Global Carbon Price Research Articles

Inclusion of forestry offsets in emission trading schemes: insights from global experts

Emissions trading schemes (ETSs) have been a central component of international climate change policies, as a carbon pricing tool to achieve emissions reduction targets. Forest carbon offset credits have been leveraged in many ETSs to efficiently meet emission reduction targets, yet there is little knowledge about the perceptions, experiences, and challenges associated with the forest carbon offsetting in existing and pilot ETS. Given that the future inclusion of forest carbon offset in ETS management activities and policies will require strong support and acceptability among the institutions and experts involved in ETS, this study explores the experiences and lessons learned with 16 globally engaging experts representing major existing ETSs (North America, Europe, and New Zealand) and Chinese pilot ETSs towards the inclusion of forestry offsets, major concerns and challenges with existing implementation models. Findings revealed that many respondents particularly from North America, New Zealand, and Chinese pilot systems portrayed positive attitudes toward the inclusion of forestry carbon offsets and its role in contributing to a viable ETS, while European experts were not supportive. Respondents cited leakage, permanence, additionality, and monitoring design features as the major challenges and concerns that inhibit the expansion and inclusion of forest carbon offsetting. Respondents from Chinese pilot schemes referenced a unique set of challenges related to implementation, including the increasing cost of afforestation and reforestation projects, the uncertainty in the future supply and demand for their national Certified Emissions Reduction (CER) scheme and landowner engagement. Existing and future ETSs should learn from and address the challenges experienced by global experts and carbon pricing mechanisms to design, evaluate, or enhance their forest carbon offset programs for an effective and viable system that successfully contributes to GHG mitigation practices globally. We recommend inclusion of forest carbon offsets at the early stages of ETS improves the perceptions and experience of policy makers and practitioners toward the success and potential of forestry offsets in ETS ensuring familiarity and confidence in the mechanism.

Assessing the impact of COVID-19 on global fossil fuel consumption and CO2 emissions

We assess the effect of the COVID-19 pandemic on global fossil fuel consumption and CO2 emissions over the two-year horizon 2020Q1-2021Q4. We apply a global vector autoregressive (GVAR) model, which captures complex spatial-temporal interdependencies across countries associated with the international propagation of economic impact due to the virus spread. The model makes use of a unique quarterly data set of coal, natural gas, and oil consumption, output, exchange rates and equity prices, including global fossil fuel prices for 32 major CO2 emitting countries spanning the period 1984Q1–2019Q4. We produce forecasts of coal, natural gas and oil consumption, conditional on GDP growth scenarios based on alternative IMF World Economic Outlook forecasts that were made before and after the outbreak. We also simulate the effect of a relative price change in fossil fuels, due to global scale carbon pricing, on consumption and output. Our results predict fossil fuel consumption and CO2 emissions to return to their pre-crisis levels, and even exceed them, within the two-year horizon despite the large reductions in the first quarter following the outbreak. Our forecasts anticipate more robust growth for emerging than for advanced economies. The model predicts recovery to the pre-crisis levels even if another wave of pandemic occurs within a year. Our counterfactual carbon pricing scenario indicates that an increase in coal prices is expected to have a smaller impact on GDP than on fossil fuel consumption. Thus, the COVID-19 pandemic would not provide countries with a strong reason to delay climate change mitigation efforts.

Modeling myths: OnDICEand dynamic realism in integrated assessment models of climate change mitigation

AbstractWe analyze how stylized Integrated Assessment Models (IAMs), and specifically the widely‐used Dynamic Integrated Climate‐Economy model (DICE), represent the cost of emissions abatement. Many assume temporal independence—that abatement costs in one period are not affected by prior abatement. We contrast this with three dimensions of dynamic realism in emitting systems: (i) inertia, (ii) induced innovation, and (iii) path dependence. We review key evidence from the last quarter century on each of these three components. Studies of stock lifetime, dynamics of diffusion and past transitions suggest typical transition timescales of at least 20–40 years for the bulk emitting systems. The evidence that substantial innovation is induced by both prices and market deployment is unambiguous. Finally, both data and a rapidly growing literature demonstrate substantial path dependence in general, and specifically “carbon lock‐in and lock‐out.” Some stylized models in the past decade have incorporated technology learning, and others have considered inertia, but the combination of these factors is important and not yet evident. More complex hybrid IAMs with technology‐rich energy‐system models incorporate these factors, but their complexity has limited the wider understanding and influence of their underlying insights. Few if any global models fully represent path dependence. We conclude with likely implications drawing upon the empirical and modeling evidence accumulated, including results from extending DICE with a highly stylized representation of such dynamic factors. This suggests that dynamicinterdependencies could multiply several‐fold the optimal level of initial abatement expenditure. This is because early abatement then also directly facilitates subsequent emission savings. The diversity of dynamic linkages across sectors and technologies also implies more nuanced policy than a single global carbon price. Thus, the issues explored in this review can radically change the general policy conclusions drawn from models, which, like DICE, neglect dynamic realism.This article is categorized under:Climate Economics > Aggregation Techniques for Impacts and Mitigation Costs

