Commission

Input to the High-level Economic Commission on Carbon Prices by Christina Hood

Input to the High-level Economic Commission on Carbon Pricing

Christina Hood (as requested in personal capacity; this input does not reflect the views of the International Energy Agency

Head of Unit, Environment and Climate Change, International Energy Agency

This input focuses on IEA analysis of the role of carbon pricing in low-carbon transition of the energy sector. Two low-carbon scenarios are discussed: the “450 Scenario” from the annual World Energy Outlook publication, and the “2DS” from the Energy Technology Perspectives publication. These scenarios incorporate best information on countries’ energy policies, and energy technology costs and trends. A third scenario, the “New Policies Scenario” incorporates only policies that have already been announced, so is in line with the lower level of ambition reflected in the current Nationally Determined Contributions (NDCs) of the Paris Agreement.

1. Carbon price levels in the IEA Scenarios

In the 450 Scenario, carbon prices in 2030 rise to US$100/t in OECD regions and US$75/tCO2 in China, Russia, Brazil and South Africa in the power and industrial sectors, accompanied by a phase-down of fossil fuel subsidies. The transport sector is not directly included in the assumed carbon price, but by increasing the level of fuel taxes and by phasing out fossil-fuel subsidies it is ensured that end-user prices in the 450 Scenario are kept at a similar level as in the central scenario (the “New Policies Scenario”). The carbon price is part of a package of policies in each region including performance regulations, government mandates, and subsidies.  

Source: World Energy Outlook 2016

Rather than assuming explicit carbon prices, the Energy Technology Perspectives scenarios use the marginal abatement cost of various technology options to construct least-cost scenarios. In some cases it will be regulations, mandates or subsidies that lead to deployment of these technologies rather than explicit carbon prices. The Table below indicates the most expensive (marginal) technologies that are deployed in various time periods, following the general principle that less costly technologies are deployed before more expensive ones.

Decisions in the model on the timing of technology deployment are not based solely only on current marginal costs however: the goal is rather a cost-effective long-term transition to 2050. In some cases early deployment of high marginal-cost technologies is cost-effective over the longer-term if it leads to technology costs being reduced, or if it is necessary to achieve the scale of deployment required in later years. A short-term analysis based on a single marginal cost would miss this important dynamic efficiency.

Source: Energy Technology Perspectives 2012

The high marginal abatement costs show in the table above disguise the fact that the majority of abatement comes at much lower cost. For example in the electricity sector, while the marginal abatement cost is $150/tCO2 in 2050, around 90% of abatement comes at a cost below $60/tCO2 with one third at virtually no cost (predominantly cost-effective energy efficiency interventions). This has important implications for assessment of “ideal” carbon prices: if it is envisaged that a carbon price would form part of a package of policies where subsidy or regulation could support the most expensive technologies, then a lower explicit carbon price would be needed in this sector.

Marginal abatement cost curves are dynamic, evolving over time with two offsetting effects: as emissions reductions get deeper costs generally increase, but technology costs also decline with learning. Support for research, development, demonstration and early-stage deployment of technologies is a critical element in bringing down long-term costs.

Source: Energy Technology Perspectives 2012 

2. Switching prices

The recent IEA publication “Energy, Climate Change and Environment: 2016 Insights” (ECCE2016) explored coal/gas/wind switching prices[1]. It finds that switching carbon prices vary widely between regions, given differing fossil fuel prices, plant technologies, capital costs, and whether competition is between existing plants or for new build. A higher carbon price is needed to displace existing assets where capital is sunk, compared to the case where competition is between two new options for generation investment.

Source: Energy, Climate Change and Environment: 2016 Insights

In regions with surplus generating capacity, carbon prices influence the dispatch of existing plant and therefore decisions on which surplus plants to retire/mothball. In the EU emissions trading system, the combination of low coal prices, high gas prices and low carbon prices have led to a coal-to-gas switch from 2012 to 2015. In 2016 in the United Kingdom this situation has substantially reversed, due to significant movements in fossil fuel prices coupled with the “carbon price support” policy that sets a carbon price floor of GBP 18/tCO2 in the United Kingdom. If fossil fuel prices were to revert to previous levels, a higher carbon price would be needed to maintain this switch away from coal generation.

Source: Energy, Climate Change and Environment: 2016 Insights

This is reinforced by latest analysis in World Energy Outlook 2016 of coal-gas switching prices in the “New Policies Scenario” (consistent with the Paris Agreement NDCs) in 2025, which sees little incentive for coal to gas switching in existing plant outside the United States, even with carbon prices reaching $30/tCO2 in Europe at that time. New coal-fired generation remains a competitive option for investment in Asia in this scenario.

