Common Tragedies

Thoughts on Environmental Economics

Fifty dollars per ton of carbon dioxide

Posted by Daniel Hall on April 2, 2008

That is what Marty Weitzman thinks we should do about climate change.

This came up at the World Bank event I wrote about yesterday. During the Q&A session a World Bank employee came to the mic and said that the Bank would likely soon adopt a social cost of carbon (SCC) to use when evaluating its projects, and what SCC would Weitzman recommend?

Weitzman hemmed and hawed and noted that the whole point of his paper was that there are these big uncertainties, and that previous attempts to calculate the socially optimal price on carbon haven’t accounted for these and thus are wrong, and that you couldn’t even really do the calculation with the current tools we have. But he finally acknowledged that if you made him philosopher-king and demanded an answer he would say that the price on emissions (i.e. a carbon tax or the price of a cap-and-trade permit) should be $50 per ton of CO2, rising at rate of a few percent over inflation.

A few thoughts:

1. Muse about uncertainty all you want, but ultimately you have to name your price.

2. This is higher than a lot of mainstream economists who work on this issue. Bill Nordhaus thinks the right value today is around $10 per ton of CO2 (see Table 5-4 of this publication); Billy Pizer at RFF thinks it is close to double this (ungated version here, see Table 5 (3 in gated version) suggesting the correct valuation is 82% higher). On the other hand Nic Stern estimates it should be $80 per ton of CO2.

3. Carbon prices in Europe are currently about 70% of this level (thanks partially to the weak dollar).

4. Carbon prices in the U.S. are short of this mark by about… oh, that’s right, $50.

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11 Responses to “Fifty dollars per ton of carbon dioxide”

  1. [...] are we more likely to know the right level of emissions or the right carbon price? Daniel Hall writes: Weitzman hemmed and hawed and noted that the whole point of his paper was that there are these big [...]

  2. You should mention Tol as well. His papers are here. Note particularly the ones on uncertainty, where he points out that assuming catastrophe means that the costs of abatement could surpass the incomes of many developing nations, and the reviews of the social cost literature, where he comes up with figures much more in tune with Nordhaus’ work. Add to that this from Lomborg’s Cool It:

    “In the biggest review of all the literature’s 103 estimates, the climate economist Richard Tol makes two important points. First, the really scary high estimates (of social cost) typically have not been subjected to peer review and published. In his words: “Studies with better methods yield lower estimates with smaller uncertainties.” Second, he finds that with reasonable assumptions the cost is very unlikely to be higher than fourteen dollars per ton of CO2 and likely to be much smaller. When I specifically asked him for his best guess, he wasn’t too enthusiastic about shedding his cautiousness–true researchers invariably are this way–but gave a best estimate of two dollars per ton.”

  3. Does not compute.

    1 kilo petrol = 3.2 kilo CO2, so 1 tonne CO2 = 312 kilo petrol, or about 375 litres (petrol being 20% lighter than water).

    $50 divided by 2 = £25.

    £25 divided by 375 litres = 6.7p tax per litre.

    So we’re miles over (in most European countries).

  4. Daniel Hall said

    Mark:

    Note the link for EU prices. I am using the current price of a EU Emission Trading Scheme (ETS) Phase II Dec2008 contract as the price of a tonne of CO2 (and then converting euros to dollars at current market exchange rates). I think this is a reasonable price to use as a measure of Europe’s willingness to pay to reduce greenhouse gas emissions, since this is explicitly what the EU ETS was set up to do.

    Fuel taxes are applied in both the U.S. and Europe — and are obviously far higher in Europe — but exist in both places for reasons other than climate change damages. They fund roads, reduce oil dependency, improve local air quality, etc. High fuel taxes in Europe reduce gasoline consumption and GHG emissions and so help Europe achieve its Kyoto obligations but it is not really possible to separate out exactly which parts of the tax are for climate change and which exist for other reasons.

  5. Here are some numbers from Canada, using CIMS, a stock turnover model and a CGE model, GEEM:

    For the follwing targets:
    • The regulatory framework of -20% below currents -34% below the 2020 BAU
    • Canada’s Kyoto target (-9% below 1990) is -38%;
    • Bill C-377 is -25% below 1990, and the least stringent of the Bali framework is -50% below BAU in 2020,
    • And the most stringent -40% Bali footnote is -60% below BAU in 2020.

    The scenarios and costs are (in metric tonnes CO2e in Canadian Dollars, Eh):

    Applying the economy-wide carbon price, additional subsidies to CCS, targeted regulations and tax shifting (Output-based for industry and income tax for households) in the models implies that a carbon price of about $100 per tonne of CO2e will be required to hit the Regulatory Framework target (-20% in 2020 below 2006) and about $200 for Bill C-377/-25%/1990 under Bali. These costs rise even more under the most stringent of the Bali targets to levels upwards of $300 dollars. But at these prices the models are much less reliable, particularly due to uncertainties over innovation and macroshocks.

    Cheers

  6. [...] all well and good, Marty, but stop squirming and tell us how much you’d price carbon at? That’s all we really care about: Weitzman hemmed and hawed and noted that the whole point of [...]

  7. @ Daniel “They fund roads, reduce oil dependency, improve local air quality, etc. High fuel taxes in Europe reduce gasoline consumption and GHG emissions … but it is not really possible to separate out exactly which parts of the tax are for climate change and which exist for other reasons”.

    I don’t think that anybody minds if fuel duties pay for roads and reduce fuel dependency and so on. But surely it would be better to slap another 6.7p open-and-honest tax on petrol, and hike VAT on domestic energy accordingly, than this whole behind-the-scenes carbon-permit trading, that is one of the biggest scams ever pulled?

  8. Daniel Hall said

    But surely it would be better to slap another 6.7p open-and-honest tax on petrol, and hike VAT on domestic energy accordingly, than this whole behind-the-scenes carbon-permit trading, that is one of the biggest scams ever pulled?

    I don’t think so, for reasons I explain here. I think that most people who say that a carbon tax is clearly better are ignoring a lot of political economy arguments for why it won’t work quite as well in practice as they think. Not that I wouldn’t get behind a carbon tax if one was possible… but at least over here in the States I just can’t see it happening in the near future.

    And regarding cap-and-trade being a scam, well, yes, if you bugger it up as badly as the Europeans did from 2005-2007 then it’s not such a great system. But that was a pretty narrow set of problems that were mostly related to having bad baseline data, and they seem to have a better handle on things now going forward. Meanwhile, the only way in which the United States’ cap-and-trade program for sulfur dioxide could be considered a “scam” is if we define scam as “delivering the required reductions for far less cost than projected”.

  9. Alasdair said

    Ummm, gentlemen (and ladies) …

    If you want to think of this on a more rational basis, we are discussing the selling of “Indulgences”, here, are we not ?

    And those have a long and only-accidentally-noble history … check how Indulgences were calculated in the way-back-when, and then apply similar calculations to take into account the modern belief systems … the Vastican Archives should be a good place to start …

    The result will be at least as rational as that which we can see here-and-now, today …

  10. drwoood said

    Iain, if my memory serves me correctly, New Scientist stated in a December 2007 article that Richard Tol now thinks that the SCC is higher than he used to, because of Weitzman’s work. Tol did write a paper or a preprint discussing Weitzman’s work, but I don’t recall it mentioning the SCC.

  11. ashfaque memon said

    how much current price of carbon dioxide(gas) per ton in market

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