Rubriktitel 1 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Contents Executive Summary Chapter 1 2 3 4 5 6 2 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a joint product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed it work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. 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Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for non-commercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522- 2625; e-mail: pubrights@worldbank.org. Cover image by Adobe Stock Report design by Simpelplus.de and editing by EpsteinWords. 3 Acknowledgments The development of this report was led by the World Bank and prepared by experts from the London School of Economics (LSE) Consulting and adelphi Consult. The World Bank task team responsible for this report comprised Samuel Jovan Okullo, Harikumar Gadde, and Marcos Castro. The consulting team was led by Michael Lerner, with the LSE team comprising Alexander Gard-Murray, Federica Genovese, Danae Kyriakopoulou, Daniela Baeza-Breinbauer, and Kristina Kiminiute. The adelphi team comprised Katja Biedenkopf, Andrés Olarte-Peña, Victor Ortiz Rivera, and Janibel Muñoz Torres. Anatole Boute, Joshua Burke, Baran Doda, Constanze Haug, and Luca Taschini provided internal technical quality assurance for the report. The report benefited greatly from the insights, discussions, contributions, and review by: Allan David Lee, Angela Kallhauge, Arthur Amorim Braganca, Catrina Godhino, David Victor, Dirk Heine, Felipe De Albuquerque Sgarbi, Franka Braun, Govinda Timilsina, Gregor Schwerhoff, Joseph Callisto Pryor, Keisuke Iyadomi, Marissa Santikarn, Mauricio Cárdenas, Martina Bosi, Michael Pahle, Muthukumara S. Mani, Mohammad Emil Widya Pradana, Penny Mealy, Rodrigo Pizzaro, Stephane Hallegatte, and Verena Fritz. Immense gratitude also goes to the PMI technical advisory group, participants in various case study focus group discussions, and experts who contributed interviews and survey responses for this report. This report has been developed as part of the Technical Work Program under the Partnership for Market for Implementation. It benefited from the guidance of Venkata Ramana Putti and Flavia Rosembuj, program managers of the Partnership for Market Implementation Facility, and Wendy Hughes and Hania Dawood, Practice Managers of the Climate Finance and Economics Unit (SSCFE) of the World Bank Climate Change Group. Contents Executive Summary Chapter 1 2 3 4 5 6 4 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Table of Contents Foreword 8 Preface 9 Five questions for navigating the political economy of carbon pricing 10 Question 1: What are the benefits and risks of pursuing carbon pricing in my context? 12 Question 2: How do I build a political coalition in support of carbon pricing? 13 Question 3: How do I improve the political feasibility of pricing carbon? 14 Question 4: How to ensure effective implementation of carbon pricing policy? 15 Question 5: How do I strengthen and consolidate carbon pricing over time? 16 Executive summary 18 1. Introduction 24 Who should read this report? 24 What does this report do? 25 What motivates policymakers to pursue carbon pricing? 25 Why study the carbon pricing experiences of developing countries? 28 What does the “political economy of carbon pricing” mean? 29 What are the key political economy challenges for pricing carbon? 30 2. Moving carbon pricing onto the policy agenda 32 2.1 Mapping the landscape: Actors and motivations for supporting or opposing carbon pricing 34 2.2 Strategies for building a powerful and lasting support coalition 45 2.3 Opportunities to place carbon pricing on the policy agenda 52 3. Negotiating an ambitious and politically feasible carbon pricing policy 56 3.1 Easing opposition to carbon 58 3.2 Overcoming opposition to carbon pricing 74 Contents 5 4. Achieving successful implementation of carbon pricing 78 4.1 Instilling trust through compliance rules 80 4.2 Communicating effectively during policy roll-out 83 4.3 Overcoming barriers to compliance and enforcement 87 5. Consolidating and strengthening carbon pricing 92 5.1 Consolidating the carbon pricing coalition 94 5.2 Planning for change over time 98 6. Conclusion: The future of the political economy of carbon pricing 104 Appendices 108 Appendix A – Additional survey results 108 Appendix B – Methodology 110 Appendix C – Expert survey acknowledgments 112 Endnotes 113 Contents Executive Summary Chapter 1 2 3 4 5 6 6 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries List of Tables Table 2.1 – Motivations for supporting or opposing carbon pricing 47 Table 2.2 – Examples of messages targeting audiences primarily motivated by related issues as 50 Table 2.3 – Examples of international technical assistance for carbon pricing 50 Table 3.1 – Select policy design options for easing opposition to carbon pricing 58 Table 3.2 – Examples and implications of options for using carbon pricing revenues 62 Table 3.3 – Examples of complementary non-pricing instruments 71 Table 4.1 – Types of regulatory and market information provided by carbon pricing regulators 80 Table 4.2 – Options for simplified MRV to ease the initial compliance burden 89 Table 5.1 – Examples of emerging threats to the consolidation of carbon pricing 94 Table A.1 – Top perceived barriers to ambitious carbon pricing, selected countries 108 List of Figures Figure 1.1 – Global adoption of carbon pricing policies by economic development 28 Figure 2.1 – Policy champions by position 35 Figure 2.2 – Perceived barriers to ambitious carbon pricing, by actor 36 Figure 2.3 – Perceived barriers to ambitious carbon pricing 43 Figure 2.4 – Perceived importance of strategies for ambitious carbon pricing 45 Figure 2.5 – Relevance of claims relating to the core objectives of carbon pricing 46 Figure 2.6 – Perceived importance of sources of pressure for climate policy 47 Figure 2.7 – Sources of momentum for ambitious carbon pricing 51 Figure 4.1 – Perceived barriers to ambitious carbon pricing relating to firms and regulators 87 Figure 4.2 – Perceived barriers relating to firms and regulators, by carbon pricing instrument 88 Figure A.1 – Likelihood of implementing carbon pricing by 2025 109 Figure A.2 – Anticipated ambition of carbon pricing by 2025 109 Figure B.1 – Survey respondents by position, experience, location, and gender 111 Figure B.2 – Survey respondents by country 111 List of Boxes Box 1.1 – Data sources for this practice review 25 Box 1.2 – What do carbon pricing experts interviewed for this report think about carbon pricing? 26 Box 2.1 – The effect of the EU’s CBAM on carbon pricing in developing countries 49 Box 3.1 – Technical effectiveness versus political feasibility dimensions in carbon pricing policy design: an experiment with carbon pricing experts 66 Box 5.1 – What strategies do carbon pricing experts favor for raising ambition? 101 Box 6.1 – Five reasons carbon pricing is gaining political momentum in developing countries 106 Contents 7 List of Case Studies Case Study 2.1 – Uruguay’s mobilization for a stringent but narrow tax 37 Case Study 2.2 – Indonesia’s challenging mobilization for carbon pricing 54 Case Study 3.1 – Slow but steady carbon pricing development in Vietnam 61 Case Study 3.2 – Easing private sector concerns through accommodation and strategic engagement in Colombia 69 Case Study 3.3 – Carbon pricing’s changing political fortunes in Brazil 73 Case Study 3.4 – Easing opposition through pilot phases in China 76 Case Study 4.1 – Chile’s roll-out building on existing emissions monitoring infrastructure 82 Case Study 4.2 – Mexico’s comprehensive implementation strategy linking pilot and implementation phases 84 Case Study 5.1 – South Africa’s delays and resistance to attempts to raise ambition 96 Case Study 5.2 – Kazakhstan’s carbon pricing policy suspended and amended following difficult implementation 100 List of Acronyms ASEAN Association of Southeast Asian Nations CBAM Carbon Border Adjustment Mechanism (European Union) CESPEDES Comisión de Estudios del Sector Privado para el Desarrollo Sustentable (Commission for Private Sector Studies for Sustainable Development, Mexico) CPLC Carbon Pricing Leadership Coalition ETS Emissions trading system EU European Union G20 Group of Twenty GIZ Gesellschaft für Internationale Zusammenarbeit ICAP International Climate Action Partnership MRV Monitoring, reporting, and validation MONRE Ministry of Natural Resources and Environment (Vietnam) NDC Nationally Determined Contribution NGO Non-governmental organization OECD Organisation for Economic Co-operation and Development PLN Perusahaan Listrik Negara (State Electricity Company, Indonesia) PMI Partnership for Market Implementation PMR Partnership for Market Readiness REDD+ Reducing Emissions from Deforestation and Forest Degradation SEMARNAT Secretariat for Environment and Natural Resources (Mexico) UK United Kingdom UN United Nations Contents Executive Summary Chapter 1 2 3 4 5 6 8 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Foreword Carbon pricing is one of the most powerful tools • Windows of opportunity: once the case of available to policymakers to help decarbonize carbon pricing has been established, there is economies. Yet, only a quarter of global usually not a set time to adopt carbon pricing emissions are currently covered by carbon pricing policy; countries have often had to take instruments, and both coverage and price levels advantage of windows of opportunity, and these can arise even in times of economic crisis. remain too low. • Policy ecosystem: complementary policies and Unlocking the potential of carbon pricing in actions improve feasibility of carbon pricing reducing emissions requires not only setting a by helping put in place supporting systems. clear policy direction but also overcoming political The associated ecosystem of policies if well- economy challenges—often a delicate balancing aligned with carbon pricing can help ensure its effectiveness. of local concerns, industry interests, institutional capacities, and the prevailing political landscape. • Policy iteration: pilot phases provide information that enables improvement and There is now a wealth of implementation refinement prior to launch but are only the start. experience across diverse jurisdictions that Successful carbon pricing systems continuously demonstrate how potential political challenges evaluate performance against objectives to improve, including through adjustment in scope, particular to developing countries—including coverage, and ambition. possible distributional impacts on vulnerable groups—can be overcome through strategic • Building confidence: rregulated entities often actions and policy design. encounter difficulty coping with new regulation but authorities who act decisively to support No one size fits all when it comes to carbon those entities, including through communication, pricing, but all successful carbon pricing systems, capacity building, or punitive measures for non- compliance build trust and confidence in the besides working out how to manage any potential system. adverse economic and social impacts, have a few attributes in common: This report discusses these themes and more, and the strategies used to achieve them using • Broadening ownership: carbon pricing policies several developing country case studies. Written with a broad and strong support base across and disseminated as part of the World Bank’s diverse sectors of the economy are both Partnership for Market Implementation’s global politically more acceptable and stable and knowledge program, “Balancing Act: the pursuit can be sustained and ambition raised even as of Ambitious Carbon Pricing in Developing administrations change. Countries” is our effort to help democratize • Stakeholder dialogue: meaningful engagement knowledge that has been gained on the political with stakeholders, that seeks to integrate economy of carbon pricing. Our intention is that feedback from various affected groups often yield report is of use to policymakers and their advisors a robustly designed policy package. around the developing world, seeking meaningful • Policy champions: While not all successful insights to help advance their own carbon pricing carbon pricing must have a policy champion, initiatives. when available, these champions can be effective communicators, and can keep carbon Hania Dawood pricing center stage even as priorities change. Practice Manager, Climate Finance and Economics, Champions in government are often the most Climate Change Group, World Bank powerful. Foreword 9 Preface Carbon pricing, especially if adopted as part of The premise of this report is that carbon pricing a comprehensive policy mix can be a powerful can be an effective and cost-effective instrument, instrument for governments to incentivize cuts one that has increasingly attracted government in carbon emissions while at the same time interest as a key part of the climate policy toolkit. realizing broader economic aspirations. There are The target audience for this report is national and substantial political challenges that governments subnational policymakers and other interested must confront in the adoption of carbon pricing, stakeholders seeking practical insights on real- however, and these often affect how carbon world approaches that have worked or failed pricing programs are designed, put into action, when advancing carbon pricing. The report and sustained, as well as the impact these policies does not prescribe best practices or cover every ultimately have on emissions reductions. The possible circumstance. Instead, by examining political hurdles associated with carbon pricing current practices at each stage of carbon pricing include the need to form alliances, overcoming development, it aims to inform and assist in resistance from businesses and communities, efforts to implement carbon pricing. communicating, and collaborating with regulated entities, international coordination, and main- taining or increasing ambition. This report provides practical insights into the political economy challenges and opportunities for advancing carbon pricing, drawing on the experiences of select countries, including those in the World Bank’s Partnership for Market Implementation (PMI). Such countries often face different socioeconomic, political, and institutional environments than high-income economies. The review combines findings from academic literature in economics and political science, interviews with stakeholders, and an original survey of carbon pricing experts and policymakers in developing countries, to extract meaningful insights into how policymakers navigate political economy challenges to promote carbon pricing in developing countries. The report does not deal with the adoption of the broader set of climate policies that may also support mitigation. Contents Executive Summary Chapter 1 2 3 4 5 6 10 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Five questions for navigating the political economy of carbon pricing Five questions for navigating the political economy of carbon pricing 11 What are the benefits and risks of 1. pursuing carbon pricing in my context? How do I build a political coalition in 2. support of carbon pricing? How do I improve the political feasibility 3. of pricing carbon? How to ensure effective implementation 4. of carbon pricing policy? How do I strengthen and consolidate 5. carbon pricing over time? Contents Executive Summary Chapter 1 2 3 4 5 6 12 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries QUESTION 1: What are the benefits and risks of pursuing carbon pricing in my context? Carbon pricing, administered via a carbon pricing can help contribute towards further tax or emission trading system, can enable catalyzing low carbon innovation and countries to steer their economies onto spawning low-carbon industries. Additionally, climate-compatible trajectories and away because of its revenue collection potential, it from carbon-intensive development models is often an avenue to shore up government that are increasingly losing their economic revenues and support expenditures without appeal and political viability. Carbon pricing resorting to distortionary policies. Carbon is consistent with the polluter-pays-principle, pricing is now also seen as a means of soft a compelling approach to accounting for the diplomacy and gaining favor with trading damage caused by private carbon pollution partners who may have carbon pricing to society. When implemented as part of policies of their own. a broader policy mix that also addresses non-price barriers, related market failures, In advancing carbon pricing, policymakers and distributive impacts, it can be especially must contend with several risks. These powerful for promoting low-carbon growth. include resistance from influential carbon polluters, unfavorable impacts on vulnerable All countries, including those with relatively communities—often manifested through low total or per capita emissions, can higher energy and product prices, possible also leverage carbon pricing to achieve short-term losses in economic competitive- broader economic objectives including ness due to emissions leakage, accusations as an opportunity to undertake broader of favoring climate elites, potential revenue fiscal reform and pursue comprehensive loss from carbon-heavy industries, and the environmental and climate policies. Carbon risk of adopting an ineffectual policy. Five questions for navigating the political economy of carbon pricing 13 QUESTION 2: How do I build a political coalition in support of carbon pricing? Mobilizing a political coalition to support supporters. Highlighting co-benefits of carbon pricing takes significant effort. carbon pricing, such as improving public While supporters in government are health and safety, energy security, and necessary, they are insufficient for moving progress on environmental issues (e.g., carbon pricing onto the policy agenda. It biodiversity conservation), can help build is, therefore, crucial that carbon pricing support for carbon pricing. Stressing advocates engage and facilitate dialogue cooperation, economic opportunities, and with various stakeholders early. Partners reputation/standing with international need to be found from other corners of partners may also appeal to some society: often private companies with supporters. The business community often low-carbon technologies and products, join the support coalition to get ahead supporters of complementary mitigation of regulation they perceive as inevitable, policies, communities experiencing the reduce regulatory uncertainty, or secure negative effects of climate change or fossil compensation that helps their sector adjust fuel use, businesses and industries that to carbon pricing. Notwithstanding, policy support a predictable carbon pricing system advocates need to also communicate over piecemeal regulation, environmental costs and facilitate dialogue to address organizations and communities, potential concerns including through design international partners, sectors that generate accommodations. offsets, and of course the public at large. In developing countries, international Policy actions such as first implementing organizations have and can also play an supporting climate policies can also draw important role in convening and providing support, because carbon pricing while technical support to carbon pricing coalitions crucial, it alone is insufficient to drive deep in the initial stages. decarbonization. Carbon pricing policy that builds upon or is integrated into existing po- Clearly communicating benefits as well licy frameworks often provide a foundation as being transparent about costs can win to build broader support. In the absence of supporters for carbon pricing. Using carbon such policy frameworks, building support revenues to provide tax rebates, fund public can mean following a sequenced approach services, or invest in clean energy can draw to adoption of carbon pricing policy. Contents Executive Summary Chapter 1 2 3 4 5 6 14 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries QUESTION 3: How do I improve the political feasibility of pricing carbon? Overcoming the resistance of regulated vulnerable populations, without eliminating firms—driven by concerns about the incentive to decarbonize. To address international competitiveness and the cost competitiveness and leakage concerns, of compliance—is especially important. policymakers may adopt carbon border Policymakers often address these fears, adjustment mechanisms, carbon tax rebates including over energy and compliance costs, on exports, or benchmark the provision of by combining an initially weak carbon price free allowances to reward the most carbon- with plans to increase stringency over time. efficient firms. This usually includes setting low tax rates, establishing high caps, targeting only select In some contexts, carbon pricing sup- sectors, providing generous allowances, porters have enough political power exemptions, or offset credits, and deploying and momentum that it may be possible countervailing subsidies. All these measures to rally public support merely through lessen carbon pricing’s efficacy, however. campaigning, communication, dialogue, and And while policymakers often view such feedback to address legitimate design and accommodations as temporary to raise implementation concerns. If supporters acceptance and help put systems in place, control the mechanisms of government, efforts to remove them later often meet they can also use legislative and regulatory substantial resistance from affected groups. opportunities to advance their goals. For example, some governments embed carbon Other options exist beyond lowering the pricing in a more comprehensive reform policy’s ambition. Policymakers may choose package (e.g., a broader tax reform), in to adopt complementary actions and policies. other situations advancing carbon pricing Actions and policies prior to carbon pricing as a standalone legislation may be the best can include (legally binding) commitments, recourse, while in others amending existing creation of supporting institutions and regulation is best suited. In other situations, processes, investment policies to support leveraging executive orders and agency the proliferation of green technologies regulations may prove successful but often or procurement policies for the phase do not result in enduring policies. When out of carbon intensive technologies, and faced with national roadblocks, supporters performance/portfolio energy standards that may also find that shifting focus to sub- may be capable of addressing a broader set national or international efforts may provide of market failures or barriers. As part of the better subsequent opportunities than at the carbon pricing package, carbon tax revenues national level. can be used to mitigate carbon pricing’s social and economic impact, especially for Five questions for navigating the political economy of carbon pricing 15 QUESTION 4: How to ensure effective implementation of carbon pricing policy? Comprehensive and clear communication Credible and transparent governance of market participants’ responsibilities and enforcement are crucial for effective and legal requirements is key for ensuring carbon pricing, as is building the right a smooth rollout of carbon pricing. Such capacity within the regulator and regulated communication efforts help ensure that entities, something that can be a challenge regulated entities know their obligations, to accomplish in low-capacity contexts. government entities coordinate among Establishing MRV procedures for traditional themselves, and the broader group of air pollutants before adopting carbon pricing stakeholders and the public are kept can build regulators’ confidence and nurture informed. Early stakeholder involvement, a culture of compliance among regulated both in the development of carbon entities. Carbon pricing mechanisms that pricing policies and pilot phases, benefits build on pre-existing frameworks tend to subsequent implementation since regulators result in a smoother rollout, such as building can iterate rules and guidance in dialogue carbon pricing upon existing tax bases for with regulated entities. Precise rules for fuel and excise taxes prior to an economy- implementing and monitoring carbon pricing wide rollout. Relatedly, starting with make the process transparent and build trust simplified processes, such as default values among affected groups. This trust is critical for emissions instead of measuring actual in shaping how views toward carbon pricing, emissions, can help address initial capacity especially those of regulated entities, evolve challenges and thereby facilitate compliance. after the introduction of the carbon pricing Importantly, regulators need to settle on policy. Without trust, initially supportive the instrument that suits the domestic and stakeholders and the public may lose capacity context best. confidence in the policy. With it, in contrast, early resistance may soften, especially if early concerns are proven wrong. Contents Executive Summary Chapter 1 2 3 4 5 6 16 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries QUESTION 5: How do I strengthen and consolidate carbon pricing over time? Preparing for future learning and raising It is helpful to make an effort from the ambition should be a part of carbon pricing start to develop a sound understanding of strategy from the beginning. This particularly policy interactions in the specific country applies when governments start with carbon context and to identify complementary pricing policies that are too weak to induce policy measures that support carbon meaningful emissions reductions. Political pricing. Measures to maintain and expand turnover, volatile socioeconomic and market support for carbon pricing over time include conditions, and ongoing efforts by oppo- increasing subsidies and policy support to nents can be barriers to making the low-carbon energy sources and technologies, necessary change. Mechanisms to overcome providing economic and financial incentives such barriers include rules that automatically for firms to decarbonize their supply chains, lock in policy changes, or a reevaluation reducing fossil fuel subsidies, expanding process conducted at regular intervals to the scope and coverage of carbon pricing, streamline the process of ratcheting up integrating carbon pricing within the broader ambition. This process can be coupled with climate policies and mitigation objectives, data collection and analytics to continually and international cooperation including assess and improve the effectiveness of on linkage with other carbon pricing carbon pricing. mechanisms. Policymakers can strategically supplement these efforts by creating a systematic process of gathering and acting on feedback from stakeholders during the implementation process. Five questions for navigating the political economy of carbon pricing 17 Contents Executive Summary Chapter 1 2 3 4 5 6 18 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Executive summary Executive summary 19 Carbon pricing carries political risks… Policy champions play a crucial role in driving momentum for carbon pricing Widely seen as one of the toughest climate policies to adopt, carbon pricing often faces opposition By effectively communicating the importance from influential polluters and communities, as it of carbon pricing, policy champions are key to elicits concerns about economic competitiveness successfully adopting and implementing carbon and fairness especially for vulnerable groups. pricing. Policy champions can emerge from any Since carbon pricing accentuates the individual part of society, including the private sector and costs of compliance vis-à-vis the collective benefits intergovernmental organizations, but champions from emissions reductions, it can be a challenging in government positions can be particularly policy to champion. Implementing a carbon price impactful. Indeed, carbon pricing initiatives are also involves complex administrative tasks, which most successful when influential figures such as often strain both regulators and regulated parties, presidents and ministers actively rally support possibly leading to delays, distrust, and potentially and endorse the policy. Well-placed policy policy weakening or reversal. Efforts to introduce supporters are valuable, but they are insufficient. or expand carbon pricing are also subject to being Meaningful engagement with stakeholders across portrayed by critics as a partisan or elitist issue. ministries, the private sector, and civil society, including those who oppose carbon pricing is also …but also rewards exist key. Governments that pursue carbon pricing without extensive consultation often struggle With proactive and adaptive policymaking, carbon to gain acceptance for the policy or maintain pricing can result in political and policy success. its legitimacy and effectiveness in the long run, To advance carbon pricing, politicians often something further discussed in Chapter 1 and strengthen their position by emphasizing the Chapter 5. polluter pays principle, i.e., the idea that polluters should bear the costs of their own pollution; responding to public demand for climate action; promoting the growth of low-carbon industries and green jobs; and generating revenue for public and social investments. Governments also can use carbon pricing to demonstrate their commitment to international and domestic climate goals, assert their leadership on policy, secure access to important export markets, and attract foreign investment. Contents Executive Summary Chapter 1 2 3 4 5 6 20 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Narratives centered around jobs, low- Combining carbon pricing with other carbon innovation, and investment attract policy reforms can help mitigate broad support for carbon pricing opposition Policy champions can emphasize that This involves policymakers leveraging the implementing carbon pricing will help open synergies between policies to on the one hand new economic opportunities including through ensure that the carbon pricing policy package also incentivizing low-carbon innovation and addresses distributional impacts, and on the other attracting investment in low-carbon technologies. hand, is supported by an ensemble of policies Redirecting carbon tax revenue towards that address both market failures and barriers bolstering the domestic low-carbon energy sector that ordinarily limit its efficacy. Safeguards and environmental causes can be instrumental for industries vulnerable to international for also building strong coalitions in support of competition and initiatives supporting a fair tran- carbon pricing and ensuring sustained backing. sition for affected workers and poor and Additionally, highlighting external pressures vulnerable populations can alleviate concerns stemming from trading partners, participation and enhance the overall benefits of carbon in climate alliances, and engagement with pricing. Many governments choose to implement international organizations can help positively complementary policies initially to pave the way shape the domestic discourse on carbon policy. for carbon pricing later. Such a bundling strategy The prospect of gaining exemptions from can also encompass a broader set of tax reforms, initiatives like the European Union's Carbon legislation, and institutions to address mitigation Border Adjustment Mechanism (CBAM), for and climate change more broadly. These initiatives instance, has motivated many countries to push can serve as opportunities to attract the attention forward with their own carbon pricing efforts. and support of key decision-makers in the private Chapter 2 presents examples of international sector and government departments. For further influences and Chapter 5 discusses how to exploit details, refer to Chapter 3. economic opportunities to help advance carbon pricing. Executive summary 21 Policymakers decide whether to use an Policymakers have often balanced Emission Trading System (ETS) or a carbon technical effectiveness against political tax based on their political situation, feasibility, but this does not have to be the priorities, and past experiences case. ETSs and carbon taxes can be made to operate Policymakers typically adjust policy designs to comparably, but policymakers tend to view them address opposition by incorporating features differently. Many see taxes as simpler, but harder like low prices, exemptions, and pilot phases. to gain political support for. ETSs, on the other However, these adjustments may compromise hand, are seen as more complex but less likely the policy's ability to effectively reduce long- to trigger opposition. Carbon taxes are often term carbon emissions (for more see Chapter favored by policymakers in smaller economies 3). Carbon pricing schemes sometimes only with transparent and effective tax systems, price certain sources of emissions, offer free where existing taxes (e.g., fuel and excise) can be allowances, provide exemptions that weaken readily updated. Policymakers choose ETSs when the carbon pricing signal, and permit the use of they have relatively large and well-functioning offsets, some of which may not be of high quality. economies, prefer to avoid legal/political risks of To facilitate adoption, it is also common to start tax reform, value providing firms with flexibility in with a modest carbon pricing signal and increase choosing the means to comply, or seek to attract it gradually. These approaches are often the foreign investment through straightforward links outcome of negotiations with stakeholders and to international carbon markets. Past experiences contribute to minimizing resistance from both with compliance and voluntary carbon markets, as regulated entities and the public concerned about well as other market-based policies, also influence the costs of decarbonization. While such practices whether policymakers choose an ETS or a carbon may also build administrative capacity, they could tax. Both options are used worldwide. For more also stall more ambitious climate action (see information, refer to Chapter 3. Chapter 3 and Chapter 5). Contents Executive Summary Chapter 1 2 3 4 5 6 22 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Detailed rules and their clear communication help meet Although overarching implementation principles implementation challenges like proactive planning and transparent decision- making apply universally, strategies should adapt Implementing a carbon pricing policy presents to local circumstances. For instance, policymakers significant challenges for governments and might tailor enforcement methods for private regulated entities. Capacity limitations in staffing, versus state-owned enterprises, considering finances, and organization increase the risk of the unique dynamics at play (see Chapter 4 for inefficiency, mismanagement, and overall poor further details). policy performance. These issues can erode political support for carbon pricing. To address these challenges, policymakers often take several steps. Firstly, they focus on clearly communicating the responsibilities of market participants and regulators. Secondly, they establish detailed and unambiguous implementation rules. Thirdly, they Effective carbon prices balance simplify procedures to streamline the compliance adaptability and predictability. process. Lastly, where possible they repurpose and extend existing institutional structures instead For carbon pricing policies to achieve meaningful of creating entirely new ones. These strategies emissions reductions, they must both push help anticipate and mitigate implementation regulated entities to reduce their pollution and challenges associated with carbon pricing policies sustain that pressure over time. Setting and (for more see Chapter 4). communicating a long-term carbon pricing trajectory helps provide firms with the certainty to make costly investments toward decarbonization. Policymakers can provide for unanticipated developments by designing flexibility mechanisms, such as a regular review-and-ratchet process. The credibility of a policy trajectory depends on its predictability even amidst transient political Inclusive deliberation and gradual events, something that can be strengthened by implementation help pinpoint issues and delegating authority to technical bodies and by establish trust. designing rules that automatically adjust prices to relevant conditions (for more, see Chapter 5). Early involvement of stakeholders and phased adoption help identify and tackle implementation challenges while fostering trust. Taking steps to develop monitoring systems before enforcement begins can aid implementation and instill confidence in the policy among regulated parties. Executive summary 23 Agenda Setting Policy champions Narratives for and broad engagement building coalitions Consolidation & Negotiation Strengthening Taxing or trading Adaptability / Insulation Effectiveness / Feasibility Flexibility and delegation Complementary policies Implementation Rules and Inclusive deliberation communication and phased roll-out Contents Executive Summary Chapter 1 2 3 4 5 6 1. 