Source: World Energy Outlook 2016

A further consideration in switching discussions is the cost at which carbon capture and storage becomes cost effective. In ETP 2014 analysis, carbon prices ranging from $70/tCO2 to $100/tCO2 result in deployment of CCS in either gas or coal-fired generation, depending on the prevailing fuel prices for coal and gas.

Source: Energy Technology Perspectives 2014

3. Energy-Climate Policy Packages

Even where carbon pricing reaches high levels there are benefits of accompanying carbon pricing with complementary policies. Although the details of a cost-effective policy package will vary among countries and regions, in general there is a case for supplementing carbon pricing with

·       cost-effective energy efficiency policies and other performance mandates to unlock potential that is blocked by non-economic barriers, and

·       technology policies (i.e. RD&D support and deployment policies) to improve the long-term cost-effectiveness of emissions reductions by reducing technology costs and supporting timely scale-up of new technologies.

Source: Energy Technology Perspectives 2012 

If carbon prices do not reach high levels but remain more moderate (e.g. at levels found in the New Policies Scenario rather than the 450 Scenario), a greater reliance on other elements of the policy package (performance standards, mandates, subsidies) would be needed to achieve the same level of emission reductions in operations, investment and disinvestment decisions.

A further motivation to considering complementary policies is that in order to attract investment in low-carbon technologies, it may be necessary to both improve the expected NPV of an investment, and to mitigate risks. Carbon pricing works to improve the NPV, but does not reduce the risk (the distribution of possible NPVs) and in the case of carbon markets uncertainty in the carbon price can add to NPV risk. The expected future level of carbon prices plays an important role in decisions on long-lived investments: if there are not credible expectations of high carbon prices in 2030 and 2040, then complementary policies to guide today’s investment and retirement decisions may be needed.

 

References:

Energy Climate Change and Environment: 2016 Insights

https://www.iea.org/publications/freepublications/publication/ECCE2016.pdf

Energy Technology Perspectives 2012

https://www.iea.org/publications/freepublications/publication/ETP2012_free.pdf

Energy Technology Perspectives 2014

https://www.iea.org/etp/etp2014/

World Energy Outlook 2016

http://www.iea.org/newsroom/news/2016/november/world-energy-outlook-2016.html

[1] This analyses uses 2015 information on fossil fuel prices and renewables costs. It is intended to illustrate the policy implications of varying circumstances rather than to provide up to date switching costs.

RUSAL’s Submission to the High-Level Commission on Carbon Prices

Moscow, 14 February 2017

RUSAL’s Submission to the High-Level Commission on Carbon Prices

UC RUSAL is a leading global aluminium producer in an industry where CO2 emissions are of great importance. Aluminium production is a very energy intensive process requiring a large amount of electricity for smelting.

RUSAL is a leading global aluminium producer and a member of CPLC. Both locally and on an international level, RUSAL has been an active proponent of the initiative to establish a price on global carbon based on fair common rules.

Bearing in mind the complexity of the international climate negotiation process, we propose that the High-Level Commission on Carbon Prices consider a sectoral approach as a starting point for a global universal carbon price.

A sectoral approach is one that involves any form of mitigation commitment, for example, pricing systems and standards, by a particular economic sector between multiple jurisdictions. Sectoral approaches can generate a number of potential benefits including increased participation, alleviation of competitiveness concerns and greater targeting of key areas.

Energy intensive industries could be indicative corridors of carbon prices which can be used to guide the design of carbon pricing instruments and other climate policies, regulations, and measures to incentivize bold climate action and stimulate learning and innovation. They can also help to deliver on the ambitions of the Paris Agreement and support the achievement of the Sustainable Development Goals.

From the perspective of competitiveness, highly concentrated and homogenous energy-intensive sectors such as aluminium would appear to be a good candidate.

Please find attached some thoughts which we believe are relevant to the High-Level Commission’s Report.

 

Sincerely,

Sergey Chestnoy

Adviser to RUSAL CEO

 

ANNEX

Sectoral Approach in carbon pricing for Aluminium Industry

 

·               New aluminum production creates around 1% of global annual GHG emissions. Mining, refining, smelting and casting primary aluminum releases about 0.4 billion tons (Gt) of carbon dioxide equivalent (CO2e) emissions per year. Approximately 80% of worldwide GHG emissions in the aluminium industry occur during the energy-intensive smelting process. Primary aluminium production results in associated direct greenhouse gas emissions from the combustion of fossil fuels in the alumina calcination process, as well as indirect emissions from production of electricity used in the electrolysis process. The largest source of GHG emissions is electricity generation: smelters consume around 4% of global electricity output[1].

