The false economy

4th July 2014


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Author

Victoria Denner

The reluctance to put a realistic price on carbon because of fears it will damage competitiveness is a false economy, as the costs of curbing emissions will only rise, argues Paul Suff

Economists have again attempted to estimate the price of carbon to avoid dangerous climate change (p.8). By revisiting a standard economic model, Lord Stern and Simon Dietz have calculated that a tonne of carbon in 2015 needs to cost between $32 and $103 to prevent warming above the 2ºC threshold scientists believe is the limit to prevent unprecedented change. And, by 2035, the price should rise to between $82 and $260.

The authors say that such figures would, according to the model, keep the expected atmospheric stock of carbon dioxide to a maximum of 425-500 parts per million and the expected increase in global mean temperature to 1.5–2ºC above pre-industrial levels.

Today, the price per tonne of carbon under the EU emission trading system (ETS) is around €6, while the price of allowances sold at the most recent auction for the cap-and-trade scheme (the regional greenhouse-gas initiative) covering nine US states was just over $5. So the price needs to climb significantly to reach even the lower Stern-Dietz estimate.

The European commission plans to backload ETS allowances, under which 900 million permits will be temporarily withdrawn from the scheme, will push prices higher – possibly to €19 in 2015, according to the best estimate – but not by nearly enough. It is worth remembering that in 2000 the commission projected that the price of an ETS allowance, which is equivalent to one tonne of CO2, would be €33.

In April 2006, just over a year after the system started, the price of allowances peaked at around €30, but have come nowhere near such heights since and there is no guarantee that backloading will see prices rise sufficiently. In the UK, the carbon price floor (CPF), which places a charge on every tonne of CO2 emitted by high-carbon energy generators, was, under George Osborne’s original plans, supposed to rise from £16 per tonne in 2013 to £30 by 2020. However, in a rethink, the chancellor announced in his 2014 budget that the CPF would remain at the planned 2016/17 level of £18 per tonne until at least 2019/20.

Policymakers, often after intense lobbying, are reluctant to pursue action to raise the cost of carbon to anything like the level required to prevent temperatures spiralling because they fear that intensive energy users will decamp to countries without similar pricing mechanisms. Hence the political haggling last year over whether to support the backloading proposals and Osborne’s backtracking on his own policy.

But a reluctance to take measures now to raise the cost of carbon is ultimately a false economy: it means the costs of curbing carbon emissions and dealing with the damage wrought by the changing climate will escalate.


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