24 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Introduction Who should read this report? The primary audience of this report is government policymakers and carbon pricing stakeholders, with interest in the experiences of countries in confronting political economy to advance carbon pricing. The report gives considerable attention to carbon pricing experiences in developing countries. It contains insights relevant both to countries that have yet to adopt a carbon price and those seeking to raise ambition. Introduction 25 What does this report do? This report captures and distills firsthand from successful (and less successful) experiences experiences of carbon pricing practitioners (Box and make informed choices on how they might 1.1). Variation in history, capacity, and institutional advance carbon pricing in their own contexts.1 arrangements create distinctive local contexts Throughout this report, “carbon pricing” refers to and thus, no universally applicable best practice the policy instrument, whereas a “carbon price” recommendations are presented. Rather, the refers to the price signal created by the policy. The report describes how stakeholders have navigated report does not address the broader issue of the political economy obstacles to pricing carbon, political of climate policies something handled in a such that other practitioners can extract insights sister World Bank publication104. Box 1.1 Data sources for this practice review for Market Implementation (PMI) and the The carbon pricing experiences described in International Climate Action Partnership (ICAP). here draw from an extensive review of more Experts surveyed have been directly involved than 180 practitioner publications, academic in the development of carbon pricing in more studies in political science and economics, as than 28 developing countries. The report thus well as 49 in-depth interviews with developing provides a broad perspective on the political country carbon pricing stakeholders, professio- economy of carbon pricing. Further details, nals, and policy champions. This report addi- including a list of respondents who wished to be tionally draws on the results of an original survey personally acknowledged for their contribution of 107 carbon pricing experts recruited from to the report, can be found in the Appendix. the stakeholder networks of the Partnership What motivates policymakers to pursue carbon pricing? Policymakers seek to enact carbon pricing for its climate action,7 and demonstrating credibility and environmental, economic, and political benefits. leadership on the international stage. Moreover, Environmentally, carbon pricing helps account for carbon pricing may generate substantial revenue, the social cost of GHG emissions. Economically, it which politicians can reinvest to advance their offers more than just a cost-effective instrument.2 broader political and economic agenda.8 Across a variety of studies, evidence indicates well-designed carbon pricing policies can reduce Box 1.2 presents a snapshot of how carbon inequality,3 broaden formal employment,4 pricing experts (demographic information of increase foreign direct investment, and, even at 5 respondents is shared in Appendix B) interviewed relatively moderate prices stimulate renewable for this report view the strengths and weaknesses energy markets.6 Countries may also implement of carbon pricing. In general, they view carbon carbon pricing policies to receive exemptions pricing favorably, see it is a politically challenging from other jurisdictions’ carbon border policies.i policy to implement, and regard carbon prices in Politically, politicians can take credit for making their own jurisdictions to be somewhat ambitious. polluters pay, meeting rising public demand for i For example, part of the rationale for carbon pricing described in Türkiye’s Medium Term Programme (2023–2025) is to reduce charges from the EU’s CBAM. Contents Executive Summary Chapter 1 2 3 4 5 6 26 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Box 1.2 What do carbon pricing experts interviewed for this report think about carbon pricing? Carbon pricing has a crucial role • They express caution about the political prospects of 1. in decarbonization carbon pricing in developing countries: 24% “strongly • Large majorities of experts believe agree” and 50% “somewhat agree” that carbon pricing is carbon pricing is necessary for feasible in their country. developing countries to transition to a low-carbon economy (92%) and • Very few (7%) believe that carbon pricing is fundamentally think the policy can do so effectively flawed. (80%). Necessary Strongly agree Somewhat agree Effective Neither agree nor disagree Feasible Somewhat disagree Strongly disagree Fundamentally flawed 100% 75% 50% 25% 0% 25% 50% 75% 100% Disagree Agree Question: “For your country to transition to a low-carbon economy, to what extent do you agree that carbon pricing is…” (104 responses). Source: Original expert survey Carbon pricing is seen as more effective 2. but less feasible than other climate policiesii 4 • Experts believe carbon pricing is more effective in reducing carbon emissions than other mitigation policies including 3 Carbon Pricing mandates, regulations, and spending. Mandates Regulations Spending • They perceive carbon pricing as less 2 politically feasible than regulations (e.g., efficiency standards) and spending (e.g., subsidies for renewable energy), and 1 at a similar level as mandates (e.g., fossil fuel phase-outs). 1 2 3 4 Feasibility ii This result reflects expert perceptions, rather than more systematic observation. To generate more robust evidence on this question, the OECD Question: “Thinking generally, rank each of the following in terms of launched the Inclusive Forum on Carbon Mitigation Approaches in January political feasibility/technical effectiveness” (112 responses). 2023 to take stock of and consider the effectiveness of different carbon Source: Original expert survey mitigation approaches: https://www.oecd.org/climate-change/inclusive- forum-on-carbon-mitigation-approaches/ Introduction 27 3. Experts view carbon prices in developing countries to be modestly successful and All responses ambitious, especially by those currently in government positions Very • On average, experts view carbon pricing successful 5% 2% 2% policies in developing countries to be at least Carbon pricing success “somewhat” successful (53%) and “somewhat” Somewhat 2% 8% 27% 9% successful ambitious (49%). A little successful 14% 14% 6% • Experts currently working in government had a far more positive view of their countries’ Not at all successful 6% 4% 3% carbon prices (78% at least “somewhat” successful and 92% at least “somewhat” Not at all A little Somewhat Very ambitious). ambitious ambitious ambitious ambitious Carbon pricing ambition By Position Government respondents Non government respondents Very successful 7% 6% 2% Carbon pricing success Somewhat 50% 21% 2% 8% 20% 6% successful A little 7% 18% 18% 6% successful Not at all 7% 7% 8% 4% 2% successful Not at all A little Somewhat Very Not at all A little Somewhat Very ambitious ambitious ambitious ambitious ambitious ambitious ambitious ambitious Carbon pricing ambition Question: “How ambitious is the carbon pricing policy in your country” “How successful has the carbon pricing policy in your country been so far?” (64 responses). Source: Original expert survey Contents Executive Summary Chapter 1 2 3 4 5 6 28 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Why study the carbon pricing experiences of developing countries? The efforts of developing and developed countries Figure 1.1 shows that following Ukraine’s to reduce carbon emissions are critical for meeting adoption of a carbon tax in 2011, a further 34 new the Paris climate goals. Yet, most countries have carbon pricing initiatives have been enacted in increased their carbon emissions over the past eleven developing countries. Currently, there are two decades.9 To help reverse this trend, multiple 21 carbon pricing policies in active preparation in countries are considering carbon pricing as a key developing countries, 12 more than in developed component of their climate action plans alongside countries. These developments suggests that a other appropriate climate policies. phase of more rapid and widespread adoption of carbon pricing in both developing and developed countries is underway. FIGURE 1.1 Global adoption of carbon pricing policies by economic development 100 Developing countries with carbon pricing implemented or scheduled: Developed Albania, Argentina, Chile, China, Colombia, India, Indonesia, Kazakhstan, Mexico, Number of regional, national, and subnational carbon pricing initiatives Montenegro, Singapore, South Africa, Turkey, Ukraine, Uruguay, Vietnam 55 80 60 40 Developing 35 9 20 21 0 Under 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 consideration Carbon pricing policies adopted since 2000 and carbon pricing policies under consideration. “Developed” and “Developing” country groupings reflect International Monetary Fund classifications as of April 2023. Carbon pricing policy data from State and Trends of Carbon Pricing 2023. Note that some countries have adopted multiple national or subnational carbon pricing instruments. Introduction 29 Learning from the experiences of other countries and implementation. And while several important can help accelerate the diffusion of carbon pricing resources examine the political economy of among developing countries.10 However, it is carbon pricing, these give relatively little attention important to tailor knowledge-sharing resources to lower-capacity contexts.11 and initiatives to the needs of developing countries. Policymakers in developing countries Accordingly, this report aims to help catalyze peer typically operate in the context of steeper learning on the political challenges of carbon emissions declines, less awareness and public pricing within developing countries. For many of support for climate action, lower levels of energy these countries, their experiences are still nascent access, more pressing needs than emissions and developing. Therefore, the report mostly reductions, and constrained human, financial, and features country experiences at the early stages institutional capacity. Hitherto, knowledge-sharing of the carbon pricing journey than at later more for developing countries has largely focused on advanced stages. the technical aspects of carbon pricing design What does the “political economy of carbon pricing” mean? The political economy of carbon pricing describes also decisions in the policy’s administration and how political and economic forces shape the communication that affect its base of support. adoption and subsequent effectiveness of carbon These dynamics reflect the challenges of pricing policies. Key issues of interest here include regulating a previously unregulated pollutant with the political challenges of implementing carbon salient localized/personal compliance costs, global pricing policies; economic implications of carbon and delayed benefits from emissions reductions, pricing for businesses and households; and the and the potential for free-riding incentives that feedback from the economic, social, and political undermine momentum for ambitious policy. arena into the choice and design of carbon pricing policies. Although each carbon pricing policy and context presents its own unique political economy, they This report explores how policymakers navigate tend to share similar stakeholder interests, ideas political economy of carbon pricing, with a driving implementation, and institutions. These particular focus on the adoption of direct carbon commonalities make it worthwhile to explore and pricing via carbon taxes and emissions trading compare the political economy of carbon pricing systems. It covers not only the initial decision across the various cases highlighted in this report. to adopt, design, and update a carbon price but Contents Executive Summary Chapter 1 2 3 4 5 6 30 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries What are the key political economy challenges for pricing carbon? This report is structured around four key challenges of navigating the political economy of carbon pricing, drawing on problem-driven approaches to political economy analysis.12 CO2 CO2 CHALLENGE 1: CHALLENGE 2: Moving carbon pricing onto the Negotiating an ambitious and policy agenda politically feasible carbon pricing policy Explicit carbon pricing has historically been slow to gain political traction, especially in Even after carbon pricing enters the policy developing countries. This is due to factors like agenda, politicians may fail to adopt the proposal committed opposition by powerful polluters, the into law. Failure at this stage often stems low salience of climate change amid competing from efforts by carbon pricing skeptics, most priorities, regressive impacts of carbon taxation commonly incumbent polluters, to shape public on households, the relative absence of carbon opinion and pressure legislators to resist carbon pricing in peer countries, and a deficit of political pricing proposals. This pressure manifests as will. Institutional inertia, incentives favoring short- misleading narratives that frame carbon pricing term decision-making, and political, economic, as an elitist concern and present objections based and fiscal reliance on carbon revenues drive this on freeriding risks, historical climate injustice, lack of political will.13 Efforts to convert carbon limited capacity to meet regulatory requirements, pricing to an action item on the policy agenda in and fears of lost international competitiveness, developing countries tend to be most successful growth, and jobs. Carbon pricing supporters can when advocates identify policy champions, build ease these concerns through strategic policy a broad and enduring support coalition, and act design, information and activist campaigns, and decisively to capitalize on a window of opportunity complementary non-pricing policies. Following (for more, see Chapter 2). this, elections, and procedural maneuvers, such as packaging carbon pricing with other large or popular reforms, are more likely to overcome residual opposition (for more, see Chapter 3). Introduction 31 CHALLENGE 3: CHALLENGE 4: Achieving successful Consolidating and strengthening implementation of carbon pricing carbon pricing Carbon pricing only spurs decarbonization Most carbon pricing policies do not begin at if regulated entities understand their legal levels that will meaningfully affect emissions obligations, respond to price signals (current trajectories. Thus, they must raise ambition and projected), and believe regulators fairly over time. Doing so can be challenging for and consistently enforce compliance. This can policymakers, as compromises made to facilitate be difficult to achieve, especially in contexts adoption, such as low prices, large exemptions, with limited time and capacity to develop and and free allowances, often prove sticky. Carbon communicate detailed rules, inexperience pricing is also vulnerable to retrenchment and and underinvestment in data management, reversal when priorities change following political provisions that provide preferential treatment to turnover, regulated entities and consumers certain sectors, and ad-hoc and opaque market experience more salient and rising costs, and governance, oversight, and enforcement. To economic shocks pressure politicians to artificially overcome such challenges, governments can, lower prices. Policymakers can take steps to among other measures, introduce simplified accommodate and shield carbon pricing from monitoring and reporting requirements, formulate transient turbulence, via the use of pre-agreed a targeted communication and coordination ambition corridors, and delegation of oversight strategy, and improve transparency in to politically insulated institutions. Investment in government decision-making. Multiple countries building capacity and trust, support for low-carbon have had success with rolling out carbon pricing industries and growth, and salient co-benefits are across the economy and conducting enforcement key for ensuring the policy’s endurance over time in phases (for more, see Chapter 4). (for more, see Chapter 5). Contents Executive Summary Chapter 1 2 3 4 5 6 2. 32 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Moving carbon pricing onto the policy agenda Moving carbon pricing onto the policy agenda 33 Key Messages • Supporters of carbon pricing are typically motivated by environmental impacts of carbon pollution, opportunities for and benefits of low- carbon growth, complying with international climate commitments, revenue generation, and fiscal consolidation. Opponents, in contrast, often cite higher energy costs, loss of revenue and competitiveness, job losses, and complexity of implementing carbon pricing. • It takes significant effort to mobilize the large coalition of supporters including from the private sector, needed to place carbon pricing on the agenda. Stakeholders decide to support or oppose carbon pricing based on values and expectations about the political and economic consequences of carbon pricing. • Policy champions build coalitions for carbon pricing through persuasive appeals (e.g., emphasizing health, economic, and environmental co-benefits), domestic and international pressure (e.g., carbon border taxes), and adjustments to the policy’s benefits and costs for key stakeholders (e.g., tying pricing to low-carbon technology subsidies). • Once supporters are identified and mobilized, carbon pricing can enter the policy agenda This chapter describes the political, economic, and when a window of opportunity social actors involved in the early stages when placing opens. These opportunities carbon pricing on the policy agenda. It identifies the include electoral turnover, fiscal motivations leading to support and opposition of crises, broad policy reforms, and carbon pricing, as well as strategies for mobilizing international climate events and supporters to create a coalition in favor of this policy pressure. intervention. This coalition allows advocates to take advantage of opportunities to generate momentum for pricing carbon. Contents Executive Summary Chapter 1 2 3 4 5 6 34 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 2.1 Mapping the landscape: Actors and motivations for supporting or opposing carbon pricing This section provides a brief overview of the key to support or oppose carbon pricing. Finally, it stakeholders relevant to entering carbon pricing characterizes perceptions regarding the extent onto the policy agenda. It subsequently describes to which different actors act as champions or common motivations that lead stakeholders blockers of carbon pricing in developing countries. 2.1.1 Champions and opponents of carbon pricing A simplified but instructive perspective for While all types of stakeholders can act as policy understanding the agenda-setting process for champions, experts interviewed for this report carbon pricing is through the lens of supporters referenced one of four types when asked of a and opponents. Each coalition is often led by specific example of a carbon pricing champion a relatively small number of individuals who in their country (Figure 2.4). The largest group, mobilize and organize stakeholders to achieve 42%, identified a champion in government (i.e., a a common political goal, either as champions political leader or bureaucrat), 20% chose a person of carbon pricing or as opponents who seek to or organization in the private sector, and 17% and prevent carbon pricing from entering the policy 12% selected an academic or member of civil agenda. society, respectively. Only 8% of those surveyed identify a carbon pricing champion who works at Champions an intergovernmental organization. Specifically named policy champions include high-level To mobilize support for carbon pricing, individual politicians in Indonesia, an Argentine member or institutional policy entrepreneurs need to of parliament, a Mexican business association publicly champion the idea and commit time leader, and a Brazilian professor. and resources toward building a support coalition. A plethora of reasons may motivate these stakeholders, including commitments to environmental protection, economic opportu- nities, desire to gain international legitimacy and recognition, and fiscal consolidation. Moving carbon pricing onto the policy agenda 35 FIGURE 2.1 Policy champions by position 50% 40% 30% 20% 10% 0% Academic/ Government Private sector Civil society Intergovernmental consultant Question: “Sometimes, specific people or organizations play a particularly important role in promoting carbon pricing. Can you think of the name of a person/organization who is a particularly important supporter of carbon pricing in your country? [If yes] Which of the following best describes their position or sector?” (59 responses). Source: Original expert survey At the early stages of the policymaking process, Leveraging synergies among different types of it is often easier to find carbon pricing policy carbon pricing champions helps strengthen the champions in civil society and grassroots momentum for carbon pricing. For example, a movements than in government. This is because consulted policy expert describes a case where an political leaders and government administrators NGO engaged in ongoing research and lobbying value concrete outcomes for which they can claim efforts for climate policy, in collaboration with credit, something that is often difficult to achieve a business association representing renewable at the agenda-setting stage.14 However, if active energy firms, and a university-affiliated partner supporters can be found in powerful positions, exploited their organizational complementarities, they can be decisive in bringing carbon pricing to expertise, and legitimacy to jointly play a central the forefront of the political conversation. role in their home country’s carbon pricing movement. Their activities included participation in a crucial multi-stakeholder commission on the country’s energy transition and a carbon pricing presentation to the Senate during discussions on whether to adopt a carbon tax.15 Contents Executive Summary Chapter 1 2 3 4 5 6 36 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Opponents Opponents attempt to ensure that carbon pricing as a “very” important barrier (Figure 2.2). remains on the fringes of the political debate. Politicians sometimes also act as carbon pricing These stakeholders often have the most to lose opponents, but only 19% of experts see politicians from the adoption of carbon pricing and include as a “very” important barrier. Politicians are fossil fuel producing regions and producers, and perceived to be barriers due to their electoral consumers benefitting from cheap or subsidized mandate or base of support, and due to more energy. Among experts, 78% view firms with high pressing economic and energy access needs carbon emissions as obstacles to ambitious carbon which render carbon pricing a low action item (for pricing, with nearly half (47%) characterizing them more see Section 2.1.3). FIGURE 2.2 Perceived barriers to ambitious carbon pricing, by actor High-emitting firms A lot -11% -12% 32% 46% Some Political leaders A little -22% -23% 37% 17% Not at all Foreign multinationals -45% -23% 21% 10% Civil society -53% -26% 15% 6% Social and grassroots movements -53% -31% 13% 3% 100% 75% 50% 25% 0% 25% 50% 75% 100% Disagree Agree Question: “To what extent have the following posed a barrier to ambitious carbon pricing in your country?” (95 responses). Source: Original expert survey Results are more ambiguous with respect to also a diverse group with differing relationships foreign multinationals. Only 33% of respondents towards carbon.16 Interview subjects, nonetheless, characterized foreign multinationals as opponents described several instances of foreign firms of carbon pricing. As discussed further in Section working to prevent ambitious carbon pricing in 2.1.3, this may stem from their orientation developing countries, including in the Gambia and towards low-carbon industries, competitiveness Indonesia. edge over domestic enterprises, ability to influence policy stringency, or simply commitment towards sustainability. Foreign multinationals are Moving carbon pricing onto the policy agenda 37 CASE STUDY 2.1 Uruguay’s mobilization for a stringent but narrow tax On January 1, 2022, Uruguay adopted one of the policy was primarily envisioned as a response to highest carbon taxes in the world, at $137 per ton, international trade and investment signals coming with little turbulence or controversy. It redirected from the then prospective European Union CBAM. revenues to climate-related projects and could have drawn attention to the often-fraught issue The fact that the Ministry of Finance, a of higher energy prices stemming from taxation, politically powerful institution in the Uruguayan yet it faced no real opposition. A key reason for government, promoted the policy also facilitated this is that the tax was conceived to make explicit smooth passage. The ministry effectively the already high tax on fuels. Additionally, it has promoted the idea that the carbon tax would relatively constrained ambition. help Uruguay claim international leadership on climate issues, which eased intra-governmental The “new” tax did not add new impetus to the negotiations and attracted additional champions country’s decarbonization trajectory as it was a from the private sector. These were mostly one-for-one replacement for a portion of existing renewable energy companies that had benefited excise taxes on fuel and electricity. Its narrow from the country’s large public investments in scope also means that the tax prices greenhouse wind and hydropower during the 2010s. The gas emissions from fuel and electricity but public remained largely unengaged. This narrow not those from agriculture, the country’s main support coalition achieved the goal of enacting a source of emissions. The ranching and meat carbon tax, but also largely explains the limitations industry remains strongly opposed to extending of the program. carbon taxation to the agricultural sector. The 2.1.2 Key stakeholders in the political economy of carbon pricing The following list identifies the key stakeholders in the carbon pricing policymaking process. • Political leader • Government administrators and ministries. Typically, the most high-profile and Staff in government institutions are consequential stakeholders in the policymaking responsible for formulating rules for carbon process, political leaders exercise the authority pricing, communicating with stakeholders, to enact a carbon pricing policy by either monitoring the behavior of regulated approving a specific carbon pricing design entities, and disseminating information or empowering the executive to create and about the policy’s performance. Government implement a carbon pricing design. Political administrators also contribute to the policy leaders include heads of state, heads of agenda by informing political leaders about government, and members of the legislature. emerging issues and opportunities for They are typically supported by advisors and improvement. Government administrators political parties. include ministers and regulators, typically located within the executive branch.17 Contents Executive Summary Chapter 1 2 3 4 5 6 38 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Ministries are most influential when their • Low-carbon firms. mandate includes climate policy and, crucially, Companies that offer low-carbon products they have the capacity, credibility, and political have a stake in carbon pricing because it influence to capture the attention of high-level affects their competitiveness against high- decisionmakers and clear a political path for carbon alternatives. Firms that produce solar carbon pricing.18 In some cases, ministries of panels and wind turbines or provide energy- finance may be more important than ministries saving technologies and equipment often see of the environment. Uruguay’s Ministry of their market share rise as coal, oil, and gas Finance initiated a proposal to implement a become more expensive under carbon pricing. carbon tax, lending strength to the proposal in Other firms offering emissions abatement subsequent discussions inside the government technologies, consulting services, etc., often (Case Study 2.1). Similarly, academic experts also see increased activity. Besides carbon in Brazil credit leadership by the Finance pricing, these firms may need additional policy Ministry for placing carbon pricing on the and financial support in the early years to policy agenda in Brazil, whereas the Ministry make them competitive against entrenched of the Environment previously had only limited firms that are supplying competitive fossil- success. based products. Not every type of stakeholder takes a highly visible • Citizenry and civil society. role in carbon pricing policymaking processes, Many countries have thriving communities however. Often only a few stakeholders are of grassroots and professional civil society directly involved at the start of the process, who organizations. These activists, who sometimes then strategically bring in others at later stages of represent broad swaths of the citizenry, may the process. have missions directly relating to advancing carbon pricing, climate action more generally, or they may be motivated by the indirect • Regulated entities. effects of carbon pricing on inequality Regulated entities are public or private and employment. Example civil society businesses whose activities fall within the organizations represent specific segments scope of a carbon price. In many countries, of the population affected by climate change direct carbon pricing—especially in the form and adjacent activities including indigenous of emissions trading—mostly applies to larger communities, coal mining communities, emitters. Many regulated entities, such as autoworker labor unions, etc. electricity generators, fossil fuel companies, and steel and cement manufacturers, are • International institutions. External political embedded in complex value chains, purchasing actors can play an important role in the or supplying products from across a country’s development of carbon pricing. Several economy and through international trade.19 international initiatives promote carbon pricing While carbon pricing may increase public by providing dedicated staff and resources revenues from carbon-intensive industries in to support the design and implementation of the short term, it can reduce fiscal dependence carbon pricing, including the World Bank’s PMI, on these industries in the long term by the International Carbon Action Partnership, diverting investment away from emitting and the Carbon Pricing Leadership Coalition. sectors and towards low-carbon activities. Intergovernmental organizations like the United Nations, the World Bank, and the World Trade Organization can also shape the Moving carbon pricing onto the