The many prices of carbon dioxide
Ask the economist what something should cost is scarce and they usually say whatever someone is willing to pay for it. They will go on to say that markets are the best way to establish that willingness. There are different systems that price carbon dioxide in that way. But they do not give the same answers. And they don’t fit what economists think might be the right answer.
For most people it seems that the cost of emitting tons of carbon dioxide is not worth it. They have to pay for fuel, they have to pay for whatever it burns, but once it’s gas they can let it go. In a few cases, they might even get someone to buy it—a liquor maker, say, or a liquor maker. DJ who wants dry ice.
But while the emissions may not cost the distributor anything, economists argue that they still have value, and that it is a negative value. This is because the carbon dioxide that is emitted is harmful to the environment, and almost everything has been felt by people as well as the emitter. Taking these externalities into account means including everything from loss of beachfront property and farm productivity to deaths caused by heat waves (other than those avoided in cold snaps).
This “social cost of carbon” is calculated through a model. These models must make assumptions, such as how much to reduce the impact of future losses and what to do about the uncertainty involved in climate damage estimates. Different assumptions give very different costs.
In many places the results of these models are used to guide policy. In America, for example, cost-benefit analyzes apply the social cost of carbon emissions to decisions about fuel standards. The government currently estimates the social cost at $51 for every tonne of carbon dioxide (or for an equivalent warming amount of another greenhouse gas). If the administration listened to the advice of its own Environmental Protection Agency, which deals with modeling differently, the cost would go up to $190. During the administration of Donald Trump, when only expenses on other Americans were considered, it fell to $5.
The social cost of carbon is hypothetical, if sometimes consequential. The costs imposed in carbon pricing schemes are real. Such systems typically limit emissions from a specific sector, and then distribute (often by auction) emission permits equal to that cap. Companies then trade permits in a “compliance market”.
Economists like these market-based “cap and trade” schemes because they find out which companies are most willing to make cuts. That spreads the burden effectively and reduces the overall cost of keeping emissions under the cap. But even when it is effectively distributed, the overall cost is something that most governments trying such schemes try to keep low: the average price charged ‘ raise in the world’s emissions trading systems around $20. The IMF estimates that for Paris-compliant decarbonisation the price per tonne would have to reach $280 on all emissions by 2050. That, the fund notes, “has may be politically unacceptable in many countries, despite the effectiveness of carbon pricing”.
A third way to establish a price is to find people who are willing to pay not to emit, thereby “correcting” the emissions of those who do. It has several practical drawbacks and two fundamental flaws. One is that cancellation is voluntary; no one has to do it. The second is that counter releases are still releases. They still warm the planet.
CDR avoiding the second problem. If a ton of carbon dioxide is taken out of the atmosphere in one place at the same time as another place is released somewhere else, the harm is practically zero.
Unfortunately, removal costs are currently much higher than governments’ preferred estimates of the social cost of carbon or the prices applied in cap-and-trade schemes; they exceed prices over a hundredfold. The idea of a market where the cost of carbon dioxide emissions is a price you have to pay to remove it is very attractive. Of course creating one will be very difficult.■