things, carbon pricing mechanisms implemented internationally.17In February 2015, the Ad Hoc Working Group on the Durban Plat for Enhanced Action ADP, released the negotiating text18for an agreement at COP21, building on the output of the Lima talks. The role of carbon markets in a future agreement is open for discussion, with six options proposed in this text.19These range from explicit definitions of market mechanisms, including definitions of an ETS and an enhanced Clean Development Mechanism CDM, to descriptions of accounting rules alone, to no provisions at all for market mechanisms. al talks on the negotiating text will resume in Bonn in June 2015. 15As of May 15, 2015, the following Parties had ratified the Doha Amendment Bangladesh, Barbados, Brunei Darussalam, China, Comoros, Congo, Djibouti, Ecuador, Grenada, Guyana, Honduras, Indonesia, Kenya, Liechtenstein, Marshall Islands, Mauritius, Mexico, Micronesia, Monaco, Morocco, Namibia, Nauru, Norway, Palau, Peru, Singapore, Solomon Islands, South Africa, Sudan, Tuvalu, and United Arab Emirates. Source Doha Amendment to the Kyoto Protocol, accessed May 15, 2015, https//treaties.un.org/Pages/ViewDetails.aspxsrcTREATYmtdsg_noXXVII-7-cchapter27langen.16Source Center for Climate and Energy Solutions, Outcomes of the UN Climate Change Conference in Lima, 2014.17Source Mexico, INDC, 2015.18Source UNFCCC, Negotiating Text, February 25, 2015. 19Source UNFCCC, Negotiating Text, February 25, 2015.Clean Development Mechanism/Joint ImplementationThe declining market trend for Kyoto creditsCertified Emission Reductions – CERs and Emission Reduction units ERUs – continued in 2014. To date, EU ETS installations have used 1.45 billion CERs and ERUs20to help with their compliance obligations, or 90 percent of the total 1.6 billion allowed by the EU ETS between 2008 and 2020. The er number represents about 60 percent of total Kyoto credits issued so far.21The total residual demand for Kyoto credits between 2015 and 2020 in existing carbon pricing initiatives such as the EU ETS is expected to be minimal. On the other hand, the potential supply for the same period is still high.22The lack of future demand is likely to lead to a substantial reduction in the supply of credits,23thereby preventing any significant price recovery from the currently historically low prices. Furthermore, carbon market actors continue to exit the market.24In order to support the CDM and Joint Implementation JI through these difficult market conditions, recent policy decisions have focused on the streamlining of project procedures and ologies,25the promotion of voluntary CER cancellations,26and new procedures for voluntary deregistration of projects. As to the latter item, if a project has been deregistered from the CDM, it can seek alternative financing by generating offsets in national schemes, such as the offset mechanism used by pilot ETSs in China.27Results-Based FinanceThe Results-Based Finance RBF approach provides a project with financial support after its emission reductions have been duly verified. Some RBF programs purchase compliance emission reduction units, including CERs and 20Source European Commission, Updated ination on exchange and international credit use in the EU ETS, May 4, 2015, http//ec.europa.eu/clima/news/articles/news_2015050402_en.htm21As of April 1, 2015, 2.4 billion CERs and ERUs had been issued. Source UNEP DTU CDM Pipeline, accessed April 30, 2015.22Based on data obtained from Thomson Reuters Point Carbon and CDC Climat for the State and Trends of Carbon Pricing 2014 report, full potential for CER and ERU issuance between 2014 and 2020 was estimated at 3.5-5.4 GtCO2e. Also, UNEP DTU Partnership estimates total issuance of CERs until 2020 to be about 11 GtCO2e nominal value. Source UNEP DTU CDM Pipeline, accessed April 30, 2015.23Projects incur operational and regulatory costs to generate credits. Without a strong signal of demand for those credits, project developers are expected to reduce or discontinue their mitigation activity in some of those projects.24For example, SGS withdrew from the validation and verification business in June 2014; in April 2015, Standard Bank closed its carbon desk, and Bunge announced it would close Climate Change Capital.25Source IETA, Lima COP20 Summary, 2014; Thomson Reuters, Year in Review and Outlook Asia on the Rise, January 2015.26Source Thomson Reuters, Same Same but Different - Progress within Reach in Lima COP December 9, 2014.27Source Thomson Reuters, Same Same but Different - Progress within Reach in Lima COP December 9, 2014.6Figure 3. Prices of existing carbon pricing instruments28xxx2828Prices on April 1, 2015.7ERUs,29helping to bridge the current lack of demand for these units. Other programs not designed for compliance markets also use RBF as a direct funding mechanism.30Regional, national, and subnational carbon pricing update Carbon pricing has been implemented or is scheduled to commence in almost 40 national and over 20 subnational jurisdictions, as displayed in Figure 2. As shown in Figure 3, the prices observed vary widely and reflect the national or regional context of the instrument in question. Prices have shown little movement over the past year. Governments commonly use funds raised through carbon taxes and the sale of allowances in ETSs to lower other taxes on businesses and households or to finance emission mitigation projects. In 2014, it is estimated that over US15 billion31was raised in government re