16 December 2016
Social cost of carbon
In 2011 WRI released a report with the Environmental Law Institute: “More than Meets the Eye: The Social Cost of Carbon in U.S. Climate Policy, In Plain English.”
The “Call for Input” memo states that the Commission: “…will study the different values of carbon (including the social cost of carbon, evaluating climate change damages, and the “switching value” needed to achieve the Paris Agreement objectives, considering various pathways and sectoral and regional specificities).” In WRI’s view, it might be best to focus on the “switching value” rather than the social cost of carbon (SCC).
Calculating the right social cost of carbon is a difficult task. Further attempts to quantify the SCC using Integrated Assessment Models (IAMs) will continue to generate a huge range of estimates. Furthermore, the IAMs will continue to struggle to incorporate factors such as:
- non-catastrophic damages such as ocean acidification and other ecosystem impacts
- potential catastrophic damages (e.g., changes in ocean circulation or massive loss of ice sheets)
- inter-sectoral interactions (e.g., between water resources and agriculture)
- impacts of human migration in response to climate change
- imperfect substitutability of market and non-market goods (e.g., disrupted ecosystems
- effectiveness and cost of adaptation strategies
Uncertainties and disputes will continue to plague any effort to arrive at the “correct” value of the SCC. Even if policymakers could agree on a value, using the SCC to determine the “optimal” amount of climate damage that nations should aim for is inappropriate. In general, climate policy has been driven by a risk management perspective, and this should continue to drive policy. Therefore, a focus of the Commission’s work on the “switching value” needed to achieve the Paris Agreement might be most useful. The Commission could support decision-makers by helping to build a global consensus on how to manage climate risks in terms of how to limit global average temperature increases and avoid “dangerous anthropogenic interference” with the climate system.
Contact: Karl Hausker
Carbon pricing and infrastructure investment
The New Climate Economy released a working paper in 2015 on “Implementing Effective Carbon Pricing,” and two working papers on Fossil Fuel Subsidy Reform in sub-Saharan Africa: From Rhetoric to Reality and Fossil Fuel Subsidy Reform: From Rhetoric to Reality.
The Global Commission’s thre major reports have all highlighted the benefits of carbon pricing, and it’s2016 report, “The Sustainable Infrastructure Imperative: Financing for Better Growth and Development,” considered carbon pricing in its recommendation for governments to tackle fundamental price distortions.
Failing to adequately price carbon emissions biases infrastructure investment towards fossil fuels and away from cleaner energy technologies. This leads to poor investment decisions, with no consideration for social or environmental externalities. Tackling these fundamental price distortions improves incentives for sustainable investment and innovation.
Evidence is also building of how successful fossil fuel subsidy reform and carbon pricing can free up scarce government revenues for other priorities. For example, the revenues can be recycled into programs that benefit the poor, through better targeted income support and social safety nets, or through investments in pro-poor infrastructure such as off-grid renewable energy and energy efficiency. A number of country examples are cited in the NCE reports on fossil fuel subsidy reforms. Examples of the use of carbon pricing revenues to fund innovation (for example, Quebec and California use revenues from their ETS auctions to fund low-carbon technology advancement) and other climate action (for example, the EU distributes EU ETS auction revenues to EU Member States, which use them to fund innovation and climate- and energy-related activities, among other things). Finally, the potential for carbon pricing revenue to be channeled into public financing support for infrastructure investment is also highlighted, for example by capitalizing green investment banks.
The Commission could usefully do further work on how the revenues from carbon pricing can be recycled into investment in sustainable infrastructure.
Contact: Joel Jaeger
Carbon pricing in the United States
WRI has recently published a series of papers on carbon pricing in the United States. Putting a Price on Carbon: A Handbook for U.S. Policymakers (April 2015) is a comprehensive reference guide for U.S. Policymakers of the design features, revenue options and economic consequences from different approaches to pricing carbon. Putting a Price on Carbon: Reducing Emissions (January 2016) describes how a national price on carbon would reduce emissions across key sectors of the U.S. economy, including empirical evidence and real world case studies. The research examines how the incentives for emissions reductions are depicted in influential carbon pricing studies, and shows why computer models are likely to underestimate the emissions reductions potential of a carbon price. Finally, Putting a Price on Carbon: Ensuring Equity (April 2016) examines the distributional effects of a national carbon price in the United States. The research finds that the revenues from a carbon price can be used to address regional disparities and ensure that unfair burdens are not imposed on households that cannot afford them. By using just a small portion of carbon pricing revenue to specifically target low-income households and coal communities, policy designers can ensure that these groups are better off under a carbon price than alternative policy pathways. These papers can all be found on WRI’s website, and key results from the papers are described in more detail in the submission of Noah Kaufman, a co-author of all three papers.
