The US will announce a national carbon pricing scheme by 2025, and potentially as early as 2023, according to an updated climate policy forecast developed by economists on behalf of the Principles for Responsible Investment (PRI).

The forecasters are also pointing to a fourfold increase in the share of global emissions covered by carbon pricing schemes, from 20% today to 80% by 2030.

The Inevitable Policy Response (IPR) is a project commissioned by the PRI that aims to prepare financial markets for climate-related policy risks that are likely to emerge in the short and medium-term.

In 2019 it produced a set of policy forecasts and a “Forecast Policy Scenario”, and it has now updated its forecast for climate policy. Later this year it will release an update of its Forecast Policy Scenario, which models the impact of the forecasted policies on the real economy.

In their 2021 policy update, the IPR economists forecast that carbon border adjustment mechanisms (CBAMs) “will become increasingly a policy option”, and that this could lead the US to announce a national carbon pricing system as early as 2023.

A report about the IPR policy update notes that the forecasts of CBAMs and a US carbon market before 2025 are controversial, as is that of an end to new coal-fired power stations in China by 2025.

The Financial Times recently reported that John Kerry, the US special presidential envoy for climate, had warned the EU that a carbon border tax adjustment should be a “last resort”. Asked about this, Eric Ling, engagement manager at Vivid Economics, part of the IPR consortium, told IPE that this did seem to go against Joe Biden’s election platform commitments, which included a pledge to apply a CBAM.

“It’s interesting that that’s the message to the EU,” said Ling.

In the report, Ling and co-author Mark Fulton of Energy Transition Advisers, also part of the IPR consortium, said that the US mid-term elections in November 2022 may “hold the key” to a US carbon market before 2025.

“If Democrats improve their majority then Republicans may support carbon pricing to head off costly piecemeal regulation,” they wrote.

Other key policy forecasts in the 2021 IPR update include that major tropical forest countries will end deforestation by 2030, and that China, France, Germany, Italy and Korea will end the sale of fossil fuel cars and vans in 2035.

Another forecast is that all major industrial economies will require all new industrial capital expenditure, led by steel and cement, to be low carbon by 2040, through a combination of emissions performance standards and carbon pricing.

The latest forecasts drew on a survey of more than 200 experts in national climate policy. The survey was “supplemented with confidential discussion with key policymakers in Europe, the US and East Asia which reinforced our broad conclusions,” the forecasters explained.

“The result was a reappraisal by the IPR policy team of the level of ambition we forecast for policy making in the coming years,” they added. “In the majority of cases, events of the past year have either confirmed our expectations or increased our expectations for levels of ambition.”

More information about the 2021 Policy Forecast can be found here.

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