Two views on mitigation economics

The annual Forum held by the MIT Joint Program on the Science and Policy of Global Change is always an interesting event, with excellent presentations and lively debate ensuing. The recent Forum held in Boston in early October was no exception thanks to a discussion on two very different approaches to triggering the necessary mitigation of carbon dioxide emissions.

The debate started with a presentation on cumulative emissions and the clear link to atmospheric warming. This comes back to the “stock” vs. “flow” nature of carbon dioxide into the atmosphere which I have written about here and is the foundation of my recent book. The key to the issue is that as CO2 is a stock addition to the atmosphere, it doesn’t matter when or where the CO2 is emitted for the same net accumulation. As a result, the eventual accumulation will tend towards the full release of known fossil fuel reserves simply because the infrastructure exists to extract them and as such they will get used somewhere or at some time.  This also implies only one remaining path forward (given that non-use is unlikely) for stabilizing atmospheric concentrations of CO2; capturing and storing the CO2 when the fuels are used (i.e. Carbon Capture and Storage or CCS)

The above line of reasoning led one participant to propose that the simplest solution to the climate issue was to mandate sequestration, starting with a small amount for each tonne of CO2 emitted, say 1-2%, but progressively increasing this throughout the century until 100% is reached. Tradable CCS certificates (where one certificate represents one tonne of CO2 stored) could be used to distribute the benefits of individual large projects amongst many, particularly in the early years when the sequestration requirement from an individual emitter would still be small. Further, it was argued that this was economically more attractive than the widespread use of a carbon price, which would have to get to higher levels (probably more than $50/tonne) than current systems are offering to trigger even the first CCS project.

In the case of CCS certificate trading, which might trade in the range $50-$100 per tonne of stored CO2 early on, the cost for an individual emitter would nevertheless be initially small. If this was started in 2020 at 1% and reached 15% sequestration by 2030 (i.e. 100% by mid 2080s), the average cost over the period 2020-2030 to an emitter would be $8.50 per tonne of CO2, even with CCS certificates trading at $100 each. This is about the current level of the EU ETS which of course is unlikely to see any CCS projects at such prices.

For a carbon pricing approach, the CO2 price would have to be somewhat higher than the current level in the EU ETS to trigger CCS activity, which would likely delay its implementation and in any case probably cause grief within the system simply because of the higher price and its claimed impact on industry, competitiveness and consumers. It was argued in the MIT debate that this latter effect could well mean that it becomes politically unacceptable to ever let direct pricing mechanisms get to the level required for CCS.

The carbon pricing economists in the room responded to this, arguing that the direct pricing approach was more efficient in that it would allow a range of other mitigation options to play out in the interim before CCS was actually needed. This brought the response that only under the circumstances of uniform carbon pricing with full global reach might this be true; although with the caveat that in the context of an accumulation problem, there were no other mitigation options other than CCS and not using the fuels in the first instance. Partial reach (e.g. the EU ETS and China ETS) of carbon pricing, while significant, might simply introduce a trade distortion, rerouting fossil fuels to other parts of the world and eventually resulting in the same accumulation in the atmosphere. The claim was that carbon pricing tended to address the problem on a flow basis rather than stock basis and measured success as reduced emssions in the location where it operated, rather than reduced accumulation in the atmosphere over the long term. By contrast, it was argued that any application of CCS, even on a local basis, dealt directly with accumulation.

There wasn’t a resolution to the issues discussed above, but the discussion was a great example of the early development of policy thinking. Carbon pricing has dominated the debate for many years and rightly so, but as the science shifts in its emphasis and focuses more specifically on the root causes, policy will eventually have to adjust as well.