Factoring carbon pricing into consumption can support climate change

02 February 2017 Consultancy.uk

Transforming the global economy to meet global climate goals, to limit global average temperature rise to well below 2.0°C and to pursue efforts to keep it under 1.5°C, has now reached implementation stage for many economies globally. One way forward is setting a price on carbon, whereby the externality costs of carbon are factored into its consumption. A new report highlights some of the effects of such an endeavour on consumer prices.

Late last year the Paris Agreement, hammered out at the end of 2015, was ratified. The agreement lays out a framework for a global move away from polluting and climate changing forms of energy consumption towards sustainability. The agreement, while a key step forward, places considerable onus on countries, business and citizens globally to transform their respective value chains and behaviours in line with the stated target of the agreement – to limit global average temperature rise to well below 2.0°C above pre-industrial levels, and to pursue efforts to keep it under 1.5°C.

One key element cited by more than two thirds of signatories to the Paris Agreement, of which 40 countries, 20 cities and around 1,200 businesses have concrete plans, is to price carbon consumption into the cost of products and services. Pricing carbon can take a number of forms, including emission trading systems (ETSs)—both cap-andtrade and baseline-and-credit systems, carbon taxes, offset mechanisms and results-based climate finance mechanisms. The effects of carbon pricing are not, however, well understood on the final cost of consumption.

Methodology of research

In a bid to better understand possible outcomes from setting a price on carbon, The Generation Foundation and Ecofys entered into partnership. One of the resulting reports, titled ‘Impacts of a Global Carbon Price on Consumption and Value Creation’, explores the costs, and benefits, of a global carbon price.

The cost of carbon

One way to understand the current relationship between carbon intensity and economic output, as well as model long-term change to meet global goals, is the measurement of greenhouse gas (GHG) productivity. The relationship considers in how far greenhouse gasses uses are able to generate economic value in different segments, and for different types of goods and services. According to the firm’s analysis – and only in relation to economically tracked value – global The global average GHG productivity equals $1.7/kgCO2e.

Overview of final consumption categories

Considerable disparity exists between sectors however. In fuel use for heating and cooking, productivity stands at around $0.2/kgCO2e, generating only a tiny fraction of global economic value while creating a significant GHG burden. Electricity use is equally unproductive. Mobility, which generates around two eights of global emissions has a relative productivity of $0.8/kgCO2e. Services, such as education, medical care, public and other services are the most effective at turning GHG used into economic value, at $3.6/kgCO2e.

The research also considers how much more productive GHG consumption needs to become to meet key global targets. The firm assumes global growth at around 3% annually until 2050, for which global emission reductions of up to 70% compared to 2010 are required to meet the 2.0°C target, altogether requiring a productivity of around US$9-18/kgCO2e by 2050. Global GHG productivity of between 4%-6% each year is required to meet a 2.0°C target and even more for a 1.5°C target.

Affect of carbon pricing on respective sectors

Given the ubiquitous nature of climate as such, the firm focused on cross jurisdiction efforts to achieve long-term climate goals by including the externality cost of carbon into the price of goods and services. The research therefore considers the wider horizontal value chain and how setting a global carbon price of $100/tCO2e, cited by the research as sufficient to incentives the required transformation, would affect consumer prices in a range of sectors.

The biggest impact, the research finds, would be on very low-value to carbon cost industries, where prices would see significant increases relative to the current level. Particularly the energy sector would see considerable increases in costs, reflecting the current reliance on legacy generation technologies – particularly coal and gas. Increased prices in these sectors would begin to affect consumer behaviour, from increased utilisation of public transport to electrification. Since the cost of carbon is subsequently collected – the firm notes that higher costs in certain categories and, particularly for, lower income groups, can be offset by redistributing collected incomes.

Other sectors, such as mobility and food, would see considerably more modest increases of around 6% and 3% respectively. The only category to see cost improvements from a price on carbon are services, whose carbon footprint is relatively small in any case.

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