Why The World Will Not Agree to Pricing Carbon (Part II)

[Editor Note: Part I yesterday explained why carbon pricing cannot succeed unless it is global, and global carbon pricing is unlikely to be achieved, let alone sustained for the time until the job is done (centuries). Today’s post evaluates the output from the most widely cited and accepted climate economics model to show that at realistically likely participation rates, carbon pricing would be economically damaging for all this century, if not far beyond.]

A new report by Sir Nicholas Stern and co-authors “Better growth better climate”, released a week before the UN Climate Summit in New York (September 2014), advocates governments around the world intervene to impose carbon pricing, wind and solar power, and energy efficiency improvements. They imply the net economic costs could be negligible.

However, these claims do not seem to reconcile with results from the DICE-2013R model, developed by the highly respected and cited climate economist, William Nordhaus. Here I draw on the work by Nordhaus to argue that a global agreement on carbon pricing is unlikely.  I focus on the probability that carbon pricing schemes will succeed rather than debating the various estimates of the projected costs and benefits; the latter are extensively debated in the literature.  I conclude by suggesting an alternative to carbon pricing.

The issues presented here may have significant policy implications.

 Net Benefit of Carbon Pricing and Participation Rate

The following chart shows the projected net-benefit to 2100 of carbon pricing under seven scenarios. All scenarios show negative net-benefit for nearly all this century.  The information is derived from the Nordhaus DICE-2013R Integrated Assessment Model, the most widely used and cited model for estimating costs and benefits of different policy options and the carbon prices needed to achieve them.

Source: Derived from DICE-2013R model (Excel version); see also ‘User’s Manual’

Each series shows the present value net-benefit compared to a baseline. The vertical axis is $ trillion per 5-years.  Net benefit is projected benefit (reduced climate damages) minus projected abatement cost.  Present value is calculated using the discount rates for the ‘Baseline’ scenario.  The Baseline scenario assumes the policies to reduce CO2-eq that existed in 2010 will continue unchanged until the year 2300.  It can be thought of as the ‘take no more action’ scenario.  The purpose of this scenario is to provide a comparison for the other scenarios. The costs and benefits of the other six scenarios are subtracted from the Baseline scenario to calculate the change from the baseline.  The scenarios (except ‘1/2 Copen Partic’) are described in DICE User Manual, pp24-25.

All scenarios except ‘Copenhagen’ and ‘1/2 Copen Partic’ assume 100% participation from 2010;  i.e., all countries implement a carbon price in unison in 2010, the pricing scheme covers all human-caused GHG emissions, the price and rules are adjusted globally in unison and it continues for 290 years.

The ‘Copenhagen’ scenario assumes increasing participation from that existing in 2010 and reaching 100% participation in 2100.  DICE-2013R ‘Version Notes’ say “… the participation rate are set to match the Copenhagen pledges with optimistic phase in”.  US, EU, Japan, Russia and ‘Other High Income’ countries become 100% participants in 2015.  However, these assumptions are unrealistic.  In 2013, only 45% of EU emissions are included in the EU ETS and only 49% of US emissions are required to be monitored and reported by the emitters; none are priced.  The assumption of 100% participation being achieved in any country this century, if ever, is unrealistic.

The DICE-2013R model does not include Copenhagen ‘realistic’ or ‘pessimistic’ participation rates, so I added another scenario to test the sensitivity of the net-benefits to the participation rate. I arbitrarily halved the ‘Copen’ participation rate and call the scenario ‘1/2 Copen Partic’.  The chart shows the net benefits are negative for all this century.

[Note: The irregularities in the ‘Copen’ and ‘1/2 Copen Partic’ lines are caused by the assumed Copenhagen participation rate to meet the Copenhagen commitments (not yet ratified).]

The table below shows the net present value (NPV) from 2010 to 2050, 2100, 2200, 2300 for the Copenhagen scenario (column 2) and the 1/2 Copenhagen participation rate scenario (column 3).

At the Copenhagen participation rate, which as noted above is optimistic, the NPV is negative for all this century. At half the Copenhagen (optimistic) participation rate NPV is negative to 2300 and beyond.  Clearly, at a realistic participation rate, the world’s nations are not likely to agree to carbon pricing because the costs exceed the benefits, at least in the time frame over which policies must deliver net benefits if they are to be politically sustainable.

Further, for the reasons discussed in Part 1, even the ‘1/2 Copen Partic’ participation rate is unlikely to be achieved.

A Better Way

Carbon pricing is considered by most climate economists’ to be the optimum way to cut global GHG emissions.  But, arguably, there is a better way.  It is to deregulate so the cost of low-emissions energy can come down over time, especially in developing countries.  With this approach there would be no need for carbon pricing, emissions monitoring, or enforcement mechanisms involving policing, disputation, conflicts and international courts.

An example of what could be achieved would be if the USA (and IAEA) removed the impediments to nuclear power that are causing it to be far more expensive than it could and should be. This act alone could unleash innovation and global competition leading to cheaper, safer and more reliable electricity for the world.  Cheaper electricity would allow nuclear power to substitute for some fossil fuels for heating and for production of transport fuels (e.g. unlimited transport fuels from seawater).  Nuclear generated electricity could be around half the cost of fossil fuel generated electricity by 2050.  Nuclear power would replace fossil fuels for electricity generation at an accelerating rate.  It would cut GHG emissions from electricity and also from fossil fuels used for heat and transport fuels.   Emissions could be reduced concurrent with global economic benefits.

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Peter Lang is a retired geologist and engineer with 40 years’ experience on a wide range of energy projects throughout the world, including managing energy R&D and providing policy advice for government and opposition. His experience includes: hydro, geothermal, nuclear, coal, oil, and gas plants and a wide range of energy end use management projects.