policy agenda 39 broader enabling environment for carbon strategic promotion of carbon pricing. These pricing. Foreign governments may have a stake experts are typically either consultants and/ in a country’s carbon pricing debate, either or academics. Many formerly worked in through proactive action (e.g., bilateral aid, government positions as climate policymakers. trade conditionality) or by serving as instructive Developing country governments often solicit examples for policy learning. support from foreign technical experts due to limited domestic expertise in design and • Technical experts. implementation of carbon pricing policy Individuals and organizations with technical instruments. expertise in carbon pricing often provide strategic input for both the design and 2.1.3 Motivations for supporting or opposing carbon pricing Stakeholders support or oppose carbon pricing and its economic consequences (e.g., government according to their beliefs about the role of finances, technological innovation, regulatory cost government in environmental protection, the burden). Table 2.1 summarizes some of these political consequences of carbon pricing (e.g., motivations.” In practice, most stakeholders hold public opinion, elections, international reputation), a combination of these motives. TABLE 2.1 Motivations for supporting or opposing carbon pricing Supporters Opponents • Focus on short-term crises • Realize polluter-pays principle Values • Misaligned missions and priorities • Promote climate justice • Skepticism about the need for climate action • Constituencies dependent on high-emissions • Meet public desire for climate industries action Political • Constituencies with low support for climate action • Improve public finances consequences • Worries about short-term increases in energy • Strengthen International prices reputation • Doubts about administrative capacity • Mitigate climate impacts • Economic dependence on carbon-intensive • Support low-carbon transition industries Economic • Secure access to export markets • Prospective losses for carbon-intensive and consequences • Attract international climate carbon-reliant firms finance • Concerns about lost international competitiveness Contents Executive Summary Chapter 1 2 3 4 5 6 40 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Motivations for supporting programs to protect poor households from rising carbon pricing energy prices, support communities and workers during exit from carbon-intensive industries, Environmental ethics and pay for environmental justice initiatives.22 Carbon pricing helps realize the polluter pays The most recent version of the EU ETS reforms principle, which was codified into international law for instance, includes a Social Climate Fund that as part of the 1992 Rio Declaration. This principle provides cash payments to vulnerable households requires the party responsible for pollution, rather and supports measures and investments that than the society at large, pay for the damage done reduce emissions in targeted sectors. Similar to the natural environment. It promotes economic steps were taken in Colombia where carbon fairness for businesses and equity for both current pricing revenues were earmarked to addressing and future generations and across geography, by social and environmental causes, popular with a reflecting the true environmental cost of polluting larger swath of voters. activities. Similarly, supporters of carbon pricing may also be motivated by commitments to International commitments environmental justice and the broader transition toward sustainable development. A further political motivation for supporting carbon pricing is the desire to maintain and Political benefits build the government’s reputation as a reliable partner to other nations in the fight against Some leaders pursue carbon pricing for its climate change. Many governments have made potential political rewards. In democracies, leaders international climate commitments, such as NDCs may broaden their base of support by including under the 2015 Paris Agreement, which will be carbon pricing as a plank of their electoral difficult to achieve without carbon pricing. Carbon platform.20 By emphasizing the need to address pricing can also be a means of demonstrating local air pollution, reduce long-term greenhouse international policy leadership. As discussed in gas emissions, and the need for revenues to Section 2.3, Chilean politicians prioritized carbon fund social and public spending, carbon pricing pricing reforms in the prelude to the 2019 UN became a winning issue across different bases climate conference as a strategy to project policy of support in Chile (see Case Study 4.2), leading leadership. Finally, the adoption of carbon pricing the country to ultimately adopt a “green” tax in may be a precondition for achieving political goals, 2014 with minimal opposition. In the absence such as accession to the EU. of competitive elections, carbon pricing can still reward political leaders by boosting their political Economic consequences standing and credibility. Indeed, while carbon pricing is key to helping China meets its long-term Many stakeholders are motivated to pursue emissions reductions goals, its immediate political carbon pricing over other mitigation instruments resonance stems in part from its capacity to help because it is seen as offering attractive immediately address local air quality.21 economic benefits. For political leaders and government administrators, carbon pricing is Revenue generation not only consistent with market principles, but the instrument can facilitate negotiations over Carbon pricing generates fiscal resources that can aid and trade ties where international partners fund initiatives government programs popular attach climate policy considerations (see Section with voters. Carbon pricing revenues have been 2.2.2).23 Additionally, carbon pricing may offer an used to promote a just green transition, fund opportunity to increase international financial Moving carbon pricing onto the policy agenda 41 flows through carbon market linkages.24 These when the political context makes the policy’s economic and financial motivation are key drivers adoption unlikely.28 Firms may also support of carbon pricing interest in Senegal, the Gambia, pricing to resolve climate policy uncertainty. and Pakistan, among other developing countries. Motivations for opposing carbon For firms, carbon pricing can reshape the market by affecting competition, the rate and direction pricing of technological innovation, and the potential of economic rents. Three types of firms are Policy priorities particularly apt to support carbon pricing. One of the primary reasons policymakers fail to support carbon pricing is that they assign • Firms that benefit directly from greater importance to other more pressing policy decarbonization policy. These firms priorities over a long-term-oriented proposal like anticipate a more even playing field, lower carbon pricing. Experts view short-term crises operational costs, more stable supply like poor economic conditions (68%) and the chains, and access or provide low-carbon 2022–2023 energy crisis (65%) to be among the technology and equipment.25 In Uruguay, most important barriers to ambitious carbon for example, renewable energy companies pricing (Figure 2.3). Catastrophic flooding in 2022 were vocally supportive of proposals for a followed by political unrest stalled Pakistan’s carbon tax. Similarly, oil companies with carbon pricing efforts. Inflation and political international operations framed carbon pricing instability associated with the war in Ukraine in Kazakhstan as a means for bringing good have similarly eroded support for increasing practices into the domestic industry. the stringency of the Kazakh ETS. Inflationary concerns in Indonesia led to delay in rolling its • Firms that benefit indirectly from carbon tax. decarbonization policy. These firms often hold assets vulnerable to climate change. Among government administrators in different Examples include ecologically vulnerable ministries, differing priorities are a common cause farmers and landowners, insurance of friction, reflecting their distinct missions and companies, the tourism industry, and carbon constituencies. In fossil fuel producing countries, offset generators.26 the power of some government ministries depends on carbon intensive firms, creating • Firms that view carbon pricing as the least- vested interest in protecting the industry against worst option. If carbon pricing seems carbon pricing. Yet, other ministries that would inevitable, carbon-intensive firms may voice see their political and economic influence rise their support to gain favor from regulators and under carbon pricing, often have an interest in lobby for measures that mitigate the policy’s advancing carbon pricing policy. This dynamic can impact, such as generous free allowances.27 lead to challenging inter-ministerial negotiations. Similarly, many firms that export to the EU seek to secure exemptions from the CBAM Another common reason stakeholders oppose by pushing their home governments to enact carbon pricing is that they do not believe it to be a carbon price, especially if domestic carbon necessary or appropriate for their government pricing would likely be weaker than the EU’s to take any form of climate action. This could tariff. Alternatively, firms under reputational stem from a rejection of climate science, a desire pressure may publicly support carbon pricing to delay climate action, or a general mistrust Contents Executive Summary Chapter 1 2 3 4 5 6 42 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries of government and the political system.29 In Carbon pricing risks raising energy prices in the developing countries, this concern may be short term, which can be politically damaging. framed in terms of climate justice or a right Experts view low energy prices as a modestly to development. Experts believe narratives important barrier to ambitious carbon pricing that compare carbon emissions in developing (Figure 2.3). countries to those in advanced countries are an important barrier to ambitious carbon pricing, In countries that have already implemented although they express fewer concerns about carbon pricing, some political leaders decide to freeriding (Figure 2.3). campaign explicitly against carbon pricing in the belief that doing so will help them get elected. Political consequences Once elected, they may well obstruct the policy. Indeed, carbon pricing ambition in several For many political leaders, the political costs of countries (e.g., Australia, Mexico, France, and carbon pricing are more salient than their benefits. Switzerland) has been scaled back or postponed The desire to retain power may discourage following a new electoral mandate or civil leaders from pursuing policies that offer long- pushback. term benefits but risk short-term political and economic costs, especially in representative Carbon pricing may also threaten political costs if democracies.30 Politicians whose constituencies its implementation is expected to be difficult (see directly or indirectly depend on high-emissions Section 4.3.1). If regulators are uncertain of their industries for their livelihoods often have little capacity to induce compliance with the policy, incentive to support carbon pricing. they may oppose carbon pricing in favor of a non- pricing climate policy instrument. Administrators A further reason for politicians to oppose carbon might also be concerned about carbon pricing pricing is that many governments—including, but conflicting with existing laws. Experts, however, not limited to, developing countries—artificially view this to be only a moderate barrier to keep energy prices low to minimize the cost ambitious carbon pricing (Figure 2.3). burden for individuals and firms. (For further discussion of energy subsidies, see Section 3.1.3.) Moving carbon pricing onto the policy agenda 43 FIGURE 2.3 Perceived barriers to ambitious carbon pricing Concerns about A lot international competitiveness -13% -18% 33% 34% Some Poor economic conditions -22% -11% 28% 40% A little Domestic fossil fuel production Not at all -23% -12% 30% 34% 2022-23 energy crisis -12% -24% 32% 33% GHG emissions relative to other countries -15% -24% 37% 23% Low public trust in government -20% -24% 25% 31% Low energy prices -22% -24% 21% 33% Low climate support -24% -24% 29% 23% Conflicts with existing laws -22% -28% 34% 16% COVID-19 pandemic -20% -33% 22% 26% Insufficient carbon pricing in other countries -24% -30% 27% 19% 100% 75% 50% 25% 0% 25% 50% 75% 100% Disagree Agree Question: “To what extent have the following posed a barrier to ambitious carbon pricing in your country?” (95 responses). Source: Original expert survey. See Table A.1 for top barriers for selected countries Economic consequences lobbying by rural community groups to avoid For political leaders, carbon pricing may raise economic losses through special treatment under concerns about damaging the international the ETS. competitiveness of exporters. In the absence of complementary and compensatory policies, For business leaders, a key reason to oppose these firms may lose market share to products carbon pricing is if they expect it to cause them from jurisdictions without or with lower carbon material losses.32 The stakes are especially high pricing.31 Experts reported that concerns about for firms that hold climate-forcing assets, such international competitiveness were the strongest as coal mines, as ambitious carbon pricing barrier to ambitious carbon pricing (Figure 2.3). poses an existential threat to their economic value.33 Examples of major emitters opposing Government dependence on employment and tax carbon pricing include opposition from business revenue from carbon-intensive industries is also associations in Mexico, electricity generators in a barrier. 64% of survey respondents indicated Chile, and fossil fuel exporters in Kazakhstan. Even domestic fossil fuel production poses a substantial when public opposition is not politically feasible, barrier to ambitious carbon pricing (Figure 2.3). groups can lobby privately to reduce the policy’s In China, this dynamic emerges in the form of cost impact, as the cement industry did in China. Contents Executive Summary Chapter 1 2 3 4 5 6 44 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Firms may also oppose carbon pricing if they If advocates can persuade neutral stakeholders to are embedded in carbon-intensive value chains. mobilize in support of carbon pricing, they can be Carbon prices are typically propagated through an important source of political capital. However, the economy, leading to higher costs for high- there are often substantial political, educational, carbon supplies and weakened demand by and organizational challenges to doing so. high-carbon customers. This results in a broad, Moreover, opponents of carbon pricing may also and often highly organized, extended coalition actively seek to move neutral stakeholders toward of carbon-dependent firms opposed to carbon their position. Ecuador’s foray into (indirect) pricing. In the U.S. context, these firms account carbon pricing was derailed when opponents for two-thirds of all climate change lobbying.34 tapped the support of indigenous communities Similarly, firms in Chile’s construction industry from the Amazon and Andes to underscore that decided to oppose carbon pricing in part due to the removal of fossil fuel subsidies on gasoline concern about rising input costs. and diesel was an inequitable and undesirable carbon tax that would negatively impact these International energy investors and trade partners communities by raising transportation costs, may also use their structural power as a deterrent considering that low fuel costs were the only real to ambitious carbon pricing. For instance, tangible benefits these communities received stakeholders in Indonesia note that the country’s following oil and gas exploitation on their robust energy trade with China has decreased homelands. These developments highlighted the its government’s political interest in imposing need for careful design and gradual execution of stringent carbon pricing. reforms as to protect vulnerable segments of the population and gain citizen’s trust. Motivations for neutrality Some stakeholders opt to remain neutral or decline to participate in the political debate over carbon pricing. While these parties are not always active in the agenda-setting stage, they hold the potential to exert substantial influence over a proposal’s political feasibility. Neutrality may reflect a short-term strategic decision to avoid a visible position.35 Alternatively, neutrality may be an inchoate position that reflects a lack of attention to carbon pricing,36 a lack of information about the benefits or costs of carbon pricing,37 or a lack of experience with the implementation of climate policy more generally. For example, fossil fuel lobbies in Texas stayed neutral about the state’s wind energy law in the 2000s due to their limited understanding of the costs of transmission.38 Moving carbon pricing onto the policy agenda 45 2.2 Strategies for building a powerful and lasting support coalition Policy champions use a combination of three pressure strategies increase the cost of failing to broad strategies to build a coalition in support support carbon pricing. Benefit-cost adjustments of carbon pricing: persuasive appeals, coercive alter the material rewards of joining the support pressure, and benefit-cost adjustments. coalition through complementary policies. The Persuasive tactics raise stakeholder awareness following sections explore common tactics for and knowledge of carbon pricing. Coercive each strategy. 2.2.1 Persuasive appeals Carbon pricing champions often develop a objectives.39 Persuasive communication aims to coordinated communications strategy, aiming to build coalitions. A moderate number of experts both mobilize existing supporters or persuade viewed education campaigns and media coverage neutral stakeholders to join the carbon pricing to be important for supporting ambitious carbon coalition. A communications strategy is a plan to pricing in their country (Figure 2.4), and they tend create and disseminate messages through a range to be lower cost than other strategies. of media to reach key audiences and achieve key FIGURE 2.4 Perceived importance of strategies for ambitious carbon pricing Industry subsidies for low-carbon energy Complementary mandates and regulations Requirements to generate Complementary spending clean energy Education and media Consumer subsidiesfor low-carbon energy Pressure and advocacy Education campaigns Media coverage Pressure from other countries Standards for energy efficiency Pressure from international organizations Climate protests and activism 0% 20% 40% 60% Percentages represent the proportion of respondents who selected a given option as per the question below. Question: “Increasing which of the following would most improve the political feasibility of ambitious carbon pricing in your country? Select up to three.” (85 responses). Source: Original expert survey Contents Executive Summary Chapter 1 2 3 4 5 6 46 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Persuasive campaigns can focus on carbon Indonesia’s carbon pricing policy with themes pricing’s ability to spur the decarbonization of of economic growth and trade in its domestic the economy and drive low-carbon innovation communications about the November 2022 and investment. Experts view both claims to be Group of Twenty (G20) Leaders’ Summit in Bali. To highly relevant to the carbon pricing discussion persuade neutral stakeholders to join the carbon in developing countries (Figure 2.5) and they pricing coalition, communication campaigns can came up in nearly all stakeholder interviews. draw attention to the co-benefits of carbon pricing For example, a stakeholder described how the that different groups of stakeholders already care Indonesian government linked UK support for about.40 FIGURE 2.5 Relevance of claims relating to the core objectives of carbon pricing Drives low-carbon innovation -1% Very relevant and investment -8% 38% 53% Somewhat relevant Leads to opportunities for -3% international collaboration Not very relevant -6% 35% 55% Moves economy away from Not at all relevant high-carbon sectors -6% -12% 41% 41% Delivers health and environmental co-benefits -6% -13% 37% 44% Raises funds for public investment -7% -17% 36% 40% Uses market signals instead of government mandates -4% -20% 33% 42% 100% 75% 50% 25% 0% 25% 50% 75% 100% Disagree Agree Question: “How relevant are the following claims to the political discussion about carbon pricing in your country?” (97 responses). Source: Original expert survey To be effective, advocates need to identify the issue that resonates with a specific audience, create a targeted message, and spread it through credible intermediaries. Table 2.1 provides examples of targeted messages that carbon pricing experts believe to be highly relevant to the carbon pricing discussion in developing countries (Figure 2.5). Moving carbon pricing onto the policy agenda 47 TABLE 2.2 Examples of messages targeting audiences primarily motivated by related issues as Primary motivation Example message Carbon pricing can promote environmental quality, public health, and help Social justice address income equality Carbon pricing uses market signals instead of government mandates, Economic efficiency thereby promoting policy efficiency. Carbon pricing raises funds that: help reduce deficits, tackle the Fiscal consolidation accumulation debt, fund public investment, social programs, ecosystem protection and preservations Carbon pricing offers opportunities for deeper international collaboration, Global cooperation economic ties, and trade security Carbon pricing expands economic opportunities by promoting the Economic expansion opening of new industries, economic sectors, and jobs. Carbon pricing reduces dependence on foreign fossil fuels and promotes Energy security energy security by helping diversify the domestic energy mix. 2.2.2 Coercive pressure Pressure tactics induce stakeholders to support some role in exerting such pressure, but nearly carbon pricing by politicizing the consequences of 80% believe that international sources are failing to do so. Pressure can come from domestic either mostly or equally important as domestic stakeholders, international stakeholders, or sources in exerting pressure for carbon pricing in both. Most experts think domestic sources play developing countries (Figure 2.6). FIGURE 2.6 Perceived importance of sources of pressure for climate policy 13% 45% Mostly international pressure Both equally Mostly domestic pressure 35% Question: “Is carbon pricing in your country driven mostly by domestic or international pressure?” (92 responses). Source: Original expert survey Contents Executive Summary Chapter 1 2 3 4 5 6 48 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Domestic pressure International pressure Climate activism has often focused on the need The most direct form of international pressure to address climate action via a comprehensive is when trade partners and aid donors make policy package, rather than focusing specifically continued engagement conditional on the on carbon pricing41.42 Carbon pricing experts tend adoption of specific climate policies. This to take a pessimistic view of the potential for generates pressure on domestic firms to prepare domestic protests and activism to facilitate the for a regulatory “race to the top” on climate adoption of an ambitious carbon tax (Figure 2.4). emissions. The ultimate objective is to seed and Protests, while the most visible form of pressure possibly catalyze norms of international trade and can be key to bringing attention to issues that could later formalize in international trade of importance, the public can use voting and agreements. All countries face this pressure, but it lobbying to advance their goals. Environmental is especially salient in developing countries.44 The activism can also mobilize politically powerful most prominent example of trade conditionality electoral constituencies, especially among middle- for carbon pricing is the EU’s CBAM (Box 2.1). class and younger segments of the population. For carbon pricing champions, demonstrating the potential political benefits of climate action may be more useful than emphasizing the technical details of pricing. Stakeholder interviewees expressed that due to limited access and technical capacity, domestic environmental NGOs generally struggle to pressure policymakers in developing countries to adopt carbon pricing. This is especially acute in countries with little operating space for civil society. Nevertheless, long-term engagement by NGOs has helped sustain momentum for carbon pricing. Among firms, pressure to support carbon pricing may spread across corporations through social forces. Corporate leaders in many countries socialize in tight-knit groups and often serve on the boards of directors for multiple firms. Through learning, socialization, and competition, these interactions push firms to align their orientations toward climate policy. In the United States, for example, firms are twice as likely to join a pro-climate group if even just one of its directors simultaneously serves on the board of a firm that has already done so.43 Moving carbon pricing onto the policy agenda 49 BOX 2.1 The effect effect of the EU’s CBAM on carbon pricing in developing countries Africa, Türkiye, Ukraine, and Uruguay among others, report a strong mobilization by The European Union’s Carbon Border exporters exposed to the EU’s CBAM, in favor Adjustment Mechanism is the EU’s tool to: (i) of domestic carbon pricing, leading to a marked put a price on carbon intensive goods that are acceleration in various countries efforts to entering the EU, and (ii) encourage cleaner develop or strengthen this policy. industrial production in non-EU countries. It Such results are encouraging for the mitigation requires that the EU’s trading partners put a agenda, and yet several complexities have price on carbon for select goods imported to emerged. It is not clear yet how domestic the territory equivalent to the carbon price carbon pricing will have to be coordinated of domestic EU production, or else importers with EU ETS prices inorder to fully exempt of carbon-intensive goods purchase CBAM importers of financial adjustments since CBAM certificates linked to the EU ETS carbon price. certificate prices will hinge on the weekly In additon to ensuring that EU’s mitigation average auction price of EU ETS allowances. objectives are not undermined through carbon In addition, since many low income countries leakage, CBAM promises to help ensure that countries have relatively weak direct trade the EU phases out free allowance allocations ties with the EU, it is unclear how CBAM can for trade exposed sectors. incentive foreign exporters in those countries The CBAM entered into operation in October to reduce emissions, absent any supplemental 2023 (with full implementation scheduled assistance.46 Finally, while CBAM may for 2026) and many industry groups and encourage countries to put in place carbon governments in developing countries are highly prices comparable to those in the EU, those motivated to respond, especially those with governments may also enact countervailing strong trade ties to the EU.45 Stakeholders subsidies, that would potentially undermine the interviewed for this study including in China, overall impact on emissions reduction. India, Indonesia, Israel, Kazakhstan, South A softer form of international pressure is a pledge coordinating future efforts on carbon pricing. for further international collaboration following Similarly, cooperation between the EU, and the adoption of a carbon price. This might consist Eastern and Central European countries has been of carbon tax harmonization, carbon market instrumental for the adoption of the Turkey ETS linkages or simply technical assistance. Such and is prooving to be key in paving the way for pressure may generate momentum for effective harmonization on carbon pricing. Availability of carbon pricing.47 Opportunities for international technical and design assistance from the EU has diplomacy that focus on cooperating on climate aslo been instrumental in the implementation and action can lead to cooperating on carbon pricing. operation of South Korea’s ETS. Efforts by the US and China to cooperate on climate action resulted in joint statements on climate action, and could be instrumental for Contents Executive Summary Chapter 1 2 3 4 5 6 50 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 2.2.3 Benefit-cost adjustments Policy champions adjust the benefits and costs implications of carbon pricing, and help develop a of carbon pricing for stakeholders through two common understanding of feasible carbon pricing approaches: seeking technical assistance and approaches.48 Technical assistance initiatives, leveraging complementary policies. such as the PMR/PMI, may also provide ongoing learning support, sharing successful practices Technical assistance across contexts, and developing networks of carbon pricing experts and scientific advisors.49 Technical assistance can play a significate role in lowering the cost and improving the The majority (63%) of developing country carbon effectiveness of carbon pricing policy including price adopters received support from international through improved policy design, implementation organizations (e.g., the World Bank) to do so.50 efficiency, and developing of transition and Carbon pricing experts view this assistance equity allocations or programs. Policy champions positively, with 73% crediting the World Bank’s can seek this assistance from international assistance with providing new opportunities for organizations, their peers, and consultants to carbon pricing (Figure 2.7). While not exhaustive, better engage stakeholders through technical lists examples of instances where international reviews, training workshops, and planning and technical assistance contributed momentum for advisory committees, among other initiatives. carbon pricing. Note that this assistance typically These efforts build institutional and human has more nuance than is shared here and may capacity, provide detailed context-specific involve several international partners delivering information on the operation, obligations, and or cooperating on assistance to one country. TABLE 2.3 Examples of international technical assistance for carbon pricing China was approached by the EU in 2010 with an offer to support the development of its ETS, which led to the EU-China ETS initiative. Key components of this program include policy dialogue between EU and China on emission trading, capacity building and training of Chinese authorities and industry representatives, practical advice to Chinese authorities on ETS development, and joint research and knowledge sharing. Colombia designed an ETS and prepared for the implementation of its Nationally Determined Contribution with support from the PMR. Key ways the PMR assisted include: ETS roadmap development, ETS design modelling, legal gap analysis, stakeholder engagement, and capacity building that included training courses and ETS simulations. Kazakhstan received assistance from Norway, the United States Agency for International Development, and the European Bank for Reconstruction and Development in the mid-2010s, accelerating the development of offset credit protocols, guidelines, and MRV methodologies.51 Mexico benefited from technical assistance from the PMR and GIZ to strengthen technical capacity and develop mutual agreement on the design of an ETS through early engagement with private sector representatives (Case Study 4.2) South Africa’s discussions on energy diversification with the International Energy Agency and engagement with the High-Level Commission on Carbon Pricing and Competitiveness informed the subsequent development of carbon pricing. Moving carbon pricing onto the policy agenda 51 Complementary policies The costs and benefits of carbon pricing vary free credit allocations) or to offset the indirect considerably according to the broader policy impacts of carbon pricing (e.g., investments in context in which it operates. Enacting non- fossil-fuel-dependent communities), can persuade pricing policies that complement carbon pricing hesitant stakeholders to support carbon pricing. by reducing its costs and increasing its benefits (See Section 3.1.3 for a discussion on the role can build a carbon pricing coalition over time. of complementary policies when negotiating a For example, firms that remain neutral out of specific carbon pricing policy.) concern for the short-term costs of carbon pricing (e.g., food suppliers, wood producers) may be Broader changes in fossil fuel and renewable convinced to support carbon pricing by packaging energy use can also affect support for carbon the policy with temporary public investments, pricing. For example, Chile’s 2019 commitment such as trade protections and subsidies. to phase out coal-fired power plants prompted Clean energy standards can provide electricity electricity generators to shift investments toward generators with an additional impetus to support renewable energy, which in turn reduced the carbon pricing. Compensation, either to reduce political risk of supporting a more stringent the direct cost impact of carbon pricing (e.g., carbon price. FIGURE 2.7 Sources of momentum for ambitious carbon pricing International assistance on carbon pricing A lot -5% -20% 42% 33% Some Submitting NDCs -8% -21% 43% 38% A little Ambitious climate policies None in other countries -12% -33% 37% 18% Green recovery from COVID-19 -27% -36% 43% 11% Natural disasters -40% -30% 22% 8% 100% 75% 50% 25% 0% 25% 50% 75% 100% Disagree Agree Question: “To what extent have the following contributed to momentum for ambitious carbon pricing in your country?” (92 responses). To ensure clarity about the meaning of “international assistance,” the wording for “International assistance on carbon pricing” used in the survey was “World Bank assistance on carbon pricing.” Source: Original expert survey Contents Executive Summary Chapter 1 2 3 4 5 6 52 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 2.3 Opportunities to place carbon pricing on the policy agenda Once actors recognize their shared interest in Broad policy reforms promoting carbon pricing and form a support coalition, they engage in coordinated efforts to Broad policy reforms, such as tax reforms, can generate a foundation of technical knowledge offer a convenient political vehicle for adopting (e.g., economic modeling) and recruit more carbon pricing. Folding carbon pricing into a bill allies. At this point, policy champions look for that is essential or popular is often an effective focal events and changes in the balance of procedural tactic for easing opposition (Section power that offer opportunities to present carbon 3.2.2). The window of opportunity for leveraging pricing as a feasible and appropriate solution to a broader policy reform can close quickly, so a given problem. This process is often described supporters often act quickly. In Chile, the pressure metaphorically as similar to surfers waiting for the to pass a larger tax reform helped speed inter- right wave.52 If carbon pricing advocates succeed ministerial coordination between the Ministries of in catching the attention of key decisionmakers, Environment, Finance, and Energy. Similar events the policy moves onto the agenda and negotiation featured in the case of Colombia (Case Study 3.2). over a specific policy proposal begins (Chapter 3). International climate commitments It can be difficult to predict when carbon pri- cing’s time has come, but some events are National climate policy targets and pledges made more promising than others. The following through intergovernmental processes (e.g., the briefly describes some of the most common submission of NDCs under the 2015 Paris Climate opportunities. Agreement) are often major opportunities to advance carbon pricing. Stakeholders in India Electoral turnover and China, among other countries, credit the process of formulating NDCs with providing Frequent government turnover and slim electoral momentum to discussions over carbon pricing in leads are not conducive to ambitious climate their countries. Most carbon pricing experts share policy.53 Nonetheless, a transfer of power can this impression, with nearly three-quarters (73%) create new opportunities for carbon pricing. agreeing that the process of formulating NDCs Indeed, electoral turnover is the third-most provides a substantial opportunity for carbon identified strategy for advancing carbon pricing in pricing (Figure 2.7). the short term (Box 5.1). Brazil’s 2022 presidential election, for example, created a window of International climate events opportunity for the country’s carbon pricing movement. The private sector was especially Several countries have taken advantage of hosting motivated to capitalize on the transition from the UN climate negotiations to announce new President Jair Bolsonaro to President Luiz Inácio climate commitments, including carbon pricing. Lula da Silva, with one industry group even going These commitments are often interpreted so far as to send a letter to every candidate asking as attempts to strengthen a government’s them to control deforestation, manage solid international standing. 