Carbon pricing and planetary boundaries

Human activities are threatening to push the Earth system beyond its planetary boundaries, risking catastrophic and irreversible global environmental change. Action is urgently needed, yet well-intentioned policies designed to reduce pressure on a single boundary can lead, through economic linkages, to aggravation of other pressures. In particular, the potential policy spillovers from an increase in the global carbon price onto other critical Earth system processes has received little attention to date. To this end, we explore the global environmental effects of pricing carbon, beyond its effect on carbon emissions. We find that the case for carbon pricing globally becomes even stronger in a multi-boundary world, since it can ameliorate many other planetary pressures. It does however exacerbate certain planetary pressures, largely by stimulating additional biofuel production. When carbon pricing is allied with a biofuel policy, however, it can alleviate all planetary pressures.

Break-even year: a concept for understanding intergenerational trade-offs in climate change mitigation policy

Global climate change mitigation is often framed in public discussions as a tradeoff between environmental protection and harm to the economy. However, climate-economy models have consistently calculated that the immediate implementation of greenhouse gas emissions restriction (via e.g. a global carbon price) would be in humanity’s best interest on purely economic grounds. Despite this, the implementation of global climate policy has been notoriously difficult to achieve. This evokes an apparent paradox: if the implementation of a global carbon price is not only beneficial to the environment, but is also ‘economically optimal’, why has it been so difficult to enact? One potential reason for this difficulty is that economically optimal greenhouse gas emissions restrictions are not economically beneficial for the generation of people that launch them. The purpose of this article is to explore this issue by introducing the concept of the break-even year, which we define as the year when the economically optimal policy begins to produce global mean net economic benefits. We show that in a commonly used climate-economy model (DICE), the break-even year is relatively far into the future—around 2080 for mitigation policy beginning in the early 2020s. Notably, the break-even year is not sensitive to the uncertain magnitudes of the costs of climate change mitigation policy or the costs of economic damages from climate change. This result makes it explicit and understandable why an economically optimal policy can be difficult to implement in practice.

A dual-track transition to global carbon pricing

ABSTRACT Unilateral climate policies have been unable to achieve intended emissions reductions. We argue that international harmonization of climate policy beyond the Paris Agreement is the only way forward and that global carbon pricing, either through a tax or market, is the best available instrument to manage this. A foundation has already been laid, as current carbon pricing initiatives cover about 20% of global CO2 emissions. Since it limits free-riding by countries/jurisdictions, global carbon pricing is, in principle, behaviourally easier to negotiate than other instruments, such as emission targets or technical standards. To overcome political resistance, we propose a dynamic strategy consisting of two parallel tracks and five transition phases. The first track entails assembly of a carbon-pricing coalition that expands over time and exerts moral and economic pressure on non-members to join. The second track involves refocusing UN intergovernmental climate change negotiations on carbon pricing, potentially involving initially heterogeneous prices reflecting distinct income levels of countries, which then gradually converge. The dual tracks are designed to reinforce one another, increasing the likelihood of a successful outcome. The proposal results in a transition trajectory consisting of two interactive tracks and five phases, with specific attention to inequity within and among countries. We illustrate how such an approach could function with either a carbon tax or market. Key policy insights International harmonization of climate policies is required to achieve the deep cuts in emissions needed to meet the Paris Agreement’s 2°C or 1.5°C target. A focus on carbon pricing – either through taxation or emissions trading – has multiple strengths: it can be easily compared and harmonized among countries; it can be gradually strengthened over time; it moderates freeriding and fear of competitiveness losses; and it automatically generates revenues to compensate low-income households and countries. Formation of a carbon-pricing coalition would enable such a group to speak with a single, powerful voice at UN climate change conferences. It would put economic and moral pressure on non-members, stimulating them to join and show a constructive attitude in ongoing UN climate change negotiations.

