New Citi GPS Report: ‘Solving the Emissions Crisis Before Time Runs Out’; Examines Potential for Climate Action Development Bank, Voluntary Climate Clubs, and Market Based Mechanisms

Citi Global Perspectives & Solutions (GPS) released a report titled ‘Global Carbon Markets – Solving the Emissions Crisis Before Time Runs Out.’ The full report is available here, additional thematic reports are available here.

Human-induced greenhouse gas emissions are still increasing. At current rates we have just 14 years before global temperatures rise beyond 1.5degrees C. “COP26 provides an opportunity for governments to come together and try to solve the emissions and climate crisis,” says Jason Channell, Global Head of Sustainable Finance, Citi Global Insights. “As things stand, the aggregated plans announced by governments around the world are not nearly ambitious enough, and much more needs to be done.”

“Market based mechanisms such as a direct carbon tax, emissions trading systems and carbon credits can be used to reduce emissions. However, this fragmented approach is clearly inefficient, and evidence tells us that it is currently ineffective in reducing emissions at a global level,” adds Channell. “Since climate change is a global problem, a global solution will be needed to solve this crisis.”

This report analyses a range of different mechanisms that could potentially be scaled up at a global level, including ‘Article 6’ as defined in the Paris agreement, linking emissions trading systems, setting up a global carbon tax, and developing a climate change club amongst two or more nations, and we examine the pros and cons of each, and the barriers to implementation.

These mechanisms are not mutually exclusive, and can be applied in conjunction with one another. “Given the difficulty and complexity of negotiating a global mechanism amongst all nations however, we believe that setting up a voluntary climate club is likely to be the most feasible option,” says Elizabeth Curmi, Global Thematic Analyst, Citi Global Insights. “We think the world is moving towards this mechanism, where each country/region would set up its own domestic system, and set up Carbon Border Adjustment Mechanisms at its borders.” Curmi adds that “…taking this one step further, these countries could set up a ‘club’ where they would exempt each other from carbon border taxes and share other benefits such as technology transfers, preferential trade agreements etc. It could also encourage non-members to either join the club, or reduce emissions domestically to avoid paying the carbon border tax.”

“Getting the right global mechanism is however not the only challenge – we also need to find a way to move finance from developed to emerging markets, allowing the latter to decarbonise without impacting growth and inadvertently consigning millions to poverty for longer than might otherwise be the case,” says Ed Morse, Global Head of Commodities Strategy, Citi. “This is why we also examine the potential of a Climate Action Development Bank—a multilateral bank dedicated solely to climate change, which could collect funding from taxation mechanisms and developed market contributions, and handle the allocation to emerging market projects and solutions.”

“This is the decade of action, and time is rapidly running out – the world needs to come together to tackle this global challenge, and COP26 in Glasgow represents the greatest opportunity since Paris in 2015 to ensure that we collectively reduce emissions, limit global temperature increases, and avoid this systemic risk materialising,” concludes Jason Channell, Global Head of Sustainable Finance, Citi Global Insights.

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About Citi Global Perspectives & Solutions (Citi GPS)

As our premier thought-leadership product, Citi Global Perspectives & Solutions (Citi GPS) is designed to help our clients navigate the global economy's most demanding challenges, identify future themes and trends, and help our clients profit in a fast-changing and interconnected world. Citi GPS accesses the best elements of our global conversation and harvests the thought leadership of our research analysts and a wide range of senior professionals across our firm.

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