78% of experts believe waste, and create an ETS (Case Study 3.3). international reputation is a key driver of carbon pricing in developing countries.iii For example, iii Seventy percent of experts agree with this statement when asked directly, but this rises to 78% after adjusting for response bias using the item-count technique. Moving carbon pricing onto the policy agenda 53 international reputation had an impact when training workshops in collaboration with the Chile co-hosted the 2019 UN climate negotiations. EU), and a source of potential economic benefit Government officials used the occasion as an through future linkage with the EU ETS. opportunity to capture the attention of political leaders and adopt a far-reaching climate strategy The extent to which another country’s climate that included establishing the legal foundation policy affects domestic political economy for enacting an ETS. However, momentum can dynamics determines its impact. A policy adopted dissipate quickly when international attention by a major trade partner, such as the United moves on. Indonesia first stated to consider States’ 2022 Inflation Reduction Act, may open a carbon pricing when it hosted the climate window of opportunity in developing countries via negotiations in 2007, but policy champions have changes in manufacturing and supply chains. In struggled to maintain momentum for ambitious contrast, a policy change in a relatively peripheral carbon pricing (Case Study 2.2). country may not offer much of an opportunity to attract political interest. Accordingly, carbon Accession to intergovernmental pricing experts are split on the overall importance organizations of such events, with only 53% believing that ambitious climate policies in other countries Political leaders may adopt carbon pricing provide “some” or “a lot” of opportunities for as a strategy for improving their country’s carbon pricing (Figure 2.7). chances of becoming a member of a prestigious intergovernmental organization. These Climate conditionality for international organizations are typically believed to have a trade and foreign investment pressure positive disposition toward carbon pricing, so the possibility of accession can spur countries As discussed in Box 2.1, the EU’s CBAM directly to adopt carbon pricing. This effect has been pressures trading partners to adopt carbon observed in Eastern Europe, the Balkans, and pricing. Other types of climate provisions in Türkiye for EU accession;54 in Argentina, Brazil, preferential trade agreements also reduce Chile, and Colombia for Organization for Economic imports of dirty goods and increase exports Co-operation and Development (OECD) accession; of clean goods, with subsequent implications and in the Philippines for Association of Southeast for the feasibility of carbon pricing.57 However, Asian Nations (ASEAN) membership. as with other types of foreign climate policy developments, the opportunities created by these Climate policy developments in other events are likely to vary by a country’s political and jurisdictions trade relationships. Ambitious climate policies in other countries can Disaster response lend momentum to carbon pricing. Policymakers and advocates regularly consider the policy actions Natural disasters, energy price spikes, and of peer countries when making policy decisions.55 other crises can indirectly increase the political This manifests as an increased probability of feasibility of carbon pricing by temporarily aligning adopting a carbon price when a government’s institutional veto points, demonstrating the trading partners and export competitors do possibility of transformative change, and raising so as well.56 For example, stakeholders in both the ambition of policymakers beyond incremental Kazakhstan and China pointed to the EU ETS as adjustments to the status quo. For example, some a key example for motivating politicians, learning countries formulated plans for a “green” recovery about carbon pricing (including study tours and from COVID-19.58 Stakeholders in Indonesia report Contents Executive Summary Chapter 1 2 3 4 5 6 54 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries that major fires and forestry damage increased pandemic, most countries approached their stakeholder buy-in for the country’s voluntary recovery in ways that entrenched the status Reducing Emissions from Deforestation and quo carbon economy more than providing Forest Degradation (REDD+) system for pricing opportunities for low-carbon development.59 carbon in forests. Carbon pricing experts take a similarly skeptical view, with fewer than 40% identifying natural However, some studies suggest crises rarely disasters or green COVID-19 recovery plans as provide meaningful momentum for climate meaningful opportunities for ambitious carbon policymaking. In the context of the COVID-19 pricing (Figure 2.7). CASE STUDY 2.2 Indonesia’s challenging mobilization for carbon pricing Indonesia made significant strides following the for offsets. The government is working on issuance of Presidential Regulation Number 98 roadmaps to extend ETS potentially to the many in 2021. The regulation lay the foundations for sub-sectors of energy related industries (e.g. iron the nation’s direct carbon pricing policy mix. It and steel, ceramics, fertilizers). Simultaneously, positions carbon pricing as an instrument for the government is working on a carbon tax— Indonesia to achieve its emission reduction announced in 2022 but sidelined to 2025 due targets under the Paris Agreement and outlines to inflationary concerns—to apply to regulated for carbon pricing to be implemented through emissions that have not been offset above a pre- mechanisms including allowance-based specified cap.63,64 emissions trading, a carbon tax, and carbon credit mechanism. Voluntary offset trading was Prior to carbon pricing, Indonesia worked on launched in 2023, with plans to transition it to reforming fossil fuel subsidies, an experience that also accommodate trading of credits for domestic provides valuable lessons for advancing carbon compliance as well as trading by international pricing but also points to potential complexities.65 participants.60 After one year of piloting, an ETS Beginning in the late 1990s, the government for the power sector was also launched in 2023 undertook episodic reforms, which culminated in the form of an intensity-benchmark credit and in 2015 with the formal elimination of gasoline trade system, currently covering coal-fired power subsidies and capping of diesel subsidies. plants above 100 MW, connected to the state’s Eliminating inefficient subsidies freed up budget electricity grid61.62 Plans are underway to expand resources to be allocated to productive sectors, the ETS to cover oil- and gas- fired power plants primarily infrastructure and social protection.63 as well as plants not currently connected to the Economic pressures and a growing fiscal state’s electricity grid. Carbon prices remain low, imbalance, caused by declining oil production and however, especially when compared to foreign the shift from a net oil exporter to an importer markets: just under $5 on the secondary market in 2004, brough about this need to reform Moving carbon pricing onto the policy agenda 55 fossil fuel subsidies. Those attempts were as one of the three pillars of the country’s frequently met with public backlash and the G20 presidency, adding further momentum unsuccessful episodes have been associated for carbon pricing and as a strategy to with the absence of a credible reform reiterate their climate commitment in both strategy including for redistributing savings the domestic space and international fora. from the reform, inadequate consultation Despite these developments, carbon pricing with stakeholders, the belief among the continues to attract only modest support population that the reform was designed rendering its rollout not only a technical issue to favor powerful interest groups, lack of but one that is also more political. an effective communications strategy, and rapid and drastic rather than staggered and Indeed, the strength of corporate concern gradual reforms.37 Subsidies rose during the about carbon pricing varies across sectors, recent global energy crisis, reaching nearly with particular concern coming from the USD 50 billion in 2022.66 Historically they energy-intensive industries and sectors.67 have also dwarfed expenditures on climate Furthermore, as a state-owned enterprise, investments. Their continued existence the PLN is less responsive to price signals while seen as key for promoting economic than a private firm might be (see Section growth while considering inequality and 3.1.3). It purchases coal at market rates but poverty, introduces additional challenges for sales electricity below-the-market, something the impact of carbon pricing and the overall that impacts the ability to pass-through mitigation agenda. carbon prices and thereby induce required investment and behavioral change, as well The Indonesian government is taking as alter economic incentives for reducing deliberate and careful steps to cultivate emissions. Politically, there are also ongoing support for carbon pricing in different sectors, deliberations between ministries on which which could help avoid some of the difficulties sectors to qualify for exemptions, at least experienced with the fossil fuel subsidy initially. Prices in the offset and allowance reform especially regarding affordability and markets have also been rather low with public support. The government is exploiting sparse trading, attributed in part to lose instrument design and a suite (rather than a benchmarks.68 And despite the enactment single) instrument to drive overall mitigation. of Presidential Regulation which provides During the power sector ETS pilot the overarching guideline for carbon pricing government exploited reputational standing, implementation and role of ministries, by formally recognizing companies that discussions are still on-going on the achieved the largest emissions reductions administration of carbon pricing instruments compared to all the companies participating and coverage, and an often-changing in it. The government is also ensuring that timeframe makes implementation slow it engages with local governments and and introduces uncertainties for the private NGOs through projects and communication sector. campaigns, in part to respond to a strong movement for decentralization and devolution reforms in the governance of forestry and environmental resources. In 2022, Indonesia named energy transition Contents Executive Summary Chapter 1 2 3 4 5 6 3. 56 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Negotiating an ambitious and politically feasible carbon pricing policy Negotiating an ambitious and politically feasible carbon pricing policy 57 Key Messages • Once carbon pricing is on the policy agenda, advocates of carbon pricing must engage with skeptical stakeholders to ease and eventually overcome their opposition. • The most common strategy for easing opposition to carbon pricing is to keep the cost to regulated entities low at the start and increase ambition over time. This can be achieved through low prices, design elements like narrow sectoral scope, offset credit provisions, free allowances, high emissions caps, and limited enforcement. • Carbon pricing mechanisms often struggle to generate public enthusiasm, primarily because they emphasize the costs rather than the benefits. Governments can attempt to build broad public support, but they must also concentrate substantial efforts on engaging with regulated entities and industries. The nuances will depend on whether a carbon tax, ETS or hybrid instrument is to be adopted. • Adopting complementary, more politically straightforward policies (e.g., green subsidies) can help broaden the support coalition for decarbonization, laying the groundwork for enacting carbon pricing at a later point. Alternatively, supporters can embed carbon pricing in larger reforms that may have more political momentum. • In some contexts, carbon pricing advocates have either enough public support or allies in control of the government to pass carbon pricing policies without making substantial compromises with opponents. In these cases, it may be viable to pursue strong prices from the start, while ensuring that potential adverse impacts of carbon pricing on households and businesses are mitigated through support measures to maintain public support. This chapter discusses how and why carbon pricing policies succeed or fail to be adopted despite the presence of a substantial support coalition. It focuses on how supporters engage with opponents, either by adjusting the policy to address their concerns or overcoming their political power. Contents Executive Summary Chapter 1 2 3 4 5 6 58 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 3.1 Easing opposition to carbon This section describes how opponents of carbon less opposition among both firms and the public. pricing can be accommodated during the policy Second, it discusses design features that can negotiation process. First, it describes how the distribute burdens in a politically advantageous policy’s design may be adjusted to encounter way. 3.1.1 Easing opposition through policy design The process of developing a carbon pricing policy effectiveness) with measures that preserve the involves many decisions about the policy’s design, policy’s political feasibility or chances of adoption. resulting in a wide variety of policy designs. This Technical effectiveness and political feasibility are diversity reflects not only variation in national both important dimensions, that policymakers circumstances (e.g., the legality of earmarking work hard to maximize. carbon pricing revenues, history of government- controlled electricity prices, and the size and The following subsections consider the political types of carbon-intensive firms) but also political economy considerations of eight key decisions in calculations that balance the policy’s potential carbon pricing policy design, summarized in Table to induce emissions reductions (i.e., technical 3.1 at the end of this subsection. TABLE 3.1 Select policy design options for easing opposition to carbon pricing Design option Mechanism ETSs are perceived to provide more flexibility and may be less threatening to Instrument opponents. Taxes are seen to be simpler and easier to incorporate into broader tax choice reforms but risk backlash from burdened groups. Coverage Exemptions for sectors, fuels, or sizes of firms can buy support or acquiescence. Use carbon pricing revenues to buy support or acquiescence from affected groups Revenue use through compensation. Differentiation Apply lower prices on more politically powerful opponents. Allow firms to reduce cost burdens by purchasing offset credits, typically at lower Offset credits prices than the compliance market. Point of Apply carbon price upstream to minimize public visibility and reduce implementation regulation costs. Lower prices, higher caps, credits, and generous free allocation of permits reduce the Effective price cost effect of carbon pricing for polluters. Start with low-stringency carbon pricing to give regulated entities time to adapt and Trajectory build capacity. Negotiating an ambitious and politically feasible carbon pricing policy 59 Instrument choice mean that many sectors are relatively low carbon, stakeholders characterize an ETS as a way of ETS, tax, or both? Instrument choice is often targeting efforts in industrial sectors where bigger the most immediate decision to make. There changes are needed. are instances in which policymakers have little choice, but in most cases policymakers must While technical concerns may not be the weigh their preferences for one instrument vis- decisive factor between an ETS or a carbon tax, à-vis the other. Factors to consider include the the perception, and related politics, of the two window of opportunity, preexisting law, choices instruments can be quite different. Stakeholders by international partners including possibilities often view some contexts as particularly for linkage, historical precedence, familiarity with amenable to one instrument or the other due to the tool, institutional context and capacity, and the simplicity of a carbon tax or the lower political preferences of entities to be regulated. Some capital needed to achieve an ETS. A carbon tax countries end up having both an ETS and tax. can also be folded into a broader tax reform Even so, they will usually pursue one at a time. with relative ease. In Uruguay, policymakers took Mexico had a carbon tax for six years before it advantage of a larger reform to convert some of began its ETS pilot in 2020. Colombia, Ukraine, the existing fuel excise tax to a carbon tax (Case and Indonesia also have carbon taxes and are Study 2.1). But an ETS is seen as giving firms more considering adding ETS programs. flexibility because allowance trading and banking provide more control over means of compliance From a technical perspective, the differences and timing of abatement. The potential for free between an ETS and a carbon tax depend on permit allocation can also make an ETS seem less specific design decisions, but they can be made threatening, and even present a financial windfall, to operate similarly or as hybrid instruments.69 to incumbent polluters.iv Past experiences with Allowance banking and minimum/maximum market-based instruments can have an effect. prices help ensure predictable ETS prices, and For example, Chile’s privatized water system may taxes can be designed to rise as emissions have negatively affected perceptions of market- overshoot targets. based instruments. However, the perceived complexity of ETSs can raise concerns that they A key consideration for the choice of ETS or tax is are challenging to implement successfully, making the domestic composition of emissions and the a tax more attractive, especially for governments potential size of a secondary market for permits. with limited administrative capacity.70 In South Africa, emissions are highly concentrated, with four firms responsible for more than two- thirds of emissions. Accordingly, policymakers feared an ETS would encounter significant liquidity issues, a problem that arose when South Korea and Montenegro implemented their ETS schemes. Montenegro’s case is especially notable, as only three plants were regulated under the ETS, and two have since shutdown according to ICAP. In Brazil, where hydroelectric power and biogas iv Carbon taxes can be designed to provide similar, if potentially less systematic, allowances and exemptions. Contents Executive Summary Chapter 1 2 3 4 5 6 60 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Stakeholder perceptions of instrument complexity sector, and Argentina’s exemption of the natural also matter. A national ETS in China would build gas sector. Natural gas is responsible for 77% of off the experience already gained with the Argentina’s emissions from electricity (63% of the regional ETS. In Brazil, stakeholders had similar country’s total), so this exemption substantially opinion, not least because some companies undermines the tax’s impact on the country’s operating internationally already had experience overall emissions.72 Rather than providing with ETSs. While some stakeholders want to indefinite exemptions from carbon pricing, it may minimize complexity, others view it as an asset. be strategically beneficial for policymakers to start with narrow coverage and broaden it over time. In Mexico, firms may have been more positively For example, Vietnam plans to gradually expand disposed to an ETS because they believed they the coverage of its ETS over time, starting first could exert greater influence on the technical with the waste sector before broadening coverage details of permit distribution than a more readily to thermal power, steel, and cement (Case Study interpretable tax rate. 3.1). The EU ETS provides a similar example, with notable expansions in 2012, 2013, and 2023.73 Attempts to define policy coverage are complicated by the potential for a lack of price pass-through and associated effects on emissions reductions. Firms’ market position and the Coverage regulatory environment shape the extent to which price increases are passed through the Carbon pricing programs vary in their breadth supply chain.74 A sector that sells primarily to of coverage and exemptions for various sectors, the domestic market and faces little competition fuels, or sizes of firms.71 Technical or administrative from imports may be able to raise prices for factors may drive this difference. Emissions in its customers, while sectors that sell to foreign some countries are highly concentrated in just markets or compete with foreign producers are a handful of sectors or large firms, making the less likely to have that option. Regulation may administration of a narrow policy more cost limit pass-through or may enable it. For example, effective. Similarly, many governments find independent electricity generators in Indonesia it administratively challenging to incorporate are allowed to pass the full cost of carbon pricing agricultural emissions into their carbon pricing to the national energy company, which means policies due to the diffuse source of emissions, increased payments from the government offset affordability impacts for farmers, and opposition any increase in the carbon price. The inability from well-organized agricultural associations and to pass-through carbon prices can generate unions. opposition to carbon pricing, especially among upstream groups. Narrow coverage of carbon prices often reflects a trade-off between technical effectiveness and political feasibility. While reducing the coverage of carbon pricing offers a straightforward way to reduce opposition from the private sector, the increased political feasibility comes at a cost of diminished emissions reductions potential such as in Uruguay’s (Case Study 2.1) or Brazil’ (Case Study 3.3) exemptions of the agricultural Negotiating an ambitious and politically feasible carbon pricing policy 61 CASE STUDY 3.1 Slow but steady carbon pricing development in Vietnam Vietnam has taken a slow but deliberate path According to the roadmap, by 2027, Vietnam toward carbon pricing. With initial interest from plans to finalize its implementation rules, increase officials in the Ministry of Natural Resources and private sector awareness, and conduct a pilot Environment’s (MONRE’s) Department of Climate Emission Trading System (ETS) and National Change and the Ministry of Finance, Vietnam Crediting Program (NCP). The carbon market started working with the Partnership for Market is expected to become operational from 2028 Readiness (PMR) project in 2015. At the time, onwards, with the government aiming to link there was no legal basis for carbon pricing in the it to regional and global carbon markets. The country and there was only limited experience key sectors that will be covered in the ETSs first with carbon markets from the Joint Crediting phase include steel, cement, and thermal power. Mechanism projects with Japan, a few Clean MONRE will manage and supervise both the trial Development Mechanism projects, and a handful and official market operation, while the Ministry of firms selling renewable energy credits on the of Finance will develop the exchange’s rules and voluntary market. management mechanisms. MONRE began by systematically engaging in MONRE has also decided to focus its first pilot data collection, research, and pilot projects to National Crediting Program on the waste sector address concerns of other ministries, especially This is because, while the technology for tracking the Ministry of Industry and Trade (MOIT). emissions from waste is more complex, the sector Progress accelerated in 2020 with the revision falls solely within MONRE’s jurisdiction, thereby of the Law on Environmental Protection and, avoiding the challenging task of coordinating notably, Vietnam’s declaration of its 2050 net-zero across ministries. Once MONRE has gained goals at COP26. The government subsequently experience with the waste sector, the NCP is established a steering committee—headed by the scheduled to expand to other sectors including prime minister and several ministers from key transport, and agriculture. While small companies ministries as committee members—tasked with in Vietnam still have limited knowledge about ensuring the country meets its commitments.75 carbon pricing, large export-focused companies This was soon followed by legislative decisions have grown more supportive of it. This shift that established emissions inventory obligations 76 partly reflects the effects of the EU’s CBAM. Firms paving the way for establishing carbon pricing in with high volumes of exports to the EU, such as the country.77 those in the textile industry, are pushing for faster development of carbon pricing policies. In contrast, companies with minimal exports to Europe, such as those in forestry, largely remain concerned about carbon pricing. Contents Executive Summary Chapter 1 2 3 4 5 6 62 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Revenue use Revenue use offers plausibly the most significant opposition and build supportive constituencies for opportunity to build support without undermining carbon pricing early on Table 3.1).78 But in some stringency. Decisions about revenue use are more countries constitutional or other legal barriers closely associated with taxes because taxes raise render earmarking impossible, requiring carbon revenue automatically, but ETS programs that pricing revenues to contribute to the general auction allowances also generate revenue. Where budget. Returning revenue primarily to emitting legally possible, some governments redistribute firms may weaken opposition but dramatically or earmark revenues from carbon pricing to ease undermine stringency. TABLE 3.2 Examples and implications of options for using carbon pricing revenues Revenue use Description Political economy implication Example(s) option Revenues can be used to subsidize Sectors that receive more financial low-carbon assistance can grow more easily and are technologies, to likely to support carbon pricing (policy Regional Environmental fund research and feedback). Greenhouse Gas earmarking innovation, to invest The climate effect of carbon pricing can Initiative, EU ETS in environmental be strengthened, which can increase infrastructure, or public support. to fund climate adaptation Revenues can be Financial assistance for low-income used to support low- households can cushion the social impact income households, of carbon pricing, which can increase the to make lump-sum Redistribution feasibility and public support for carbon British Columbia transfers to all pricing. households, or to Lump-sum support for all households grant tax rebates for may generate broad public support. certain sectors Tax rebates mitigate undesirable social Revenues can be or competitiveness impacts, which can used to reduce increase beneficiaries’ support for carbon indirect taxes, Tax reform pricing. Uruguay to reduce labor The tax system can be shifted away from taxes, or to reduce labor and toward environmental activities corporate taxes (polluter pays). Revenues can be Contributions to the general budget used to reduce a can avoid the increase of taxes or other General budget budget deficit or revenue streams. It tends to be less Chile to supplement the visible than other options for revenue general budget use. Negotiating an ambitious and politically feasible carbon pricing policy 63 Differentiation Redistributing revenues across the whole tax base tends to be less popular than targeting spending Multiple sectors or fuels included under a toward green investments or help for the carbon pricing policy can—and typically do—face vulnerable.79 For example, Switzerland allocates different prices. Extreme price differentiation one-third of its carbon pricing revenues to fund can be equivalent to exemption; for example, the green building retrofits and uses the remaining carbon prices of nearly all developing countries two-thirds to provide a discount on health and apply to only a few high-emitting sectors and social insurance.80 However, the low visibility of leave others unpriced.82 However, more nuanced the insurance discount may have led to relatively uses of differentiated pricing provide a middle low public awareness of the individual benefits way for strengthening the political viability of provided by Switzerland’s carbon pricing. carbon pricing, promising to reduce the policy’s cost for key opponents without providing outright Public opinion research in both advanced and exemptions that risk fracturing the support developing countries indicates that more targeted coalition. revenue recycling helps make carbon pricing more equitable and, as a result, more popular.81 While differentiation is politically useful and Carbon pricing experts working in developing often technically and economically necessary, countries also perceive redistribution of revenue policymakers should exercise caution to ensure to vulnerable groups as politically resonant, that it does not inadvertently encourage switching even more than supporting green infrastructure to more emissions-intense production processes or lump-sum transfers to the entire population or fuels. Discrepancies between emissions (Box 3.1). Yet being able to target vulnerable potential and prices can lead to perverse populations in practice is often a challenge outcomes. For example, uneven environmental especially when social assistance systems are taxes in both Mauritius and Vietnam led electricity absent or need to be built up anew. For further generators to switch towards dirtier sources.83 In discussion on strengthening the support for Mauritius, the Maurice Ile Durable fuel levy applies carbon pricing through revenue use, see Section to coal, diesel, and gasoline, but while diesel and 5.1. gasoline also face an excise tax, coal does not. As a result, the use of fuel oil for electricity decreased by 4.5% following implementation, while the use of coal went up by 2.6%. Similarly, after Vietnam introduced its Environmental Protection Tax in 2012, it kept taxes on non-anthracite coal at lower levels, abolished its gasoline surcharge, and reduced tariffs on ASEAN fuel imports. This price differentiation may have encouraged diesel and coal use for transportation and electricity. Contents Executive Summary Chapter 1 2 3 4 5 6 64 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Offset credits Point of regulation Offset credits allow regulated entities the option The number of regulated entities and their to pay for the right to continue emitting by compliance liabilities covered by a carbon pricing funding emissions reductions by other actors. policy typically depends on where in the supply Most major ETSs allow the use of offset credits, chain emissions are regulated. Policies that apply and several carbon tax schemes have provisions to upstream carbon emissions often face less that allow offset credits to reduce the tax burden. opposition because, even if the incidence is high, For example, Colombia’s program has a provision the cost is less visible to consumers. Moreover, allowing firms to avoid their carbon tax liability by regulating upstream sources of emissions can be purchasing offset credits generated in national much simpler administratively given the smaller GHG mitigation project activities. In South Africa, number of entities involved. For example, Chile waste and land use sectors have free allowances of limited its carbon price to stationary sources, offset credits equal to their total emissions, and all opting to regulate mobile sources with non-pricing other regulated firms receive an allocation of tax- policies, such as efficiency standards and product free allowances equivalent to between 60% and bans. However, policymakers implementing 75% of their emissions. South African firms can programs that apply to upstream emissions also use offset credits and additional allowances should be prepared for those entities to mobilize to avoid 90–100% of the tax. Moreover, South downstream opposition from firms or the public African energy firms can use their obligations based on threats of rising costs.85 under the existing electricity generation levy to reduce their carbon tax liability.84 In the near term, offset credits help reduce opposition in exchange for reduced effectiveness of the carbon price signal. Offset credits may also threaten efforts to raise ambition in the future. Instead of decarbonizing to reduce policy exposure over time, firms purchasing offset credits on an ongoing basis to maintain their emissions levels continue to be exposed to price increases. As a result, carbon pricing policies that allow for the widespread use of offset credits may encounter growing opposition over time. In addition, firms that rely on offset credits may attempt to minimize their compliance costs by making it difficult to validate their offset claims and resisting proposals to create and enforce quality standards for purchased credits (Chapter 4). Authorities have also to be judicious, ensuring that the credits they admit for compliance are high quality. Negotiating an ambitious and politically feasible carbon pricing policy 65 Effective price Trajectory Perhaps the most common way to limit opposition It is common to give regulated entities time to is to minimize the carbon price that is effectively adapt and build capacity by starting with a low- paid by business and consumers (the case of stringency policy. This may consist of an impact- Kazakhstan provides a notable example, see Case neutral tax, generous free allocation, a pilot Study 5.2) In a carbon tax, this is simply a matter phase, a narrower scope, and/or less demanding of setting low effective tax levels. In an ETS, this rules and enforcement (Chapter 4). This may be a often involves setting high caps under which sensible strategy, but policymakers must take care emissions are traded. In both systems, regulated to maintain ambition to increase stringency. See entities can be granted free emissions rights Section 5.2 for a more detailed discussion of the that reduce the effective price, such as is done political economy of carbon pricing trajectories. for some industries in South Africa. Around the world, most carbon prices are currently too weak to incentivize rapid decarbonization.86 However, low carbon prices can still induce emissions reductions if firms anticipate higher prices in the future.87 Contents Executive Summary Chapter 1 2 3 4 5 6 66 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries BOX 3.1 Technical effectiveness versus political feasibility dimensions in carbon pricing policy design: an experiment with carbon pricing experts A putative relationship exists between the technical carbon pricing experts made judgments about efficacy of carbon pricing proposals and their six pairs of designs for a simplified carbon pricing political viability. 