Two key questions relating to a design of a carbon price are (1) how high a price?; and (2) in what form?
In 2010 world governments agreed to limit the increase in global temperature to two degrees Celsius (2 °C) above pre-industrial levels to avoid the worst impacts of climate change.
To have an 80 percent chance of maintaining this 2 °C limit, the IEA estimates an additional $36 trillion in investment is needed through 2050—or an average of $1 trillion more per year compared to a “business as usual” scenario over the next 36 years.
A new Ceres report has provided some guidance on the price of carbon. With respect to the price level, the short answer is high enough to create a pathway to reducing energy-related CO 2 emissions by more than half in 2050 (compared with 2009 levels) and ensuring that they continue to fall thereafter in line with the IEA’s 2 °C scenario.
Specific carbon prices will vary by region and will be influenced by wide-ranging factors, including the presence of voluntary or mandatory energy efficiency or renewable energy targets and the broader credibility that the private sector attributes to carbon prices.
Both macroeconomic models and technology-specific analyses, however, suggest that prices in the $20-50/ton of carbon-dioxide equivalent (tCO2e) will make a variety of low-carbon technologies economical and competitive on a global scale.
As for the necessary policy frameworks, a carbon price can take the form of either a carbon tax or a “cap-and-trade” system. If properly designed, both can effectively level the economic playing field between clean and conventional energy sources. Ireland, Sweden, British Columbia and other countries all levy some form of carbon tax—with prices ranging from $3/tCO 2e (in Japan) to $163/tCO 2e (in Sweden). Current carbon trading prices for the largest existing carbon cap-and-trade systems, however, are generally well below the $20-$50/tCO 2e range, including California ($14/tCO 2e), Europe ($7/tCO 2e), and especially the Northeastern U.S. ($3/tCO 2e).
In the near future political gridlock will in many countries continue to thwart adoption of an explicit price on carbon. Legislative inaction, however, does not relieve the need for begin preparing for a low-carbon future. Prudent companies are already doing this by implementing a “shadow price” on carbon in their long-term financial plans. The Carbon Disclosure Project or CDP, recently reported that 29 large companies based or operating in the U.S. across multiple sectors (including Google, Walmart, Exxon Mobil and Walt Disney) are using shadow carbon prices of $6-60/tCO 2e.
CDP notes that such companies use a shadow carbon price as “a planning tool to help identify revenue opportunities, risks, and as an incentive to drive maximum energy efficiencies to reduce costs and guide capital investment decisions.” Investors should encourage all companies to adopt shadow carbon prices as a means for properly evaluating the costs and benefits of investments decisions, in particular those related to clean energy.