Carbon Price

Establishing a carbon price is one of the most powerful mechanisms available to reduce national greenhouse gas emissions. Similarly a global bench mark is an urgent challenge for international collective action. A global approach can in theory, be created through internationally harmonized taxation or intergovernmental emissions trading, but neither is straightforward in practice. Simply because it is difficult, does not mean we should shy away from it.

What is a Carbon Price?

This is an administrative approach imposing a cost on the emission of greenhouse gases which cause global warming. Paying a price for carbon spewed into our atmosphere is a way of motivating countries, businesses and individuals to reduce carbon emissions. It also provides an incentive to invest and deploy renewable energy technology that does not emit carbon to our atmosphere. Such a pricing mechanism would also act as a disincentive for electricity generators to use relatively more polluting coal, gas and oil fired stations.

For carbon price policy to be effective, “at least two broad policy elements are required: fairly uniform, pervasive emission pricing from taxes, permit trading, or combinations of the two; and significant government support for innovation of new, low-emission technologies, via a mixture of patents, prizes, subsidies and direct spending.

“Technology-focused policy and the Kyoto Protocol approach have been falsely presented as incompatible, which ignores the possibility of combining them, and many other options worth considering for a suite of climate policies to last well into the 21st century. As a result, purely technology-focused climate policy will either be very inefficient or very ineffective. Given current funding, we fear the latter, meaning that countries exclusively following such policies will be literally fiddling while carbon burns.” (December, 2006. John C.V. Pezzey, Frank Jotzo and John Quiggin Australian National University Economics and Environment Network Working Paper).

In May 2007 the World Bank’s carbon finance unit released figures to show that the global carbon market last year trebled to $30 billion (U.S.) from $11 billion in 2005. The emissions trading program of the European Union is the hub of the global market, and it trebled to $24 billion in turnover last year. Kyoto’s clean development mechanism , or CDM, works by capping emissions by rich countries, forcing them to buy permits from poor countries to emit greenhouse gases, which some fear may raise business costs in the developed world. Yvo de Boer from the UNs climate section believes that finance flows of some $100 billion per year are likely in the years after 2012. See this interesting paper on the moral responsibility of climate change.

Why Do We Need A Carbon Price?

We need a carbon price to stabilise global greenhouse gas concentrations at levels that limit the risk of severe future climate change damage. Annual global emissions will need to be reduced substantially in the coming decades. So paying a price for carbon emissions will slow the output.

Stabilisation of atmospheric concentrations at 550 parts per million (ppm) of CO2 equivalent(around twice the pre-industrial level) is estimated to require a 25% reduction compared to current annual emissions by 2050, and a more ambitious target of 450 ppm a reduction of 70% below current levels (Stern 2006, xi).

From the Stern Review is it clear that there is more to reducing the risks from global warming than making consumers pay more for plane flights or refraining from using huge cars: “Three elements of policy for mitigation are essential: a carbon price, technology policy and the removal of barriers to international change. Leaving out any one of these elements will significantly increase the costs of action.”

Dr Mark Diesendorf, a lecturer in Environmental Studies at the University of New South Wales argues:

“To reduce greenhouse gas emissions substantially, we need a combination of different measures: carbon pricing, directed government funding of alternatives, regulations and standards, organisational change, education and information. Each of these elements is necessary, but not sufficient. Emissions trading schemes, properly constructed, are neither a licence to pollute nor a means of “unnecessarily prolonging the world’s dependence on coal, oil and gas”.

The Cost Of Pricing Carbon

Just about every aspect of economic activity results in greenhouse gas emissions. To have significant impact our climate policies will need to fundamentally change the basis of our fossil fuelled economies.

Climate change policy that will take us away from fossil based fuel will cost us more, but in the long term benefit us more, and will require more changes in behaviour by firms and individuals than any other environmental policy. The magnitude of this challenge has drawn attention to the potential use of market-based or economic-incentive instruments to ensure that polluters face direct cost incentives to mitigate emissions at the lowest possible cost.

Undoubtedly, climate change is a global problem. Greenhouse gases emitted in one location will affect people in other locations. For this reason we cannot afford to have “free-riders”, and all countries need to be involved.

Putting in place a carbon tax or cap-and-trade system will increase the cost of electricity and very likely to decrease the competitiveness of energy intensive industries. This lack of competitiveness effect can result in negative economic and environmental outcomes. For instance, some companies may move their facilities to places where there are no climate change policies. This will increase emissions at these new locations and bypass some of the emissions benefits of the cap and trade or tax policy.

The outcome of a truly global system would mean countries will not benefit proportionately from greenhouse gas mitigation policies. As a result, the costs to mitigate climate change are likely to exceed benefits for some countries, at least in the short term. Cost effective international policies insuring that countries get the most environmental benefit out of their mitigation investments will help promote participation in an international climate policy approach.

2007 was another record year in the carbon market place, with an increase from 1.6 billion tonnes traded in 2006 to 2.7 billion in 2007. Not only did the total traded volume increased by 64 percent, but in a survey conducted by Point Carbon, respondents indicated that they expected a carbon price of €24 a ton in 2010, and €35 a ton in 2020. However these prices are based on the EU ETS as no truly global trading system currently exists.

A global market and carbon price may emerge after 2012 when the ongoing negotiations for a new international climate agreement replace or modify the existing Kyoto Protocol. Of extreme importance is the extent to which the large emitting countries such as China and India become involved in a new international agreement. The key question posed* is: Will these countries take on commitments in a new international agreement? Whatever the answer, action from all countries is pressing. 

Sources:

*Carbon 2008 – Post-2012 is now” Røine, K., E. Tvinnereim and H. Hasselknippe (eds.) 60 pages, accessed 18 May http://www.pointcarbon.com/polopoly_fs/1.912721!Carbon_2008_dfgrt.pdf

John C.V. Pezzey, Frank Jotzo and John Quiggin Australian National University Economics and Environment Network Working Paper, December, 2006.

Dr. Mark Diesendorf, http://www.sustainabilitycentre.com.au/index.html

Stern Review, http://www.hm-treasury.gov.uk/