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A Case for the Price of Carbon

November 15, 2017

There is already a price for Carbon in every country on earth. In most it is not explicit. However, the wider acceptance of at least partial responsibility for the unequivocal and observed changes in the climate has provided changes in expectations that are impacting prices today. This maybe higher employment costs for organisations that do not explicitly incorporate climate change in their corporate social responsibility policies, lower yields from delayed adaptation effort raising food prices, or higher energy prices due to the integration of mitigation effort costs and a lack of response to demand signals due to uncertainty in explicit carbon pricing.

 

This could be considered a step forward, yet there is no design to this impact and as such whatever response it creates is not only unclear but unattributable. A lack of allocation blurs cause and effect and mires analysis in uncertainty. This is a worst of all outcomes as it fuels further inaction and delays purposeful response.

 

Gaining clarity for the value of our actions requires a price for Carbon

 

The world is currently attempting to establish a common method to evaluate the scarcity of Carbon and thus form a price. Unfortunately the failure to achieve this may be more fundamental than a lack of will or a breakdown in the institutional processes. Instead, the failure maybe more directly attributable to the structural dissimilarities in the Carbon intensity between nations and sectors of their economies.

 

One sector’s ideal price to drive action may represent a microeconomic disaster for the government and society as it is applied unilaterally to all sectors. This inconsistency is all the more significant as it crosses borders and passes through the barriers of currency exchange, dissimilar general tax regimes and potentially Carbon driven tariffs. It is therefore fairly clear that there is no one price for Carbon at least in terms of its application into an economy.

 

In traditional economics this doesn't appear to make sense. In what way can Carbon be all that different to any other globally trading commodity? The difference is twofold. The economy is already dependent upon this commodity based on a zero price and in most cases the demand is completely inelastic with no practical substitute. This difference is fundamental. The only practical approach to increasing the price from zero is to provide substitution alternatives and the capacity for demand to become progressively elastic.

 

In the two hundred years since the industrial revolution began, economic development in each national economy as it has industrialised has been directly correlated to Carbon emissions. The nominally free cost of Carbon intrinsically within our economy will not be de-coupled from economic prosperity without substantive change. This change is of a scale such that the destination beyond the change is likely to be just as different to our current economic and social fabric as we are to that of pre-industrial times. The difference is that we have only two generations to restructure what took eight to construct.

 

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