Global carbon pricing could pay for itself while cutting emissions by 12%, says new report from PwC and the World Economic Forum

Jakarta, 5 November 2021 - President Joko Widodo signed a presidential regulation on the arrangements of the economic value of carbon, prioritising the fulfilment of the country's Nationally-Determined Contribution (NDC) and control of greenhouse gas (GHG) emissions as part of national development on 29 October 2021. 

With the enactment of this decree, Indonesia will be the first country to implement market-based climate change mitigation and will encourage more global green investment interest to enter the country, as well as the opportunity to obtain low-cost financing.

It is important for governments, businesses and civil society, especially in Indonesia, to find solutions to reduce carbon emissions and also estimate the revenues raised through carbon pricing, which could be used to help manage the transition. 

An international carbon price floor (ICPF) for carbon dioxide and other greenhouse gas (GHG) emissions could spur greater emissions reduction to help address the global climate crisis. But how big are the emissions reductions it would create? And how would it impact the global economy? 

A new report by PwC and the World Economic Forum, “Climate Ambition: Analysis of an International Carbon Price Floor” finds that an ICPF could reduce global GHG emissions by 12%. The cost of implementation would be less than 1% of GDP, and that cost could be offset by avoiding economic losses associated with global warming and by potential productive uses of carbon revenues. The report models the impact of an ICPF as proposed by the International Monetary Fund (IMF).

Separate research (Net Zero Economy Index 2021) by PwC shows that the world needs a five-fold increase in the pace of GHG reduction to be on a path to limit warming below 1.5 degrees and avoid the risks of catastrophic climate change. 

Key findings from the report include:

• An international carbon price could pay for itself. Assuming the revenues raised are returned to households, GDP would decrease by less than 1% across all scenarios tested. Over the longer term, much if not all of the GDP loss would be offset by reducing economic losses due to global warming: sea level rise, losses in labour and agricultural productivity, and damage to human health.
• The significant revenues generated by an ICPF could be used to support those most disadvantaged. An ICPF could raise up to 3% of GDP in revenues in some countries, which could be redistributed to lower-income households and help deliver a just transition.
• An international carbon price would effectively reduce emissions by up to 12.3%. When combined with countries’ existing pledges for emission reductions in their Nationally Determined Contributions (NDCs), this would help limit global warming to 2 degrees C above pre-industrial levels. And together with strengthened climate ambition and action, this would help give the world a better chance of achieving the 1.5 degrees target.
• Significant “carbon leakage” (the shifting of emissions from one jurisdiction to another because of lower carbon prices) can be avoided. The modeling found that with widespread participation in the ICPF, even with reduced price floors for low- and middle-income countries, there would be very little transfer of emissions-producing manufacturing to countries where carbon prices are lower.

Carbon today is priced at anywhere from US$0 to over US$130 per tonne of CO2 equivalent in different regions. This creates an uneven playing field and limits the climate ambition of countries that fear loss of international competitiveness. In June, the IMF put forward the framework for an ICPF that proposes different price points for emissions for economies at different stages of development to drive greater participation in emissions reduction.

Indonesia is set to become the fourth Asian country to introduce a carbon tax scheme. This measure is part of the Taxation Harmonization Law which was ratified by the House of Representatives in October 2021. Beginning April 2022, carbon tax will be imposed on coal-fired power plants using two schemes, namely, 1) cap and tax, and 2) cap and trade; and by 2025, the measure will be rolled out for full implementation at the current price of Rp30,000 (US$ 2.1) per tonne of CO2. An ICPF would have a significant impact on the Indonesian government’s carbon tax plans, imposing an increased cost burden on carbon emitters but also presenting big opportunities for other businesses.

Julian Smith, ESG, Government and Infrastructure Advisor, PwC Indonesia said: “The findings of our analysis show that introducing an ICPF could make a significant contribution to tackling global warming by accelerating emissions reductions. But there is also a big opportunity for many Indonesian businesses. Up until now, the price of carbon has been too uncertain and volatile to be the basis for investment decisions but now is the time for businesses to start thinking about investment in new projects and activities (such as sustainable forestry, plantations and tourism or renewable energy) which would enable them to generate revenue from a more stable price of carbon in the future.”

Børge Brende, President at the World Economic Forum said: “The results of analysis of the ICPF are extremely positive. Public-private cooperation will be key for next steps and to accelerate efforts for a more sustainable and inclusive recovery.