88 Specifically, the measures that policy. All experts, as earlier noted, have worked ostensibly enhance a proposal’s effectiveness in on creating carbon pricing policies for developing driving emissions reductions to mitigate severe countries. Each design presented to them was a climate change impacts are also putatively linked random combination of an instrument (carbon tax to a decrease in its political feasibility, as these or ETS), coverage (narrow or broad), and revenue measures potentially impose upfront costs on use rule (investment in green infrastructure, businesses and households across the whole compensation to the entire population, or economy, thereby potentially eroding public compensation to vulnerable groups). For each pair, support. This tension sometimes possess a 89 respondents selected the design they believed to be trade-off for policymakers since an overly stringent more technically effective, more politically feasible, policy may never be adopted, but an insufficiently and one they would propose to a policymaker. stringent policy fails to address the underlying To have a common baseline, respondents were problem of carbon pollution.90 asked to advise a policymaker in a fictional The tension between technical effectiveness and democratic upper-middle-income country with high political feasibility have been studied in the context inequality and significant fossil fuel production. of public opinion, but few studies examine how While this scenario and exercise has limits in its carbon pricing experts approach this trade-off in generalizability, it nonetheless offers important the context of developing countries. To shade some insights into how experts evaluate the various light and attempt to disentangle these motivations, dimensions of carbon pricing design. Carbon Pricing Instrument: Tax or ETS? Coverage: Narrow or Broad? Experts see an ETS as similarly effective to a In comparing broad and narrow carbon pricing carbon tax but are 10% more likely to view it policies, experts were 6% more likely to perceive as politically more feasible. By a slightly higher broad policies to be more effective than narrow margin, they are more likely to propose an ETS to policies, but 24% more likely to view narrow a policymaker. While the latter recommendation policies as politically feasible. On balance, is likely partially explained by the professional feasibility outweighs effectiveness: experts are exposure of the sample of respondents, they also 7% more likely to recommend narrowly scoped by a substantial margin, would not recommend carbon pricing than a broad approach. That is, a an ETS if it implies a less effective policy package significant number of experts who saw narrow than a carbon tax. policies as less effective but more feasible, would recommend them. Negotiating an ambitious and politically feasible carbon pricing policy 67 Revenue Use: Green Infrastructure, Vulnerable Groups, or the Entire Population? Experts consider using revenue from carbon pricing infrastructure spending as 7–10% less politically to support green infrastructure to be more effective attractive. On balance, carbon pricing experts are as for reducing carbon emissions than compensating likely to recommend infrastructure support as they vulnerable groups (by 11%) or compensating the are compensation for the vulnerable, but 16% less whole population (by 20%). But they also see likely to recommend universal compensation. Expert preferences for carbon pricing policy design Effective Feasible Propose Instrument (Baseline = Carbon tax) Emissions trading Coverage (Baseline = Narrow) Broad Revenue Use (Baseline = Support green infrastructure) Compensate vulnerable groups Compensate entire population -30% -20% -10% 0% 10% 20% -30% -20% -10% 0% 10% 20% -30% -20% -10% 0% 10% 20% Change in probability of selecting policy Survey respondents were asked to compare six pairs of alternative carbon policy designs and identify which would be more effective, which would be more feasible, and which they would propose to a policymaker. To make responses comparable, respondents were asked to imagine they were advising a policymaker in a fictional democratic, upper-middle-income country with high inequality and significant domestic fossil fuel production. Each policy design consisted of a random combination of instrument, coverage, and revenue use. Estimates represent average marginal conditional effects, interpreted as the change in probability of selecting a policy design with one attribute over another (all other attributes set at random levels). Estimates correct for multiple testing using the Holm-Bonferroni method. Error bars are with 95% confidence intervals (97 responses). Source: Original expert survey Contents Executive Summary Chapter 1 2 3 4 5 6 68 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 3.1.2 Easing opposition through information and pressure campaigns Even a well-designed carbon price may fail Sometimes information campaigns for carbon to win support from the public, industry, or pricing center on building a basic understanding within government itself if it is mistrusted or of how carbon pricing works, especially misunderstood. In general, carbon pricing faces a among (prospective) regulated entities. In challenging communications landscape because Mexico, policymakers’ early engagement with a price tends to draw attention to costs rather representatives from industry facilitated the than benefits. Communication difficulties are development of technical capacities as well as particularly likely in contexts where trust in the a solid understanding of the different design government is low.91 Moreover, it can be difficult elements that the policy would have (Case Study to identify typical patterns because perceptions 4.2). In China, the government helped generate of carbon pricing vary widely across contexts, as a media coverage of carbon pricing to build policy that seems simple and business-friendly in awareness among both regulated industries and one country may be perceived as complicated and the public. In Colombia, the government worked overbearing in another. extensively with the relevant industry associations to proactively engage with the private sector (Case Study 3.2). Carbon pricing in developing countries often involves only limited public debate, especially where civil society in general, and environmental movements in particular, are weak or primarily focused on insider politics. If elite stakeholders can negotiate settlements among themselves, using the tools discussed in the previous section, then there may be less incentive for any of them to mobilize the Negotiating an ambitious and politically feasible carbon pricing policy 69 CASE STUDY 3.2 Easing private sector concerns through accommodation and strategic engagement in Colombia In December 2016, Colombia introduced a national contributed to discussions determining the rules for carbon tax of $5 per ton.92 Part of a wider reform the use of carbon credits, eligibility of international aimed at modernizing and simplifying Colombia’s carbon standards, and promoting Ecoregistry, an tax code, the policy was developed in a relatively independent national registry of national emissions short time by the Ministry of Finance and Public reduction projects.97 Credit. Anticipated to provide $200 million in annual government revenue,93 the policy was an Revenues from Colombia’s carbon tax are opportunistic response to several years of declining earmarked for environmental projects in post- government finances.94 The policy’s supporters conflict zones. Revenues are currently channeled hoped it would facilitate Colombia’s prospects of through the Peace Fund for Columbia (previously joining the OECD by improving the government’s through the Fund for Environmental Sustainability fiscal health and supporting the country’s NDC and and Sustainable Rural Development) to finance national development strategy. It also addressed adaptation (25%), ecosystem preservation (5%), concerns of an expert commission that Colombia and post-conflict solutions (70%).98 Key policy had few environmental taxes relative to its peer developments since adoption include the tax countries in Latin America. underperforming revenue projections,99 which has led to a revision limiting the use of offset credits. The carbon tax contained several features to The exemption of coal has also been reversed, ease opposition from the private sector. Like although it will only be subject to the full tax rate most countries new to carbon pricing, Colombia from 2028 onwards.100 began with a modest initial price and cautious price trajectory, with increases of 1 percent plus Colombia’s 2018 climate change law provided the inflation annually until approximately $25 per ton legal authority to create a mandatory emissions (2022 values).95 It applies to less than a quarter of trading system (ETS). This offers an opportunity to Colombia’s greenhouse gas emissions, targeting develop an ETS that covers more of the country’s producers and direct importers of fossil fuels for the greenhouse gas emissions than the fuel sales domestic market but excluding coal and domestic covered by the tax. The ministries of finance, the gas use.96 Moreover, firms could entirely avoid environment, and planning are collaborating on the the tax through carbon offset credits, reflecting design of the ETS. While implementation details, the private sector’s concerns about abatement including linkage to the carbon tax, are still being opportunities. developed, recent secondary regulation to the climate action law stipulate that the ETS should be While many multinational firms had already initiated operational by 2030 and that allowances will be plans to reduce their emissions, the Ministry allocated primarily through auctions. of Environment and Sustainable Development engaged in substantial outreach in collaboration with the Ministry of Commerce, Industry and Tourism, which acted as a convener for the sectors involved. Reflecting its strong interest in the offsetting mechanism, the private sector actively Contents Executive Summary Chapter 1 2 3 4 5 6 70 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries public. In Uruguay and Indonesia, for example, Public pressure for climate action is often stakeholders described a top-down process in important in advanced countries, though it may which ministries and relevant industries but not not always be tied to specific policies. In contrast, the public had meaningful input. In Argentina, the attempting to ease opposition to carbon pricing inclusion of carbon pricing in a larger tax reform by appealing to public opinion has a mixed record package took environmental NGOs by surprise. in developing countries. Market-based policies South Africa’s government, in contrast, started like carbon pricing are often largely unfamiliar to communicating with the public early, launching stakeholders in developing countries and pose a campaign to educate the public about the complex political and distributional implications, benefits of carbon pricing and the need to act on requiring more extensive communication efforts climate change. The campaign included a range than non-pricing policies. In contrast, opponents of activities, such as public meetings, workshops, of carbon pricing can more easily rally against and online engagement tools (see Case Study taxation and build a narrative that carbon pricing 5.2).101 reflects the values of an out-of-touch elite willing to sacrifice economic growth and development Of course, carbon pricing supporters can also for climate action.103 Developing countries may use information and pressure campaigns to push provide especially fertile soil for narratives against governments to act in the first place. However, carbon pricing, as many have relatively low such campaigns are likely to produce a response historical responsibility for carbon emissions, high from pricing opponents with the strong incentive levels of social inequality, and difficulty achieving to limit policymaker and public support for an broad public participation in government decision- ambitious price. Opponents of carbon pricing making.104 Case Study 3.3 describes Brazil’s are often large, well-resourced firms with strong carbon pricing experience before, during, and connections to policymakers and sophisticated after the populist presidency of Jair Bolsonaro. lobbyists. Fossil fuel companies have a strong incentive to mobilize against any meaningful In political systems where bargaining and carbon price and have historically played a crucial consensus between ministries and peak role in blocking climate action.102 organizations like trade associations drive most policy decisions, the carbon pricing movement may only seek to create mass pressure campaigns as a last resort, when negotiations have already broken down. Similarly, motivating carbon pricing by pointing to external sources of pressure may lead to mixed results. For example, while the EU’s CBAM has accelerated carbon pricing discussions in many developing countries, stakeholders in Ukraine, Argentina, and Mexico expressed concern that the resulting carbon prices may be ineffective (Box 2.1). They also challenged the policy’s implicit presentation of the EU ETS as “good practice” to be emulated, observing that the EU ETS has encountered its own challenges and may not be a suitable model for their economic, political, and social context. Negotiating an ambitious and politically feasible carbon pricing policy 71 3.1.3 Easing opposition through sequencing and alignment with comple- mentary policies Just as carbon pricing is not the only policy Removing countervailing policies mechanism at governments’ disposal, the failure to internalize the cost of emissions is not the only One of the most important policy actions to barrier to decarbonization. There are many other complement carbon pricing is the reduction barriers, such as lack of financing, weak incentives or elimination of countervailing subsidies and to innovate, friction in technological deployment, protections. These may include measures that slow consumer uptake, and countervailing allow firms to reduce their carbon pricing tax subsidies for fossil fuels and energy consumption. liabilities. For example, South Africa allows independent power producers to use the levy on For countries with few existing climate policies, fossil and nuclear electricity generation in this carbon pricing may not be the best place to manner, making it difficult for carbon pricing to begin105.106 Developing a portfolio of related policies incentivize meaningful emissions reductions. can help build a coalition of supporters before pursuing a carbon price. Moreover, such policies Other policies may undermine the price signal can address other barriers to decarbonization created by carbon pricing, especially energy and market failures, making the eventual market subsidies. Most energy subsidies favor the use of response to an eventual carbon price stronger. fossil fuels. Some are justified as protections for Countervailing policies can also interact with consumers, especially low-income consumers. carbon pricing in unexpected ways, even causing Others are targeted at producers. They are the policy to unintentionally increase emissions. extremely costly in both developed and developing As discussed in Section 3.1.1, Mauritius’s Maurice countries, with estimates ranging from more than Ile Durable fuel levy led to increased emissions $500 billion to as much as $5.9 trillion.109 Among because its interaction with excise taxes led 33 developing countries, more than half provide to increased use of coal. Similarly, Vietnam’s fossil fuel subsidies that act as negative carbon Environmental Protect Tax, in combination with prices and for seven countries, the net effective other tax reductions, encouraged a shift toward carbon price is negative.110 Comparing fossil fuel diesel and coal. provides examples of policies subsidies with fuel taxes and explicit carbon that can lay a foundation for carbon pricing and prices shows global carbon pricing has stagnated: tend to provoke less resistance than carbon it is not much higher now than it was in 1994.111 pricing. Some of these policies can be passed at the same time as a carbon price, but there is also Countervailing policies can also interact with value in pursuing them first to expand the future carbon pricing in unexpected ways, even causing support coalition for pricing. As demonstrated in the policy to unintentionally increase emissions. developed countries, there is often value in having As discussed in Section 3.1.1, Mauritius’s Maurice green industrial policies in place before pursuing Ile Durable fuel levy led to increased emissions carbon pricing107.108 because its interaction with excise taxes led to increased use of coal. Similarly, Vietnam’s Environmental Protect Tax, in combination with other tax reductions, encouraged a shift toward diesel and coal.112 Contents Executive Summary Chapter 1 2 3 4 5 6 72 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Table 3.3 Examples of complementary non-pricing instruments Instrument type Description Use government funds to directly encourage decarbonization and subsidize Green Industrial domestic firms that benefit from decarbonization. These policies aim to leverage Policy, Subsidies, and climate action as a means to create strategic industries, jobs, export revenue, and Green Procurement economic growth.113 Tilt the energy playing field toward clean sources, without provoking the same Feed-in Tariffs or resistance among losers that taxes tend to do. Such policies impose costs on Renewable Portfolio taxpayers or ratepayers, but these costs tend to be less visible and salient than Standards taxes. These can also provide a more stable investment environment for green energy entrants than a carbon price. Resolve domestic concerns about carbon leakage through trade, potentially Carbon Border reducing the size of the opposition coalition. Climate provisions in preferential Adjustment trade agreements lower imports of dirty goods and increase exports of clean Mechanisms goods, which gives them a stronger impact on national legislation than anything else.114 Create social welfare programs to target redistribution and investment in specific vulnerable groups that may suffer in the short term under decarbonization. For Just Transition example, labor unions that are concerned about job losses under decarbonization Policies might receive specific transition assistance to help them weather economic changes, making carbon pricing less threatening. Removing fossil fuel subsidies is critical for the in Indonesia (Case Study 2.2), who noted that success of carbon pricing and, while it is likely President Joko Widodo had successfully achieved to be hard, it may not be impossible.115 Surveys a subsidy reform early in his first term by of public attitudes towards subsidy removal in communicating clearly with the public about how Ecuador, Egypt, Mexico, Indonesia, and India find the money would be reallocated to education and that people believe removing fossil fuel subsidies healthcare, although favorable shifts in world is just as valuable as introducing carbon taxation, prices around the time of the reform also played especially when there are plans to use the money a role. saved from subsidies in ways they consider positive.116 This echoes the views of a stakeholder Negotiating an ambitious and politically feasible carbon pricing policy 73 CASE STUDY 3.3 Carbon pricing’s changing political fortunes in Brazil Different from most countries, Brazil’s GHG for congressional efforts to create a compliance emissions are concentrated in agriculture and carbon market in Brazil, with an emphasis on land use and land use change (LULUCF). In the aligning with the best international practices. 2000s, Brazil achieved a significant reduction in emissions through policies that bolstered On October 4th 2023, a bill to establish the “Brazil socioeconomic development and the enforcement Greenhouse Gas Emissions Trading System” or of environmental regulations, leading to a “Sistema Brasileiro de Comércio de Emissões decrease in deforestation, particularly in the de Gases de Efeito Estufa” was approved by Amazon region. The strengthened environmental Senate’s Environmental Committee. The bill measures, however, encountered resistance from aims to establish a cap-and-trade system in the various interest groups linked to agriculture and country. Its components include a system for mining, resulting in a partial rollback of these trading GHG emissions, introduces emissions policies in the 2010s, which corresponded with ceilings, establishes regulation and a market for an uptick in deforestation and emissions. In carbon credits, and allocates carbon revenues. response to these challenges, recent efforts have The regulated carbon market is expected to affect been made to enhance environmental regulation 5,000 companies across non-LULUCF sectors enforcement, curb deforestation, and lower that annually emit more than 25,000 tons of CO2 emissions. These efforts have yielded a notable equivalent. In its current form, it does not cover decrease in Amazon deforestation by 21.8 percent agriculture directly. However, it might affect it in 2023. Despite this progress, deforestation in indirectly as emissions reductions from the land the Cerrado region has shown more resilience to use sector (e.g., forest restoration) could be used change. as offsets in the ETS market. On December 21, 2023 the house of representatives approved a Compliance carbon pricing mechanisms in revised proposal to regulate the carbon markets Brazil have historically not been a central topic in Brazil. The revisions made by the house of in environmental debates, largely because such representatives included more detailing on schemes have not included the land use sector. carbon crediting under the SBCE framework, Legislative discussions gained momentum in the particularly in relation to REDD+ projects. These mid-2010s and 2020s with the introduction of changes reflected the opinions of groups of multiple bills, yet progress stalled due to a lack stakeholders, namely Amazon state governments, of governmental backing. In 2022, a significant agribusiness, and project developers. The bill will policy development was the announcement of return to the Senate for analysis on changes made a “national carbon market,” aimed at creating a by the house of representatives. registry for companies to report their emissions and planned reduction trajectories. However, experts predicted limited impact on emissions reductions from this initiative, citing a lack of enforcement mechanisms and no clear path to developing such mechanisms. Moving forward, in 2023, federal government support was signaled Contents Executive Summary Chapter 1 2 3 4 5 6 74 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 3.2 Overcoming opposition to carbon pricing This section discusses how carbon pricing can be passed without the accommodation of political opponents, when supporters gain enough power to act without their plans being vetoed. This depends both on the relative political strength of supporters and opponents, as well as the extent of institutional constraints on policy change. 3.2.1 Overcoming opposition through electoral platforms Occasionally, political candidates attempt to use Some governments have tried to use referenda carbon pricing to distinguish themselves from to bypass regular policymaking channels. their opponents. Winning an election with an This carries substantial risk, as it encourages explicit carbon pricing platform provides a strong opponents to counter-mobilize the public as much mandate to pursue pricing once in office. This as possible. This counter-mobilization may shape occurred in Mexico when Enrique Peña Nieto public perceptions in ways that last longer than featured tax and energy reforms prominently elite lobbying would. Referenda can also make during his 2013 campaign for president. After his it hard to adjust policy details as needed. In the victory, he included a carbon tax in his legislative United States, the left-leaning and relatively low- package. Similarly, as described in Case Study 3.3, carbon Washington State tried and failed to pass a Lula da Silva won Brazil’s 2022 presidential election carbon price by referendum twice after triggering on a platform that included environmental tax significant pushback from industry and dividing reform as part of a broader reform, defeating the the state’s labor and environmental movements. incumbent, Jair Bolsonaro. However, as discussed Ultimately, the pro-climate coalition’s effort found in Section 3.1.2, most carbon pricing experts success by first enacting a clean portfolio standard believe the policy’s complexity and technical law through the state’s legislature in 2019. Two nature make it a poor fit for general election years later, the state finally enacted a carbon campaigning, especially in developing countries. price, designing the policy as a “cap and invest” Around half of the experts surveyed say that low program that uses revenue from an ETS to make support for climate action or low public trust in clean energy investments. government were barriers to enacting ambitious carbon pricing in their countries (see Figure 2.3). Even more respondents say that the shocks of the 2022–2023 energy crisis and poor economic conditions make ambitious pricing difficult to enact (see Figure 2.3). Negotiating an ambitious and politically feasible carbon pricing policy 75 3.2.2 Overcoming opposition through procedural maneuvers Design and communication are not the only launched pricing pilots in several subnational paths to policy success. Carbon pricing advocates regions—Beijing, Shanghai, Guangdong, and in government can also take advantage of Tianjin (2013), Hubei and Chongqing (2014), and procedural maneuvers to advance pricing. Fujian (2016)—before launching its national ETS in 2021. Subnational pilots offer an opportunity Log-rolling for governments and firms to learn about pricing without applying it to the whole economy, limiting Log-rolling, or packaging carbon pricing with the number of entities with a strong incentive other policies, is a classic approach for building to resist. This approach can also work well in support among neutral actors. For example, federal countries, as the ability for subnational if a government is already pursuing larger tax units to implement policies independently reform packages, including carbon pricing as one allows jurisdictions with more climate policy element among them may be less controversial support to move faster. And, though there are than pursuing it on its own. This can be especially limited examples of international carbon pricing effective when carbon pricing is combined in developing countries so far, transnational with spending on green infrastructure, low- programs are possible: the California cap-and- carbon technology, or redistributive transfers trade program has been linked with a companion to vulnerable groups.117 Log-rolling with such program in Québec since 2014. measures does not mean concealing the carbon price, but finding complementary policies that Process Management expand the coalition. Indeed, attempting to “sneak in” a carbon price through log-rolling could As in all policymaking, control of the negotiation provoke a backlash that threatens subsequent process itself, the degree of formalization, and implementation and consolidation. the level of transparency can all shape outcomes. As discussed in Chapter 2, it is often worthwhile Argentina successfully achieved its carbon tax to include stakeholders who are neutral or even through log-rolling when it passed a much larger initially opposed to see if they can be brought in tax reform program.118 Uruguay presents more through policy adjustments and compromise. of a cautionary tale, as log-rolling probably Brazil chose to take a very deliberate, gradual helped prevent controversy but the compromises process for considering a carbon price, with wide required to do so caused the overall package to consultation and many engagement sessions. have either a null or minimal net positive effect on Stakeholders observe that, while this slow carbon emissions (see Case Study 2.1.) approach may have delayed the introduction of a carbon price, it may have helped the movement Shifting to sub-national or international survive the administration of President Bolsonaro, venues who was strongly opposed to climate action (Case Study 3.3). When carbon pricing advocates face strong barriers at the national level, they can also consider shifting venues to either the subnational or international level. Many countries have implemented carbon pricing at the subnational level first, laying the groundwork for national prices later. As discussed in Case Study 3.4, China Contents Executive Summary Chapter 1 2 3 4 5 6 76 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries CASE STUDY 3.4 Easing opposition through pilot phases in China Before the introduction of emissions trading, the The pilots were designed to give regulated entities Chinese government already had experience with and bureaucracies a chance to learn and build an “Energy Saving Campaign,” but the process the capacity to comply, a process that can require of setting targets for individual firms proved several years. Compliance rates appear high difficult. As momentum grew for carbon pricing in but concerns about data quality persist despite other countries, and the European Union offered a decade of pilots and investment. This is due specific support for emissions trading, interest in in part to persistently low prices in most of the an ETS within the Chinese bureaucracy grew. pilots (although Beijing’s pilot has reached over $17 per ton). In the pilots’ early stages, electricity The idea of a carbon pricing scheme initially faced consumers were compensated by receiving free resistance due to concerns that an energy price allowances associated with indirect electricity shock would disrupt an economic growth model emissions.121 that had brought benefits to millions. And even though the Central government has substantial The government has now begun the process of authority over policy, the support of state-owned transitioning to a national ETS. Since 2021, power enterprises that dominate the economy would sector emissions, accounting for more than 40% have to be key for any national pricing policy.119 of China’s carbon dioxide, have been covered. Carbon pricing faced an additional hurdle: despite As with the pilot systems, the system began the high level of state capacity, the lack of a data with many free allowances and prices on the collection apparatus for emissions meant that secondary market are still relatively low ($8.20 any pricing system would require non-trivial per ton on the secondary market). Coverage is investments in new administrative and monitoring intended to expand over time; in the meantime, capabilities for both government and firms. the pilots continue to cover sectors and emissions not yet integrated into the national system.122 The government decided that rather than The government has also pursued other climate immediately pursuing a national ETS, it would mitigation strategies alongside pricing, especially set out a series of pilot ETS programs in eight through investment in manufacturing and provinces and large cities. The pilot jurisdictions deployment in areas like clean energy, electric were chosen to cautiously test the performance vehicles, and mass transit. The overall effect of of an ETS, with the different provinces and cities these spending programs may be larger in impact accorded flexibility in their chosen design and than the pricing schemes. coverage of their local ETS. Hubei province’s ETS for example opted to only cover industrial emissions, while Shanghai’s covers industry, domestic aviation, transportation, and buildings. Most only cover CO2, but Chongqing’s ETS also covers CH4, N2O, SF6, HFCs, and PFCs. In Shenzhen, all firms with annual emissions of over 3,000 tons of dioxide are covered, but in Tianjin, the threshold is 20,000 tons.120 Negotiating an ambitious and politically feasible carbon pricing policy 77 Contents Executive Summary Chapter 1 2 3 4 5 6 4. 