Diversity disqualifies global uniform carbon pricing for effective climate policy

Real economies and societies are diverse. Applied economics responds to diversity by a variety in technologies, institutions, products, policies, for meeting the demands of differentiated actors. Nevertheless, neoclassical economics states that climate change can be regulated most efficiently by installing a global uniform carbon price. This position is based on many assumptions, such as full substitutability, negligible transaction costs, and boundless scale economies. However, diversity is relevant for designing well functioning carbon pricing policies. Diversity is a gradual property for cataloging homogeneous and heterogeneous cases. When categories are incompatible, substitutability is problematic, and transaction costs are high, respecting diversity is beneficial, not costly. Negating heterogeneity (strong diversity) by applying uniform approaches triggers subsequent remedial ad-hoc policies to anyhow address relevant differences. Ex-ante consideration of diversity prevents the flaws of remedial policies. By opting for diverse, case specific financial incentives, economics would well partner with other social sciences in search for realistic, effective, efficient and just climate policies. The global uniform carbon price is a theoretical concept, unlikely to ever be realized, hence escaping decisive assessment of its actual performance. We suggest a substitute indicator for UNFCCC monitoring of countries’ efforts to financially incentivize climate actions.

Economic Impact of a Unilateral Carbon Price

A global uniform carbon price is a simple and cost-effective tool to curb greenhouse gas emissions. However, countries have widely varying carbon intensity of production and supply chains. They further differ in the total value add to the national economy of carbon-emitting sectors. Ward and co-authors have recently analyzed the country-level impact of a unilateral carbon price. It was found that the cost burden under such a policy would be heaviest on developing and industrializing nations.

Assessing the Impact of COVID-19 on Global Fossil Fuel Consumption and Co2 Emissions

We assess the effect of the COVID-19 pandemic on global fossil fuel consumption and CO2 emissions over the two-year horizon 2020Q1-2021Q4. We apply a global vector autoregressive (GVAR) model, which captures complex spatial-temporal interdependencies across countries associated with the international propagation of economic impact due to the virus spread. The model makes use of a unique quarterly data set of coal, natural gas, and oil consumption, output, exchange rates and equity prices, including global fossil fuel prices for 32 major CO2 emitting countries in 1984-2019. We produce forecasts of coal, natural gas and oil consumption, conditional on GDP growth scenarios based on alternative IMF World Economic Outlook forecasts that were made before and after the outbreak. We also simulate the effect of a relative price change in fossil fuels, due to global scale carbon pricing, on consumption and output. Our results predict fossil fuel consumption and CO2 emissions to return to their pre-crisis levels, and even exceed them, within the two-year horizon despite the large reductions in the first quarter following the outbreak. Our forecasts anticipate more robust growth for emerging than for advanced economies. The model predicts recovery to the pre-crisis levels even if another wave of pandemic occurs within a year. Our counterfactual carbon pricing scenario indicates that an increase in coal prices is expected to have a smaller impact on GDP than on fossil fuel consumption. Thus, the COVID-19 pandemic would not provide countries with a strong reason to delay climate change mitigation efforts.

How global climate policy could affect competitiveness

A global uniform carbon price would be economically efficient and at the same time avoid ‘carbon-leakage’. Still, it will affect the competitiveness of specific industries, economic activity and employment across countries. This paper assesses short-term economic shocks following the introduction of a global carbon price that would be in line with the Paris Agreement. Based on the World Input-Output Database (WIOD), we trace the carbon content of final output through global supply chains. This allows us to estimate how prices of the final output would react to the introduction of a global carbon price. We find that impacts on industrial competitiveness are highly heterogeneous across regions and economic sectors. The competitive position of Brazil, Japan, the USA and advanced economies of the EU is likely to improve, whereas industries and labor markets in newly industrializing Asian economies as well as Eastern Europe are likely to experience substantial adverse impacts.

How to Comply with the Paris Agreement Temperature Goal: Global Carbon Pricing According to Carbon Budgets

Avoiding irreversible climate change as effectively as possible is one of the most pressing challenges of society. Carbon pricing that is uniformly valid on a global and cross-sectoral basis represents a cost-efficient policy tool to meet this challenge. Carbon pricing allows external costs to be allocated or internalized on a polluter-pays principle. It is shown that a global emissions cap-and-trade system is the most suitable market-based instrument for reducing global emissions levels, in line with the temperature goal set by the Paris Agreement. A proposal for its design is presented in this paper. This instrument encourages worldwide measures, with the lowest marginal abatement cost, according to a pre-defined reduction path. Thereby, it ensures compliance with a specified remaining carbon budget to meet a certain temperature limit in a cost-efficient manner. Possible reduction paths are presented in this paper. Weaknesses in the design of existing emissions trading systems (ETS), such as the EU ETS, are identified and avoided in the proposed instrument. The framework solves several problems of today’s climate change policies, like the free rider problem, carbon leakage, rebound effects or the green paradox. The introduction of a global uniform carbon pricing instrument and its concrete design should be the subject of policy, especially at the United Nations climate change conferences, as soon as possible in order to allow for rapid implementation. If a global ETS with a uniform carbon price could be introduced, additional governmental regulations with regard to carbon emissions would become obsolete.