·               The aluminium sector has already undertaken voluntary climate initiatives to reduce GHG emissions under the auspices of the International Aluminium Institute (IAI) – a sectoral international organization of 26 companies from different regions, representing aluminium production[2]. The IAI co-ordinates, monitors and promotes voluntary performance standards (including PFC reduction and energy efficiency targets).

·               The Aluminium Stewardship Initiative (ASI)[3] is a global, multi-stakeholder, non-profit, standard setting and certification organisation. Its formation is a result of producers, users and stakeholders in the aluminium value chain coming together with the aim of maximising the contribution of aluminium to a sustainable society. The ASI Performance Standard also includes two smelter-specific criteria:

o   Smelters starting production after 2020 must achieve a level of direct and indirect (Scope 1 and 2) GHG emissions below 8 tonnes CO2-eq per metric tonne of aluminium produced.

o   Existing aluminium smelters that were in production before 2020 must achieve the 8 tonnes CO2-eq per metric tonne level by 2030.

The ASI’s Performance Standard requirements thus represent a shift towards a lower emissions profile for the sector in the long-term. Furthermore, the ASI’s Certification programme can help to create market drivers for change.

·               Consumers are demanding environmental responsible products. Carbon pricing should stimulate a worldwide application for low carbon sectoral standards building upon these voluntary initiatives.

·               Purchasing and producing renewable energy as well as investing in low carbon technologies, working to improve energy efficiency, and offering new products and services aimed at reducing emissions are all meaningful strategies for the aluminum industry to undertake. Revenues from carbon pricing should underpin this process.

·               Whereas historical producers have grounded their production in hydropower energy sources, “new comers” from the Gulf States, India and China who are now the world’s leading producers, have effectively opted for fossil fuels (natural gas and coal) to power their smelters. Today’s geography of aluminium smelters is partly based on access to cheap electricity, reflecting a decision which was taken when the cost of was not a concern.

·               The UN climate change negotiations with its substantial international buy-in whilst being propelled by a palpable sense of urgency, offers both public and private actors the chance to make real changes in energy consumption. The UNFCCC could also make major industries far more environmentally friendly and sustainable through incentives such as phasing out fossil fuels, cutting emissions and promoting various standards. The Paris Agreement does not constitute a global rule book on emission reduction and the key regulation will continue to be determined on a country-by-country and sector-by-sector basis. If the measures and standards aren’t stringent or binding enough, whatever progress is made on UNFCCC will be undone by developing countries that are heavily reliant on oil or coal.

·               Carbon pricing could also help to address the very sensitive issue of carbon leakage. Today a company that faces high costs relating to meeting a CO2 target could either face increased competition from companies without such a constraint, or decide to relocate part or all of its CO2-intensive processes to jurisdictions where climate policy is less stringent. Sectoral cooperation and universal carbon pricing ensures that industry competitors all undertake comparable mitigation efforts and are on a same level playing field. An international emission tax could be imposed directly on energy intensive sectors.

·               Taxes, unlike an emission-trading scheme, do not require a new institutional infrastructure to keep track of ownership of emissions allowances. This consideration may be especially important in developing countries. Regarding the choice between taxes and tradable permits, longstanding economic theory suggests that in the presence of uncertainty about the marginal cost of emission reduction, for a stock pollutant like CO2, a carbon tax is more economically efficient than a tradable permit system[4].

·               A tax can be used in conjunction with other policy instruments while a cap-and-trade system either renders the other policies environmentally irrelevant or is itself rendered environmentally irrelevant by them. This is a major concern when decision making takes place at several levels.

 

References:

1.              D.Bodansky. International Sectoral Agreements in a Post-2012 Climate Framework, 2007

2.              Mitigating Emissions from Aluminum. Columbia University, 2011. http://www.thegncs.org/

3.              IAI, http://www.world-aluminium.org

4.              ASI, https://aluminium-stewardship.org/about-asi/

5.              Sectoral approaches to greenhouse gas mitigation. Exploring Issues for Heavy Industry, IEA, 2007

6.              Industry Sectoral Approaches and Climate Action: From Global to local level in a post-2012 climate framework. UNEP, 2009 http://www.unep.org/pdf/industrial_sectoral.pdf

7.              http://www.diplomaticourier.com/what-the-aluminum-industry-has-to-say-about-climate-change/

