Effective Carbon Rates 2021

3. How far do we need to go (to decarbonise)?

Abstract

This chapter asks the question how high carbon prices need to be to reach the goal of net-zero carbon emissions by mid-century. It reviews studies on the topic and proposes three benchmarks. First, EUR 30 per tonne of CO₂ as an historic low-end benchmark of carbon costs. Second, EUR 60 per tonne of CO₂ as mid-range estimate for carbon costs in 2020, and at the same time low-end estimate for carbon costs in 2030. Third, EUR 120 per tonne of CO₂ as a central estimate for carbon costs in 2030.

Aiming to limit global temperature increases to 1.5°C, as called for in the Paris Agreement, requires decarbonisation by about mid-century (Rogelj et al., 2018[14]; Rogelj et al., 2015[15]).1 Kaufman et al. (2020[16]) estimate that decarbonising by 2060 requires a carbon price of about EUR 30 per tonne CO₂ in 2025 for the example of the United States.2 In 2030, the same decarbonisation goal requires a carbon price that is twice as large: EUR 60 per tonne CO₂. Decarbonising by 2050, which is more in line with the 1.5°C goal, by their estimates requires a carbon price of EUR 100 in 2030. If, in addition, carbon pricing is supposed to play a role as a major decarbonisation tool (which would almost certainly increase economic efficiency and lower aggregate emission abatement costs), carbon prices would need to be higher by EUR 20, equalling about EUR 120 per tonne of CO₂ in total (see Figure 2, “low complementary” policies in Kaufman et al. (2020[16]))3.

Earlier estimates, by the High-Level Commission on Carbon Prices (2017[17]), show that carbon prices at a level of EUR 40-80 per tonne CO₂ are needed in 2020 for countries to decarbonise in line with the Paris Agreement. In 2030, prices should reach EUR 50-100 per tonne of CO₂. The IMF recommends an increase in carbon prices by EUR 75 per tonne of CO₂ from current levels through 2030 in a scenario that assumes optimal support for clean technology development (IMF, 2019[18]). Based on a less technologically optimistic scenario, the Quinet Commission (2019[19]) recommends a carbon price of EUR 52 per tonne of CO₂ in 2018, increasing to EUR 250 in 2030 and EUR 775 in 2050,4 which is levied in addition to the baseline of fuel taxes in France in 2017.5

A different approach is to estimate the damage that results from one tonne of CO₂ released into the atmosphere. Under this approach, it is economical to cut emissions, as long the investment needed to reduce emissions is lower than the costs of emissions to society.6 Estimates vary considerably due to different assumptions, for example, how future consumption is valued compared to current consumption, and what types of damage are taken into account. The German Environmental Protection Agency estimates the social damage to be EUR 180 per tonne of CO₂ released in 2016. An earlier literature review by Alberici et al. (2014[20]) suggested a low-end estimate of climate cost of EUR 30 at that time.

Against this background, this edition of Effective Carbon Rates employs three carbon price benchmarks:

• EUR 30 per tonne of CO₂, a historic low-end price benchmark of carbon costs in the early and mid-2010s (Alberici et al., 2014[20]). A carbon price of EUR 30 in 2025 is also still consistent with the slow decarbonisation scenario by 2060 according to Kaufman et al. (2020[16]).

• EUR 60 per tonne of CO₂, low-end 2030 and mid-range 2020 benchmark according to the High-Level Commission on Carbon Pricing (2017[17]). A carbon price of EUR 60 in 2030 is also consistent with the slow decarbonisation scenario by 2060 according to Kaufman et al. (2020[16]).

• EUR 120 per tonne CO₂, a central estimate of the carbon price needed in 2030 to decarbonise by mid-century under the assumption that carbon pricing plays a major role in the overall decarbonisation effort (See Figure 2 , low complementary policies in Kaufman et al. (2020[16])). EUR 120 is also more in line with recent estimates of overall social carbon costs.

EUR 30 and EUR 60 per tonne of CO₂ have already been applied in earlier editions of Effective Carbon Rates and thus allow for comparison over time. EUR 120 is a new benchmark that allows assessing progress towards carbon prices in the near future that are in line with current decarbonisation goals.

References

[7] Alberici, S. et al. (2014), Subsidies and Costs of EU Energy – Final Report and Annex 3, Ecofys.

[4] High-Level Commission on Carbon Prices (2017), Report of the High-Level Commission on Carbon Prices, World Bank, Washington, D.C., https://static1.squarespace.com/static/54ff9c5ce4b0a53decccfb4c/t/59b7f2409f8dce5316811916/1505227332748/CarbonPricing_FullReport.pdf (accessed on 16 February 2018).

[5] IMF (2019), Fiscal Monitor: How to Mitigate Climate Change, IMF, Washington, D.C.

[3] Kaufman, N. et al. (2020), “A near-term to net zero alternative to the social cost of carbon for setting carbon prices”, Nature Climate Change, http://dx.doi.org/10.1038/s41558-020-0880-3.

[6] Quinet, A. (2019), La valeur de l’action pour le climat. Une valeur tutélaire du carbone pour évaluer les investissements et les politiques publiques, France Stratégie, Paris, https://www.strategie.gouv.fr/sites/strategie.gouv.fr/files/atoms/files/fs-2019-rapport-la-valeur-de-laction-pour-le-climat_0.pdf (accessed on 24 July 2019).

[2] Rogelj, J. et al. (2015), “Energy system transformations for limiting end-of-century warming to below 1.5 °C”, Nature Climate Change, Vol. 5, pp. 519-527, http://dx.doi.org/10.1038/nclimate2572.

[1] Rogelj, J. et al. (2018), “Mitigation Pathways Compatible with 1.5°C in the Context of Sustainable Development”, in Masson-Delmotte, V. et al. (eds.), Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C., IPCC.

Notes

← 1.  In the Paris Agreement signatories agreed to aim for limiting global average temperature increases to 1.5°C compared to pre-industrial levels and ensuring that global average temperature increases remain well below 2°C. Many model simulations predict that the 1.5°C goal requires net-zero emissions in the 2050s, while for a 2°C goal net-zero emissions by 2070 can be sufficient (Rogelj et al., 2018[14]). In addition, the amount of emissions that could potentially be removed from the atmosphere affects the pathway to net-zero emissions.

← 2.  This document assumes long-term EUR-USD parity.

← 3.  Carbon pricing is generally not the lead decarbonisation instrument in the jurisdictions where it exists. Some emissions trading systems instead work as a backstop rather than as the prime decarbonisation tool. This is the case when there are many other policies such as efficiency standards, technology phase outs, clean energy requirements etc. that are more stringent than the carbon price that results from the emission cap. In this case, the cap works as a backstop to ensure that aggregate emission targets are reached. In such a case permit prices can be expected to be low or remain close to the minimum carbon price of the system, if such a minimum price exists. For example, permit prices in the California Cap-and-Trade-Program have so far been very close to the corresponding reserve prices for permit auctions.

← 4.  Keeping the decarbonisation objective by mid-century in mind, there will be few emissions for which the very high carbon price needs to be paid.

← 5.  The Quinet Commission baseline scenario corresponds to the French effective carbon rates in 2017, excluding the French carbon tax and the EU ETS permit price.

← 6.  Emissions can also be reduced through behavioural change in some cases, not requiring a monetary investment.