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Energy Pricing

There are several ways in which energy is over- or under-priced.

Social Cost of Carbon

Greenhouse gas emissions, primarily from energy, have harmful impacts on the future climate that are generally externalized from the emitter. Imposing a tax at the point of emission internalizes those costs. Following are select estimates of damages.

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Select estimates of the social cost of carbon, assessed per ton of CO2, 2019 USD. Sources: Hänsel et al. 1, Interagency Working Group on Social Cost of Carbon 2, Moore and Diaz 3, Nordhaus 4, Ricke et al 5, and Wang et al. 6. A major source of variation in SCC estimates is the discount rate, or the extent to which future economic damage should be valued less than present costs. Rennert and Kingdon 7 illustrate how an SCC estimate can vary by discount rate.

Major damages in climate economic modeling include rising sea level, severe weather, wider range of tropical disease, direct impact of heat, and increased cooling costs. Models generally take into account the benefits of lower heating costs and CO2 fertilization of crops 8. Most countries will be harmed by climate change, with India hit particularly hard, though Russia, Canada, and Scandinavian countries could benefit 5.

Throughout much of Urban Cruise Ship, we have used a social cost of carbon of $50/ton CO2e, which translates to 45 ¢/gallon for gasoline 9. More recent estimates suggest that a higher price may be appropriate. Based on a weighted median of nearly 6,000 estimates of the social costs of carbon collected by Richard Tol 10, with more recent estimates given higher weights, we estimate that a cost of $141.40 per ton (2024 dollars) is appropriate. We have used this figure in more recent work.

Carbon Pricing

Döbbeling-Hildebrandt et al. (2024) 11 perform a meta-review on carbon pricing policies and found that the ones that had been implemented, despite low prices, had reduced emissions by 4% to 15% after correcting for publication bias. Gugler, Haxhimusa, and Liebensteiner 12 find that in addressing greenhouse gas emissions in the power sector, Britain's carbon tax was far more effective than Germany's subsidizing of solar and wind. Boyce (2018) 13 finds that carbon pricing is effective, but there is a risk of regressive distributional impacts. This problem can be mitigated with carbon dividends to the general public. However, the meta-review of Green (2021) 14 finds a modest role for the effect of carbon pricing.

Estimating the degree to which carbon pricing reduces emissions is difficult. For Resources for the Future, Rafaty, Dolphin, and Pretis (2021) 15 find that the introduction of a carbon price, at any level, reduces emissions growth by 1-2% per year, while every dollar of the level of the price reduces emissions growth by 0.03% per year. They conclude that a carbon price is an important solution to reducing emissions but not sufficient on its own. For the OECD, D’Arcangelo et al. (2022) 16 find that a 10 Euro ($11) carbon price results in a 3.7% reduction in fossil fuel emissions.

Carbon Pricing Policies

The World Bank finds that, as of 2023, there were 75 carbon pricing policies in effect worldwide at national and subnational levels 17. Of these, 39 were carbon taxes and 36 were emission trading schemes, both of which were in many cases accompanied by carbon offsets. As of April 2024, pricing policies covered 24% of world greenhouse gas emissions, raising an annualized $104 billion of revenue. In 2024 dollars, a price of $63-127 per ton was identified as necessary to meet the Paris Agreement's goal of limiting global warming temperature rise to 2°C and a price of $226-385/ton was identified as necessary to meet the 1.5°C temperature rise goal. Of 75 carbon pricing mechanisms, only 7, covering less than 1% of world emissions, had a price of at least $63/ton as of 2023.

A carbon price typically imposes near-term economic costs with long-term climate benefits and more immediate health benefits by reducing other forms of pollution. Recent modeling has found the following costs, climate benefits, and health benefits from recent carbon pricing proposals in the United States Congress.

