We Must Put a Price on Carbon: EU to the Rescue Again?

Boyd Cohen, Co-author, Climate Capitalism

Many public policy gurus and economists will tell you that if we truly want to decarbonize our economy we need to actually put a price on carbon.  Just last week I conducted a book launch for Climate Capitalism in Portland with the support of Sustainable Business Oregon, Net Impact and Keen Footwear.  The last question I received centered directly on this point.  The individual in the audience asked: “Until we price the externality associated with climate change, can we ever get to scale with the low-carbon economy without massive subsidies?”

I would personally argue that without a price on carbon we will eventually de-carbonize our economy.  Why? Because there won’t be enough cheap fossil fuels to meet our insatiable appetite for energy.  And as fossil fuel prices climb on their way to “extinction” technology advancements will improves the efficiency of low-carbon alternatives like wind, solar, geothermal, algae biofuels, etc.  Not only that but many industries are already recognizing the financial business case for energy efficiency, new transportation solutions, localized food production and more.

Besides all of the above, sooner or later our society is going to wake up to the reality that climate change is already wreaking havoc on our economies and societies. As Thomas Friedman recently pointed out in the New York Times:

You really do have to wonder whether a few years from now we’ll look back at the first decade of the 21st century — when food prices spiked, energy prices soared, world population surged, tornados plowed through cities, floods and droughts set records, populations were displaced and governments were threatened by the confluence of it all — and ask ourselves: What were we thinking? How did we not panic when the evidence was so obvious that we’d crossed some growth/climate/natural resource/population redlines all at once?

So public policy will eventually catch up, assuming some sense of sanity finds its way to the corridors of Congress in Washington.

However we can’t wait much longer.  While I believe, and Climate Capitalism demonstrates, industry is getting on with the transition to the low-carbon economy because in many cases it is already profitable to do so, the transition is not going to happen fast enough without bold politicians and supportive public policy. That starts with some mechanism to price carbon so that we can expedite the transition.

The U.S. failure to participate in Kyoto and its overall ambivalence towards carbon pricing and cap and trade has led to an increase in emissions of 6% over 1990 levels despite the fact we are mired in a prolonged economic downturn (which obviously drives down emissions due to reduced production, construction, and travel budgets).  The EU, on the other hand is on track to meet or exceed its 8% reduction targets by 2012.

The EU Emission Trading Scheme, a product of the Kyoto Protocol, created an EU-wide carbon market and priced the externality for the first time in 2005.  Of course, the regulators left the actual pricing of a ton of CO2 equivalents (CO2e) up to the markets.  That has led to significant fluctuations in the price for CO2e in the ETS with a historical high of €25 and recent lows in the €7 euro range.

For companies like mine that develop carbon offsets under the United Nations Clean Development Mechanism to sell to the European market, price fluctuations can be problematic.  The biggest problem over the past few years however has been the failure to reach agreement on a post-2012 carbon market in EU and beyond.  As it stands currently, there are no guarantees that there will be a market for carbon offsets after December 31^st, 2012 in Europe.  All of us inside the industry are convinced there will be, but investors and companies in the developing world who must bet their money on the market, are holding off on making significant investments in projects that rely in part on revenue from carbon offsets.

The failures of Copenhagen to achieve the unrealistic expectations of a new, global climate accord, followed by modest progress in Cancun last year have led the carbon markets to stall significantly.  However just this week a potential solution has emerged.  The EU is now considering extending the current Clean Development Mechanism (CDM) through 2018 while the EU and the world try to reach broder consensus.

I am ALL for this solution and in fact have discussed this scenario with colleagues and clients over the past year.  Realistically, I doubt we will see an EU or a global overhaul of the CDM at the next Conference of the Parties in Durban.  But extending something that has already been agreed to previously and that is more or less working while global leaders continue to work out a long-term compromise, makes a lot of sense.

We need a price on carbon to accelerate the transition to the low-carbon economy. I am not holding my breath for such a price at the federal level in the U.S. any time soon (although the Western Climate Initiative regional carbon market will begin to operate next year), but I am optimistic for the world’s sake that EU will take this stop-gap measure to ensure some progress towards the ultimate goal of 2 degrees and 350 parts per million is achieved.

[Image Credit: Bookazine, Flickr]

Boyd Cohen is the CEO of CO2 IMPACT, a carbon origination company based in Vancouver, Canada and Bogota, Colombia. Boyd is also the co-author of Climate Capitalism: Capitalism in the Age of Climate Change.

Twitter: boydcohen

This series uses the hashtag #climatecapitalism