Executive summary

A transformative change in greenhouse gas (GHG) emission pathways is needed to reach net zero by 2050 and meet the temperature goals of the Paris Agreement. Despite the strengthening of many national climate change policies and targets (e.g. towards net zero emissions), global GHG emissions are still projected to lead to an average global temperature rise above 1.5°C. A transformative change, encompassing both demand- and supply-side shifts, will be needed to deliver the pace and scale of emission reductions required to limit global warming to 1.5°C

Carbon pricing could potentially play an important role in pathways to net zero GHG emissions, but, overall, price levels and coverage have been too low to date to do so. In 2022, 68 carbon pricing schemes1 existed globally, covering around 23% of global GHG emissions, with most prices below EUR 50/tCO2 In 2021-2022, ETS and carbon tax price levels hit record highs in many jurisdictions. Despite this, GHG emissions covered by carbon pricing schemes have, on average, fallen by 0-2% per year since the 1990s. To limit global warming to the Paris Agreement goal of 1.5°C, annual average GHG emissions reductions of almost 8% globally are needed between 2020-30. This paper aims to improve understanding of carbon pricing’s potential role and contribution to transforming emission pathways to net zero GHG emissions, by drawing on current experiences. This paper also explores the potential application of emissions pricing in food systems and identifies data gaps and questions to guide future research.

Disentangling the impact of carbon pricing on sectoral emission pathways is challenging, but available evidence indicates that carbon pricing alone has so far been insufficient to reach net zero GHG emissions. Evidence from the electricity sector in the EU, New Zealand, and California suggest that carbon pricing, related revenues and other policies have together contributed to reducing GHG emissions and increasing the share of renewables in the electricity mix.

Pathways to net zero GHG emissions need to be carefully designed and take just transition aspects into account. Rapid and broad transformative change and associated emission reductions could have some short-term negative social impacts. While estimates indicate an overall net gain in employment from a transition to net zero, new jobs may not necessarily occur in the places where jobs are lost, and new jobs may also require new skills. Targeted and proactive measures, based on social dialogue, investments, and social protection, will be needed to help affected workers, communities, and regions.

Comprehensive policy packages that simultaneously address the supply- and demand-side could create enabling conditions for a just transition to net zero. Although challenging, significant GHG emissions reduction potential exists in addressing demand-side changes alongside supply-side shifts. Carbon pricing could play an important role in incentivising demand-side shifts as part of a wider policy package that carefully uses carbon pricing revenues For example, carbon pricing could help reduce consumption levels of carbon-intensive goods, encourage a shift to less carbon-intensive goods, or improve the carbon intensity of existing goods.

Sequencing the deployment of polices could help to reduce or remove potential barriers and increase the effectiveness of carbon pricing. For example, deploying green industrial policies (e.g. research and development support) before carbon pricing could encourage greater use of low-carbon alternatives. Once these alternatives are commercially available, carbon pricing could discourage the use of conventional, high-emitting goods or services. In addition, enhanced international co-operation and collaboration could incentivise more ambitious carbon pricing by helping to overcome obstacles and facilitate exchanges of good practices. For example, enhanced international collaboration such as, linking carbon pricing schemes, could help improve cost efficiency and address competitiveness concerns.

Reducing food systems’ emissions is vital in pathways to achieve net zero GHG emissions, yet decarbonising food systems is far from straightforward, despite significant potential. This is because emissions from an individual food product can be spread across different countries, sectors, and gases. There are GHG emissions differences between the production of different food products and within production of the same food product. There are also differences in the feasibility and cost of reducing emissions in different food system parts. Reducing some food systems emissions, such as biogenic CH4 from enteric fermentation, is difficult given the lack of commercially available means of doing so, whereas reducing other types of emissions, such as from synthetic fertiliser or manure may be more feasible Moreover, significant support to high-emitting food products continues to be provided by many countries. Targeting emissions reductions from the most GHG-intensive food items could help to substantially decrease the overall emissions from food systems.

This report explores the potential for emissions pricing policies to support emissions reductions in food systems. To help reduce GHG emissions from food systems, an emissions pricing scheme covering GHG emissions pertinent to food systems (i.e. CO2, CH4, N2O) could be applied via the polluterpays (ETS or carbon taxes) or the beneficiary-pays principle (abatement payments and offsets). Such a scheme, depending on its design, could help to encourage production of individual food products to become more efficient and/or encourage shifts to foods with a lower GHG intensity.2 Yet to date, emissions pricing is only marginally used in global food systems, covering a small part of GHG emissions

Implementing emissions pricing in food systems has significant short-term methodological, technical, and political barriers High variability in the emissions intensity between and within different food products, and across geographies, makes it methodologically challenging to provide an accurate price signal. In particular, given the many steps from farm to fork, and the many actors involved, it can be technically challenging to monitor, report and verify emissions for a food product across its lifecycle. There are also significant political challenges associated with policies that could increase food prices, as illustrated by the political difficulties triggered by the high food inflation rate in 2021 and 2022 There could also be negative just transition implications of emissions pricing in food systems, e.g. reductions in agricultural employment in specific sub-sectors (e.g. livestock production), for farmer income, and for food security. Implementing emissions pricing in food systems would require carefully designed policy packages to meet multiple policy objectives while addressing the triple challenge facing food systems of providing food security and nutrition for a growing global population, maintaining livelihoods in the food chain and contributing to environmental sustainability. Given the challenges of applying emissions pricing in food systems, some countries are likely to prioritise the use of non-pricing policies in this area

Nevertheless, reducing GHG emissions from food systems could have many co-benefits and potential policy avenues on the supply- and the demand-side could be explored. These co-benefits could include positive outcomes for biodiversity, water demand, and local environmental pollution Further exploration is needed of the potential applicability, feasibility, and political acceptability of different means to reduce GHG emissions from food systems, and the role of GHG emissions pricing approaches in this

2 Other non-pricing policies could also be used to address emissions from food systems, but an exploration of these is outside the scope of this analysis.