Download Carbon pricing - University of Warwick

Putting a price on carbon
emissions
Andrew Sentance
Warwick University and Bank of England
Climate Change Policy Seminar
15 May 2007
Climate Change Policy Seminars
• Forum for discussing climate change
research across University
• Cross-disciplinary, and with strong focus
on policy implications
• Build a stronger research community
and increase visibility of existing
research
• Platform for external speakers
Outline
• Why price carbon emissions?
• How to price carbon emissions?
• Taxes vs emissions trading
• Developing carbon pricing
• Is carbon pricing enough?
• Key conclusions and issues
Stabilising the global climate
450ppm CO2e
100
Global Emissions (GtCO2e)
90
80
500ppm CO2e (falling to
450ppm CO2e in 2150)
70
550ppm CO2e
60
Business as Usual
50
40
50GtCO2e
30
65GtCO2e
20
70GtCO2e
10
0
2000
2010
2020
Source: Stern Review
2030
2040
2050
2060
2070
2080
2090
2100
UK carbon emissions
Stern Review: Policies
• Carbon pricing
• Accelerating technological change
• Regulation, information and behaviour
• Adaptation
• International frameworks
• Cost-effective action
“It is not from the benevolence of
the butcher, the brewer, or the
baker, that we expect our dinner,
but from their regard to their own
interest.”
Adam Smith, Wealth of Nations, 1776
Climate change as an externality
• Externalities are costs (benefits) imposed on
others which those who create the costs
(benefits) do not take into account
• The costs of climate change are potentially
very large and irreversible but also uncertain
• Pricing carbon emissions aims to ensure
these costs are reflected in the decisions
firms and individuals take
Pricing emissions
• Regulation – command and control
• Taxation – influence prices directly;
quantity adjustment uncertain
• Permits and trading – set quotas and
allow markets to determine pricing
• Possible hybrids – eg trading within
price bands
Taxes vs trading - economics
• Cost curve likely to be flatter over the longterm than in short-term
• Benefit curve may steepen sharply if climate
change reaches critical level
• Trading likely to be more efficient over the
longer-term
• In short-term, taxes may have a bigger role to
play in establishing a price signal
Emissions trading - requirements
• Enforceable limits on emissions
• Robust accounting and administration
• Agreed mechanisms for distributing/allocating
permits
• Transparent and liquid markets, including
futures markets
• Participation of wide range of firms and
sectors
• Confidence in long-term viability
Carbon pricing – policy issues
• Achieving consistent price signals across
different activities
• Long-term price signal needed to stimulate
technology and investment
• Wide international coverage strengthens the
price signal
• Institutional frameworks
• Distributional issues
UK carbon “taxes”
£/T of CO2, 2007 values
300
250
200
150
100
50
0
-50
Domestic
gas
Climate
change
levy
EU ETS
permits
Stern
carbon
price
Air
Diesel fuel Petrol fuel
passenger
duty
Carbon pricing in UK
• Uneven pricing across transport and other
activities
• Uneven/inefficient pricing within transport (eg
aviation, agriculture, public transport)
• Domestic and industrial energy “underpriced”
• Key issue is reconciling carbon pricing with
other policy objectives, eg:
– Cost of domestic energy for poorer households;
– Competitiveness impact on business
Technical progress and emissions reductions
Social cost of
carbon
Marginal abatement
costs
Time
Technical
progressin
abatement
lowersthe
marginal cost
curve
Emissions
reductions
Long-term carbon price signals
• Price impact on investment and technical
change is a key channel for climate change
policy
• Outside private motor transport, price signals
are still weak and short-term
• EU Emissions Trading Scheme has short time
horizon and allocation rules are still uncertain
• Longer-term frameworks needed both
nationally and internationally
Widening international scope
• Broader international coverage:
– Strengthens price signal for development of low-carbon
technologies
– Reduces concerns about competitive impacts on industry of
national/regional policies
• Emissions trading better suited to international cooperation than taxation
• Potential approaches:
– Global governance of carbon markets under “Kyoto 2”
agreement
– Linking together national/regional schemes
• International agreements needed to underpin both
approaches
Lessons from Kyoto
• US support and involvement needed for a
successful climate change agreement
• Stronger engagement from emerging nations
also needed
• Longer term focus required to drive investment
and technological change
• Lack of effective compliance mechanisms has
weakened credibility of emissions caps
• More focus needed on developing delivery
mechanisms – carbon markets and technology
Institutional frameworks
• Stronger policy frameworks needed both domestically
and internationally to underpin efficient carbon pricing
• Compared to Kyoto, we need:
– Longer-term focus
– Better monitoring and compliance
– Focus on actions/outcomes, not just targets
– Better alignment with other policy objectives (eg development)
• Potential lessons from other policy frameworks?
– International trade
– Monetary policy
– Development of international standards
Distributional issues
• Focus on pricing penalises countries with low
per-capita emissions with large catch-up
potential
• Potential solutions:
– Link climate change policy to technology transfer
and development aid
– Tougher targets for richer countries, supported by
robust trading system
• May also be distributional issues within
countries, eg related to transport access and
domestic energy prices
Technology: Is carbon pricing enough?
• Comprehensive global carbon markets will
take time to develop
• Long-term carbon prices will depend on
future policies which may be uncertain
• Long time horizons, uncertainty and risk also
justify additional policies to support lowcarbon technologies
• Technology support and carbon pricing are
complementary, not alternatives
Conclusions
• Efficient carbon pricing now and into the future is a key
mechanism for incentivising emissions reductions
• Current carbon pricing is very uneven across different
activities, both nationally and internationally
• Emissions trading looks the most promising mechanism,
but will take time to develop and gain credibility
• A long-term international framework is essential to
underpin emissions trading
• Tax-based approaches could be made more attractive if
coupled with incentives for developing and embodying
new technology
Key issues
• Policy frameworks – national and international
• Consistency of pricing and alignment with other
policy objectives
• Impact on technology and investment
• Robust accounting and administration to underpin
emissions trading
What next?
• Buffet lunch served in S1.50
• Future seminars:
– Dr Peter Newell (Warwick): “Climate for Change – the
politics of global warming”, Tue 22 May, 11.30am
– Michael Grubb (Cambridge and Carbon Trust) “Lessons and
evolution of EU Emissions Trading Scheme”, Fri 8 June,
3pm
– Professor Brian Thomas (Warwick HRI), Tue 19 June,
11.30am (tbc)
• Continue in Autumn term, subject to demand.
Suggestions for topics and speakers most welcome.