Global carbon pricing and international trade

ABSTRACTThis paper provides policies other than trade restrictions to induce global carbon pricing. It shows that bilateral increases of domestic taxes between large open economies represent a useful first step toward global carbon pricing. Specifically, the paper recommends that the production tax of the importing country and the consumption tax of the exporting country be increased together. Unlike a tariff-induced carbon pricing, the proposed policy mix is robust to trade distortions and increases market access. What is more, it addresses world price volatility and emissions leakage.

The Case against Carbon Prices

Professor Dr. Anthony Patt is head of the Climate Policy Group in the Department of Environmental Systems Science at ETH Zurich, Switzerland. His research focus is on technological pathways and public policies for climate change mitigation and adaptation. He is a Coordinating Lead Author in Working Group III of the Intergovernmental Panel on Climate Change. He obtained his PhD at Harvard University's Kennedy School of Government. He is the author of “Transforming Energy: Solving Climate Change with Technology Policy” (Cambridge University Press, 2015). Download : Download high-res image (204KB) Download : Download full-size image Professor Dr. Johan Lilliestam is head of the Renewable Energy Policy Group in the Department of Environmental Systems Science at ETH Zurich, Switzerland. His research focus is policies and strategies for a transition to a completely renewable energy system, including the effects of interactions between different energy policies. He obtained his PhD at the Central European University in Budapest, Hungary. Before joining the ETH, he worked at the Potsdam Institute for Climate Impact Research (PIK) in Potsdam, Germany, and the International Institute for Applied Systems Analysis (IIASA) in Laxenburg, Austria. He currently holds a grant from the European Research Council for his work on policy interactions. Download : Download high-res image (202KB) Download : Download full-size image

Parallel Tracks Towards a Global Treaty on Carbon Pricing

We argue that a global carbon price is the only way to effectively tackle free riding in international climate policy, required to substantially reduce greenhouse gas emissions. We briefly review the main reasons behind the essential role of carbon pricing, address common misunderstandings and scepticism, and identify key complementary policy instruments. Negotiating global carbon pricing is argued to be much easier than negotiating binding country-level targets, especially if it includes equitable revenue recycling. Moreover, a global carbon price can be more readily adapted to new data and insights of climate science. We propose a political strategy towards a global carbon price that consists of two tracks. The first entails assembly of a carbon-pricing club, a specific case of a climate club, to gradually move towards a full participatory agreement on carbon pricing. The second track involves putting time and energy into re-focusing UNFCCC negotiations on a carbon-pricing agreement. The two tracks reinforce one another, increasing the likelihood of a successful outcome.

Inequality and Greenhouse Gas Emissions

Global inequality has been falling in the last 20 or 30 years, mainly because of rising incomes in China, India, and, more recently, also in Africa. That has been good for global justice and poverty reduction, but not for greenhouse gas emissions. Indeed, the majority of growth in emissions since 1990 has taken place in emerging countries. As a result, if global inequality continues to fall, we have to confront the fact that greenhouse gas emissions will continue to rise. There is no easy solution to this problem, since it is very difficult for emerging countries to drastically change their emission pathways. But there are some policies that might help, including, for example, the removal of energy subsidies and a greater focus on air pollution and energy security, both of which are co-benefits of moving away from fossil energy. The question also remains whether more unequal countries emit more or less greenhouse gases. Theoretical arguments in this regard are ambiguous. We find that in poorer countries, higher inequality actually reduces per capita emissions, mainly because it pushes poor people out of the carbon economy and forces them to lead carbon-neutral lives, relying entirely on biomass. However, in richer countries, inequality is associated with rising emissions. Therefore, if we reduce inequality in rich countries, we will also help reduce emissions. But how to think about climate policy? Economists have very much focused on the idea that there is a first best climate policy with a global carbon price, achieved either through an emission trading scheme or a carbon tax. But one should realize that climate policy in practice involves many different initiatives at many different levels. The driving forces of such policies are often the co-benefits such as cleaner air or greater energy security than emission reduction. If we recognize this, then our analysis should focus not on trying to design first best, but unrealistic policies, but rather on studying the interactions between existing policies and on trying to improve their functioning. This will be a much more promising way to tackle climate change than focusing on an unrealistic first best option.

