Carbon Markets Cut Emissions 17x Cheaper Than Subsidies

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The cornerstone appeal of carbon markets is their ability to cut emissions while creating clean energy investments – but it turns out they may be far more effective at the task than anyone could have ever imagined.

Carbon markets reduce greenhouse gas emissions nearly 17 times cheaper than paying power generators renewable energy subsidies, according to new analysis of 15 nations by the Organization for Economic Cooperation and Development (OECD).

OECD’s research once again shows the power carbon markets can have in fighting climate change and funding clean energy, especially when linked across international systems, and is another example that cap-and-trade is far from dead.

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Carbon Markets Cut CO2 17 Times Cheaper

Emissions reduction efforts have traditionally focused on decarbonizing the global power sector by boosting clean energy generation, but OECD’s findings hint at a better way to spend limited government funds.

According to the report, the cost of cutting carbon dioxide (CO2) from electricity generation through carbon markets is roughly €10/$13.50 per metric ton on average. Compared to average feed-in tariff costs of  €169/$228.40 and capital subsidies costing €176/$237.80, the potential for rapid decarbonization is evident.

Before dismissing the OECD’s findings, consider the list of countries analyzed in the report: Australia, Brazil, Chile, China, Denmark, Estonia, France, Germany, Japan, Korea, New Zealand, South Africa, Spain, the United Kingdom, and the United States.

The analysis covers nearly every potential energy market – from developed economy to developing, from high renewables to fossil fuel dependent, and those with mature carbon markets to those just starting out or under consideration.

No “Climate Bailout Option” If We Fail

Considering the Earth has 30 years at most until its carbon budget is exhausted and the planet is locked into dangerous climate change, “consistent carbon pricing must be the cornerstone of government actions to tackle climate change,” says OECD.

By combining policies that include pricing every ton of CO2 emitted, placing an implicit price on emissions, removing fossil fuels subsidies, and transparently operating carbon market functions, OECD maintains both consumers and investors will be incentivized to reduce emissions while offsetting power price increases.

“Cherry-picking a few easy policy measures is not enough…and we don’t have any time to waste,” said Angel Gurria, OECD Secretary-General. “Unlike the financial crisis, we do not have a climate bailout option up our sleeves.”

But beyond the world’s carbon budget, OECD’s analysis also tackles the carbon bubble – the potential financial meltdown that could occur when fossil fuel corporations and the investments that depend on their stability are suddenly devalued as a result of proven reserves coming off balance sheets as they’re forced to remain in the ground as “unburnable assets.”

By one OECD-cited estimate alone, over 55% of pension fund portfolios is invested in high-carbon assets or sectors greatly exposed to climate change-related regulation – forcing a decision of “either stranding those assets or stranding the planet.” This figure doesn’t even consider the $523 billion in fossil fuel subsides governments paid in 2011: How well would Big Oil perform without that support?

In addition, governments face a “carbon entanglement” where they hold a major stake in bringing fossil fuels to market and being paid their share of the profits – around $200 billion annually from royalty payments and taxes on oil and natural gas in OECD states alone.

Funding A Fossil-Free Future

And that’s where dedicated revenue from the transition to a clean energy economy comes in. Carbon markets are pouring money into energy efficiency, climate mitigation, and renewable energy projects across the world. With roughly 60 carbon pricing systems currently in place or under development, a clear path forward is apparent – if governments choose to make the right policy decisions.

“We are on a collision course with nature, and we need to take bold decisions to change that path,” concluded Gurria. “ There is only one way forward – governments need to put together the optimal policy mix to eliminate emissions from fossil fuels.”