Key climate question: What's the cost of carbon?
Current offset prices vary from 50 cents to $30 a ton. But the US Congress will have to find the optimum rate.
Iowa farmer Jeff Labertew knows the price of carbon dioxide as well as he does the price of corn. A company pays him $1 per acre – about 50 cents per ton of CO2 emissions – not to till his soil. (Plowing releases CO2 trapped under the soil's crust.)Skip to next paragraph
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But that's a voluntary program. The company pays him to offset its own emissions. Now a raft of bills emerging in the US Congress wants to mandate something similar – a system where the market determines the price. One bill envisions an upper limit of $7 per ton; others would let it swing far higher. In Europe, which has wrestled far longer with impending mandatory cuts in emissions, the price has fluctuated from $30 a ton to $1.
Of all the issues now facing policymakers worried about climate change, the price of carbon emissions may be the most fiendishly difficult to solve. Set it too low and companies have little incentive to curb their emissions. Set it too high and the economy grinds to a halt.
At least a half dozen bills in Congress aim to solve the problem by letting the market decide through "cap-and-trade" systems. But those systems, where companies decide the most economical way to meet an overall cap, include widely varying details whose impact is largely unknown. How lawmakers implement the system could propel the program forward – or sink it entirely. That's why finding the right price of carbon is key.
"You have a lot of people right now talking in broad terms about cap-and-trade or carbon tax approaches to dealing with the problem, but a lot of them haven't gotten into details," says Andrew Bowman, director of the Doris Duke Charitable Foundation climate-change program. This week, the foundation announced it would spend $100 million on climate change – at least a third of it on developing more robust economic theory to undergird emerging greenhouse-gas pricing policies.
The region with the most experience in setting carbon prices is, arguably, Europe. Under the mandates of the Kyoto Protocol, the European Union modeled its cap-and-trade approach on a US program for reducing sulfur dioxide. But CO2 prices have gyrated between $30 a ton and $1 a ton. Those wild shifts have undermined emissions goals there and must not be replicated in the US, economists say.
To avoid that, key economic problems must be resolved, including:
• Proper allocation of pollution allowances. In Europe nearly all of the valuable emission allowances – permits that each allow one ton of CO2 emissions – were given away to power companies. Those free permits became a windfall for the companies. And because an excess of permits were issued, market trading has seen carbon prices remain depressed or unsteady, driving only tiny gains in pollution reduction.
"If the amount of the allowances allocated for free exceeds the cost of reducing emissions, then you've given away a windfall gain and undermined the emissions program," says Richard Newell, professor of energy and environmental economics at Duke University in Durham, N.C.