78 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Achieving successful implementation of carbon pricing Achieving successful implementation of carbon pricing 79 Key Messages • Inclusive engagement of regulated entities and other stakeholders, along with detailed and precise rules (e.g., for MRV) and targeted communication can build trust in carbon pricing, shaping subsequent levels of support and opposition. • Carbon pricing communication strategies inform firms of their legal obligations, encourage cooperation, and keep stakeholders updated on the policy’s performance and plans for its development over time. • Assessing and building institutional capacity, both for governments and for firms, is crucial for the successful implementation of carbon pricing. Concerns about capacity are especially high for countries with an ETS. • Strategies for overcoming capacity issues include building on existing institutional infrastructures, simplifying MRV burdens where relevant, and starting with a facilitative approach to enforcement before gradually transitioning to a more punitive approach. This chapter focuses on three core pillars of policy implementation: formulation of MRV rules, communication with regulated entities and other stakeholders, and compliance and enforcement of legal obligations. Contents Executive Summary Chapter 1 2 3 4 5 6 80 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 4.1 Instilling trust through compliance rules To move carbon pricing from paper to practice, Compliance rules are important for providing regulators develop a suite of additional rules regulated entities with the certainty to make and guidelines that detail what regulated entities the investments necessary to close the cost must do and what they can expect (Table 4.1). gap between high-carbon and low-carbon This tends to be more demanding for an ETS, than technologies, reduce the cost of emissions for a carbon tax which requires fewer rules and mitigation, and realize behavior changes like fuel additional institutions. Generally, the responsible switching and technology adoption.124 Clear rules ministry or a specific agency oversees carbon can be decisive in determining whether regulated pricing implementation. Whereas the political entities become alienated due to inefficient and sphere is crucial for policy design and adoption, unclear obligations or whether they gradually the public administration sphere is central in develop confidence in the carbon pricing policy implementation. Detailed instructions help and its procedures because their concerns are regulated entities understand the compliance addressed. In this context, trust describes the activities expected of them, allowing them to make willingness to make business decisions and invest plans according to a shared set of expectations. in low-carbon technologies with the assumption It can take time to formulate these rules. For that the carbon price will develop in a certain way. example, Indonesia enacted its ETS law in October 2021 and continues to develop implementing regulations as of June 2024.123 TABLE 4.1 Types of regulatory and market information provided by carbon pricing regulators Types of information MRV rules, including rules for reporting and third-party verifiers Free Rules allocation overseeing rules the registry Market Enforcement oversight approach and rules penalties Offset credit rules Achieving successful implementation of carbon pricing 81 Rigorous market oversight and disclosure 2010 Indian Clean Environment CESS tax on coal, requirements can combat regulators’ temptations lignite, and peat built off the existing monitoring to provide preferential treatment of certain mechanisms in the tax system. sectors through ad-hoc and opaque calculations of, for example, free allocations, exemptions, Where MRV systems do not already exist, many and tax rates. By making such information public, governments opt to help prepare both regulated regulators defuse potential conflict among entities and regulators by phasing them in over stakeholders and strengthen the belief that the time. This may consist of making reporting government is motivated to pursue carbon pricing voluntary at first and gradually moving to a out of the public interest. Many of the policies mandatory system. During the voluntary phase, established under the EU ETS provide examples both regulators and regulated entities can build of transparent decision-making processes, such capacity and establish procedures without the fear as allocating free permits according to a defined of penalties if their reporting is not yet compliant. method for calculating regulated entities’ trade exposure and carbon leakage risk. Another common strategy for capacity building is to begin by using default values instead of Developing a robust MRV system measuring actual emissions. These default values are estimates based on the firm’s sector, Monitoring, reporting, and verification are size, and other characteristics. In this way, firms indispensable for effective carbon pricing. can pay the approximate cost of their emissions Regulated entities need to measure and report without investing in the infrastructure necessary their emissions or fuels to regulators, who must to directly measure their emissions. The use be able to verify the accuracy of emissions claims. of default values is straightforward, but it is Setting up an MRV system can be challenging, important to transition to requiring firms to report especially in contexts where regulators and measured emissions quickly, as the use of default regulated entities face capacity limitations. values does not incentivize firms to reduce their emissions thereby reduce their cost burden. See A recommended strategy is for governments to Section 4.3.2 for further discussion of options for build on existing MRV structures. Chile’s carbon simplified MRV systems. pricing MRV system is directly based on an existing MRV system developed for conventional Data management is also challenging for both air pollution controls (Case Study 4.1). Firms regulators and regulated entities, and poor were already familiar with what, how, and data quality has hampered some programs. For when to report and they can report in a single example, the city of Wuhai in Inner Mongolia, China, system to the Ministry of Environment. Similarly, discovered in 2021 that a company had falsified Türkiye positioned itself to eventually adopt a data, which would have increased its free allocation full emissions trading system by adopting MRV share in the national ETS. The fraud incident led to legislation in 2012 with the support of the PMR. ETS rule revisions that imposed stricter financial While the country has not yet created a carbon penalties in cases of fraud and noncompliance. price, approximately 1,000 entities have had to Data quality concerns were mentioned as early as monitor, report, and verify their carbon dioxide 2017 as one of the reasons for delaying the Chinese emissions from large installations annually. national ETS, but a systematic effort has eventually Initially, the Turkish MRV system was voluntary, built confidence in the system. These examples but since 2015 it has been mandatory, and illustrate the importance of investing in MRV and regulated entities face fines for noncompliance.125 data management to ensure the credibility and Similarly, the South African carbon tax and the effectiveness of the carbon pricing policy. Contents Executive Summary Chapter 1 2 3 4 5 6 82 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries CASE STUDY 4.1 Chile’s roll-out building on existing emissions monitoring infrastructure In 2014, Chile’s legislature adopted a broad tax After the tax’s adoption, the agricultural sector reform that included three emissions taxes, and other groups with seasonal operations, as including a carbon tax on stationary sources. well as renewable energy firms, raised concerns With high societal pressure to raise money for about the use of thermal capacity to calculate the educational system, as well as the public’s the tax. Chile’s government responded quickly by desire to reduce local air pollution, carbon pricing switching to total annual emissions. Policymakers advocates worked quickly to take advantage of also later added an offset mechanism allowing the opportunity offered by the tax reform. companies to submit emissions reductions or capture certificates from domestic projects Electricity generators were initially skeptical of instead of direct payment of the tax. the carbon tax, as they had made substantial investments in coal following Argentina’s decision Chile’s government has also continued to work to cut natural gas supply to Chile in 2007. One key on improving the tax and there are plans to to securing their acquiescence was the decision introduce a tax price raise in a future tax reform. to set the rate at just $5 per ton and to provide The election of a strongly pro-climate government cost certainty by fixing the price in law. The policy in 2021 has raised new opportunities for plans also defined a high threshold at which emitters to raise the carbon tax from $5 to $35 per ton became subject to the tax, leading the policy to by 2030. The Framework Law on Climate Change apply primarily to the power sector. However, passed in 2022 legally requires the government the Chilean constitution requires tax revenue to to develop a range of carbon pricing instruments, go to the general budget, so policymakers could including an ETS. Rather than replace the carbon not allocate carbon price revenues to specific pre- tax, policymakers are considering whether to defined uses. allow the private sector to choose between the two instruments or use the tax as the price floor The carbon tax entered into force in 2017 and its for the ETS. implementation proved straightforward, largely because electric utilities and heavy industry had already developed emissions MRV systems in response to conventional air quality standards adopted between 2011 and 2013.126 This process had already given regulated entities experience in interacting with regulators on emissions control. Achieving successful implementation of carbon pricing 83 4.2 Communicating effectively during policy roll-out Once a policy is adopted and rules are established, public informed of the policy’s performance and the policy’s designated regulator formulates a any planned adjustments, as well as provide communication strategy. This strategy should channels for regulators to systematically gather accomplish three main goals. First, regulated and process feedback. The following sections entities must understand their responsibilities assess the political economy of these three and legal obligations. Second, other relevant objectives as they relate to a carbon pricing government institutions and regulated entities communication strategy. The PMR/Carbon Pricing should determine how to coordinate information Leadership Coalition Guide to Communicating and decision-making with the primary regulator. Carbon Pricing offers detailed and practical advice Third, procedures need to be created to keep on creating a carbon pricing communication regulated entities, other stakeholders, and the strategy.127 4.2.1 Explaining responsibilities and obligations The most basic function of a carbon pricing As discussed in Section 4.1, the success of communication strategy is to inform regulated initial efforts to help firms become comfortable entities of their legal responsibilities and with their new carbon pricing obligations can obligations under carbon pricing. Clear shape their disposition toward the policy over explanation of the processes by which regulators the long term. When regulators provide clarity will monitor and verify emissions and firms will and certainty, firms often see the opportunities pay the tax liability they incur (under a carbon tax), and benefits offered by stringent carbon pricing or purchase/trade emissions allowances (under favorably. But if firms remain uncertain about an ETS) is vital. Firms need to acquire a detailed their responsibilities, they are likely to resist. understanding of what they need to do, how, and Kazakhstan was forced to suspend its ETS in when if they are to comply. 2015 after adopting it in 2013, for example, and stakeholders attributed industry resistance to a It is in regulators’ interests to explain the practical lack of government engagement with the private implications of carbon pricing to regulated sector in developing and implementing the entities Thoroughly. This may involve both direct program (Case Study 5.2). interaction through training workshops and roundtables and the writing and distribution of technical guidelines and news articles. The goal of these efforts is not just to convey technical knowledge, but to engage with regulated entities as compliance partners. To the extent possible, and especially at the outset, communications efforts should aim to generate buy-in from affected actors by cultivating a sense that stakeholders are not being left behind or threatened. Contents Executive Summary Chapter 1 2 3 4 5 6 84 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 4.2.2 Stakeholder inclusion In some developing countries, carbon pricing varied missions and remits of these institutions, policies apply to only a handful of large firms, governments often opt to establish formal making it easy for regulators to communicate procedures for intra-governmental coordination. consistently with regulated entities. In others, Through these procedures, governments can carbon pricing affects many firms—China’s clarify and align carbon pricing activities with nationwide ETS began with more than 2,200 existing obligations and ensure regulated entities firms.128 In these contexts, regulators need to receive consistent information. take a proactive and structured approach to coordination (Case Study 3.4). A third function, often left implicit, is to provide a venue for maintaining enthusiasm and political Similarly, the implementation of carbon pricing support for carbon pricing among government can involve government authorities from a wide stakeholders. Case Study 4.2 describes Mexico’s range of sectors, from energy and manufacturing coordinated communication efforts for its ETS to transport and agriculture. To accommodate the program. CASE STUDY 4.2 Mexico’s comprehensive implementation strategy linking pilot and implementation phases Mexico launched its three-year ETS pilot program feasibility of a mandatory system in 2015, in 2020, with plans to launch a formal national identifying legal and technical requirements and program in 2022.129 The pilot enabled the nation developing MRV guidelines, regulatory context to build the carbon pricing capacity and fluency assessments, and stakeholder engagement of regulators and regulated entities. It sought procedures. Early in the planning process, to enhance competency in emissions reporting, private sector stakeholders were proactively system design, and the emissions trading capacity consulted about their concerns and questions of regulated entities. As part of the pilot, the through the Emissions Trading System Advisory Mexican government engaged in a comprehensive Committee, a dedicated multistakeholder stakeholder mapping, communication, and forum consisting of government, academic, and engagement strategy. The strategy explicitly industry representatives. This effort was a major included linking experiences in the pilot and innovation in how public policies are developed implementation phases to strengthen future in Mexico and stakeholders view this decision compliance. as invaluable for the subsequent success of the planning process, legislative amendments, and Effective early engagement with formal consultation. regulated entities Building on this initial consultation, SEMARNAT The Secretariat for Environment and Natural implemented an ETS simulation exercise in 2017– Resources (SEMARNAT) began assessing the 2018 in collaboration with the PMR. The simulation Achieving successful implementation of carbon pricing 85 involved direct technical exchanges between the strategy was a capacity-building plan that regulators and representatives for over 100 identified productive narratives and opportunities energy and industrial companies. This exercise to develop skills and seed constructive debate led to the formation of a public-private working among audiences directly involved in the design group. Guided by the ICAP ETS Handbook, the and implementation of the ETS. working group conducted a series of constructive dialogues that ultimately produced an ETS design Once the strategy was formulated, it was reviewed that would be politically feasible in Mexico. and integrated into the government’s broader carbon pricing implementation strategy, along In the day-to-day operation of the pilot, the with a monitoring and evaluation plan to assess regulator and regulated entities maintained its application and performance. Government- ongoing dialogue relating to the implementation affiliated industry associations play an important process. Policymakers from SEMARNAT note role in implementing the strategy, acting as the value of the exchanges as an evaluation mediators between regulated entities and the mechanism for improving the system. For government. example, they described recognizing the importance of specifying and incorporating Ongoing decarbonization efforts despite specific processes and procedures in the political turbulence implementing rules to generate trust and certainty for regulated entities and reduce the risk of legal The administration of President Andrés Manuel challenges to regulatory decisions not described López Obrador (2018-2024) is perceived to have in the original policy. not proactively prioritized ETS, with observers seeing ETS efforts as having largely stalled130.131 Communication, capacity building, and The proliferation of subnational “green” taxes, stakeholder engagement strategy also culminated in a successful challenge court challenge that pointed to unconstitutionality In parallel with its stakeholder consultation, the with aspects of their implementation.132 This Mexican government commissioned the design introduced additional policy uncertainty that of a communication, engagement, and capacity- could affect carbon pricing stringency, and building strategy for its ETS. underscored the need for greater coordination on environmental taxes between the federal Tailored specifically for the Mexican context, the and state government.133 Amidst such concerns, strategy identified clusters of stakeholders in firms continue to invest in emissions monitoring support or opposition to ETS. This stakeholder and reduction technologies, likely reflecting the mapping was a crucial step for preparing targeted success of SEMNARAT’s strong engagement messages and strategically positioning the ETS effort. President-elect Claudia Scheinbaum has within the broader landscape. The strategy reiterated her commitment to accelerating the also produced a proactive risk management renewable energy transition, but there remains plan for addressing a wide range of threats, a lack of clarity on the role of carbon pricing and including inconsistent messaging from other ETS within this transition as the pilot program’s parts of government, institutional instability, status is unclear and a full-fledged ETS has not poor performance, lack of periodic information been implemented yet.134 for key actors, and politicization of the ETS by organized opposition. The final component of Contents Executive Summary Chapter 1 2 3 4 5 6 86 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Keeping stakeholders informed The third goal of a carbon pricing strategy is These communication channels can also work in to keep stakeholders informed of the policy’s the reverse direction, from the regulated entity performance and plans for its development over to the regulator. Collecting feedback on the time. Regulators in several jurisdictions such policy’s performance and practical suggestions as California and Québec regularly disseminate for improvement is critical for empowering implementation results, such as compliance regulators to make evidence-based adjustments rates, collected revenues, and the use of those to carbon pricing rules. A representative of an revenues. Such transparency can discourage international NGO highlighted this aspect by corruption and mismanagement and create describing how China has established multiple virtuous cycles in which high rates of compliance feedback mechanisms to promote responsive and effective use of carbon pricing revenues make regulation, including provisions that ensure a firms more motivated to comply and make similar chain of communication from regulated entities to investments in emissions reductions. Of course, if provincial authorities to the central government the policy is performing poorly, transparency may (see Section 5.2 for further discussion of contribute to negative cycles of low compliance, strategies for updating carbon pricing policies). revenues, and investment. Beyond regulated entities, efforts to communicate Regulators often need to adjust carbon with the public are important for sustaining pricing rules, either following a planned set support for carbon pricing throughout of phased stages or on an ad-hoc basis (e.g., implementation. For example, communication in response to unanticipated events). By campaigns that highlight the use of carbon establishing regular channels of communication, pricing revenues for specific environmental regulators can disseminate new obligations causes or to address the policy’s regressivity can and other important information to regulated help raise awareness of the policy and generate entities and other stakeholders. For example, support. Government communication around the Chilean government has intentionally carbon pricing success stories (e.g., firms that developed communication ties with specialized make substantial emissions reductions) can spokespersons for different stakeholder groups, raise broader awareness and support for carbon such as indigenous communities, youth, the pricing.135 private sector, and academia. The speed and clarity afforded by these procedures are especially important for maintaining trust and minimizing uncertainty when regulators deviate from previously announced plans. Achieving successful implementation of carbon pricing 87 4.3 Overcoming barriers to compliance and enforcement After implementation rules have been formulated carbon pricing. This section first explores common and communicated to regulated entities and other obstacles to compliance and enforcement in stakeholders, countries are prepared to start developing countries before describing a set of enforcing compliance with the legal obligations of strategies for overcoming such challenges. 4.3.1 Compliance, monitoring, enforcement, and trust limitations for car- bon pricing Most carbon pricing initiatives in developing of firms to comply with carbon pricing as either countries contend with significant limitations very low or somewhat low. Another 65% view in compliance, monitoring, and enforcement. firms’ trust in government regulators posing at Limitations of trust are common as well. Carbon least some barrier to implementation. While pricing experts believe both governments and the capacity assessment tool included as an firms are generally poorly positioned to enforce attachment to the World Bank’s report on Carbon and comply with carbon pricing (Figure 4.1). Pricing Assessment and Decision-Making offers a Three-quarters of the experts express concern way to make a more comprehensive assessment, that government capacity for monitoring these results indicate the presence of substantial and enforcing carbon pricing is either very or obstacles to implementing ambitious carbon somewhat low. Similarly, 70% judge the capacity pricing in low-capacity countries.136 FIGURE 4.1 Perceived barriers to ambitious carbon pricing relating to firms and regulators Low government capacity for monitoring A lot -9% -16% 30% 45% Some Low government capacity for enforcement A little -9% -18% 30% 44% Not at all Low firm capacity for compliance -11% -18% 40% 31% Low firm trust in government regulators -18% -27% 36% 19% 100% 75% 50% 25% 0% 25% 50% 75% 100% Disagree Agree Question: “To what extent have the following posed a barrier to ambitious carbon pricing in your country?” (96 responses).“ Source: Original expert survey Contents Executive Summary Chapter 1 2 3 4 5 6 88 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries While the capacity challenges for carbon taxes more likely to identify “government monitoring” are meaningful, as the World Bank’s Carbon and “enforcement capacity”, respectively, as a Tax Guide details,137 pursuing an ETS may place major concern than experts in countries pursuing a particularly severe strain on capacity (Figure a carbon tax (82% vs. 67% and 80% vs. 67%). 4.2). ETSs require a more elaborate institutional Similarly, 72% of carbon pricing experts indicated structure (e.g., allowance registry and trading an ETS is likely to cause firms to have compliance platform) compared to an upstream carbon tax, challenges compared with 58% for a carbon tax. an issue the World Bank report Governance of Emissions Trading lays out.138 As a result, carbon pricing experts in countries pursuing an ETS were FIGURE 4.2 Perceived barriers relating to firms and regulators, by carbon pricing instrument A lot Low government capacity -2% -15% 31% 52% Some for monitoring A little -14% -18% 28% 40% Not at all lnstrument Low government capacity -4% -15% 25% 56% for enforcement Carbon Tax -14% -18% 28% 40% ETS Low firm capacity -6% -20% 45% 29% for compliance -16% -26% 34% 24% Low firm trust in -12% -34% 38% 15% government regulators -22% -27% 33% 18% 100% 75% 50% 25% 0% 25% 50% 75% 100% Disagree Agree Question: “To what extent have the following posed a barrier to ambitious carbon pricing in your country?” (50 responses from respondents in countries with carbon taxes adopted or implemented, 49 responses from respondents in countries with ETSs adopted or implemented).“ Source: Original expert survey Achieving successful implementation of carbon pricing 89 4.3.2 Strategies for overcoming compliance and monitoring limitations Simplified MRV The most immediate response to capacity Simplified MRV measures may require regulators limitations is to design rules that account for them. to rely on trust to a greater extent than These include simplified MRV approaches that use they otherwise would. In Chile, for example, default values rather than actual emissions data, policymakers initially intended to have regulators clear and easy-to-use templates and forms, and use third-party verification, but legal barriers built-in plausibility checks for data submission required the use of a simpler verification strategy; (Table 4.2). Such measures help facilitate the regulator verifies the data itself rather than compliance among regulated entities that are still using third-party verification. While this strategy learning to navigate the policy and can gradually carries a higher chance of false reporting, the be replaced by more elaborate provisions. To process is simpler and, if regulators have come to ensure that rules are feasible, regulated entities trust that regulated entities will comply with the can be involved in rulemaking processes such as rules, the risk of cheating may remain relatively rule design, the development of methodologies, low. and setting default values. TABLE 4.2 Options for simplified MRV to ease the initial compliance burden Option Description Default factors are an estimate of emissions rather than directly measured emissions. This simplifies the procedure and saves costs for regulated Default values rather than entities. The regulator generally establishes default factors for the covered actual emissions data emission sources. The downside of default values is that they do not incentivize investment in cleaner technology and processes. Clear and easy-to-use Numerous ETSs provide templates that can easily be downloaded and templates and forms completed. These facilitate the process of reporting for regulated entities. To verify reported emissions, regulators can cross-check them with activity Built-in plausibility checks data, such as amounts of steel produced and energy usage patterns. in data submission Third-party verification may be more accurate and reliable but also requires accredited verifiers and verification standards. Contents Executive Summary Chapter 1 2 3 4 5 6 90 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Capacity-building the ministry’s capacity for engaging with industry A longer-term strategy is to build capacity to groups and expertise in managing markets and overcome capacity limitations. This involves enforcing penalties for noncompliance. These establishing sound infrastructure for carbon capacity-building efforts were supported by pricing and targeted guidance for specific types initiatives like the EU-China ETS Dialogue, which of regulated entities on how to meet their organized training sessions for firms to improve obligations. their understanding and MRV responsibilities.139 China’s experience provides an instructive Beyond experience and technical expertise, example. The National Development and Reform governments need to be appropriately staffed Commission had responsibility for developing to provide timely support to regulated entities carbon pricing until 2018, when it became the through helpdesks, guidelines, and up-to-date responsibility of the Ministry of Ecology and websites. Since this may be challenging to organize Environment. However, the latter lacked the in resource-limited contexts, policymakers should experience and technical capacity to coordinate allocate resources ahead of time for ongoing carbon pricing stakeholders effectively, as it had support services. Policy design can also anticipate been responsible primarily for implementing capacity limitations by, for example, designating only non-market pollution control instruments an upstream point of compliance, which tends to up to this point. To address this capacity gap, be more straightforward to administer.140 China invested substantial resources in building 4.3.3 Strategies for overcoming enforcement limitations Considering the capacity limitations of regulated of Mexico’s experience is provided in Case Study entities, regulators may opt for a facilitative, 4.2. rather than punitive, approach to compliance and enforcement in the early phases of More punitive enforcement tactics include implementation. This can avoid alienating naming-and-shaming, make-good obligations, regulated entities and build a collaborative culture monetary fines, and criminal charges. Naming- of compliance. However, facilitative enforcement and-shaming involves making noncompliance risks free-riding and subsequent reputational information publicly available (e.g., through press damage if firms start to perceive enforcement as releases) on the premise that firms will shrink from lax. the resulting reputational damage. Make-good obligations give regulated entities an extended The Mexican ETS pilot illustrates a gradual deadline to comply. Fines are a fixed amount approach to enforcement. During the pilot to be paid per ton of emissions. For example, phase, entities did not face monetary penalties South Africa’s 2019 carbon tax includes penalties for noncompliance. Instead, they would not be for the failure to register for the carbon tax or able to bank unused allowances for the next submit carbon tax returns on time of up to 10,000 pilot compliance cycle. They would also lose free Rand (about $670) per day of noncompliance.141 allowances during the first compliance cycle of Criminal charges are also legally available and, the system’s operational phase. Through this while rare, some governments have brought process, regulated entities were able to become charges for reporting false information and selling fluent in their roles and responsibilities without fraudulent carbon credits. Examples include cases fear of severe punishment for failing to comply in Canada and the United States.142 with an unfamiliar regulation. A further discussion Achieving successful implementation of carbon pricing 91 The blurring of interests and responsibilities can Reducing the coverage by initially increasing complicate enforcement. In several countries, the threshold for entities that must comply with state-owned enterprises are some of the largest certain requirements can be another option to emitters. This creates a situation in which the gradually build up capacity and phase in the actor who fines and gets fined is de facto the implementation of a carbon pricing instrument. same. In these contexts, non-monetary tactics For example, the Vietnamese ETS plans currently may be more effective for eliciting compliance. include only the waste and few industrial emitters China’s gradual and adaptive approach to (see Case Study 3.1). This approach is in line with regulating state-owned enterprises within its ETSs a gradual expansion of scope and ambition as is particularly instructive (Case Study 3.4) and described in Chapter 3. will be especially so as the ETS is rolled out to the manufacturing and industrial sectors. Contents Executive Summary Chapter 1 2 3 4 5 6 5. 