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Analysis of carbon pricing proposals. A carbon price of $52/ton CO2e is assumed. Source: Hafstead 18. The proposals analyzed are the Climate Action Rebate Act (Coons) 19, the Energy Innovation and Carbon Dividend Act (Deutch) 20, the America's Clean Future Fund Act (Durbin) 21, the MARKET CHOICE Act (Fitzpatrick) 22, the America Wins Act (Larson) 23, the Raise Wages, Cut Carbon Act (Lipinski) 24, the SWAP Act (Rooney) 11, the Healthy Climate and Family Security Act (van Hollen) 25, and the American Opportunity Carbon Fee Act (Whitehouse) 26.

Problem:
Unpriced Externalities of CO₂ Emissions
Solution:
Economy-wide Carbon Pricing - World

Fossil Fuel Subsidies

The International Monetary Fund has released several reports detailing direct energy subsidies and unpriced externalities, both of which they consider to be "subsidies". The 2023 values are as follows 27.

The IMF assesses subsidies and unpriced externalities by type. Unpriced externalities, or implicit subsidies, are assessed by four major categories: local air pollution, climate change, externalities from road use that is enabled by petroleum fuels, and forgone government tax revenues. Explicit subsidies are further divided into subsidies for consumers, such as subsidized gasoline and heating oil, and subsidies for producers. While we believe that road externalities should be internalized, such as through congestion pricing, it is debatable whether they should be termed energy subsidies since they apply regardless of how a car is powered.

Problem:
Negative Impacts of Fossil Fuel Subsidies
Solution:
Remove Fossil Fuel Subsidies - World

Clean Energy Subsidies

In our deployment section, we note that technology deployment has social value via the learning-by-doing effect. We estimate the learning-by-doing value as follows.

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Estimated learning-by-doing value for clean energy technologies.

Not all of the value estimated here is necessarily an appropriate subsidy, as the developer of the energy system will capture some of the learning benefits.

Carbon Offsets

Sometimes it is too expensive or infeasible to reduce onsite emissions, and in that case one may purchase carbon offsets to reduce emissions elsewhere. Such purchases may be done voluntarily or to comply with a cap-and-trade law. Over 2023, the average carbon offset price was $6.53 per ton CO2e removed 16.

Among certified offsets, forestry and land use projects are currently the most popular.

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Certified carbon offsets in the first quarter, 2018, by type of projects. Source: 28

Carbon offsets have been criticized for failing to deliver the promised emissions reductions 29, 30, 31, 32, 33. An estimated 85% of forestry projects under the Clean Development Mechanism, one of the main certifications of carbon offsets, are estimated to overstate emissions reductions 34, and in 2023, Carbon Direct estimated that fewer than 10% of asssessed projects meet their standards for high quality 35. However, offsets in California have been observed to reduce emissions 36.

It may be the case that many of Clean Development Mechanism's wind power projects would have been built without the offsets, and thus they do not reduce emissions, a problem known as additionality 37, 38. Independently, it is estimated that 37% of REDD+ projects (deforestation and land use projects) and 24% of ARR (Afforestation, Reforestation and Revegetation) projects overlap areas that are already protected, a problem known as double-counting 39, 38. Carbon offsets have also been criticized for obstructing deep decarbonization of sectors such as transportation 40. Additional problems with offset effectiveness are leakage--the tendency for emissions reductions in one place to result in increased emissions elsewhere--and permanance, or uncertainty over how long carbon will be sequestered 38.

In California, regional averages have been used to estimate sequestration capacities, but landowners are then able to select land areas that have lower-than-average sequestration; over-crediting in this manner has been estimated at 29% of claimed reductions 38.

Problem:
Carbon Offsets Are Possibly Ineffective
Solution:
More Stringent Carbon Offsets Monitoring

At prices below $50/ton, a low estimate of the social cost of carbon, an estimated 3-13 billion tons per year of carbon offsets may be available 41. This contrasts to world emissions of about 40 billion tons annually.

Following growing concern about the problems with carbon offsets as described above, the market lost about 60% of its traded value from 2021 to 2023 42. As of 2023, 3.2 billion tons of non-retired CO2-equivalent have been issued through voluntary carbon markets, equivalent to about 7% of a single year's worldwide emissions 42.

