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Carbon Pricing

Optimal Carbon Price Should Be 200% Higher Than Economists Currently Estimate

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Originally published on The Carbon Brief.
By Sophie Yeo

The “optimal” carbon price should be up to 200% more than economists currently estimate, according to a new study published in Nature Climate Change. This is because, says the study, climate change could have sudden and irreversible impacts, which have not, to date, been factored into economic modelling.

While rising temperatures will affect many parts of the planet in a steady and predictable way, some places on the planet could be pushed beyond a “tipping point” by just a small change in temperature, with severe consequences for people and ecosystems.

There is a lot of uncertainty  among scientists about if and when these tipping points will occur. Yet the potential for such serious damage at some point in the future means that polluters should pay a lot more today in order to avoid such an event, the report says.

Carbon Brief looks at the suggestion that an uncertain future should mean imposing a higher price on carbon today.

Tipping points

The paper was written by Thomas S Lontzek from the University of Zurich, Yongyang Cai and Kenneth L Judd from Stanford University, and Timothy M Lenton from the University of Exeter.

Economists use models to calculate the “social cost of carbon” – the amount that it is worth paying now in order to avoid future damage.

The model used by the researchers in the study put this at $36.70 per tonne of carbon in 2005. This is a theoretical sum, as politicians have in reality allowed polluters to emit for much less, or nothing at all.

The intensifying impacts of climate change are expected to have an increasing effect on economic growth. Today’s carbon emissions mean that future generations will have to pay for declining agricultural productivity and damage to property from more frequent disasters.

The new study includes the impacts of five different tipping points among the potential damage.

These tipping points are the irreversible melting of the  Greenland Ice Sheet, the collapse of the  West Antarctic Ice Sheet, the dieback of the  Amazon Rainforest, the reorganisation of circulation in the Atlantic ocean and the increase in the amplitude of the  El Niño Southern Oscillation.

Their calculations are based on a general “conservative” estimate that each would shave off 10% of gross domestic product (GDP) over a period of 50 years.

When the authors included the potential for these unpredictable events in their calculations, they found that it caused the carbon cost to rise around 50% from $37 to $56.

Scientists from the Intergovernmental Panel on Climate Change  acknowledge that finding the correct carbon price is notoriously difficult, and that the various uncertainties involved can change the final figure by up to three times. Working Group 2 says:

“Uncertainty in SCC [social cost of carbon] estimates is high due to the uncertainty in underlying total damage estimates, uncertainty about future emissions, future climate change, future vulnerability and future valuation.”

The new study reflects this uncertainty. The authors make it possible to tweak how these tipping points unfold inside their model within what they say are plausible boundaries.

They calculate that, for a faster, higher impact event, the damage caused would be so great that today’s carbon price ought to be 200% higher in order to avert the future impact on the economy.

Other studies

Other economists have also concluded that we should be paying more now.

Three models are used to calculate the social cost of carbon: DICEPAGE and FUND. The authors of the study published today adjusted the DICE model to include tipping points. A 2012  paper by Cambridge economist Chris Hope made the same adjustments to his PAGE model.

The two approaches have led to broadly similar results, Hope tells Carbon Brief. Including tipping points in his own modelling caused the baseline carbon dioxide price to jump around 35% from about $80 to $106, close to the 50% within today’s study.

This means that most bodies, including the  US Environmental Protection Agency, are seriously underpricing carbon dioxide. The EPA uses a hypothetical price of around $40 to inform its policymaking, while in the EU polluters are already paying around €7 to emit a tonne of carbon dioxide.

Hope tells Carbon Brief:

“I think there’s more and more evidence coming that the damage being caused by a tonne of CO2 being put into the atmosphere is quite high; higher than people in the past might have thought it was, and maybe even higher than the kinds of numbers to come out of the US EPA studies.”

The inclusion of tipping points is not the only addition that is tipping the scale towards a higher price.

study published in Nature Climate Change in January incorporated three modifications into the DICE model, allowing climate change to affect the growth rate of the economy, adaptation to climate change, and dividing the model to represent high- and low- income countries.

With these assumptions, the optimal cost of carbon came out at $220 per tonne.

At the London School of Economics, Lord Stern and Simon Dietz also tried to  update the DICE model to include the latest science, allowing for a greater range of potential warming, damage to infrastructure, and changing the temperature threshold at which large economic impacts occur.

Plugging these changes into the model led to a rise in today’s optimal carbon dioxide cost from $32 to $103.

No government is likely to impose such high prices on their businesses and industry anytime soon. But if the predictions of these models play out, then it means that future generations could pay heavily for under-priced carbon emitted today.

Lontzek, T. S. et al. (2015) Stochastic integrated assessment of climate tipping points indicates the need for strict climate policy, Nature Climate Change, doi:10.1038/nclimate2570

Reprinted with permission.

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