Contact: Noah Kaufman
Carbon pricing in Mexico and India
Carbon pricing can be an effective instrument to reach climate policy objectives and decarbonize the economy. WRI has done research on these possibilities in Mexico and India, linked to assessments of their NDCs and opportunities to achieve them.
WRI’s recent work in Mexico, Achieving Mexico’s Climate Goals: An Eight Point Action Agenda, identified and evaluated key climate and energy policy options available to support the implementation of its NDC. The analysis found several policies that, when combined in a package, can achieve deep cuts in GHG emissions. Carbon pricing was among the top policy options to achieve Mexico’s climate objectives. The assessment included a revenue neutral, economy-wide carbon tax that helped to achieve 12-20% of the emission reductions needed to comply with the NDC objectives.
The analysis suggests that a way forward for Mexico would be to increase the relatively modest excise tax on fossil fuels, to extend it to all fossil fuels (currently natural gas is exempted), to strengthen the efforts for consolidating the current pilot system for GHG permit trading, and to explore further the option of linking up with the emerging North American carbon market (e.g. collaborate with California, Quebec, and Ontario).
WRI is analyzing India’s key current and planned climate policies on GHG emissions to 2030, and identifying options that can be considered for enhancing implementation among a range of objectives. Among these, we assess India’s clean energy cess (earmarked tax) on coal, lignite, and peat to be levied on both domestically produced and imported coal. The proceeds are to contribute to a non-lapsable National Clean Energy Fund. We modeled this instrument considering that the revenues are distributed evenly between non-fossil fuel-based electricity sectors and capital investments in the services and health sectors.
We found that, under the clean energy cess, the economy’s net energy demand could fall and correspondingly leads to reduced CO2e emissions. The contribution of the clean energy cess in bringing down the Indian economy’s emission intensity could also be significant – a roughly 30-40% decline in 2030 over 2005 levels. We find that while promising in theory, the effectiveness of the tax is low in practice. To increase it, we recommend to improve the selection of projects funded, to have a specialized staff dedicated to administer the fund, to have better communication strategies (especially involving the private sector), to establish independent external monitoring agencies and to design a set of key performance indicators.
Contact: Juan Carlos Altamirano
Carbon pricing and cities
Economic benefits of low-carbon urban growth
The New Climate Economy and its cities special initiative the Coalition for Urban Transitions has produced a large body of work unpacking the economic opportunities that could be unleashed from low-carbon urban growth, and how carbon pricing could help to support it.
- Accelerating Low-Carbon Development in the World’s Cities shows that investing in building efficiency, public and low emission transport, and better waste management in cities worldwide would have a net present value of US$17 trillion by 2050 based on energy savings alone. With national policy interventions such as fossil fuel subsidies reforms and carbon pricing, the direct savings could be as high as US$22 trillion. These actions could also reduce greenhouse gas emissions by 3.7 Gt CO2e per year by 2030, more than the current annual emissions of India.
- Better Cities, Better Growth India’s Urban Opportunity shows that poorly planned, sprawling, unconnected pattern of urbanisation could impose significant costs on Indian development, amounting to an estimated US$330 billion to US$1.8 trillion per year by 2050, or 1.2–6.3% of GDP. However, put differently, better, smarter urban growth could be an economic opportunity for India worth up to 6% of GDP by mid-century, and maybe higher.
- Achieving Uganda’s Development Ambition shows that better urban growth could increase access to basic services by a third and reduce infrastructure investment costs by 11%.
- NCE Cities is currently working on economics of low carbon cities and looking at wider jobs, poverty, health benefits of low carbon urban development, private investor returns to smart urban growth, and better understanding the net benefits of more compact, well managed urban growth. Carbon pricing will help unleash all of these benefits.
Carbon markets at subnational level
· Steering Urban Growth: Governance, Policy and Finance, from NCE and LSE Cities in 2014, found that city-based emissions trading schemes can price externalities associated with city- based pollution and carbon emissions. However, there are significant challenges in administration, effective monitoring and carbon accounting.
