Policy inaction on carbon emission pricing is delaying a market-led transition towards a net zero world, which could have far-reaching economic and geopolitical consequences.
These were the stark conclusions of a new report from Legal & General Investment Management, which calls for more effective, transparent and consistent use of carbon pricing. It says this would allow price signals to drive a market-led solution to the climate crisis.
In its report LGIM says just 23 per cent of emissions are subject to a carbon price. However it claims that even here these prices are often set at a level too low to make a difference.
Globally, emissions currently cost on average $6 per tonne of CO2, and only around 4 per cent of emissions are covered by a carbon price within the range needed by 2030 to meet the Paris targets.
LGIM says financial markets and investors are underestimating the long-term impact of the ongoing delay of transitioning to net zero. It says: “The biggest policy level available to help this transition and drive real change is carbon pricing, however this solution remains largely unused.”
LGIM head of climate solutions Nick Stansbury says: “Global emissions are on track to reach all-time highs, and we have observed little tangible evidence that this trajectory is likely to change any time soon. Our modelling tells us that a delayed below 2°C scenario is economically disruptive and costly, and so delaying the more ambitious target of 1.5°C is something that the world cannot afford.
“We believe the single most effective policy measure that the world could take to drive global emissions down, is to put an effective price on them. A meaningful carbon price, covering all global emissions by an explicit tax or a cap-and-trade mechanism, is desperately needed to induce the immediate and dramatic capital allocation required to build a low carbon energy system in our view.
“However, an objective perspective on the current policy environment would not suggest that this sort of policy is likely any time soon. Instead of tangible action, continued procrastination seems the path of least resistance.”
The report, which is based on LGIM’s extensive climate modelling, also found that costs may no longer be the most important barrier to the transition to net zero.
A low carbon energy system is now so cheap, that further improvements in costs and efficiencies are no longer likely to have as large an impact on the pace of change as they have had historically. Instead, the modelling suggests that it is the speed at which capital can be deployed into low carbon energy systems that is now the most important driver and most pressing challenge.
Stansbury adds: “To follow our net zero 1.5°C pathway, we estimate average annual gigawatt capacity additions to 2050, would have to be three times current levels for solar and double for wind. But this is far from being just about making capital available, removing bottlenecks like permitting and infrastructure are just as important as capital availability to unlock this acceleration.
“Science and engineering have already delivered much of the cost reduction, but now, the emphasis is on capital providers to dramatically accelerate the flow of capital into the low carbon energy system of the future.”
As well as outlining the need to transition sooner, the LGIM report suggest there is a now a risk of a shorter more chaotic transition, rather than an ordered market led process over a longer-time frame.
LGIM warns that the financial consequences of this sort of shock would be significant, with as much as 10 per cent of global GDP estimated to be at risk by 2050.
It adds that a delayed transition will almost certainly lead to a sustained building of inflationary pressures which may start to materialise just as the current wave of energy price led inflation starts to recede.
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