CEE’s 2007 Industry Partners Meeting was held during the same week that both the United Nations and President Bush held separate climate change summits in the United States to propose ways to reduce carbon emissions. The fact that these two meetings happened at the same time is a clear sign that the question is not will the United States regulate carbon emissions, but rather when and how? The carbon buzz was also felt at the Industry Partners Meeting, where Jim McMahon, PhD, of Lawrence Berkeley National Laboratory provided a timely, abridged overview of mechanisms, both proposed and existing, for putting a price on carbon emissions in order to make it attractive to large emitters to reduce their output.
Inherent in climate change is risk. As temperatures rise due to carbon emissions into the atmosphere, risks also rise. For example, as temperatures rose 1°C over the previous twenty years, insurance costs rose due to increased damage from floods and storms. Some risks change over time. With a 1.5°C rise, cereal production increases, but at 4°C, production begins to decline. Carbon monetization addresses climate change risks by putting a cost on carbon emissions.
Carbon monetization can establish prices by quantifying the costs of damages or of mitigation. Assessing the cost of climate change damages is a difficult exercise since its magnitude is global and over a long time scale, both of which create mathematical uncertainty in projecting the costs of future damages. The U.N. Intergovernmental Panel on Climate Change has assigned an average of $43 per tonne of carbon (or $39 per ton) to account for the social costs, however projected variability is $10 per tonne to $350 per tonne.
A more practical way to assign value to emissions may be to quantify the costs of mitigation. Energy efficiency, demand side management (or behavioral change), carbon neutral fuels, or carbon capture and sequestration for power plants are examples of mitigation strategies that can be quantified.
Given the intricacies involved with quantifying the cost of carbon emissions, who sets the price? Several models exist for carbon monetization. The Chicago Climate Exchange is an example of voluntary trading in emissions, but the government can also regulate, for example by setting fuel efficiency standards. Sweden, Finland, Netherlands, Norway, and now the province of Québec all tax carbon directly. The European Union operates a cap-and-trade system where emissions are capped at a certain level and traded for above and below that level. President Bush has proposed an international clean energy research and development fund.
Carbon monetization is happening now. The global market for carbon was worth $11 billion in 2005 and almost tripled in 2006 to $30 billion. The European Union traded 1100 tonnes of carbon dioxide emissions in 2006. The Regional Greenhouse Gas Initiative (RGGI) was initiated by the northeastern and mid-Atlantic states in the United States and has been joined by California. It plans on using a cap-and-trade system to cut regional power plant emissions 80 percent from 1990 levels by 2050.
What will this do to our economy to put a price tag on the fuel that runs it? Not as much as you’d think according to Lawrence Berkeley National Lab research. At $10 per ton of carbon, gasoline prices would increase by $.027 per gallon, a kilowatt hour of coal-fired electricity would go up $.0027, and gas-fired electricity would go up $.0013. At $100 per ton of carbon, the price increases are still lower than ones we’ve already seen in the past few years. In addition, some of this money will go towards reducing demand, including greater energy efficiency measures.
McMahon reminded us that the costs of mitigation are lower than paying for the damages of climate change. He also offered that getting into the market early allows you to “buy low and sell high.”
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