Corporate and Municipal Clean Energy

A Renewable Energy Certificate (REC) is similar in concept to a carbon offset, in that one REC represents a megawatt-hour of renewable energy generation. Typically, when corporations such as Google or Apple announce that they run on "100% renewable energy", it means that they purchased enough RECs to cover their full usage portfolio 43.

RECs are useful to renewable energy generators in that they represent an additional revenue stream. However, the price of RECs has fallen to 97 ¢/MWh in the West to $64/MWh in the Northeast, in most the country too low a price to meaningfully incentivize new renewable energy generation 44.

Problem:
RECs Not Always Transparent
Solution:
Blockchain for RECs

References

  1. Hänsel, M., Drupp, M., Johansson, D., Nesje, F., Azar, C., Freeman, M., Groom, B., Sterner, T. "Climate economics support for the UN climate targets". Nature Climate Change 10, pp. 781-789. July 2020. ↩

  2. Interagency Working Group on Social Cost of Carbon. "Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis". Under Executive Order 12866, United States Government. August 2016. ↩

  3. Moore, F., Diaz, D. "Temperature impacts on economic growth warrant stringent mitigation policy". Nature Climate Change 5, pp. 127-131. 2015. ↩

  4. Nordhaus, W. "Revisiting the social cost of carbon". Proceedings of the National Academy of Sciences of the United States of America 114(7), pp. 1518-1523. January 2017. ↩

  5. Ricke, K., Drouet, L., Caldeira, K., Tavoni, M. "Country-level social cost of carbon". Nature Climate Change 8, pp. 895-900. 2018. ↩ ↩2

  6. Wang, P., Deng, X., Zhou, H., Yu, S. "Estimates of the social cost of carbon: A review based on meta-analysis". Journal of Cleaner Production 209, pp. 1494-1507. February 2019. ↩

  7. Rennert, K., Kingdon, C. "Social Cost of Carbon 101". Resources for the Future. August 2019. ↩

  8. Diaz, D., Moore, F. "Quantifying the economic risks of climate change". Nature Climate Change 7, pp. 774–782. 2017. ↩

  9. U.S. Energy Information Administration. "How much carbon dioxide is produced from U.S. gasoline and diesel fuel consumption?". U.S. Department of Energy. May 2019. ↩

  10. Tol, R. S. J. "The Social Cost of Carbon". ArXiv. October 2023. ↩

  11. Rooney, F. "H.R.4058 - SWAP Act". Congress.gov. July 2019. ↩ ↩2

  12. Gugler, K., Haxhimusa, A., Liebensteiner, M. "Effectiveness of climate policies: Carbon pricing vs. subsidizing renewables". Journal of Environmental Economics and Management 106:102405. March 2021. ↩

  13. Boyce, J.K. "Carbon pricing: effectiveness and equity". Ecological Economics 150, pp. 52-61. August 2018. ↩

  14. Green, J. F. "Does carbon pricing reduce emissions? A review of ex-post analyses". Environmental Research Letters 16(4): 043004. March 2021. ↩

  15. Rafaty, R., Dolphin, G., Pretis, F. "Carbon pricing and the elasticity of CO2 emissions". Resources for the Future. October 2021. ↩

  16. D’Arcangelo, F. M., Pisu, M., Raj, A., van Dender, K. "Estimating the CO2 emission and revenue effects of carbon pricing". OECD Working Paper. November 2022. ↩ ↩2

  17. World Bank. "State and Trends of Carbon Pricing 2024". Washington, DC. 2024. ↩

  18. Hafstead, M. "Carbon Pricing Calculator". Resources for the Future. August 2020. ↩

  19. Coons, C. "S.2284 - Climate Action Rebate Act of 2019". Congress.gov. July 2019. ↩

  20. Deutch, T. "H.R.763 - Energy Innovation and Carbon Dividend Act of 2019". Congress.gov. January 2019. ↩

  21. Durbin, D. "Durbin Introduces Bill To Fund A Clean Climate Future". Press Release, Dick Durbin. August 2020. ↩

  22. Fitzpatrick, B. "H.R.4520 - Modernizing America with Rebuilding to Kickstart the Economy of the Twenty-first Century with a Historic Infrastructure-Centered Expansion Act". Congress.gov. September 2019. ↩

