An Alternative Approach to Pricing Carbon
Despite the several international meetings on climate change, and the time, money, and effort spent on researching the issue, experts still haven’t reached an agreement on one of the most pressing issues: setting a price on the carbon that is exacerbating the greenhouse effect.
Traditionally the price of carbon was based on the social cost of inaction. What if we stepped back and looked at it from a different point of view? What if we priced carbon on the price of action?
The traditional approach looks at the cost of the economic damage of burning fossil fuels, making cement, and a few other processes or the negative externalities. These negative externalities are the cost to society in health, food production, and coastal erosion, which are not included in the cost of the fossil fuels, cement, etc.
This social cost of carbon is calculated by predominately three models: the DICE model, the FUND model, and the PAGE model.
The price of carbon varies from these types of models and ranges from $11 to $109 per metric ton of CO2e (the carbon dioxide equivalent, or a measure of the overall greenhouse cases). It is important that we understand the cost of inaction on carbon pollution. We need these models so we can understand the risk of inaction.
The problem with pricing carbon using these models is that it is difficult to motivate people with the idea that something bad is going to happen if we all don’t do something. Just look at how difficult it is to get people to eat right and exercise. How could we use this approach for pricing carbon? What comes to mind are cap-and-trade, penalties, and taxes — policies designed to make fossil fuels less attractive with the hope of us using less. How long does it go on? As a tax, would a government have an incentive to reduce carbon pollution if it was receiving revenue from that pollution? How would that money be spent?
What if we approached the cost of carbon based on what it would cost to fix this problem?
Let us do an estimate.
What is the specific goal?
The widely accepted threshold to avoid the catastrophic impacts of climate change is to keep global temperatures from rising above 2 degrees Celsius, or 3.6 degrees Fahrenheit, compared to pre-industrial temperatures. The timeframe for this goal is 2050. To accomplish this goal we will have to limit the amount of carbon released into the air between the years 2000 and 2050, keeping it within a range of 1000 to 1440 Gt of CO2e (Meinshausen in Nature 2009).
How much CO2e do we release?
Estimates of released CO2e from 2000 to 2014 are 566 Gt of CO2e: that includes 463 Gt from fossil fuels and cement production, 58 Gt from deforestation and land use changes and 45 Gt from methane release.
A conservative estimate of how much CO2e we will release from 2015 to 2049, if we continue business as usual, is 1,860 Gt CO2e. That’s 1,614 Gt from fossil fuels and cement emissions, growing at a rate of 1.25 percent per year; 140 Gt from deforestation and land use with the rate remaining constant; and 105 Gt from methane release with the rate remaining constant.
In other words, that is above what is necessary to prevent climate change.
If we allow a release of just 700 Gt CO2e between now and 2050, that would put us at a total 1266 Gt for the 2000-2049 period and in the middle of the 1000-1440 Gt range. To that, we would have to reduce our total CO2e emissions by 1,160 Gt over the next 35 years.
Reduce CO2e emissions by 1,160 Gt over the next 35 years.
How much will it cost to fix the problem?
The IEA’s Energy Technology Perspective 2014 estimates an investment of USD 44 trillion to decarbonize the energy system and keep global temperatures within the 2 degree Celsius limit.
Invest USD 44 trillion to decarbonize the energy system.
What is the price of carbon using this method?
If we simply divide the USD 44 trillion investment by 1,160 Gt CO2 of reduced emissions we get a rounded USD 38/metric ton of CO2E. This number is in the range of the social cost of carbon models.
USD 44 trillion / 1,160 Gt CO2E = USD 38/ metric ton CO2E
If we view it as an investment, what is the return?
The IEA’s Energy Technology Perspective 2014 estimates the fuel savings of this investment to be USD 115 trillion.
This approach to pricing carbon is based on creating something better. What comes to mind with this approach is investment and added value.
We have estimates on the cost of inaction.
We have estimates on the cost of action.
We have estimates on the savings of action.
From a long term financial perspective it seem obvious that we should take action. Why not price carbon on the price of action?
How would we use this price of action to reduce carbon emissions?
Since the price is determined by how much it will cost to fix the problem then the money should be directly invested in correcting the problem. Money spent on reducing the carbon infrastructure saves fuel costs and has a positive return so this does not have to be a penalty or tax and it could be an investment. Units of “green” bonds dedicated to renewable energy and energy efficiency could be priced at the cost of a metric ton of CO2E. Companies and individuals with a need or desire to take responsibility for their carbon emissions would purchase the number of units of these “green” bonds equivalent to the metric tons of CO2E they wish to offset. The money would be tied up for some time but they would get it back with interest. In the meantime, that money is being put to work creating energy efficiency, renewable energy, and energy storage.
Comparing the two methods of pricing carbon, the price is about the same. The social cost of carbon attacks the problem indirectly. This method would utilize the complex infrastructure of cap-and-trade, penalties, and taxes.
Pricing carbon on the price of action would attack the problem directly. This method would use existing infrastructure and be more transparent and simple. As an investment, it would reduce or eliminate the financial burden of companies and individuals taking responsibility for carbon pollution.
The method of quantitatively offsetting one’s carbon footprint with investments in clean energy was developed by Carbon Xprint.
