Carbon Pricing: Achieving SDGs and supporting economic growth

Ghana has a large forest cover, estimated to be 9.17million hectares, contributing to sustainable climate and suitable environment for wildlife and vegetation such as cocoa – Ghana’s major exporting commodity. However, due to excessive cocoa farm expansion, logging and recent illegal mining, there has been depletion of forest cover (deforestation), leading to high greenhouse gases (GHG) in the atmosphere. So far, Ghana’s age-old strategy to GHG reduction has been limited to planting more trees and discouraging deforestation. Yet, there are numerous benefits, both monetary and economic, that Ghana can derive from exploring alternative means of reducing GHG, such as Emission Trading, and simultaneously achieving Sustainable Development Goal (SDG) 13: Take urgent action to combat climate change and its impacts.

Introduction

In his essay on population, Thomas Robert Malthus, an English scholar and economist proposed that “population growth is potentially exponential”. In other words, human population is expected to grow rapidly. Malthus’ statement underscores the impact of explosion in human population on earth’s sustainability. In that, as the world’s population grows, human activities; viz. industrialization, fuel burning and transportation, also increases. The increase in the aforementioned activities is characterized by increase in emission of greenhouse gasses (GHG), such as carbon dioxide (CO₂), methane (CH₄), hydrofluorocarbons (HFCs), which threatens climate, life on the earth, and the planet, itself, a phenomenon popularly referred to as Global warming.

The Kyoto Protocol

The gloomy future painted by global warming necessitated the Kyoto Protocol. Adopted in Kyoto, Japan in 1997, the protocol is an international agreement that aimed to reduce the presence of GHG in the atmosphere. The protocol, linked to United Nations Framework Convention on Climate Change (UNFCCC), became an international law on February, 2005. The Kyoto Protocol outlined measures for countries to reduce their GHG emission. One approach was to make use of natural processes (called “sinks”), such as planting trees which absorb CO₂, to reduce GHG. Another approach, called the Clean Development Mechanism (CDM), encourages countries to invest in technologies, example a clean-burning natural gas power plant that reduce emissions. A third approach is emissions trading, which allowed participating countries to buy and sell emissions rights and thereby placed an economic value on GHG emissions. This approach presents a win-win situation. On one side, the ultimate goal to reduce GHG is achieved and on the other hand, the participating country rake in economic/monetary benefit. This approach has been lauded by many governments and businesses, considering the benefits it present. However, this approach requires carbon pricing. What is carbon pricing?

Carbon Pricing

Carbon pricing simply is putting a price on carbon pollution as a means of bringing down emissions and drive investment into cleaner options. A price on carbon helps shift the burden for the damage back to those who are responsible for it, and who can reduce it. This carbon price mechanism, thus gives an economic signal and polluters decide for themselves whether to discontinue their polluting activity, reduce emissions, or continue polluting and pay for it. The price on carbon is expressed as a value per ton of carbon dioxide equivalent (tCO₂e). There are five types of carbon pricing mechanisms, however much emphasis is given to two: emissions trading systems (ETS) and carbon taxes.

Carbon Taxes: A carbon tax, as the name implies, directly sets a price on carbon by defining an explicit tax rate on GHG emissions or—more commonly—on the carbon content of fossil fuels, i.e. a price per tCO₂e.

Emissions Trading System (ETS): An emissions trading system (ETS) is a system where emitters can trade emission units to meet their emission targets. By creating supply and demand for emissions units, an ETS establishes a market price for GHG emissions.

Other types include Offset mechanism, Results-Based Climate Finance (RBCF) and Internal carbon pricing. 

World Carbon Pricing Trends

According to the World Bank, as of 2017, 42 countries and 25 subnational jurisdictions (cities, states, and regions), totaling 67 jurisdictions, are putting a price on carbon through an ETS or a carbon tax. In all these regions, a total of 47 carbon pricing instruments (consists of 24 ETSs, and 23 carbon taxes) have been implemented. The total value of ETSs and carbon taxes in 2017 increased by 7 percent, compared to 2016.

