Carbon pricing has become an increasingly popular policy tool to reduce greenhouse gas emissions and mitigate climate change. But for those new to the topic, the various mechanisms under the umbrella of "carbon pricing" can be confusing. This post will explain carbon pricing simply using the framework of the Helsinki Principle.
What is the Helsinki Principle?
The Helsinki Principle provides guidance on how to design effective carbon pricing policies. It was developed by the Coalition of Finance Ministers for Climate Action, consisting of over 50 countries working together to tackle climate change.
The 3 key components of the Helsinki Principle on carbon pricing are:
Coverage: Carbon pricing should cover as wide a range of greenhouse gas emissions as possible.
Pricing: The price applied should be sufficiently high and rising to incentivize emissions reductions over time.
Revenue: Revenue generated should be used to support climate action and sustainable development.
Carbon Pricing Mechanisms
There are two main types of carbon pricing covered by the Helsinki Principle:
Carbon Tax
A carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or on the carbon content of fossil fuels. The tax per tonne of emissions provides a clear price signal to drive emission reductions.
Emissions Trading System (ETS)
An ETS sets a limit on total emissions allowed by covered entities, which must hold tradable permits or allowances for each tonne of emissions. The emissions limit causes permit prices to rise to a level that motivates emissions reductions.
Complementary Policies
Carbon pricing works best alongside complementary policies like performance standards, subsidies or tax breaks for clean technology, and energy efficiency policies.
The Helsinki Principle recognizes that broader policy packages help address competitiveness concerns and distributional impacts while also driving deeper decarbonization.
Using Revenue for Climate Action
Revenue generated from carbon pricing can be substantial and should be used strategically. The Helsinki Principle recommends using revenue to:
- Support those impacted by higher energy prices
- Invest in clean energy, transportation, and infrastructure
- Fund worker retraining and new green jobs
- Advance international climate finance and adaptation
The Helsinki Principles
The six Helsinki Principles guide the Coalition's commitment to #ClimateAction
1. Aligning Policies with the Paris Agreement
Finance ministers should ensure their policies and practices align with the Paris Agreement's long-term goals, which aim to limit global warming to well below 2°C and pursue efforts to limit the temperature increase to 1.5°C.
2. Sharing Best Practices
Collaboration is key. Finance ministers should share experiences and best practices in implementing climate policies, including carbon pricing, green budgeting, and climate risk management.
3. Promoting Carbon Pricing Measures
Finance ministers should promote the use of carbon pricing measures, such as carbon taxes and emissions trading systems, to create incentives for reducing greenhouse gas emissions and driving the transition to a low-carbon economy.
4.. Mobilizing Finance for Climate Action
Finance ministers must work with clients and partners to mobilize public and private finance for climate action. By leveraging public finance and policy, they can facilitate markets for climate-positive investments.
5. Engaging in Climate Policy Dialogue
Active participation in international climate policy discussions is crucial. Finance ministers can contribute their expertise on fiscal policy and public finance to help shape global climate action.
6. Enhancing Climate Resilience
Supporting efforts to enhance climate resilience is essential. Finance ministers can do this by investing in climate-resilient infrastructure and developing early warning systems.
By adhering to the Helsinki Principles, finance ministers can play a pivotal role in driving the global transition to a low-carbon, climate-resilient economy.