92 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Consolidating and strengthening carbon pricing Consolidating and strengthening carbon pricing 93 Key Messages • Support for carbon pricing needs to entrench and expand over time to achieve meaningful emissions reductions. • Governments can attempt to maximize equity and minimize opposition to carbon pricing by adjusting the balance of costs across groups through a combination of flexibility mechanisms and the distribution of visible benefits. • Policymakers seeking to build capacity, transparency, and trust can gradually raise ambition over time through either separate or dynamically linked phases. • Requirements for governments to reevaluate prices at regular intervals are increasingly popular as a strategy for ensuring carbon pricing policies adapt to changing conditions without locking in specific increases or tying them to specific goals. • The absence of strong carbon pricing coalitions generally implies a preference to limit discretion in updating the policy, and instead tending to prefer automatic stringency mechanisms. To realize the full potential of carbon pricing, supporters must contend with ongoing efforts to weaken or repeal it, especially as the policy’s ambition increases. This chapter assesses how carbon pricing, once adopted, can be consolidated and strengthened. It first describes strategies for creating an enduring carbon pricing coalition before turning to plans for raising the ambition of carbon pricing over time. Contents Executive Summary Chapter 1 2 3 4 5 6 94 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 5.1 Consolidating the carbon pricing coalition Once a carbon price is enacted, a variety of There is a wide range of strategies for threats that test the strength and cohesion of its consolidating carbon pricing, including continuing support coalition typically emerge. Stagnation, to revise, adapt, and expand the policy itself; retrenchment, and the eventual reversal of carbon receiving reliable financial support and capacity pricing can result. Table 5.1 provides examples of building; persistently engaging the public and these challenges to the consolidation of carbon policymakers to communicate the benefits of pricing. carbon pricing; and adopting other climate, fiscal, and social policies that complement and rely on To maintain momentum, supporters must carbon pricing (see Box 5.1 for expert views on the consolidate the coalition for carbon pricing. importance of these and other strategies). These Whereas coalition-building, negotiation, and strategies can help prepare for future attempts implementation of carbon pricing implicate to weaken or dismantle prices, although they can only current interests, consolidation requires never prevent them completely. advocates to consider how these interests will change in the future. The political economy of The most effective strategies redistribute the costs carbon pricing, like that of any policy, is not static. and benefits of carbon pricing across economic, Policy feedback cycles emerge gradually over time, social, and political groups. These aim to strike a as choices made at the outset eventually reshape balance between retaining support in the short the landscape of relevant interests. Ideally, these term and avoiding inequities and favoritism that decisions expand the coalition of supporters may risk the coalition’s cohesion over the long over time, rather than creating or strengthening term. The following discussion examines two such opponents. strategies in greater detail. Consolidating and strengthening carbon pricing 95 TABLE 5.1 Examples of emerging threats to the consolidation of carbon pricing Threat Description Illustration Policy design choices empower Ambition opponents to resist price increases, Legislative approval is required to increase handcuffs limiting future ambition price levels (e.g., Chile’s 2014 carbon tax) Stakeholders belatedly discover an incentive to resist once the initial “fog Fossil fuel exporters initially support, The “fog of of enactment” lifts and costs become then push to abolish carbon pricing (e.g., enactment” real143 Kazakhstan, see Case Study 5.2) Adverse issue- Opponents link the policy to other, Carbon pricing framed as “climate elitism” linkage more contentious social issues144 (e.g., France’s 2018 Yellow Vests protests145) Opposition to the policy becomes Carbon pricing is targeted as part of partisan Adverse polarized, forming part of a partisan messaging (e.g., Australia’s 2014 carbon tax politicization political platform repeal) Unrelated short-term crises (social, Global inflation delays plan for implementing Crisis spillover political, economic, or environmental) carbon pricing (e.g., Indonesia’s carbon tax146) fracture support for long-term policy Flexibility mechanisms One strategy to promote the consolidation of carbon pricing is to simply reduce the policy’s costs for key stakeholders. Flexibility mechanisms like offset credits or free permits are useful for accommodating regulated entities and reducing the overall costs of decarbonization. In the South African system, for example, firms can use carbon credits to offset 5-10% of their emissions (Case Study 5.1). Flexibility mechanisms can be included in the policy’s initial design or added subsequently. For instance, Chile created an offset mechanism for its carbon tax six years after its initial passage (Case Study 4.1). Contents Executive Summary Chapter 1 2 3 4 5 6 96 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries CASE STUDY 5.1 South Africa’s delays and resistance to attempts to raise ambition South Africa published its National Climate The tax was initially to be priced in U.S. dollars, Change Response Policy in 2011 and subsequently but, in response to domestic firms’ concerns released a carbon pricing proposal and began about exchange rate fluctuation, the tax was seeking comment and support. Discussion and eventually set in rand, at 120 Rand (approximately consultation would take the next eight years. $8) per ton to start. Reflecting policymakers’ The Department of Environmental Affairs desire to address fugitive emissions, reduce trade backed the proposal immediately, but many impacts, and encourage offset credit projects, other departments were initially opposed: Trade they created a wide array of exemptions and and Industry was concerned about industrial offset crediting opportunities.147 As a result, firms energy prices already being high; Transport can avoid between 60% and 95% of their tax was concerned about impacts on fuel costs, and burden through free emissions allocations and Employment and Labor was concerned about offset credits. Firms will continue to enjoy large the impact on coal jobs, salient concerns given exemptions until the policy’s second phase, and that more than 90% of South Africa’s electricity some key sectors—agriculture, forestry, waste, is generated from coal and up to 200,000 people and the state-owned utility Eskom—remain were employed in coal mines, coal power plants, outside the tax’s scope. and coal transport. Resistance from energy- intense industries, combined with the lack In February 2022, a new Climate Change Bill and of ministerial enthusiasm and a high level of budget speech reset plans for the carbon tax.148 ministerial turnover, undermined momentum. These plans announced an intention to gradually raise the tax rate until it reaches $30 by 2030 and To ease these concerns, the Department of more than $120 after 2050. But the start of the Environmental Affairs led an extensive process of carbon tax’s second phase was also delayed from stakeholder consultation, which helped avoid the 2023 until 2025, raising significant concerns about misperception that the tax’s primary aim would be the future. Changes in ministerial enthusiasm and to simply raise revenue. Carbon pricing boosters exposure to domestic inflation may mean that the also worked to emphasize the co-benefits of the tax will not provide meaningful incentive for firms policy. For example, testimony by civil society and households to decarbonize in the foreseeable organizations about local air pollution impacts future, and the planned rate increases may proved pivotal for policymakers who might have merely serve as bargaining chips to be cashed in otherwise been less motivated to address a purely for further short-term political gains. global issue. When Tito Mboweni, became Minister of Finance in 2018, the policy regained its political momentum. The 2019 announcement of the EU’s plans to pursue its CBAM policy provided a new rationale for departments like Trade and Industry to support carbon pricing. This became reality in June 2019. Consolidating and strengthening carbon pricing 97 If flexibility is too great and/or in place for too long, Distributing visible benefits it will eliminate the incentive for firms to reduce emissions and maintain their interest in opposing A more sustainable strategy is to create benefits stringent pricing in the future. As a result, that change group interests over the long term. flexibility often only postpones opposition until The more that firms and industries benefit from ambition starts to rise. This occurred in Colombia, increasing carbon prices, the stronger and more where firms were at one stage able to avoid 100% unified the coalition will be in supporting and of the carbon tax through offset credits (see Case raising the policy's stringency over time. To Study 3.2). Similarly, state energy subsidies and accelerate this shift, policymakers can subsidize long-term power purchasing agreements mean the development and implementation of low- generators in Indonesia do not bear meaningful carbon technology. In the United Kingdom, costs from the carbon tax (see Case Study 2.2). the energy sector changed from opponents to When eliminating exemptions, it is crucial that supporters of carbon pricing after electricity regulators target raising both the average and generators had invested in renewables, marginal carbon price paid. The former can technologies whose value depends in part on the provide valuable insights for long-term planning, carbon price itself.149 Developing countries also policy design, and overall progress assessment, often opt to allocate carbon pricing revenues while the latter is useful for operational decisions to fund low-carbon technology, although other and identifying which actions will have the most countries—many in Latin America—have legal or significant impact on reducing emissions in the constitutional restrictions on using tax revenue in short-term. this way and must look for other sources, such as repurposed fossil fuel subsidies. It may also be important to create public benefits that are visible and explicitly linked to the carbon pricing policy. These typically take the form of compensation, but different communities may prefer different forms of compensation. Coal communities in India and the United States, for instance, want spending to be focused on replacing lost coal jobs, whereas the general public prefers more widely spread compensation and investment.150 Carbon pricing experts, as well as public opinion surveys in middle-income countries, suggest that, in countries with less public trust in government, people may see using carbon pricing revenues for investment as more credible than broad compensation (Box 3.1).151 Contents Executive Summary Chapter 1 2 3 4 5 6 98 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 5.2 Planning for change over time There are three approaches for structuring commitment to higher prices and places more updates to a carbon pricing scheme.152 The first pressure on firms to plan accordingly. Moreover, is a discretionary approach where governments it provides entities with regulatory certainty, simply update as needed. This offers flexibility facilitating investment decisions in low-carbon but limits predictability. A discretionary approach alternatives. However, automatic mechanisms may also make it difficult to revise or strengthen come at the cost of flexibility in the event of the policy, as it can be hard to re-capture the unexpected changes in conditions. attention needed to address technical issues that emerge during a carbon pricing policy’s operation. Finally, in a structured discretionary approach, Stakeholders that rely on carbon-intensive where changes are not fixed in advance but are production processes and products, especially subject to reevaluation on a regular schedule, firms that struggle to pass costs through to their usually by a delegated body. The UK’s independent customers, are likely to oppose proposals to Climate Change Commission, for example, raise the stringency of carbon pricing. Moreover, is empowered to make recommendations there is no guarantee that government leaders every five years based on progress with will continue to prioritize carbon pricing after emissions reductions. While the commission’s its adoption, both due to government turnover recommendations do not bind the government, and competing priorities. Opponents who failed they provide regular windows of opportunity to block the passage of a policy may wait until to update policy and a clearer signal when the political attention has shifted, and then work government is falling behind. behind the scenes to weaken it after passage. All these challenges make it important to anticipate The structured discretionary approach is an and plan carefully for change. increasingly popular strategy, as it avoids explicitly defining stricter standards (which could An automatic approach is either based on a face stronger opposition) while still ensuring fixed schedule or tied to certain triggers, such as that discussions about increasing stringency meeting emissions goals (as is done in Switzerland) periodically return to the policy agenda. Similarly, or economic conditions (as in Colombia, which while not a carbon tax, Vietnam’s Environmental indexes prices to inflation). Tying the rules to non- Protection Tax provides an instructive example emissions factors can address concerns around of a streamlined process in which a standing growth, but they can also undermine emissions committee in the legislature is empowered to impacts. Automatic changes provide the carbon adjust the tax within specified ranges, making it pricing trajectory with the most predictability and relatively easy to update. protection from political turbulence, though such protection can never be complete. By reducing the risk that future administrations weaken carbon pricing, this approach communicates a credible Consolidating and strengthening carbon pricing 99 Phased roll-out Many countries break their pricing systems challenges, even as the empirical evidence points into distinct phases that expand the policy to minimal impacts of carbon pricing on firm sequentially. The purpose of a pilot phase is to relocation decisions.154 Delays in raising ambition help build capacity for the regulator and trust undermines the urgency of the price signal, and familiarity among regulated entities. China reducing pressure to invest in mitigation and was able to experiment with different designs leading firms to further lock themselves into fossil by conducting multiple parallel pilots in different fuels and stranded assets. cities and provinces (Case Study 3.4). During Mexico’s ETS pilot, the regulator maintained an ongoing list of processes and procedures to be improved, which helped to build a consensus about how the full policy should be implemented. Developed countries also frequently employ a phased approach. The weakness of the phased structure is that transitioning away from minimal or nonexistent pricing in an early phase to a policy with meaningful stringency in a subsequent phase is often difficult. In the case of the EU, high-emitting firms were initially more likely than lower-emitting firms to support the ETS in its early, lenient phase, but they eventually became more likely to express opposition to the policy as it entered a more stringent phase.153 In Kazakhstan, plans to move beyond the second phase of its pricing program to the more stringent third phase elicited objections from regulated entities. These concerns caused the program to halt altogether for two years before it resumed with weaker stringency in the third phase than in the second (Case Study 5.2). Similarly, energy-intensive firms in India, Vietnam, and Bangladesh have threatened to relocate to other developing countries if their governments change from a voluntary to a mandatory carbon price. This presents additional political economy Contents Executive Summary Chapter 1 2 3 4 5 6 100 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries CASE STUDY 5.2 Kazakhstan’s carbon pricing policy suspended and amended following difficult implementation Kazakhstan became one of the first developing The ETS was reactivated in 2018 with greater countries to enact a carbon price when it passed industry involvement, but disconnects remain. ETS legislation in 2011. Covering about half of the Permitting was reformed to allow facilities to country’s emissions, the program was proposed pick between grandfathering based on historical and adopted quickly, attracting some initial emissions or benchmarking sector-specific support from fossil fuel exporters. Private sector factors.158 However, regulators have not explained involvement and consultation had been minimal, how they provide free allocations. Industry had however, and a significant backlash from the no way to anticipate that after several years of private sector ensued. large free allocations, there would be none in 2021. Similarly, one-fifth of the reserve for the The Kazakh ETS began its first phase in 2013 as period 2022–2025 must be set aside for auctions, a quasi-pilot, with free permit allocations based but, as of 2023, the Kazakh ETS regulator has not on historical emissions, no commitment to explained how the auction will be conducted. With reductions, and penalties for nonreporting but patchy communications, firms seem to be having not noncompliance. In 2014, the program entered difficulty in planning for future carbon price its second phase, requiring firms to make gradual developments and making investment decisions. reductions in their emissions and a small amount of trading at low prices (around US$2 per ton) The pace of emissions reductions under the ETS began.155 However, market activity quickly proved has slowed to a halt, with the planned 2025 cap set to be limited, in large part because the initial above its 2015 level. Additional pressure mounted permit allocations were calculated during years on policymakers when the price of liquified of economic downturn. Stakeholders reported petroleum gas doubled in early 2022, resulting in that firms found it challenging to acquire enough large protests.159 The price of traded permits in the permits to comply with their obligations. Kazakh ETS remains very low, around 500 tenge or $1, making trading a much cheaper option than Under pressure from industry, the government emissions reductions. This limits the incentive soon rolled back requirements and extended for change. The government has announced that the pilot phase by one year, but criticism of it intends for prices to rise from $1.1 in 2021 to the ETS escalated. Industry groups claimed $50.8 per ton in 2026-2030,160 but the potential for that, in addition to requiring unrealistic industry and public resistance makes it unclear emissions reductions, the program was based whether this claim is credible. on a “weak” “legal foundation.”156 Within the Kazakh government, there was also substantial disagreement over the order in which regions or sectors would be obliged to participate. Meanwhile, both international oil prices and the value of the tenge fell. In 2016, Kazakhstan suspended the ETS entirely for two years.157 Consolidating and strengthening carbon pricing 101 Dynamic linkage The relationship between coalition consolidation and approaches to raising One way to ease the transition from one phase to ambition another is through dynamic linkages that connect firm performance in one phase to the next.161 Policymakers There is a two-way relationship between plans for can allow emissions permits to persist across phases increasing stringency and the consolidation of the or use a dynamic asset price that accounts for rates of support coalition. If support for carbon pricing is technological change, carbon budgets, or inflation. As relatively consolidated, it may be desirable to use a described in Case Study 4.2, the Mexican government more flexible, ad-hoc approach to raising ambition. started its ETS with a pilot in which there were no In contrast, if the carbon pricing coalition is weak and monetary penalties for noncompliance, but compliant risks becoming fragmented in the future, a less flexible firms received additional credits for the post-pilot price trajectory may be more likely to succeed. period. In Indonesia, firms can receive carbon credits based on renewable energy investments through the Similarly, it may make sense to chart a more gradual Joint Crediting Mechanism, which they can bank for or differentiated trajectory if the risk of resistance use in future periods. is higher.37 A gradual trajectory can be achieved by incremental rises in the carbon price, phasing out of offsets, or expansion of industries covered. Such measures may lessen the chances of repeating the experiences of Indonesia in the 1990s, Mauritania in the 2000s, Nigeria in the early 2010s, France in the late 2010s and more recently in 2023 Canada, when rapid energy price increases and general inflation led to public backlash and scaling back of policy ambition. A differentiated trajectory can involve structuring price increases to affect products used by wealthier consumers first, although this may be difficult in countries where the poor make up a large share of the population, as is the case for many developing countries.37 Contents Executive Summary Chapter 1 2 3 4 5 6 102 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries BOX 5.1 What strategies do carbon pricing experts favor for raising ambition? Broad emphasis on the importance of economic or political opportunity continuing the technical development of carbon pricing policies • In the long term, experts emphasize cultivating a stronger enabling environment for pursuing • The technical work of developing additional carbon pricing, leveraging complementary policy instruments was the most preferred policies, international action, and education strategy for promoting ambitious carbon pricing in both the short- and long-term More cohesive vision for near-term strategies than long-term strategies • Carbon pricing can only move forward if its frameworks and rules are ready to be rolled • Experts identify only seven primary approaches out in the short-term, whereas 11 long-term approaches attracted substantial support Distinct approaches for short-term and long-term strategy • This difference may reflect experts’ greater uncertainty about the long-term future of the • In the near term, experts value financial and political economy of carbon pricing technical support specific to carbon pricing and look to take advantage of windows of Common factors identified by experts for promoting ambitious carbon pricing in the short term Strategy Frequency Example Policy 28% “Creation of a robust and internationally acceptable ETS” development Financial support 22% “Access to finance is of utmost importance” Change in 20% “A federal government with a climate agenda” government Technical support 19% “Support from development partners” Education 16% “Climate education for policymakers” Lobbying 15% “Lobbying, media, and [civil society organization] pressure” Technical 11% “More effective MRV system” development Other factors included opportunities for peer learning (6%), the development of complementary policies (5%), improved enforcement (4%), international carbon markets (3%), regulatory stability (3%), external conditionality (3%), international action (2%), policy communication (2%), pilots (2%), and the end of a crisis (2%). Percentages do not add up to 100% due to multiple answers in open response. Question: “In a few words, what would most help carbon pricing in your country in the short term?” (93 responses). Source: Original expert survey Consolidating and strengthening carbon pricing 103 Common factors identified by experts for promoting ambitious carbon pricing in the long term Strategy Frequency Example Policy 31% “Designing tailor-made carbon pricing instruments mix for the country” development Complementary 22% “A Green Deal” policies International 13% “Trade (CBAM)” action “Awareness of local elected officials in the fight against global Education 13% warming” Financial support 12% “Government to government incentives” “A comprehensive and integrated approach that involves the Coalition-building 8% government, private sector, and civil society in developing and implementing carbon pricing policies” Institutional “Establish a strong institutional architecture that does not depend on 8% development the political cycle” Lobbying 8% “A push from the domestic and international finance sectors” Strategic policy “Revenues obtained from carbon pricing used in mitigation actions/ 8% design technologies and…public welfare” Technical 8% “Introducing an absolute emission cap for the market” development “A new CPLC [Carbon Pricing Leadership Coalition] including UN and Technical support 8% IMF [International Monetary Fund]” Other factors included change in government (7%), stronger monitoring and enforcement (7%), technical capacity-building (6%), policy communication (3%), disaster response (3%), and learning (2%). Percentages do not add up to 100% due to multiple answers in open response. Question: “What would most help carbon pricing in your country in the long term?” (89 responses). Source: Original expert survey Contents Executive Summary Chapter 1 2 3 4 5 6 6. 104 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Conclusion: The future of the political economy of carbon pricing Conclusion: The future of the political economy of carbon pricing 105 Carbon pricing has gained momentum Developing countries have economic in developing countries and most and political incentives to act swiftly experts expect carbon pricing to and decisively to mitigate the impacts continue to both spread and become of climate change. As the political more ambitious (Figure A.1 and Figure economy challenges of carbon pricing A.2). Although many threats to carbon become easier to navigate (Box 6.1), pricing remain—including adverse more policymakers in developing politicization, uncertain political countries are pursuing carbon pricing. outcomes, and spillovers from social While few developing countries have disruptions, wars, and disasters— the implemented stringent carbon prices supporters of carbon pricing have at this point, initially modest carbon developed a variety of strategies for pricing policies can complement and, promoting, negotiating, implementing, in time, replace more feasible, if less and consolidating carbon pricing. efficient climate policies. Economic theory suggests that carbon As this report demonstrates, the pricing is the single most cost-effective political economy of carbon pricing way to catalyze the economic transition requires many compromises, to a carbon-neutral global economy.162 exceptions, and accommodations—a However, political economy dynamics balancing act of sorts. Nevertheless, can make it difficult to put a price on when used in conjunction with a carbon emissions. These dynamics are broader portfolio of climate policies especially challenging in developing and commitments, carbon pricing countries, where factors like quickly can be a flexible, powerful, and rising emissions trajectories, relatively politically feasible tool for accelerating weak support for climate mitigation, decarbonization. and capacity constraints combine to pose a formidable obstacle to ambitious carbon pricing. This report has highlighted a wide range of carbon pricing experiences, especially those in developing countries to improve efforts to advance carbon pricing worldwide. Contents Executive Summary Chapter 1 2 3 4 5 6 106 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries BOX 6.1 Five reasons carbon pricing is gaining political momentum in developing countries Stakeholder learning about the technical details and political 1. economy consequences of carbon pricing It takes time for policymakers to become comfortable with carbon pricing, especially for relatively complex ETSs. International technical support, pilots, and other low- stakes opportunities have helped regulators and regulated entities become familiar with the mechanics of carbon pricing. Policymakers have also been able to observe and learn from the carbon pricing experiences of their peers abroad.163 Shifting rationales for climate action Policymakers increasingly see climate action as an opportunity for growth, rather than 2. only a moral responsibility. The 2015 Paris Climate Agreement marked a particularly important turning point in the shift from minimizing the costs of climate policy to maximizing the gains it offers.164 This discourse motivates carbon pricing in terms of accelerating the development of low-carbon technology and increasing the fiscal resources at policymakers’ disposal. Conclusion: The future of the political economy of carbon pricing 107 Environmental priorities, also among multinational corporations and 3. international investors National policy to reduce local pollution will continue to be a key driving force for adopting carbon pricing in many developing countries. But corporate environmental commitments are also spreading across the private sector,165 especially among international investors and multinational corporations. While only some of these commitments are genuine, some firms have played a role in generating pressure for climate action in countries where they operate. Adoption of complementary environmental policies 4. A wide range of complementary environmental policies—traditional pollution control, low-carbon subsidies, reductions in fossil fuel subsidies, increases in indirect forms of carbon pricing, and decarbonization targets—have strengthened coalitions for explicit direct carbon pricing while reducing the cost of decarbonization. With increasing access to renewable energy, as well as the expansion of research and development and manufacturing capacity for clean energy technologies, policymakers are increasingly confident that, if they adopt carbon pricing, firms will be able to transition successfully to low-carbon alternatives.166 Policy actions by trading partners 5. When other countries adopt pro-climate trade restrictions, firms—especially large exporting firms—often endorse climate action as a means of maintaining access to international markets. Policies like a carbon border tax offer preferential treatment to countries with carbon pricing, raising the opportunity cost of failing to price carbon. The EU’s CBAM, the first carbon border tax to be adopted, has become a key driver of carbon pricing in developing countries (Box 2.1). With industry groups pushing hard to respond to CBAM before its full implementation in 2026, hopes are high for rapid policy development. In the words of a Chinese NGO representative, of carbon pricing, “Everyone is talking about it.” Contents Executive Summary Chapter 1 2 3 4 5 6 108 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries Appendices APPENDIX A – ADDITIONAL SURVEY RESULTS TABLE A.1 Top perceived barriers to ambitious carbon pricing, selected countries Country Top barriers Brazil Domestic fossil fuel production; concerns about international competitiveness; (N = 4) poor economic conditions Chile Concerns about international competitiveness; 2022-23 energy crisis (N = 7) China 2022-23 energy crisis; COVID-19 pandemic (N = 10) Colombia Greenhouse gas emissions relative to other countries; domestic fossil fuel (N = 7) production; insufficient carbon pricing in other countries India Concerns about international competitiveness; poor economic conditions (N = 4) Indonesia Domestic fossil fuel production; low energy prices; 2022-23 energy crisis (N = 9) Mexico Domestic fossil fuel production; low climate support (N = 16) Pakistan Low public trust in government; 2022-23 energy crisis; COVID-19 pandemic (N = 5) Türkiye Concerns about international competitiveness; greenhouse gas emissions (N = 6) relative to other countries; 2022-23 energy crisis Ukraine Domestic fossil fuel production; low energy prices; poor