· Tokyo, Rio de Janeiro and a few cities have set up carbon markets for capping and trading industrial emissions.
o The Tokyo Municipal Government has set carbon emission reduction targets of 25% relative to 2000 levels by 2020, and 50% by 2050. The city’s Emissions Trading System (ETS), developed in 2002, covers around 20% of Tokyo’s GHG emissions. Companies that fail to meet their Phase I obligations must cut Phase II emissions by 1.3 times the Phase I shortfall. If they fail to achieve this added indemnity, they face penalties of up to JP¥500,000. Reports show that Tokyo’s 2010 emissions were reduced by 13% compared to the base year.
o The BVRio Green Credit system was developed in collaboration with both the Rio de Janeiro State and Municipal Governments and their respective finance and environmental secretariats. It is currently undertaking a cap and trade simulation based on real data with a group of blue-chip corporations in Brazil. It aims to put in place trading and auction platforms and a registry of allowances that will be tailored to a range of participants, companies, government, and market regulators.
· According to NCE’s 2015 working paper, Accelerating Low-Carbon Development in the World’s Cities, A number of states and regions are cooperating on emissions trading, with over 20 sub-national jurisdictions having implemented or scheduled a price on carbon. They include the nine states of the US and Canada which since 2009 have combined under the Regional Greenhouse Gas Initiative to implement a regional carbon budget for power sector emissions.
Carbon pricing contributes to urban sprawl
Interlocking market failures, including the failure to price the significant and rising costs of carbon emissions and air pollution are associated with unsustainable urbanization patterns, such as sprawl (NCE, 2015). For example, urban sprawl costs the US over US$1 trillion annually, including more than $400 billion dollars in external costs and $625 billion in internal costs, according to NCE’s 2015 working paper, Analysis of Public Policies that Unintentionally Encourage and Subsidize Urban Sprawl. If emissions are taxed appropriately, then private individuals will make appropriate decisions about location choices without any additional location-specific policies[1]. This requires carbon prices that capture long-term and long-lived externalities that markets fail to capture, locking in unsustainable spatial development. Corrections of price distortions can also have positive impacts in addressing inequalities, improving air quality, and reducing carbon emissions, according to NCE’s 2016 working paper, Financing the Urban Transition for Sustainable Development.
Carbon pricing can redirect investment in the transport sector
In the transportation sector, a 2016 WRI study, on Tracking Investment Needs in Transport finds that a low-carbon pathway is in fact 1) more affordable than the current business-as-usual approach that prioritizes road infrastructure, and 2) within existing financial resources invested currently in the transport sector. Estimated annual investment needs are $2 trillion to achieve the 2 degree scenario and $2.3 trillion to achieve the 4 degree scenario. Current financial flows in the transport sector are around $2.1 trillion. Therefore, realizing a low-carbon scenario in the transport sector is a matter of shifting portfolios of investments, projects, and policies toward sustainable options. There are several decision makers who have a critical role to play: ministers of finance, ministers of transport, or directors of national development banks; and multilateral development banks. Therefore, pricing carbon is a powerful lever to redirect public investment decision and frame the market forces.
Contacts: Benoit Lefevre andXiao Zhao
Valuation of carbon benefits from secured land-tenure
WRI’s work on land tenure and the benefits of community forestlands provides a basis for comparing the economic benefits and costs of securing community forestland tenure. In particular, we compare the costs and benefits of securing and maintaining tenure for indigenous forestlands in the Amazon, in Colombia, Bolivia and Brazil, in Climate Benefits, Tenure Costs: The Economic Case for Securing Indigenous Land Rights in the Amazon. On the benefits side, to understand the broader societal economic benefits related to tenure-secure indigenous forestlands, we included calculations of the economic value of carbon storage resulting from avoided deforestation.
To monetize these carbon benefits—the avoided damages from avoided deforestation in tenure-secure indigenous forestlands—various estimates of the social cost of carbon were used. Because carbon storage benefits are global, we calculate (using US EPA’s social cost of carbon estimates) carbon benefits to show the total global economic benefits (or avoided global damages). The monetary estimations help with understanding the potential global carbon benefits attributable to tenure security over the indigenous forestlands in the Amazon area.Tthe resulting values (ranging from US$25–34 billion over the next 20 years) can be used by stakeholders to make the business case for investing in improving tenure security policies as an effective climate change policy.
Contact: Juan Carlos Altamirano
[1] Edward L. Glaeser and Matthew E. Kahn, May 2010. “The greenness of cities: Carbon dioxide emissions and urban development,” Journal of Urban Economics, Vol. 67:1.