  23. Larson, J. "H.R.4142 - America Wins Act". Congress.gov. August 2019. ↩

  24. Lipinski, D. "H.R.3966 - Raise Wages, Cut Carbon Act of 2019". Congress.gov. July 2019. ↩

  25. Van Hollen, C. "S.940 - Healthy Climate and Family Security Act of 2019". Congress.gov. March 2019. ↩

  26. Whitehouse, S. "S.1128 - American Opportunity Carbon Fee Act of 2019". Congress.gov. April 2019. ↩

  27. Black, S., Liu, A., Parry, I., Vernon, A. "“IMF Fossil Fuel Subsidies Data: 2023 Update". Working paper, IMF, Washington, DC. 2023. ↩

  28. Hamrick, K., Gallant, G., Donofrio, S., Thiel, A., Yoshimoto, E. "Voluntary Carbon Markets Outlooks and Trends: January to March 2018". EcosystemMarketplace. Sponsors: 3Degrees, BP Target Neutral, Cool Effect. August 2018. ↩

  29. Elgin, B. "These Trees Are Not What They Seem". Bloomberg Green. December 2020. ↩

  30. Foss, P. "The Office of the Auditor General of Norway’s investigation of Norway’s International Climate and Forest Initiative". The Auditor General of Norway, Document 3(10). 2018. ↩

  31. Gorte, R., Ramseur, J. "Forest Carbon Markets: Potential and Drawbacks". Congressional Research Service. July 2008. ↩

  32. Peach, S. "'Are carbon offsets a scam?'". Yale Climate Connections. May 2019. ↩

  33. Song, L. "An Even More Inconvenient Truth: Why Carbon Credits For Forest Preservation May Be Worse Than Nothing". ProPublica. May 2019. ↩

  34. Cames, M., Harthan, R., Füssler, J., Lazarus, M., Lee, C., Erickson, P., Spalding-Fecher, R. "How additional is the Clean Development Mechanism?". Institute for Applied Ecology, Berlin. Study prepared for DG CLIMA. March 2016. ↩

  35. Potts, M. D. et al. "State of the Voluntary Carbon Market". Carbon Direct. 2023. ↩

  36. Anderson, C., Field, C., Mach, K. "Forest offsets partner climate‐change mitigation with conservation". Frontiers in Ecology and the Environment 15(7). September 2017. ↩

  37. Calel, R., Colmer, J., Dechezleprêtre, A., Glachant, M. "Do Carbon Offsets Offset Carbon?". CESifo Working Papers. October 2021. ↩

  38. Aldy J. E., Halem Z. The Evolving Role of Greenhouse Gas Emission Offsets in Combating Climate Change. HKS Faculty Research Working Paper Series RWP22-011. August 2022. ↩ ↩2 ↩3 ↩4

  39. Simonet, G., Karsenty, A., Newton, P., de Perthuis, C., Schaap, B., Seyller, C. "REDD+ projects in 2014: an overview based on a new database and typology". Les Cahiers de la Chaire Economie du Climat. July 2015. ↩

  40. Hagelberg, N. "Carbon offsets are not our get-out-of-jail free card". UN Environment Programme. June 2019. ↩

  41. Rossetti, P. "Economic and Environmental Potential of Carbon Offsets May be Underestimated". R Street. October 2021. ↩

  42. Ecosystem Marketplace. "2024 State of the Voluntary Carbon Market (SOVCM)". 2024. ↩ ↩2

  43. Mathi, S. "What It Really Means When Google and Apple Say They Run on 100% Renewable Energy". Medium. April 2020. ↩

  44. Roberts, D. "RECs, which put the "green" in green electricity, explained". Vox. November 2015. ↩