8.              IPCC Fifth Assessment Report. Climate Change 2014: Mitigation of Climate Change, Chapter 15 “National and Sub-national Policies and Institutions”. http://www.ipcc.ch/pdf/assessment-report/ar5/wg3/ipcc_wg3_ar5_chapter15.pdf

9.              State and Trend of Carbon Pricing. World Bank Group, 2016

___________

 

[1]https://pdfs.semanticscholar.org/1eaf/1e0e36725bd3698133f2bd0a34992f8b9811.pdf?_ga=1.77240469.1279308319.1481727660

[2]Industry Sectoral Approaches and Climate Action: From Global to local level in a post-2012 climate framework. UNEP, 2009

[3] https://aluminium-stewardship.org/about-asi/

[4] http://www.ipcc.ch/pdf/assessment-report/ar5/wg3/ipcc_wg3_ar5_chapter15.pdf

WRI inputs to the High-Level Commission On Carbon Prices to further drive climate action

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.

Summary of Relevant OECD Publications Carbon Pricing

Recent relevant OECD publications.

Below are summaries of OECD's main points on carbon pricing, drawn together by Kurt Van Dender (OECD, Centre for Tax Policy and Administration) and Richard Baron, Principal Advisor OECD Round Table on Sustainable Development

We attach a couple of recent OECD publications that we think will be of relevance. Below are summaries of their main points on carbon pricing, drawn together by Kurt Van Dender (OECD, Centre for Tax Policy and Administration) and myself.

Main points of the OECD’s September 2016 report: Effective Carbon Rates (OECD, 2016)

Carbon prices alone do not suffice to decarbonise the global economy (see the points on policy alignment below) but – by steering investment towards low-carbon infrastructure and technologies, and discouraging carbon-intensive production and consumption patterns – are indispensable to achieve them.

To what extent are prices already used to mitigate carbon emissions? The OECD report “Effective Carbon Rates: Pricing CO2 through taxes and emissions trading systems” provides answers. For 41 OECD and G20 economies, representing approximately 80% of global carbon emissions from energy use, the report measures effective carbon rates (ECRs) – the price signals resulting from emissions trading systems and carbon taxes, but notably also from specific taxes on energy use. These three components all increase the relative price of CO2 emissions, so they capture the economically relevant contribution of tax and emissions trading policies to the cost of emitting CO2.

The results paint a dire picture. Countries are very far from exploiting the full potential of emissions pricing policies. Most emissions across the 41 countries are not priced, and 90% are priced at less than EUR 30 per tonne of CO2, a conservative estimate of the costs resulting from a tonne of CO2 emissions. Relatively high effective carbon rates occur mostly in road transport, because of high excise taxes on motor fuels. In addition to cutting CO2 emissions, motor fuel taxes can help curb air pollution, congestion and other external costs related to car use. They also may help raise government revenue at a relatively low economic cost. Therefore, relatively high rates in transport may well be justified, at least as long as external costs are not addressed by more targeted instruments such as distance- or congestion-charges. It also is worth observing that the high rates in transport have not resulted in strong decarbonisation. Higher prices do lead to less fuel use in transport, but up to now not by enough to induce a switch to cleaner fuels, or a structural shift towards less low occupancy and car-oriented mobility patterns. Prices work, but can’t do the job alone.

Non-road sectors account for 85% of carbon emissions across the 41 countries. Outside road transport, effective carbon rates are usually well below EUR 30 (only 4% of emissions across all countries face a price of EUR 30 or more). This is very hard to justify, now and especially going forward. 

It is worth noting that the 10 countries with the highest effective carbon rates represent 5% of the 41 countries’ carbon emissions, whereas the 10 countries with the lowest rates – which include several large countries –account for 77% of emissions.

The three pricing instruments – carbon taxes, other specific taxes on energy use, and emissions trading systems – are used to varying extents across economic sectors. In road transport, carbon is priced almost exclusively via excise taxes on fuel use in all countries analysed. Specific taxes on energy use are the dominant component of the average effective carbon rate in the industry, electricity and residential and commercial sectors too, but the role of price signals from tradable emissions permits tends to be larger in these sectors than in the road sector. Carbon taxes presently only play a small role on average, and their impact is largest in the residential and commercial sector.

Taxes and emissions trading systems overlap frequently. However, taxing emissions that are subject to a trading system does not result in additional emission reductions as long as the cap is binding. The overlap then may compromise the cost-effectiveness of abatement as it undoes the uniformity of the price signals sent by a trading system. While this does not necessarily mean that taxes and trading systems should never be combined, the justification for levying taxes on ETS-covered emissions should be to address other market failures, or raise revenue.

