Pricing Carbon: Realistic Option for Moving Forward, or Just Another Pipe Dream?
It is becoming increasingly accepted that we must put a price on carbon if we are to make progress on climate change. There are many ways in which carbon can be priced, including a pre-determined carbon tax, perhaps based on the social cost of carbon; prices can also be set by using an emissions-trading or cap-and-trade program. But can we achieve this obvious goal in a meaningful way in a world where we can’t seem to make progress on any kind of rational climate policy?
The real question isn’t “should we price carbon?” We already price carbon through all sorts of means, including renewable energy and energy efficiency mandates. The real question(s) when it comes to pricing carbon are: 1) what is the objective of carbon pricing; 2) what is the “right” price for carbon to meet that objective; and 3) how do we get that price into place? These questions are far more complicated and contentious than the basic question of “should carbon be priced?” That’s why most of the discussion of carbon pricing stops short of the tough discussion regarding the actual carbon price that would make a difference to climate change.
In this blog post I’m not going to provide “my answer” to any of these questions. As Thomas Woodrow Wilson stated: “There is no idea that hasn’t already been worn shiny by someone else’s brain.” So instead of pretending that I will come up with a completely new idea in this space, I want to point readers to sources that may facilitate their understanding and exploration of the topic.
Why Talk About Carbon Pricing Now?
Interest in the topic of carbon pricing is increasing rapidly; just last week carbon pricing was at the forefront of discussions at the Climate Summit in New York City. There are several reasons for this expanding conversation regarding carbon pricing:
- The topic of carbon pricing has grown as the prospect of strong international emissions mandates has faded.
- People are looking for alternatives to emissions-based targets, and game theory suggests it might be easier to get agreement on a global carbon price than a global emissions cap.
- There is a lot of hype that “companies are ready for carbon pricing,” and many companies have some kind of internal carbon price already as reflected in some of the links provided below:
√ Exxon assumes long-term $80 emissions price as investors back GHG disclosure (May 2014)
√ Companies speak out on putting a price on carbon (June 2014)
√ Businesses double down on carbon pricing while Capitol Hill idles (Sept. 2014)
√ Carbon pricing is no-brainer for big corporations (Sept. 2014)
√ Companies Ready for Carbon Pricing (Sept. 2014)
√ Global Corporate Use of Carbon Pricing (Carbon Disclosure Project report 2014)
- The idea that companies are already pricing carbon should be considered carefully; many internal carbon prices are very low, and many internal carbon prices don’t necessarily influence decision-making. Companies that might truly price carbon at a significant level are fighting an uphill battle. The unfortunate reality is that any company that acts as if carbon actually has a materially high price might turn out to be better prepared for a carbon-constrained future, but they could easily deliver lower profits in the short-term as compared to competitors who are acting on the basis of how energy actually IS priced today.
- One also hears that investors are now “ready” for carbon pricing.
√ Why Investors Support a Price on Carbon (July 2014)
√ Global investors push for carbon pricing ahead of UN climate summit (Sept. 2014)
√ Global investors urge leaders to act on carbon pricing before UN meeting (Sept. 2014)
- Here too, it is difficult to differentiate rhetoric from practice. Are investors willing to accept lower returns in the near-term from companies that price carbon, even if companies are better prepared for long-term carbon risk? Corporate action on climate change is often presented as a win-win, but it is much more complicated than that. And most importantly, are investors actually calling for public policy that will result in carbon prices that would make a real difference? To make a difference, carbon prices in the electricity sector would probably need to start at about $30/ton CO2; in the transportation sector, the starting point is probably about $100/ton CO2. Yet none of the “calls for a carbon price” specify what level of carbon price is being advocated.
A Sampling of Topic Thinking
The literature surrounding the many facets of carbon pricing is already large, and expanding rapidly.
- Aldy and Stavins, The Promise and Problems of Pricing Carbon Theory and Experience (2011): A brief review of experience to date with carbon pricing.
- Ecofys, State and Trends of Carbon Pricing (2014): A comprehensive look at carbon pricing efforts around the world.
- Ecosystem Marketplace, Is There A Right Price For Carbon? (Sept. 2014): A discussion of the “right price” for carbon, and why it’s a much trickier topic than it first appears.
- Bowen, The Case for Carbon Pricing (2011): A good review of the many issues associated with implementing a carbon price.
- Pindyck, Pricing Carbon When We Don’t Know the Right Price (2013): An interesting look at the challenge of setting the “right price” for carbon.
- Carbon-Price.com, Carbon Pricing: A Breakthrough (2014): An interesting profiling of expert economic opinions on carbon pricing.
- Organization for Economic Cooperation and Development (OECD), Effective Carbon Prices (2013): A comprehensive look at the “effective carbon price” associated with different policies and measures today. It’s worthwhile noting that almost any policy can be translated into an equivalent carbon price. Some transportation sector programs turn out to have equivalent carbon prices of more than $500/ton (when total program costs are divided by total GHG emissions reductions).
Carbon pricing is likely to remain a “hot topic” for some time. In the meantime, we should ask some hard questions:
- Are companies and investors advocating for public policy that would result in a meaningful carbon price?
- Are companies and investors assigning a specific number to their call for a carbon price?
- Do internal company carbon prices really influence investment decision-making?
- Is it politically feasible to ever price carbon at the levels necessary to significantly reduce overall emissions?
Some good work on these topics can be accessed here:
- A series of blogs (based on a paper only available behind a paywall) exploring the very real implementation challenges associated with any meaningful carbon prices
- A useful blog suggesting that being desperate for climate progress in the form “a price on carbon, any price” doesn’t necessarily lead to good policy.
√ Roger Pielke Jr., The Carbon Price Paradox (April 2010)