Originally appeared in Neue Zürcher Zeitung
The most efficient way to protect the planet and to avoid the negative consequences from climate change would be to assign a comprehensive price to greenhouse gas emissions.
The crisis caused by the coronavirus pandemic teaches us two things: firstly, we should prepare better for the next pandemic and secondly, we should take steps to prevent risks we know exist. Climate change is one such risk. By acting now, we can avert potentially catastrophic consequences in the future. If we delay any longer, costs will only rise.
Axel A. Weber
Chairman of UBS Group.
Financial sector has a key role to play
A significant reduction in greenhouse gas emissions is fundamental to averting the severe consequences of climate change. Since the transition to a low-carbon global economy requires huge investment, the financial sector has a key role to play in converting savings into investments. And we are aware of our responsibilities. In 2019, sustainable investments in our clients' portfolios rose by more than 56% to USD 488 billion, equating to 13.5% of the assets we manage. We are also constantly reducing CO2-relevant assets on our balance sheet; in 2019, they were down more than 40%, to just 0.8% of our balance sheet. Furthermore, we have reduced our own firm's CO2 footprint by more than 70% since 2004.
Even though businesses and politicians are increasingly making climate protection a priority, the target for net zero emissions worldwide by 2050 is still a distant goal. Measures taken so far are not enough to limit global warming to the level needed to prevent a climate catastrophe. The problem is that most of the instruments being used – regulations, restrictions, subsidies for green technologies, and economic stimuli – are not market-based and are relatively inefficient or burdensome for the economy. This applies also for many of the green stimulus measures that are being discussed and implemented across Europe as a response to the Covid-crisis.
A price tag for emissions
A more efficient way of reducing greenhouse gas emissions would be to put a uniform and comprehensive price on them that is also sufficiently high. This could be determined by means of a government-imposed CO2 levy or an emissions-trading system, and would ease the burden on the economy. If funds raised this way were paid back into society, this would help increase societal acceptance and could lead to other taxes and levies being reduced. Setting a price for greenhouse gas emissions in this way would – like reference rates on financial markets – send a signal and steer investment and consumption in the desired direction.
Existing mechanisms for levies on greenhouse gases (the World Bank counts 31 emissions trading systems and 30 CO2 levies in operation today) are fragmented, incomplete and only apply to 22% of global emissions. Of those, less than 5% are set at the level needed to achieve climate neutrality by mid-century. Even the Swiss levy, which at CHF 96 per ton is set well above the necessary price threshold, has its weaknesses: firstly, it's not applied consistently and, secondly, Switzerland accounts for only about .001% of global CO2 emissions.
We need pioneers
Negotiations about introducing a CO2 emissions trading mechanism unfortunately failed at the Madrid UN Climate Conference in 2019 and will only resume next year in Glasgow. If no agreement on a globally consistent market mechanism is reached then, a coalition of countries should lead the way by jointly introducing a standardized, comprehensive price for greenhouse gas emissions. A carbon border adjustment tax on goods traded would compensate for price differences between groups of countries – in a similar way to how differences in interest rates are compensated for by exchange rates on financial markets. The financial sector has the necessary know-how and is ready to offer support in setting up such mechanisms. It should also help simplify existing fragmented and non-transparent voluntary CO2 offsetting systems. Already today we can observe a large and increasing demand for voluntary carbon-offsetting. A liquid, global and transparent market for voluntary carbon offsets could further stimulate this demand and ultimately become part of a global, government-owned pricing mechanism.
Global CO2 emissions are expected to decrease by 8% this year as a result of the COVID-19 crisis. Annual reductions on this scale would be needed for many more years to limit global warming to 1.5 °C, which is why we should try to stay this course – even in the face of political obstacles. In my view, a comprehensive, global price for greenhouse gas emissions is the only way we can mitigate the severe economic, societal and environmental consequences of global warming.