Fast-forward to 2021, according to the State and Trend of Carbon Pricing 2021 report, 64 carbon pricing instruments have been scheduled or implemented so far indicating a 67 percent increment in the number of instruments in operation. As of December 2020, 127 countries, 823 cities, 101 regions, and 1,541 companies have committed to decarbonizing their activities by midcentury. Despite the social and economic upheaval caused by COVID-19, price on carbon generated US$53 billion in revenues in 2020. Early this year (2021), China launched its national ETS, becoming the world’s largest carbon market. The above trends shows the adoption rate of carbon pricing and its potentials of contributing to economic development.

A typical example is the Australia ERF Safeguard Mechanism, an ETS mechanism implemented in 2016 seeking to reduce emissions in Australia, priced at A$16/tCO₂e (US$10/tCO2e). As at 2020, the Australian ERF Safeguard Mechanism is valued at US$3,510 million. France, currently generates US$9,632m million in revenues from carbon tax, making it the leading country generating revenue from carbon pricing mechanism in the world. The European Union in general, generates US$22,548 million from ETS, making it the leading jurisdiction generating revenue from emissions trading system.

Africa’s Emission Reduction Strategy

From the map above, South Africa, Senegal and Cote d’Ivoire are the only countries/jurisdictions in Africa where carbon pricing instruments (ETS or carbon taxes) are either implemented, scheduled for implementation or under consideration. Nevertheless, this does not imply that Africa is lagging behind in the adoption of carbon pricing mechanism to achieve Sustainable Development Goal 13, and protect the climate and environment.

The African Development Bank (AfDB) in partnership with Climate Investment Fund (CIF), through a climate finance program, have heavily financed and implemented environmentally-friendly projects across Africa to the sum of US$2.87 billion. Although these projects do not operate on carbon pricing mechanism, they rather chart alternative paths of protecting climate and environment. Some of these projects, for instance, encourage the use of low carbon and renewable energy solutions, and forest restoration.

Carbon Pricing Mechanism in Ghana

According to the Global Forest Resources Assessment (FRA) 2020, Ghana has a considerable forest cover, estimated to be 9.17 million hectares, representing 40 percent of total land cover. However, according to the World Bank, Ghana has one of the highest deforestation rates in Africa. This is driven primarily by cocoa farm expansion, coupled with logging and a recent increase in illegal mining.

In 2016, Ghana’s total GHG emissions, was estimated to be 42.2 million tones (Mt) of CO₂ equivalent (CO₂e). This was 7.1 percent more than the 2012 total emissions. The National Greenhouse Gas Inventory report indicated that rising emissions trend correlates well with a notable emission increases from road transport, thermal electricity generation and deforestation.

So far, the country’s approach to GHG reduction has been planting of more trees (sink) and discouraging deforestation using the Reducing Emissions from Deforestation and forest Degradation (REDD+) action plan. Over the years, these strategies have not been effective in combating the damaging effects of high CO₂ and other GHG concentration. There is a need for a lasting solution to this menace that will also benefit the country in the long term.

Indeed, carbon pricing mechanism has been a lauded by many countries and international organizations. There are enormous benefits Ghana can derive from implementing carbon pricing mechanisms, which will support economic growth and protect the environment in the long term. According to industry players, the value of carbon in Ghana is estimated to be US$2.2 billion. Government can take advantage of this opportunity to increase revenue and drive green investment by adopting a carbon pricing mechanism, either Emission trading system or Carbon tax.

Ghana’s revenue generation has over the years been lower than expenditure, and this has become the norm. Undeniably, Ghana needs additional sources of revenue! Carbon pricing mechanism has the potential of providing additional revenue source to support development. At present, there is no legal framework in Ghana which pertains directly to carbon emission, meaning that ownership rights or exploitation rights cannot be stated with any level of certainty. Admittedly, it would take tremendous effort to implement a carbon pricing mechanism in Ghana, be it ETS or carbon tax. It would take consultation and collaboration with policy makers, legal practitioners, and multinational consultants like the IFC, government machinery and agencies such as Ministry of Finance, Ghana Revenue Authority; and professional consultants for a successful implementation of a framework that supports carbon pricing in Ghana.

What do you think, should carbon pricing mechanism be implemented in Ghana?