In the “final cut” wrap up of their global warming survey issue The Economist examines the carbon pricing choice, coming down on the side of the angels — for a carbon tax, against cap-and-trade [more Seekerblog discussion of carbon pricing policy options]:
…Still, a carbon price is likely to be the best way to cut emissions. That can be established through either a tax or a cap-and-trade system of the sort Europe has.
A tax would be the better option. Unlike a cap-and-trade system, which stipulates the amount of CO2 that may be emitted and allows the price to vary, a tax sets a price and lets it determine the quantity emitted. The volatility of the carbon price in Europe, which has variously risen above €30 and dropped to close to zero, is blamed in part for the lack of investment in clean energy, so there is a lot to be said for setting a price. But the prospects for a tax are not good. Business—particularly in America—is allergic to the very word; and the allowances which companies tend to be handed in the early stages of a cap-and-trade system have an obvious appeal to companies concerned about rising costs.
Whichever way a carbon price is established, the big question remains: can it be set at a level high enough to make a difference to climate change without derailing the world economy?
Probably. According to Richard Newell of Duke University, economists’ estimates of the carbon price needed to stabilise CO2 concentrations at 550 parts per million (widely reckoned to be a safeish level) range from $5 to $30 per tonne by 2025 and from $20 to $80 per tonne by 2050. The Intergovernmental Panel on Climate Change came out with fairly similar figures in its fourth report earlier this year—$20-50 per tonne by 2020-30. Mr Newell reckons that, in America, $20 per tonne would raise petrol prices by an average of 18 cents (or 6%) per gallon, and electricity prices by 14%. A $50 price would raise petrol prices by an average of 45 cents (or 15%), and electricity prices by 35%.
At the bottom end of the range these costs are not huge. Even at the top end they are manageable. The IPCC’s estimates of what a $20-50 carbon price would do to world GDP by 2050 range from a slight increase on what it otherwise would have been to 4% less. The average is 1.3% less, which would mean that average annual growth would be around 0.1% lower than it might otherwise have been.
Those prices assume that the entire world adopts a carbon price. That is a heroic assumption. Persuading developing countries to do so will be very hard.
It cannot be done unless all rich countries take the first step. They need to set an effective carbon price, and show the developing world that they can do so without ruining their economies. It wouldn’t be a solution to climate change, but it would be a start.
We don’t know what will be the GDP growth impact of an effective but as-yet unformulated policy.
My working hypothesis is that we need a five-year ramp-up to a price of US$ 25 per ton emitted CO2 [or about $100 - 125 per ton carbon] to stay within a stabilization range of 550 ppm. If I’m right about that price, and the price applies only to the developed countries at the outset but ramps onto the developing countries in a decade — then the drag on GDP growth/annum might be less than 1%. If Jeff Sachs optimism proves justified it could be half that, or 0.5%. For moderate-growers like U.S. or Australia that might translate into giving up 1/3 of compounded economic growth — 2% instead of 3%.
This is a topic deserving of front page debate and analysis — it would sure be nice to see some substantive coverage. This Economist survey is a good start.
Even with much more study we still won’t really know the cost — as we don’t know very precisely what our goal should be [ to stabilise CO2 concentrations at 550 parts per million, or must it be 450 ppm to ensure we don't cross into positive feedback country?]. We don’t know what sort of remarkable innovations will emerge, nor how the global climate will evolve.
So let’s seek approaches that facilitate adjustments along the way — so we can steer the policy into a happy port.
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