economic conditions (N = 5) Factors most frequently identified as posing “a lot” or “some” extent of an obstacle to ambitious carbon pricing (Top two; three in case of ties). Source: Original expert survey Appendices 109 FIGURE A.1 Likelihood of implementing carbon pricing by 2025 8% 28% 17% Very likely Somewhat likely Not very likely 47% Not at all likely Question: “Is it likely or unlikely that carbon pricing will be implemented in your country by 2025?” (36 responses). Source: Original expert survey FIGURE A.2 Anticipated ambition of carbon pricing by 2025 4% 31% 65% More ambitious About the same Less ambitious Question: “In 2025, do you expect carbon pricing in your country to be about the same/less ambitious/repealed?” (55 responses). Source: Original expert survey Contents Executive Summary Chapter 1 2 3 4 5 6 110 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries APPENDIX B – METHODOLOGY report upon publication, and an invitation to the Literature review launch event, but no financial compensation. Responses were collected between February 14, A literature review was conducted to identify 2023, and March 24, 2023. relevant publications on the political economy of carbon pricing, with particular focus on developing Of the 345 experts in the sample frame, 185 country contexts. Publications were relevant started the survey (54%) and 107 provided a if they centered on 1) carbon pricing policies, valid response (31%). A valid response was policymaking processes, and related policies defined as participants who completed more and dynamics in developing countries, 2) the than 25% of survey questions, spent longer development and implementation of low-carbon than 10 minutes on the survey (median time to technology in developing countries, 3) strategies completion 32 minutes), and indicated when and approaches to eliciting behavior change asked that their responses were sincere and that through policy design, or 4) interest-based factors they had experience working on carbon pricing affecting the adoption and implementation of in a developing country. Figure B.1 provides carbon pricing. survey respondents’ demographics by position, experience, location, and gender. Figure B.2 lists The first stage of the review compiled practitioner the count of survey respondents by country. publications from relevant units at the World Bank, International Monetary Fund, and OECD, Stakeholder interviews as well as academic journals in political science and behavioral economics. The review was then Stakeholder interviews were conducted to study expanded by examining the reference lists of cases of interest in greater depth, fill knowledge these seed publications, an iterative process that gaps, validate claims in the literature, and provide was continued to saturation. Finally, the literature context and detail to the survey results. The review was complemented by suggestions interviews were conducted primarily as remote, from peer reviewers. In all, the literature review semi-structured one-on-one discussions of identified more than 300 items, of which more approximately one hour in duration, although than 180 were eventually integrated into this other modalities were used on occasion (e.g., practice review. in-person and/or group interviews). The semi- structured interviews relied on an interview guide Expert survey customized according to the interview subject’s context, position, and (where available) survey The population of interest for the survey consisted responses. of individuals with personal experience working to advance or develop carbon pricing in one or Potential interview subjects were identified from more developing countries. The sample frame a combination of survey respondents and the was constructed using the PMI and International authors’ professional contacts, including through Climate Action Partnership stakeholder contact the PMI’s Knowledge Forum. All interview subjects lists, supplemented by the authors’ professional had worked on carbon pricing in developing contacts. A total of 345 carbon pricing experts countries. A total of 88 stakeholders from 23 from more than 37 countries received an countries were invited to participate in an invitation to participate in the survey via Qualtrics. interview, of which 49 completed an interview. The invitation came from the PMI Secretariat and Approximately half of the interview subjects included incentives consisting of the opportunity also participated in the survey. No incentive was to be acknowledged in the report, a copy of the offered for participating in the interviews. Appendices 111 Figure B.1 Survey respondents by position, experience, location, and gender FIGURE B.1 Survey respondents by position, experience, location, and gender Position Years experience 47% Academic & consultant 56% 1-10 years 7% Civil society 13% 11-20 years 30% Government 25% 21-30 years 10% International agency 6% More than 31 years 7% Private sector Location Gender 86% 14% 64% 36% Inside country Outside country Male Female FIGURE B.2 Survey respondents by country Country Number of respondents Mexico 19 China 11 Indonesia 9 Chile 7 Colombia 7 India 7 Pakistan 6 Türkiye 6 Ukraine 6 Brazil 4 Other (18) 25 Contents Executive Summary Chapter 1 2 3 4 5 6 112 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries APPENDIX C – EXPERT SURVEY ACKNOWLEDGMENTS The authors gratefully thank the 107 experts who agreed to participate in our expert survey. Those who wished to be personally acknowledged are: Sevil Acar Azlin Mohd Azmi William Acworth Cristián Mosella Vial Ari W. Adipratomo Marco Murcia Soledad Aguilar Tahanyat Naeem Satti Camilo Alvarez-Espinosa Kapil Narula Jorge Alvarez Lam Nam Nguyen Erika Ginett Amaya Rabe Brian Oronoz Ximena Aristizabal Bengisu Özenç Juan Carlos Arredondo Brun Masiukov Pavlo Ahmet Atıl Aşıcı Saúl Pereyra García Abdelrhani Boucham Eduardo Piquero Jorge Burgos Arredondo Rodrigo Pizarro Kishore Butani Le Quang Dung Marcelo Caffera Shaozhou Qi Lina María Castaño Luján Methmali Rajaguru Darragh Conway Saon Ray Paola Del Rio Villegas Muhammad Ridzwan bin Ali El Hadji Mbaye Diagne German Romero Maosheng Duan Juan Pedro Searle Solar Alejandra Elizondo Ronaldo Seroa da Motta Victor Escalona Fu Sha Muhammad Farooq Liaquat Shaikh Josilene Ticianelli Vannuzini Ferrer Belal Shqarin Dida Gardera Inderjeet Singh Denitza González Quiñonez Edgardo E. Tongson Hugo Gonzalez-Manrique Romero Paloma Vázquez Guido Nicolás Westenenk Md. Harun Or Rashid Wongkot Wongsapai Laura Higuera A. Olga Yukhymchuk Ashwini Hingne Zeng Xuelan Iryna Holovko Da Zhang Olumide Idowu Xiaolu Zhao Agustin Inthamoussu Suriel Islas Martínez Jai Kumar Gaurav Natalie Kushko Sara Larrain Shude Li Hongqiao Liu Amanda Luna Mera Memory Machingambi Francisco Martínez-Conde Eliezer Martins Diniz Oussama Masmoudi Neil McCulloch Mariana Micozzi Kian Mintz-Woo Rangeet Mitra Appendices 113 Endnotes 1 5 For more of a broader consideration of the political econ- Xiaojie Yu, Duminda Kuruppuarachchi, and Sriyalatha omy of climate policies more generally, see World Bank, Kumarasinghe, “Financial Development, FDI, and CO 2 Emis- “The Political Economy of Climate Policies: Taking Climate sions: Does Carbon Pricing Matter?,” Applied Economics, Action in the Face of Politics, Trade-Offs, and Vested Inter- April 19, 2023, 1–16, https://doi.org/10.1080/00036846.2 ests” (Washington, DC: World Bank Group, In Progress). 023.2203460; Wei Shao, Xiaobo Yu, and Ziqi Chen, “Does the Carbon Emission Trading Policy Promote Foreign Direct 2 Investment?: A Quasi-Experiment From China,” Frontiers in For a review, see World Bank Group, Carbon Pricing for Environmental Science 9 (January 17, 2022): 798438, https:// Climate Action (Washington, DC: World Bank, 2021), https:// doi.org/10.3389/fenvs.2021.798438. doi.org/10.1596/36080; and World Bank, “State and Trends of Carbon Pricing 2023,” State and Trends of Carbon Pricing 6 (Washington, DC: World Bank, 2023), 10.1596/978-1-4648- High-Level Commission on Carbon Prices, “Report of the 2006-9. High-Level Commission on Carbon Prices” (Washington, DC: World Bank, 2017), https://www.carbonpricinglead- 3 ership.org/report-of-the-highlevel-commission-on-car- Nils Ohlendorf et al., “Distributional Impacts of Carbon bon-prices; Henri Waisman, “Carbon Prices in National Pricing: A Meta-Analysis,” Environmental and Resource Deep Decarbonization Pathways: Insights from the Deep Economics 78, no. 1 (January 1, 2021): 1–42, https://doi. Decarbonization Pathways Project (DDPP)” (Carbon Pric- org/10.1007/s10640-020-00521-1; Arun Advani et al., “What ing Leadership Coalition, 2017), https://www.carbon- Is the Case for Carbon Taxes in Developing Countries?,” pricingleadership.org/open-for-comments/2017/5/28/ Comment, The IFS (blog), April 11, 2021, https://ifs.org. carbon-prices-in-national-deep-decarbonization-path- uk/publications/15817; Jan C. Steckel et al., “Distributional ways-insights-from-the-deep-decarbonization-path- Impacts of Carbon Pricing in Developing Asia,” Nature Sus- ways-project-ddpp; Ian Parry, “Putting a Price on Pollu- tainability 4, no. 11 (November 2021): 1005–14, https:// tion,” IMF Finance & Development, December 2019, 16–19. doi.org/10.1038/s41893-021-00758-8; Ira Irina Dorband et al., “Poverty and Distributional Effects of Carbon Pricing in 7 Low- and Middle-Income Countries – A Global Comparative Karstan Neuhoff, International Support for Domestic Cli- Analysis,” World Development 115 (2019): 246–57, https:// mate Policies in Developing Countries (London: Routledge, doi.org/10.1016/j.worlddev.2018.11.015. 2009), https://doi.org/10.4324/9781849770101; Parrish Bergquist and Christopher Warshaw, “Does Global Warm- 4 ing Increase Public Concern about Climate Change?,” The Karlygash Kuralbayeva, “Effects of Carbon Taxes in an Journal of Politics 81, no. 2 (April 2019): 686–91, https://doi. Economy with Large Informal Sector and Rural-Urban org/10.1086/701766; Bianca Oehl, “Public Demand and Migration,” OxCarre Research Paper (Oxford, UK: Oxford Climate Change Policy Making in OECD Countries: From Centre for the Analysis of Resource Rich Economies, 2013), Dynamics of the Demand to Policy Responsiveness,” appli- https://ora.ox.ac.uk/objects/uuid:49ecc597-803c-4bb7- cation/pdf (ETH Zurich, 2015), https://doi.org/10.3929/ bdcf-0c587037c3c4; Anil Markandya, Mikel González- ETHZ-A-010432416. Eguino, and Marta Escapa, “From Shadow to Green: Linking Environmental Fiscal Reforms and the Informal Economy,” 8 Energy Economics 40 (December 2013): S108–18, https:// Jeremy Carl and David Fedor, “Tracking Global Carbon Rev- doi.org/10.1016/j.eneco.2013.09.014; Govinda R. Timilsina enues: A Survey of Carbon Taxes versus Cap-and-Trade in et al., “How Can a Carbon Tax Benefit Developing Econo- the Real World” 96 (2016); Antoine Dechezleprêtre et al., mies with Informality? A CGE Analysis for Côte d’Ivoire,” “Fighting Climate Change: International Attitudes toward Climate Policy, June 26, 2023, 1–16, https://doi.org/10.1080/ Climate Policies,” OECD Economics Department Working 14693062.2023.2223530. Papers, 2022, https://doi.org/10.1787/3406f29a-en; Martin Rabbia, “Why Did Argentina and Uruguay Decide to Pursue a Carbon Tax? Fiscal Reforms and Explicit Carbon Prices,” Review of Policy Research n/a, no. n/a (2022), https://doi. org/10.1111/ropr.12517. Contents Executive Summary Chapter 1 2 3 4 5 6 114 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 9 Genovese, and Dustin Tingley, “Creating Climate Coali- IEA, “Global Energy Review: CO2 Emissions in 2021” (Paris: tions: Mass Preferences for Compensating Vulnerability in IEA, 2022), https://www.iea.org/reports/global-energy-re- the World’s Two Largest Democracies,” American Political view-co2-emissions-in-2021-2. Science Review 116, no. 4 (2022): 1165–83, https://doi. org/10.1017/S0003055422000223; Cesar B. Martinez-Alva- 10 rez et al., “Political Leadership Has Limited Impact on Fossil Marlene Kammerer and Chandreyee Namhata, “What Fuel Taxes and Subsidies,” Proceedings of the National Acad- Drives the Adoption of Climate Change Mitigation Policy? emy of Sciences 119, no. 47 (November 22, 2022), https:// A Dynamic Network Approach to Policy Diffusion,” Policy doi.org/10.1073/pnas.2208024119. Sciences 51, no. 4 (December 2018): 477–513, https://doi. org/10.1007/s11077-018-9332-6; Sophie Biesenbender and 14 Jale Tosun, “Domestic Politics and the Diffusion of Interna- Martinez-Alvarez et al., “Political Leadership Has Limited tional Policy Innovations: How Does Accommodation Hap- Impact on Fossil Fuel Taxes and Subsidies.” pen?,” Global Environmental Change 29 (November 2014): 424–33, https://doi.org/10.1016/j.gloenvcha.2014.04.001. 15 Comisión Ciudadana Técnico Parlamentaria para la 11 Política y la Matriz Eléctrica, Chile necesita una gran reforma Examples include: Geoffroy Dolphin, Michael G. Pollitt, energética: propuestas de la Comisión Ciudadana Técnico-Par- and David M. Newbery, “The Political Economy of Carbon lamentaria para la transición hacia un desarrollo eléctrico Pricing: A Panel Analysis,” Oxford Economic Papers 72, no. limpio, seguro, sustentable y justo, Primera edición (Chile: 2 (2019): 472–500, https://doi.org/10.1093/oep/gpz042; Comité Editorial Comisión Ciudadana-Técnico-Parlamenta- World Bank, “The FASTER Principles for Successful Carbon ria para la Política y la Matriz Eléctrica, 2011); Biblioteca del Pricing: An Approach Based on Initial Experience” (Wash- Congreso Nacional de Chile, “Historia de Ley Del Artículo 8° ington, DC: World Bank Group, 2015), http://documents. de La Ley N° 20.780: Impuesto Anual Que Grava Las Emis- worldbank.org/curated/en/901041467995665361/ iones Contaminantes de Fuentes Fijas,” Primer Informe de The-FASTER-principles-for-successful-carbon-pric- Comisión de Hacienda (Biblioteca del Congreso Nacional ing-an-approach-based-on-initial-experience; David Victor de Chile, July 14, 2014). et al., “The Political Economy of Carbon Pricing: Presenta- tions and Discussion,” Presented at Global Harmonized 16 Carbon Pricing: Looking Beyond Paris,” Conference Pro- Federica Genovese, “Sectors, Pollution, and Trade: How ceedings (Yale Center for the Study of Globalization, May Industrial Interests Shape Domestic Positions on Global 27, 2015), https://ycsg.yale.edu/sites/default/files/files/ Climate Agreements,” International Studies Quarterly 63, no. session-5.pdf. 4 (December 1, 2019): 819–36, https://doi.org/10.1093/ isq/sqz062; Amanda Kennard, “The Enemy of My Enemy: 12 When Firms Support Climate Change Regulation,” Interna- Verena Fritz, Kai Kaiser, and Brian Levy, “Problem-Driven tional Organization 74, no. 2 (2020): 187–221, https://doi. Governance and Political Economy Analysis: Good Practice org/10.1017/S0020818320000107. Framework” (Washington, DC: World Bank, 2009), https:// openknowledge.worldbank.org/entities/publication/ 17 e6a721db-d3ab-5a73-a6c2-be6b7ebe431d; Verena Fritz, Jonas Meckling, Thomas Sterner, and Gernot Wagner, Brian Levy, and Rachel Ort, eds., Problem-Driven Political “Policy Sequencing toward Decarbonization,” Nature Economy Analysis: The World Bank’s Experience, Directions in Energy 2, no. 12 (November 13, 2017): 918–22, https:// Development Public Sector Governance (Washington, DC: doi.org/10.1038/s41560-017-0025-8; Matto Mildenberger, World Bank, 2014). Carbon Captured: How Business and Labor Control Climate Policies (Cambridge, MA: The MIT Press, 2020); Jessica F 13 Green, “Does Carbon Pricing Reduce Emissions? A Review Michael M. Bechtel, Federica Genovese, and Kenneth F. of Ex-Post Analyses,” Environmental Research Letters 16, no. Scheve, “Interests, Norms and Support for the Provision 4 (April 1, 2021): 043004, https://doi.org/10.1088/1748- of Global Public Goods: The Case of Climate Co-Opera- 9326/abdae9 tion,” British Journal of Political Science 49, no. 4 (2019): 1333–55, https://doi.org/10.1017/S0007123417000205; 18 Parrish Bergquist, Matto Mildenberger, and Leah C Stokes, Jakob Skovgaard, “Learning about Climate Change: Finance “Combining Climate, Economic, and Social Policy Builds Ministries in International Climate Change Politics,” Global Public Support for Climate Action in the US,” Environmental Environmental Politics 12, no. 4 (November 2012): 1–8, Research Letters, 054019, 15, no. 5 (2020): 1–9, https://doi. https://doi.org/10.1162/GLEP_a_00136. org/10.1088/1748-9326/ab81c1; Nikhar Gaikwad, Federica Endnotes 115 19 28 Jared Cory, Michael Lerner, and Iain Osgood, “Supply Chain Lawrence Carter, “Inside Exxon’s Playbook: How Ameri- Linkages and the Extended Carbon Coalition,” American ca’s Biggest Oil Company Continues to Oppose Action on Journal of Political Science 65, no. 1 (2021): 69–87, https:// Climate Change” (Greenpeace, June 30, 2021), https:// doi.org/10.1111/ajps.12525. unearthed.greenpeace.org/2021/06/30/exxon-cli- mate-change-undercover/; Alex Thomson, “Revealed: Exx- 20 onMobil’s Lobbying War on Climate Change Legislation,” Neuhoff, International Support for Domestic Climate Policies Channel 4 News, June 30, 2021, https://www.channel4. in Developing Countries. com/news/revealed-exxonmobils-lobbying-war-on-cli- mate-change-legislation. 21 Fergus Green and Nicholas Stern, “China’s Changing 29 Economy: Implications for Its Carbon Dioxide Emissions,” David Klenert et al., “Making Carbon Pricing Work for Climate Policy 17, no. 4 (May 19, 2017): 423–42, https://doi. Citizens,” Nature Climate Change 8, no. 8 (2018): 669–77, org/10.1080/14693062.2016.1156515. https://doi.org/10.1038/s41558-018-0201-2; Climate Social Science Network, “The Structure of Obstruction: 22 Understanding Opposition to Climate Change Action in Gaikwad, Genovese, and Tingley, “Creating Climate Coali- the United States,” CSSN Primer (Climate Social Science tions: Mass Preferences for Compensating Vulnerability in Network and Brown University, 2021), https://cssn.org/ the World’s Two Largest Democracies. wp-content/uploads/2021/04/CSSN-Briefing_-Obstruc- tion-2.pdf. 23 Clara Brandi et al., “Do Environmental Provisions in Trade 30 Agreements Make Exports from Developing Countries Jared J. Finnegan, “Institutions, Climate Change, and the Greener?,” World Development 129 (May 1, 2020): 104899, Foundations of Long-Term Policymaking,” Comparative https://doi.org/10.1016/j.worlddev.2020.104899. Political Studies 55, no. 7 (June 1, 2022): 1198–1235, https:// doi.org/10.1177/00104140211047416; Martinez-Alvarez et 24 al., “Political Leadership Has Limited Impact on Fossil Fuel Baran Doda and Luca Taschini, “Carbon Dating: When Taxes and Subsidies.”"plainCitation":"Jared J. Finnegan, Is It Beneficial to Link ETSs?,” Journal of the Association of “Institutions, Climate Change, and the Foundations of Long- Environmental and Resource Economists 4, no. 3 (September Term Policymaking,” Comparative Political Studies 55, no. 7 2017): 701–30, https://doi.org/10.1086/691975; Michael A. (June 1, 2022 Mehling, Gilbert E. Metcalf, and Robert N. Stavins, “Linking Climate Policies to Advance Global Mitigation,” Science 359, 31 no. 6379 (March 2, 2018): 997–98, https://doi.org/10.1126/ Juan Carlos Belausteguigoitia, Vidal Romero, and Alberto science.aar5988. Simpser, “The Political Economy of Carbon Pricing: Lessons from the Mexican Carbon Tax Experience for the Mexican 25 Cap-and-Trade System,” in Towards an Emissions Trading Jonas Meckling et al., “Winning Coalitions for Climate Pol- System in Mexico: Rationale, Design and Connections with icy,” Science 349, no. 6253 (2015): 1170–71, https://doi. the Global Climate Agenda, ed. Simone Lucatello (Springer, org/10.1126/science.aab1336; Jonas M. Nahm, Collabora- Cham, 2022), 133–50, https://doi.org/10.1007/978-3-030- tive Advantage: Forging Green Industries in the New Global 82759-5_7; Yves Steinebach, Xavier Fernández-i-Marín, and Economy (New York: Oxford University Press, 2021), https:// Christian Aschenbrenner, “Who Puts a Price on Carbon, academic.oup.com/book/39911. Why and How? A Global Empirical Analysis of Carbon Pricing Policies,” Climate Policy 21, no. 3 (March 16, 2021): 26 277–89, https://doi.org/10.1080/14693062.2020.1824890. Jeff D. Colgan, Jessica F. Green, and Thomas N. Hale, “Asset Revaluation and the Existential Politics of Climate Change,” 32 International Organisation 75, no. 2 (2021): 586–610, https:// Mildenberger, Carbon Captured: How Business and Labor doi.org/10.1017/S0020818320000296. Control Climate Policies; Jonas Meckling, Carbon Coali- tions: Business, Climate Politics, and the Rise of Emissions 27 Trading (Cambridge, Mass: MIT Press, 2011); Sung Eun Kaija Belfry Munroe, Business in a Changing Climate: Explain- Kim, Johannes Urpelainen, and Joonseok Yang, “Elec- ing Industry Support for Carbon Pricing (Toronto: University tric Utilities and American Climate Policy: Lobbying by of Toronto Press, 2017). Expected Winners and Losers,” Journal of Public Policy Contents Executive Summary Chapter 1 2 3 4 5 6 116 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 36, no. 2 (June 2016): 251–75, https://doi.org/10.1017/ 41 S0143814X15000033. For a review, see Dana R. Fisher and Sohana Nasrin, “Cli- mate Activism and Its Effects,” WIREs Climate Change 12, no. 33 1 (January 2021), https://doi.org/10.1002/wcc.683. Colgan, Green, and Hale, “Asset Revaluation and the Exis- tential Politics of Climate Change.” 42 Stokes and Mildenberger, “The Trouble with Carbon Pric- 34 ing.” Cory, Lerner, and Osgood, “Supply Chain Linkages and the Extended Carbon Coalition.” 43 Michael Lerner and Iain Osgood, “Across the Boards: 35 Explaining Firm Support for Climate Policy,” British Journal Mildenberger, Carbon Captured: How Business and Labor of Political Science, November 16, 2022, 1–24, https://doi. Control Climate Policies. org/10.1017/S0007123422000497. 36 44 Leah C. Stokes and Matto Mildenberger, “The Trouble with Brandi et al., “Do Environmental Provisions in Trade Agree- Carbon Pricing,” Boston Review (blog), 2020, https://www. ments Make Exports from Developing Countries Greener?” bostonreview.net/articles/leah-c-stokes-matto-milden- berger-tk/. 45 Steinebach, Fernández-i-Marín, and Aschenbrenner, “Who 37 Puts a Price on Carbon, Why and How?” David Coady, Ian W. H. Parry, and Baoping Shang, “Energy Price Reform: Lessons for Policymakers,” Review of Envi- 46 ronmental Economics and Policy 12, no. 2 (July 1, 2018): Michael Jakob, “The Political Economy of Carbon Border 197–219, https://doi.org/10.1093/reep/rey004. Adjustment in the EU,” Oxford Review of Economic Policy 39, no. 1 (February 7, 2023): 134–46, https://doi.org/10.1093/ 38 oxrep/grac044. Leah Cardamore Stokes, Short Circuiting Policy: Interest Groups and the Battle over Clean Energy and Climate Policy 47 in the American States, Studies in Postwar American Politi- Kai Schlegelmilch, Jacqueline Cottrell, and Matthias Run- cal Development (New York, NY: Oxford University Press, kel, Environmental Tax Reform in Developing, Emerging and 2020). Transition Economies, vol. 93, Studies / Deutsches Institut Für Entwicklungspolitik (Bonn: Deutsches Institut für 39 Entwicklungspolitik, 2016), https://www.idos-research.de/ Partnership for Market Readiness; Carbon Pricing Leader- uploads/media/Study_93.pdf. ship Coalition. “Guide to Communicating Carbon Pricing.” Washington, DC: World Bank, 2018. http://hdl.handle. 48 net/10986/30921. World Bank, “From the Ground Up: A Decade of Lessons on Carbon Pricing” (Washington, DC: World Bank Group, 2021), 40 http://hdl.handle.net/10986/36021. For evidence from high income countries, see Steffen Kall- bekken, Stephan Kroll, and Todd L. Cherry, “Do You Not 49 like Pigou, or Do You Not Understand Him? Tax Aversion World Bank. and Revenue Recycling in the Lab,” Journal of Environmental Economics and Management 62, no. 1 (July 1, 2011): 53–64, 50 https://doi.org/10.1016/j.jeem.2010.10.006; Paul G. Bain Jakob Skovgaard, Sofía Sacks Ferrari, and Åsa Knaggård, et al., “Promoting Pro-Environmental Action in Climate “Mapping and Clustering the Adoption of Carbon Pricing Change Deniers,” Nature Climate Change 2, no. 8 (August Policies: What Polities Price Carbon and Why?,” Climate 2012): 600–603, https://doi.org/10.1038/nclimate1532; Policy 19, no. 9 (October 21, 2019): 1173–85, https://doi.org Andrea Baranzini and Stefano Carattini, “Effectiveness, /10.1080/14693062.2019.1641460. Earmarking and Labeling: Testing the Acceptability of Car- bon Taxes with Survey Data,” Environmental Economics and Policy Studies 19, no. 1 (January 1, 2017): 197–227, https:// doi.org/10.1007/s10018-016-0144-7. Endnotes 117 51 60 Lara Dahan et al., “Kazakhstan: An Emissions Trading https://www.climatechangenews.com/2023/11/20/slow- Case Study” (Paris, Boston, and Brussels: EDF, CDC Climat start-for-indonesias-much-hyped-carbon-market/ Research, IETA, 2015), https://www.edf.org/sites/default/ files/kazakhstan-case-study-may2015.pdf. 61 https://carbonpricingdashboard.worldbank.org/compli- 52 ance/factsheets?instrument=ETS_ID John W. Kingdon, Agendas, Alternatives, and Public Policy (Boston, MA: Little, Brown and Company, 1984). 62 Natasha Teja, “Indonesia Working on Plan for Delayed 53 Carbon Tax Legislation,” Bloomberg Tax, October 9, 2023, Jared J. Finnegan, “Changing Prices in a Changing Climate: https://news.bloombergtax.com/daily-tax-report-interna- Electoral Competition and Fossil Fuel Taxation,” Compara- tional/indonesia-plans-carbon-tax-legislation-eyes-year- tive Political Studies, November 28, 2022, 001041402211418, end-roll-out. https://doi.org/10.1177/00104140221141853. 63 54 https://www.straitstimes.com/asia/se-asia/indonesia- World Bank, “State and Trends of Carbon Pricing 2023.” launches-carbon-trading-under-push-to-tame-coal; https://www.reuters.com/sustainability/sustainable-fi- 55 nance-reporting/indonesia-begins-trading-carbon-diox- Lucie Cerna, “The Nature of Policy Change and Implemen- ide-emissions-credits-2023-09-26/, accessed May 2024 tation: A Review of Different Theoretical Approaches,” OECD Economics Department Working Papers, 2013; Manuel 64 Linsenmeier, Adil Mohommad, and Gregor Schwerhoff, https://www.straitstimes.com/asia/se-asia/indonesia- “Global Benefits of the International Diffusion of Carbon launches-carbon-trading-under-push-to-tame-coal; Pricing Policies,” Nature Climate Change 13, no. 7 (July 2023): https://www.reuters.com/sustainability/sustainable-fi- 679–84, https://doi.org/10.1038/s41558-023-01710-8. nance-reporting/indonesia-begins-trading-carbon-diox- ide-emissions-credits-2023-09-26/, accessed May 2024 56 Steinebach, Fernández-i-Marín, and Aschenbrenner, “Who 65 Puts a Price on Carbon, Why and How?” Indonesia’s Efforts to Phase Out and Rationalize its Fos- sil-Fuel Subsidies: A self-report on the G-20 peer review 57 of inefficient fossil fuel subsidies that encourage wasteful Brandi et al., “Do Environmental Provisions in Trade Agree- consumption in Indonesia, 2019, https://www.oecd.org/ ments Make Exports from Developing Countries Greener?” fossil-fuels/publication/Indonesia%20G20%20Self-Re- port%20IFFS.pdf 58 See, for example, a statement by 54 African Ministers of 66 Environment committing to support a green COVID-19 This is as reported by the both the IMF and IEA recovery plan (Report of the 8th special session of the African Ministerial Conference on the Environment, 9 67 December 2020, https://wedocs.unep.org/bitstream/ https://www.climatepolicyinitiative.org/blog-indonesia- handle/20.500.11822/34819/K2002848_en.pdf?se- wants-a-carbon-tax-but-with-subsidies/ quence=1&isAllowed=y). 68 59 https://www.climatechangenews.com/2023/11/20/slow- The OECD Green Recovery Database, “The OECD Green start-for-indonesias-much-hyped-carbon-market/ Recovery Database: Examining the Environmental Implications of COVID-19 Recovery Policies” (Paris, 69 France: OECD, April 19, 2021), https://read.oecd-ili- Robert N. Stavins, “The Relative Merits of Carbon Pricing brary.org/view/?ref=1092_1092145-fqx3tx0r1q&ti- Instruments: Taxes versus Trading,” Review of Environmen- tle=The-OECD-Green-Recovery-Database; Jonas M. Nahm, tal Economics and Policy 16, no. 1 (January 2022): 62–82, Scott M. Miller, and Johannes Urpelainen, “G20’s US$14-Tril- https://doi.org/10.1086/717773. lion Economic Stimulus Reneges on Emissions Pledges,” Nature 603, no. 7899 (March 2022): 28–31, https://doi. org/10.1038/d41586-022-00540-6. Contents Executive Summary Chapter 1 2 3 4 5 6 118 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 70 Economic, and Social Policy Builds Public Support for Cli- Izlawanie Muhammad, “Carbon Tax as the Most Appropri- mate Action in the US”; Gaikwad, Genovese, and Tingley, ate Carbon Pricing Mechanism for Developing Countries “Creating Climate Coalitions: Mass Preferences for Com- and Strategies to Design an Effective Policy,” AIMS Environ- pensating Vulnerability in the World’s Two Largest Democ- mental Science 9, no. 2 (2022): 145–68, https://www.aims- racies.” press.com/article/doi/10.3934/environsci.20220012. 79 71 Dechezleprêtre et al., “Fighting Climate Change: Inter- Alexander Gard-Murray, “Splitting the Check: A Political national Attitudes toward Climate Policies”; Matto Mild- Economy of Climate Change Policy” (DPhil Thesis, Oxford, enberger et al., “Limited Impacts of Carbon Tax Rebate Oxford University, 2020), https://ora.ox.ac.uk/objects/ Programmes on Public Support for Carbon Pricing,” Nature uuid:f647e4f3-c37c-40a0-ac47-4cc55a82505a. Climate Change 12, no. 2 (February 2022): 141–47, https:// doi.org/10.1038/s41558-021-01268-3. 72 OECD, Effective Carbon Rates 2023: Pricing Greenhouse Gas 80 Emissions through Taxes and Emissions Trading, OECD Series World Bank, “Carbon Tax Guide: A Handbook for Policy on Carbon Pricing and Energy Taxation (OECD, 2023), Makers” (Washington, DC: World Bank Group, 2017), http:// https://doi.org/10.1787/b84d5b36-en. hdl.handle.net/10986/26300. 73 81 International Carbon Action Partnership, “EU Emissions Dechezleprêtre et al., “Fighting Climate Change: Interna- Trading System (EU ETS),” ICAP, 2023, https://icapcarbon- tional Attitudes toward Climate Policies”; Stefano Carat- action.com/en/ets/eu-emissions-trading-system-eu-ets. tini, Maria Carvalho, and Sam Fankhauser, “How to Make Carbon Taxes More Acceptable,” Policy report (London: 74 The Centre for Climate Change Economics and Policy / Don Fullerton, “Six Distributional Effects of Environmental The Grantham Research Institute on Climate Change and Policy,” Risk Analysis 31, no. 6 (June 2011): 923–29, https:// the Environment, December 2017); Frederick van der doi.org/10.1111/j.1539-6924.2011.01628.x. Ploeg, Armon Rezai, and Miguel Tovar Reanos, “Gathering Support for Green Tax Reform: Evidence from German 75 Household Surveys,” European Economic Review 141 (Jan- Prime Minister of Viet Nam, “National Steering Committee uary 1, 2022): 103966, https://doi.org/10.1016/j.euro- on Climate Change Commitment Realization Set Up,” Press ecorev.2021.103966. Release, Viet Nam Government Portal (blog), December 22, 2021, https://primeminister.chinhphu.vn/national-steer- 82 ing-committee-on-climate-change-commitment-realiza- Gard-Murray, “Splitting the Check: A Political Economy of tion-set-up-11240859.htm. Climate Change Policy.” 76 83 Prime Minister of Viet Nam, “Decision 01/2022/QĐ-TTg on Coady, Parry, and Shang, “Energy Price Reform”; Jacqueline Promulgation of Lists of Sectors and GHG Emission Facil- Cottrell and Tatiana Falcão, “A Climate of Fairness: Environ- ities Subject to GHG Inventory Development” (THƯ VIỆN mental Taxation and Tax Justice in Developing Countries” PHÁP LUẬT, January 18, 2022), https://thuvienphapluat. (Vienna: Vienna Institute for International Dialogue and vn/van-ban/EN/Tai-nguyen-Moi-truong/Decision-01-2022- Cooperation, November 2018). 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Schlegelmilch, Cottrell, and Runkel, Environmental Tax Reform in Developing, Emerging and Transition Economies. 98 Emily Giovanni, Fatima Khalid, and Kenneth Richards, “Case 91 Study: Carbon Tax in Colombia” (Gnarly Tree Sustainability A global survey by Ipsos found that “[o]ver twice as many Institute, July 2022), https://gnarlytreesustainability.com/ of the population rate their government as untrustworthy wp-content/uploads/2022/07/Case-5_Colombia.pdf. rather than trustworthy, by 50% to 20%.” “Government ministers” and “politicians generally” were the least trusted 99 of all the groups respondents were asked to rate. Gideon Giovanni, Khalid, and Richards. Contents Executive Summary Chapter 1 2 3 4 5 6 120 BALANCING ACT: Political Economy and the Pursuit of Ambitious Carbon Pricing in Developing Countries 100 109 EY Global, “Colombia Introduces Environmental Taxes in Ian Parry, Simon Black, and Nate Vernon, “Still Not Get- Tax Reform Bill.” ting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies,” IMF Working Papers (International 101 Monetary Fund, September 24, 2021), https://www.imf. 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Contents Executive Summary Chapter 1 2 3 4 5 6 The political economy of adopting carbon pricing can be challenging to navigate but policymakers have become increasingly adept it as a variety of factors are driving this shift including, lessons learned from early adopters, evolving discussions on the need for climate action, adoption of complementary policies, increasingly ambitious private sector climate commitments and demand for regulation, and climate policy actions by trading partners such as the European Union’s Carbon Border Adjustment Mechanism. Amidst those developments, many carbon pricing policies are expected to become more ambitious. And while carbon pricing is not on its own a silver bullet capable of completely mitigating climate change, there is broad consensus that it can accelerate the transition to a climate-compatible trajectory while contributing to broader economic objectives, especially if adopted alongside supporting policies, measures, and actions. This report synthesizes information on navigating the political economy of carbon pricing based on select country experiences, lessons learned from scientific literature, and an original survey and interview with carbon pricing policy experts from developing countries. The goal is to extract and make available meaningful insights for countries that are seeking to adopt carbon pricing for the first time or to increase their carbon pricing ambition. The report can also be used as part of carbon pricing capacity building toolkit.