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A Clear Long-term Price Guide of Carbon is Paramount

December 4, 2017

The global economy and insufficient progress of the Sustainable Development Goals fosters uncertainty to the lives of every man, woman and child. To then plan to purposefully take a leap of faith to address climate change adds a layer of uncertainty that is near insurmountable and has regularly caused a paralysis in our national and global institutions. Those called upon to lead must then strive to provide as much certainty as far into the future as possible.

 

The timescale of the response to climate change is in the order of several decades, yet many of our institutions are structured around periods not longer than five years with deregulated energy sectors having horizons measured in minutes. To provide long term certainty the solution, including a price for Carbon needs to be based on the long term levers and tools of our society. Therefore, a Carbon price cannot be solely dependent upon a market mechanism or defined by the political cycle.

 

Clearly the pricing of Carbon within any nation is defined by legislation within that nation. The law may also be a suitable place to define its price, but there are other examples of non-market centric long term pricing mechanisms. A Carbon price could be established in the same fashion as the price for money is in many economies, by a benchmark guided by political policy but set independently. Whichever of these two or any other method that may arise to mark a price, this does not address the discontinuity of carbon intensity that our historically zero-Carbon-price economy has created.

 

Transitioning to a Carbon-constrained economy will require sector specific transitional pricing for Carbon

 

In every national economy there is a sector where it will take the highest Carbon price to achieve a behavioural response to lower the carbon intensity within that sector. At first glance in high petrol/gas taxing economies such as those of Europe and Australia the transport sector is a likely candidate. It may take a Carbon price beyond US$100 to reduce travel demand, drive modal shift and shift driving behaviour. That is, if this high price were not occur, then the transport sector in these countries will not respond to price signals until sometime in the late-2020s or beyond. This is clearly far too late for such a large, slow to change and significant contributor of emissions to begin its shift. Certainly legislation and changing social values will move the sector's carbon intensity but at current or even forecasted prices for Carbon, price itself will not being playing its part.

 

An alternative approach is available. Set the price at the level of the highest price in the economy and define in law concessions and transitional arrangement for the sectors where such a price is overkill. In the high fuel tax economies with coal dependant electricity it is quite likely a price only 20% of that required to motivate change the transport sector is sufficient to motivate change in the energy sector. Noting that such action should not be perpetual with the implied 80% discount in the example here for the energy sector still needing to have a predetermined transition to no discount over perhaps a 20 or 25 year period.

 

Finally, such an approach is not seeking to define the actual market price itself, but a certainty to the application of the market price to the economy sector by sector with transitional processes having a suitable investment and decision making time frame. It is expected that as markets only function well with knowledgeable market makers and market participants that in the initial stages a price floor would need to be defined in the Carbon pricing framework and that the 'initial stages' may be the entire period while discounts apply to any specific sector - that is, more than 20 years.

 

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