Stability carries a cost

25/10/2007 If every greenhouse gas emitter in the world paid a price for such emissions equivalent to the carbon tax levied on the Norwegian continental shelf, the climate challenge would have been considerably smaller.

Terje SørenesText: Terje Sørenes


Human-induced climate change is like most other environmental problems in that those who release greenhouse gases contribute to the problem without being exposed to its full cost.

In this way, emitters impose an economic burden on the world’s population and on future generations for which they do not have to pay themselves.

Annual global emissions of greenhouse gases now total some 40 million tonnes of carbon equivalent. According to the UN’s Intergovernmental Panel on Climate Change (IPCC), this figure must be reduced by 50-80 per cent before 2050.

That is necessary to prevent global warming exceeding 2°C, which would mean Norwegian winters becoming 3-6°C hotter.

Three principal approaches are available for solving human-induced climate change, including the imposition of emission or carbon taxes. These must be pitched at a level which reflects the cost to society.

Second, restrictions can be imposed on the volume emitted. These take the form of quantitative ceilings or emission targets, such as sectoral requirements for reductions.

Finally, a tradable right to release greenhouse gases can be created between those who pollute and those who are affected – in other words, emission trading.

The common denominator of these approaches is that they put a price on releasing greenhouse gases, which in turn defines a cost for the impact of such emissions.

However, a number of factors make such pricing difficult, not least the fact that climate change is global in terms of both causes and effects.

The impact of an extra tonne of greenhouse gases is the same regardless of where in the world it gets released. A great many players are thereby involved, making it difficult to reach agreement on the measures to be adopted and on their form.

Second, the effects of climate change are persistent and develop over time. Certain greenhouse gases, such as carbon dioxide, could stay in the atmosphere for more than a century. Today’s emissions will therefore also affect future generations.

Climate change could have substantial consequences for the world economy unless action is taken to halt it.

Finally, great uncertainty prevails about both the scope of climate change and the cost of and opportunities for curbing or halting these developments.

Putting a global price on greenhouse gas emissions, either by direct taxes or through trading, could be an effective way of stabilising or reducing them.

The results might take the form of reduced energy consumption and a shift towards energy bearers with a lower carbon dioxide content.

Other outcomes might be efficiency improvements for new and existing fossil fuel consumers (such as coal-fired power stations or cars), and new technology for capturing carbon emissions.

In the short term, cutting fossil energy consumption will probably call for wider action than simply coming up with new technology.

Setting a global price for greenhouse gases creates predictability for companies and households in making the investment needed to tackle climate challenges, and incentives for technological progress to reduce carbon emissions.

Reaching agreement on common global taxes, direct or indirect, has so far proved impossible. Europe has established a regional market through its emission trading scheme (ETS).

One strategy might be to continue developing today’s ETS market in a global direction. It could conceivably become a hub in a system of regional or world markets which helps to set a global carbon dioxide price.

The Massachusetts Institute of Technology (MIT) has done a broad cross-disciplinary study to see how a global carbon tax or pricing would effect world energy consumption and the release of greenhouse gases.

This analysis shows that carbon emissions will be twice their present level by 2050 without global pricing of carbon dioxide. But emissions would be stabilised at their present level as early as 2015 with a high carbon price.

Adopting a high global carbon price in the near future would make CCS technology profitable, and allow global coal consumption to grow without increasing carbon emissions.

As a result, the MIT study concludes that CCS solutions are crucial for meeting higher global energy demand without releasing more greenhouse gases.

The tax rate applied in the MIT analysis starts at USD 25 (in 1997 money) per tonne of carbon equivalent in 2015, with a four per cent real rise in value per annum thereafter.

A similar picture is revealed in another study carried out by Swedish power utility Vattenfall and the McKinsey consultancy.

This looked at what would be required to reduce global greenhouse gas emissions by 27 billion tonnes of carbon equivalent up to 2030, and thereby limit the rise in temperature to 2°C.

The conclusion is that such a target is fully attainable at a price of less than EUR 40 per tonne of carbon equivalent. More than two-thirds of possible cuts up to 2030 can be achieved with existing technology.

Reductions based on new technological solutions would primarily come later. Cuts are not possible without contributions from rapidly-growing economies such as China, India and Brazil.

A series of other investigations all paint the same picture – the price needed to achieve the goal of reducing greenhouse gas emissions is on a par with today’s carbon tax on the NCS.


Updated: 14/12/2009