New carbon price focuses on results you want, not impacts you don’t

Some of the actions we need to take regarding climate change are pretty hard to implement without putting a price on carbon emissions. There’s no inherent profit to be made from capturing carbon dioxide and storing it underground, for example, but that changes when a price on carbon makes it cheaper to store it underground than to emit it. Some sort of carbon tax or cap and trade program has also been seen as a solution that might appeal across political party lines, as it can enable more market-based responses.

The biggest question has always been the correct price of carbon emissions. That is, what do all the impacts of climate change and air pollution add up to in financial terms? This is known as the “social cost of carbon,” and estimates can range from as little as $10 per ton of CO₂ to well over $100 per ton. It’s not just about the scientific knowledge of climate change’s worsening impacts, but also abstract and subjective factors. The “discount rate,” for example, defines how much more one values a dollar in hand now compared to a dollar several years into the future. There is no correct answer, but this rate has a huge influence on social cost of carbon values.

A team led by Noah Kaufman at Columbia University decided to come at this question from a very different angle. Instead of attempting to work out an ever-more-complete financial accounting of the harms of climate change, they calculate something much more pragmatic: What price would be sufficient to have the result you want?

Pick a target

They lay out what they describe as a “near-term to net zero approach” (abbreviated to NT2NZ in boy band nomenclature). First, you select the year in which you’re aiming to hit net-zero emissions—2050, for example. Next, you select the pathway you want emissions to follow between now and then. Perhaps you think you can make steady progress starting immediately, so you choose a linear downward slope. But if you think you’re going to need to invest in solutions that aren’t quite ready to take off yet, you might aim for initial slow progress followed by a rapid drop.

Then, you simply plug this scenario into some economic models and solve for the carbon price that makes it happen.

The researchers illustrate this using the United States. For net-zero targets of 2040, 2050, and 2060 using simple linear pathways, they use an energy-economy model to calculate carbon prices. In making their estimates, they include additional climate policies beyond the price of carbon, like energy efficiency gains, air pollution regulations that push coal plants into retirement, and subsidies for technology like electric vehicles.

To reach net zero emissions in 2050, the model estimates a carbon price of $34-64 per ton of CO₂ is required in 2025, rising to $77-124 per ton in 2030. The ranges are largely due to two variables: future oil prices and how aggressive the other climate policies are. Higher oil prices reduce the necessary carbon price, as do successful climate policies. While oil prices are hard to predict, a carbon pricing policy would likely come bundled with other policy measures, and the carbon price could be calculated based on that bundle.

Here are US carbon prices for 3 different net zero dates.

Credit: Kaufman et al./Nature Climate Change

The price could easily be updated over time, as well, limiting the need for long-term prognostication—hence the “near-term” in “near-term to net zero.” The researchers’ pitch is really about ease of use for policymakers: rather than sifting through piles of scientific studies evaluating esoteric variables, the knobs that dial in this price are pretty easy to grok.

Get your price

Once a plain-language policy goal has been chosen—like the net-zero emissions in 2050 target, which is consistent with limiting global warming to 1.5°C—the remaining variables to consider are fairly intuitive and easy to update. That also makes it easier to communicate the rationale behind the price without explaining the deep complexities underlying irreconcilably divergent estimates.