Carbon Pricing in the Power Sector

There is an urgent need for action. Demand for electricity in low- and middle-income countries (LICs and MICs) is rapidly growing. If they are to meet the challenge of serving this demand and providing the electricity needed for socioeconomic development, they must increase power generation.7 If this is to occur without making it impossible for the world to meet its objective codified in the Paris Agreement on Climate Change, countries must rely on low-carbon power. Electricity is the lynchpin of meeting the Paris Agreement. The Paris Agreement is aimed at limiting the increase in the global average temperature to well below 2°C above preindustrial levels and to pursue efforts to limit the temperature increase to 1.5°C above preindustrial levels. In 2023, at the 28th Conference of the Parties (COP28), the world agreed to transition away from fossil fuels, the main driver of climate change. Moreover, 130 countries endorsed a global pledge on renewables and energy efficiency, which set targets to triple installed global capacity of renewable electricity and double the rate of energy efficiency improvements by 2030 compared to 2023.8 Electricity generation is the largest source of energy-related greenhouse gas (GHG) emissions worldwide (IEA, 2021e). The global power sector’s strong dependence on fossil fuels has made it the single largest source of CO2 emissions, contributing 42% of global emissions (IEA, 2023g). As well, most projected low-carbon development pathways rely on electricity as the major source of power. Several cost-competitive technologies—including hydropower, wind, solar photovalic (PV), nuclear power, electricity storage, and smart grids—now offer alternatives to fossil fuel generation. As a result, low-carbon development pathways tend to include both the rapid decarbonization of electricity supply and mass electrification of energy services, a step that would increase electricity demand even further (Fay et al., 2015).9 LICs and MICs play an increasing role in emissions. Historically, high-income countries (HICs) produced most energy-related GHG emissions, but the landscape is rapidly changing. Following a model set by several HICs, LICs and MICs have built significant fossil fuel generation capacity to meet growing electricity demand, which has increased the absolute emissions of the power sector (World Bank, 2022e). While some LICs and MICs rely primarily on hydropower and therefore their power sectors make minimal contributions to GHGs, others are on the list of the world’s biggest emitters in absolute terms. A growing number of developing countries have announced commitments to carbon neutrality by mid-century. These countries are considering a range of policies to decarbonize their power sectors. Their aim is to promote the uptake of low-carbon electricity, increase energy efficiency, and phase down fossil fuels. To achieve these goals, reform to existing policy instruments as well as new instruments, including standards, quotas, pricing, fiscal and subsidy instruments, as well as financing mechanisms and public programs to support energy efficiency, technological innovation, and compensation for early retirement of carbon intensive assets may be necessary.

source :

https://openknowledge.worldbank.org/entities/publication/00e80b55-d845-43b9-af80-f230f4a1ec83