How much should carbon cost?

Do trees grow on money?

Do trees grow on money?

Nowhere are the mysteries of carbon economics (carbonomics?) laid bare more than in the offsetting trade. Today’s internet prices for a tonne of CO2 varied from US$2 — yes, you did read that correctly — to a whopping 116 Swiss Francs, or US$95.55 at current exchange rates.

Some of the variability is perfectly legitimate. Carbon offset projects cost different amounts depending on their goals (e.g. wind farm vs tree planting) and location (industrialised vs developing countries). It stands to reason that the cost per tonne of CO2e (carbon dioxide equivalent — the accepted measure of greenhouse gas emissions) varies with the complexity of a project and the associated cost of locking up carbon.

The trouble is that these differences between projects aren’t always immediately apparent to the consumer, leading to suspiciously low (and in some cases equally suspiciously high) prices.

Fortunately, there is another way to put a price on carbon. It’s called the Shadow Price of Carbon. Those clever chaps at Defra based the SPC on the Social Cost of Carbon, a measure of the damage inflicted on society by an “incremental” rise in atmospheric carbon concentrations.

The SCC aims to measure the full cost of the extra carbon over the time it spends in the atmosphere. The idea is to get a measure of how much we should be prepared to pay now to avoid having to pay the consequences of inaction later.

Unfortunately for us, that’s not the end of it. The SCC depends not just on our own actions in the UK, but on what everyone else is doing (that is in fact a hallmark of the whole climate change disaster, but let’s save that discussion for another time). The UK accounts for just two percent of the world’s annual GHG emissions, so in a sense it doesn’t matter what we do if no one else follows us. But shhh… let’s not make that too widely known on the world political stage!

It makes sense for us to err on the side of caution and assume that the rest of the world acts, if it acts at all, to reduce emissions towards the top of the range suggested in the Stern report as being “acceptable”. In other words, each country can only be expected to do the minimum necessary to reduce atmospheric GHG concentrations into the “safe zone” (and there’s a huge amount of debate over whether it really will be that safe). And there’s no cause for piety — for all our ambitious targets, the reality is that we’ll struggle to meet them.

The Shadow Price of Carbon reflects this, being derived from the SCC on the basis of that less drastic emissions reduction trajectory. The upshot is that carbon is very, very expensive. How about £92 per tonne, or £25 per tonne of CO2e?

If you’re still with this, congratulations.

Of course, the SPC isn’t the same thing as the carbon trading market, which is subject to it’s own set of economic rules, including the great bear of competition. But it does give us some indication of the price we should be prepared to pay to act now. One could say that anything on the market below the SPC represents good value as long as it delivers.

So there you go: an upper limit on the price of carbon. As for the lower limit, buyer beware!

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