What is the true price of social carbon? Getting to net zero requires better numbers.
Climate Finance is a tough business for the mathematically-challenged (yes, like me). But nowhere is it more important to arrive at accurate numbers than in any cost-benefit analysis.
That thought was prompted by the publication of a warning by two leading economists that policymakers may be vastly underestimating the expense of “social carbon.” In “The Social Cost of Carbon, Risk, Distribution, Market Failures: An Alternative Approach,” Nobel laureate Joseph Stiglitz and Lord Nicholas Stern from the London School of Economics spell out the implications of the bad math and flawed strategies they describe. It takes 74 pages and 24,000 words to make their point, and although I don’t pretend to grasp all of their formidable insights, I get it.
Their bottom line is this: “Current climate policies are based on overestimates of the costs of climate action and underestimates of the benefits of such action.” Plainly said, they argue that the so-called “greenium” — the price tag for a green product — is a mythic construct based on faulty figures, which are themselves based on incomplete and outdated assumptions. The consequences: Without a realistic carbon price, the race to convert the global economy to net zero emissions by 2050 is not being measured accurately. Here are the basics:
- The paper re-visits the calculations made under the Obama administration to establish the “social cost” of carbon. That number was set by regulators at $50 per ton to capture the economic impact of events that are not accounted for in market prices. That number was rolled back to $8 by the Trump administration (“They just made it up,” writes Stiglitz.)
- Stiglitz and Stern say the actual price should be $100 per metric ton.
- Last week, the carbon price in the EU market, the world’s largest, hit a record high of €40 ($49) per ton before falling back slightly this week.
- Part of the reason given for last week’s peak was an opinion by Tom Lord, head of trading and risk management at Redshaw Advisors, that referenced a Bloomberg article projecting a price of €100 ($121) per ton on the par. Lord’s analysis credited the article with prompting major inflows from hedge funds.
So, whether from hedge fund bets or analysis by top economists, the nice round figure of $100 per ton for carbon is slipping into place as the new target price. Talk about a circular economy …
Why does this all matter? Again, without an accurate, globally agreed-upon benchmark price for carbon, the financial planning to achieve a net zero economy by 2050 will be spectacularly inadequate. If current mitigation and compensation practices are maintained at the current pace, claim the authors, global warming will have risen in a range from 3°5 to 4°C — more than twice the Paris Agreement goal. So today’s status quo is like the Red Queen’s Race in Lewis Carroll’s Alice in Wonderland: “It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” We’re losing ground — and time.
Without an accurate, globally agreed-upon benchmark price for carbon, the financial planning to achieve a net zero economy by 2050 will be spectacularly inadequate.
Stiglitz and Stern single out one glaring error in today’s economic modeling, which is that it relies on a poor description of the market economy and its ability to fully account for the social cost of carbon.
In their concise summation, they claim that “A higher price will encourage the low-carbon investments and innovations that we need … The more successful these investments are in curbing carbon emissions, the lower the carbon price could be in the future.” It’s a sobering but convincing argument.
In a striking coincidence, while researching updated cost and benefit approaches to energy transitioning, I stumbled across some earth-shaking findings out of Poland: Analysts in Europe’s centrally-located emissions bellwether have concluded that Poland’s proposed decarbonization plan is, simply put, cheaper than maintaining the dirty status quo. That assessment comes from the Polish Economic Institute, established in 2018 to provide analysis and expertise for the implementation of the country’s Strategy for Responsible Development.
The government has formally adopted the Polish Energy Policy2040 (PEP2040) which describes “the economic challenges” inherent in energy transition. Details of PEP2040 are not yet public, but it is said to closely follow a draft presented in 2019. That document set CO2 emissions targets low enough to meet the EU climate policy goals and also to decrease energy prices in Poland.
Biznes Alert, a Polish media outlet covering innovation in energy and the environment, echoes the PIE’s provocative conclusion: It’s cheaper to transition to a clean energy future than to continue supporting the country’s traditional fossil fuel power (mostly coal). According to Biznes Alert, investments in the fuel and energy sectors are projected to be PLN 890 billion ($239 billion) while the cost to maintain the current system is PLN 1.064 trillion ($286 billion).
It’s cheaper to transition to a clean energy future than to continue supporting the country’s traditional fossil fuel power (mostly coal).
That, as my handy calculator tells me, is a difference of 19.5% — a huge gap.
There’s one nasty hitch: Those figures include the factors of two EU-specific policies that support the transition to green energy and make maintenance of the status quo going forward more and more costly.
One: costs to remain with the current, conventionally powered energy sector include the expense of EU Allowances that Polish energy producers are required to purchase to offset emissions from the country’s coal-powered facilities. The price of these EUAs is skyrocketing (see above) and projected to go much higher.
Two: A non-green, future energy policy could cause the country to miss out on PLN 260 billion ($70 billion) in EU funds to be granted only toward renewable energy initiatives. So, those projected rising expenses and missed subsidies add a big fat debit in the balance sheet.
The projected difference at the bottom line favors the transition to clean energy and represents a big bet on Poland’s economy. In fact, the recommendations of the PEP2040 strategy are so potentially transformative that the outline has been described as a “green Marshall Plan” for the country by Wojciech Jakóbik, editor in chief of Biznes Alert.
Poland’s example of a cost-effective energy transition is a paradigm-changing event. After Germany and France, Poland wields big clout within the EU. It is marked by its large size, history of dirty energy (lots of coal) and pollution, and critical geographical position in central Europe between Germany and Russia. It is the largest electricity market in Central Europe, and one with the lowest share of renewable energy in its current generation mix. Its PEP2040 strategy invites other EU member countries to re-evaluate the entire bloc’s targets by re-assessing the foundational figures of cost-benefit analysis.
Poland’s example of a cost-effective energy transition is a paradigm-changing event.
Speaking of the “social cost” of the current energy situation:
As I write this column, in Texas power production by gas, nuclear, and coal is frozen, wind turbines are iced up, and five oil refineries including the country’s largest in Port Arthur are shut down. Throughout the Midwest and the South truck transportation is stalled due to ice-covered highways, and cities from Minneapolis to Memphis are locked down under sub-zero temperatures.
It’s still too early to calculate an accurate damage assessment from winter storm Uri, but a number stands out here and there. For example, wholesale electricity prices have skyrocketed from $25 to over $9,000 per megawatt-hour in the Texas grid. Still, any future cost estimate will easily run into hundreds of millions. This latest in a lengthening list of recent, very costly extreme weather events is yet another reminder of why getting the numbers right matters so much in financing a better energy future.