 

Main points of Aligning Policies for a Low-carbon Economy, (OECD-IEA-ITF-NEA, 2015, OECD Publishing, http://oe.cd/lowcarbon)

- First, the publication points out the importance of broadening the scope of climate policy beyond the usual policy portfolios, where some margins for improvement may exist to increase the effectiveness of climate policy instruments. The ‘elasticity’ with which a sector can respond to a carbon price may be increased with targeted policy reforms, some of which are indicated in the report.

·        For instance, incentives through the income tax treatment of company cars (20% of the car fleet in OECD and key partner countries) bias choices and uses of cars to more carbon-intensive ones – chapter 3.

·        A second example is provided by the pricing of electricity on wholesale markets, with a volatility that implies that a higher carbon price is required to trigger investment in high-capital cost low-carbon generation than would be the case if there were more certainty on electricity market returns for these investments; this is the logic that is pushing the introduction of auctions for renewables. At the moment, the price of carbon is unlikely to be the instrument of choice for the decarbonisation of power generation, even if it is useful to reflect the carbon constraint in short-term operation choices – Chapter 7).

I note that the issue of policy alignment as addressed in the report goes beyond the treatment of this issue in the World Bank’s latest State and Trends of Carbon Pricing.

- The report also contains important policy points on carbon pricing itself:

·        Page 29 (see also the reference to Acemoglu et al. 2012) on the superiority of policy packages to a ‘price only’ approach, in light of technology dynamics.

·        Page 30: countries are using monetary carbon values to guide long-term investments (see Figure 1.2 p.30 and publication by Smith and Braathen, 2015). There are also examples of use of carbon values in public procurement procedures (see Baron, 2016, The Role of Public Procurement in Low-Carbon Innovation, page 17, http://www.oecd.org/sd-roundtable/papersandpublications/The%20Role%20of%20Public%20Procurement%20in%20Low-carbon%20Innovation.pdf ). These approaches can usefully complement ‘effective carbon rates’ when there are political economy barriers to the introduction of higher carbon prices.

·        Page 35: see discussion about industrial competiveness, and page 37 about distributive impacts and their possible mitigation.

 

Social Value Of Mitigation Action; An Anchor For New Forms Of Carbon Pricing?

Social Value of Mitigation Action, an anchor for new forms of carbon pricing?

Etienne Espagne (CEPII), Jean-Charles Hourcade (Cired), Emilio La Rovere (UFRJ), Baptiste Perrissin-Fabert (France Stratégie), , Antonin Pottier (Ecole des Mines), Priyadarshi Shukla (IIMA)

 

Revisiting the Carbon Pricing Challenge after COP21 and COP22
Working Paper N° 2017-59
Priyadarshi Shukla (IIMA), Jean-Charles Hourcade (Cired), Emilio La Rovere (UFRJ), Etienne Espagne (CEPII), Baptiste Perrissin-Fabert (France Stratégie)

Date: March 2017
CIRED

 

Social Value of Mitigation Activities and forms of Carbon Pricing

Working Paper N° 2017-60

Emilio La Rovere (UFRJ), Jean-Charles Hourcade (CIRED), Shukla Priyadarshi (IIMA), Etienne Espagne (CEPII), , Baptiste Perrissin-Fabert (France Stratégie) Date : March 2017
CIRED

 

How to use SVMAs to reduce the Carbon Pricing and Climate Finance Gap: numerical illustrations

Working Paper N° 2017-61
Jean-Charles Hourcade, Shukla Pryadarshi, Emilio La Rovere, Subash Dahr, Etienne Espagne, Dominique Finon, Amaro Pereira, Antonin Pottier

Date : March 2017

CIRED

The carbon prices making low carbon plants competitive

The carbon prices making low carbon plants competitive

Centre International de Recherche sur l’Environnement et le Développement (CIRED)

Authors:

Dominique Finon,  Research Director, CNRS, Centre International de Recherche sur l’Environnement et le Développement (CIRED) Paris, France

 
 

The Comparative Importance for Optimal Climate Policy of Discounting, Inequalities, and Catastrophes

Mark Budolfson, Francis Dennig, Marc Fleurbaey, Asher Siebert, Robert Socolow Princeton University

 

Optimal climate policy and the future of world economic development

Mark Budolfson Francis Dennig Marc Fleurbaey Noah Scovronick Asher Siebert Dean Spears Fabian Wagner

August 12, 2016

The Carbon Pricing Leadership Coalition brings together leaders from government, private sector, academia, and civil society to expand the use of carbon pricing policies.

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