The Economics of 1.5°C Climate Change

The economic case for limiting warming to 1.5°C is unclear, due to manifold uncertainties. However, it cannot be ruled out that the 1.5°C target passes a cost-benefit test. Costs are almost certainly high: The median global carbon price in 1.5°C scenarios implemented by various energy models is more than US$100 per metric ton of CO2in 2020, for example. Benefits estimates range from much lower than this to much higher. Some of these uncertainties may reduce in the future, raising the question of how to hedge in the near term. Maintaining an option on limiting warming to 1.5°C means targeting it now. Setting off with higher emissions will make 1.5°C unattainable quickly without recourse to expensive large-scale carbon dioxide removal (CDR), or solar radiation management (SRM), which can be cheap but poses ambiguous risks society seems unwilling to take. Carbon pricing could reduce mitigation costs substantially compared with ramping up the current patchwork of regulatory instruments. Nonetheless, a mix of policies is justified and technology-specific approaches may be required. It is particularly important to step up mitigation finance to developing countries, where emissions abatement is relatively cheap.

Book Reviews

In Book Reviews, we review an extensive and diverse range of books. They cover theory and applications in operations research, statistics, management science, econometrics, mathematics, computers, and information systems. In addition, we include books in other fields that emphasize technical applications. The editor will be pleased to receive an email from those willing to review a book, with an indication of specific areas of interest. If you are aware of a specific book that you would like to review, or that you think should be reviewed, please contact the editor. The following books are reviewed in this issue of Interfaces, 48(5), September–October: Global Carbon Pricing: The Path to Climate Cooperation, Peter Cramton, David J. C. Mackay, Axel Ockenfels, and Steven Stoft, eds; Business Analytics for Managers: Taking Business Intelligence Beyond Reporting, Gert H. N. Laursen and Jesper Thorlund.

Impacts of global carbon pricing on international trade, modal choice and emissions from international transport

Transportation is one of the significant sources of global anthropogenic emissions, generating about 14% of global Greenhouse Gas Emissions (GHG) with the largest contribution from ground transportation followed by air and water transport. However, international climate agreements such as the Kyoto Protocol or Paris Agreement focused mostly on the regulation of production emissions without considering transport emissions in policy regulations. In this paper I analyze the effects of global carbon pricing on international trade and modal choice in the transportation of goods between countries, and resulting changes in international transport emissions. For this purpose I modify the Energy-environmental version of the Global Trade Analysis Project (GTAP-E) model to allow for substitution among different modes of transport.I find that a global GHG tax increases the competitiveness of transport services exports from the most developed countries which exhibit relatively low economic emissions intensities, while having a negative effect of services exports from most developing regions, which have relatively higher emissions rates per dollar of transport services. The findings also indicate that when international transport emissions and modal substitution are considered in global emissions regulation policies there is significant impact on the expected reduction in global emissions and global warming.

Global Carbon Pricing: The Path to Climate Cooperation

<i>Global Carbon Pricing: The Path to Climate Cooperation</i>

Impacts of Carbon Pricing on Brazilian Industry: Domestic Vulnerability and International Trade Exposure

After COP 21, with the adoption of the Paris Agreement in December 2015, the outlook for carbon pricing policies has been widened. While the agreement does not directly establish a global carbon pricing, the provisions accounted for in Article 6 have the potential to increase international cooperation in favor of greenhouse gas (GHG) mitigation through market mechanisms. The Brazilian Nationally Determined Contribution (NDC) considers the use of such mechanisms, though the configuration of the Brazilian climate policy does not specify the economic instruments for carbon pricing. When examining the recent evolution of GHG emissions in Brazil, the already achieved reduction in deforestation sheds light on the need to address GHG mitigation in other sectors, such as industry. Therefore, this paper analyzes the impacts of carbon pricing on the Brazilian industry in terms of sectorial value added (VA), emissions intensity, international trade exposure, and the risk of carbon leakage. Results indicate that, considering a price of carbon of US$10/tCO2, the cost of reducing emissions from 35% to 45% (same range of the Brazilian NDC) could represent an impact of 0.3% to 3.7% on sectorial VA. However, results for emissions intensity and international trade reveal medium to high carbon leakage risks for all analyzed industrial sectors.