What should greenhouse gas emissions cost?CO2 Price Could Promote Climate Protection and More Energy Independence

9 March 2022, by Franziska Neigenfind

Photo: Pixabay/Sigurd Rille

Almost all academic experts recommend carbon prices that exceed existing emission-weighted carbon prices, the first comprehensive global survey on carbon pricing concludes.

Making CO₂ emissions more expensive – whether through taxation or emissions trading – is considered to be a key political instrument for climate protection. Doing so is intended to reduce emissions of the greenhouse gas and prevent harm to the climate – but can also have a number of positive side-effects. The environmental economist Prof. Moritz Drupp from the Center for Earth System Research and Sustainability (CEN) is currently investigating which CO₂ price is best suited. Together with his coauthors, he conducted a worldwide survey of experts.

Mr. Drupp, we have all been shaken by the war in Ukraine, which is also producing a number of effects on long-term efforts. What will this mean for the climate?
Unfortunately, it will also affect climate protection, even if it’s perfectly normal that right now, climate issues are overshadowed by the human suffering in connection with the war. Nevertheless, we have to keep working toward our goals and get the climate crisis under control. A universal CO₂ price could help us achieve climate neutrality faster, while also ending our dependence on autocratic regimes. The war is going to make life more expensive, for instance for motorists, because oil prices are now climbing. But the key difference here is that the revenues the government collects from CO₂ pricing can be redistributed to citizens, whereas the higher prices that will now have to be paid to oil companies or autocratic regimes can never be recovered and are partly used to fund the war chest.

Since the beginning of the year consumers in Germany have had to pay higher prices, including for gasoline and diesel.
In Germany, the national emissions trading system started out with a fixed price of 25 euros per metric ton of CO₂ in 2021. Since the beginning of 2022, the price has been 30 euros per metric ton – which amounts to roughly 7 cents additional charge per liter of gasoline. In European emissions trading, the price was already ca. 100 euros per metric ton of CO₂. That offers an effective incentive to reduce emissions.

It was a long and winding road before carbon prices were finally introduced in Germany. What does it look like in other countries?
Well, there are a number of obstacles. Enforcing a price that accurately reflects the actual social costs of CO₂ emissions remains a major challenge for lawmakers. Nevertheless, 45 countries have now introduced CO₂ prices, and more will soon join them. The prices vary tremendously – from a few cents to more than 100 euros per metric ton of CO₂. Beyond the price, how these revenues are used differs greatly: in Germany, they are used to reduce energy costs via lower EEG surcharges or, for instance, are invested in regional public transportation. In Canada and Switzerland, the money is largely given back to citizens as a “climate dividend.” Refunding the per capita revenues can help to ensure that those with low incomes can afford to meet basic needs like heating or transportation.

How do you determine which price is suitable and acceptable?
Climate economists like the Nobel prize winner William Nordhaus often use computer models to determine optimal CO₂ prices. But these models are also influenced by social views on value, or specific views held by the modeler. It’s hard to say whether CO₂ prices calculated in this way are adequate or not. Accordingly, we conducted a survey with a host of experts so as to provide a broader basis for recommendations on suitable CO₂ prices. We received responses from more than 400 experts from nearly 40 countries. Here we focused not just on the price, but also on questions concerning policy design.

You often hear that the experts can’t agree.
Although there are a broad range of recommendations, our findings show that the majority agree on a number of key points – for instance, that a universal, global carbon price should be considerably higher than the current global average, which was recently estimated at $3 per metric ton of CO₂. Even in 2020, more than 95 percent of the experts surveyed considered a global carbon price of less than $5 to be unacceptable. The majority can agree on certain CO₂ prices – both in the short term and for the year 2030. Moreover, within most of the participating countries, the majority can agree on certain carbon prices. If this is supplemented with a CO₂ border adjustment mechanism to ensure that the country’s companies don’t suffer any disadvantages in international competition, the level of agreement on supranational CO₂ prices becomes even higher.

Do the experts also recommend these prices to their own governments? Or do they prefer to benefit from their neighboring countries introducing high prices, which puts them in an even better light?
You might think that there would be quite a few free-riders. But in fact, on average the prices recommended at the national level are even higher than the global price recommendations. So, what we’re seeing is more a case of “ride-sharing” than of “free-riding.” Out of a sense of global responsibility, many experts from more affluent countries tend to recommend higher carbon prices to their own governments. But the reason can also be local benefits: when CO₂ emissions are reduced, it reduces dependence on autocratic regimes and improves local air quality, which in turn has positive effects on health.

But generally speaking, they’re not behaving as expected?
That’s right, which came as quite a surprise to us, since in the extant literature, the problem of free-riders has long been considered one of the greatest obstacles to climate protection. Our findings don’t confirm that; rather, they indicate other problems that make it harder for countries to make progress in climate protection, like competitive disadvantages, lobbyism or questions of distribution.

That would seem to be a very clear signal with regard to climate policy.
The message here is that climate policy should capitalize more on the steering effect of carbon prices in order to reach more ambitious climate protection goals. In more concrete terms, we found that the recommended global prices for 2020 were $50 per metric ton of CO₂ on average. Over time, the recommendations have risen to nearly $100 for 2030 and to more than $200 for 2050. In Germany, the majority of experts surveyed agreed that the 2020 carbon price should have started at more than 25 euros. For 2030, for example, two thirds of all German experts consider a price of $100 (ca. 88 euros) to be acceptable – provided the European Commission has introduced a CO₂ border adjustment mechanism by then in order to reduce distortions of competition.

But none of this compares to the higher prices now resulting from the war?
No, you’d be hard pressed to find an expert who recommended the kind of dramatic price hikes we’re seeing now. Every liter of gasoline now costs roughly 50 cents more, which amounts to a CO₂ price of roughly $200 per metric ton of CO₂. The CO₂ prices favored by the majority of experts are approximately a fourth as much – or less than 15 cents. Needless to say, no further charges should be introduced until the current turmoil on the global oil markets has subsided.

Professor Moritz Drupp is an environmental economist at Universität Hamburg’s Center for Earth System Research and Sustainability (CEN) and Cluster of Excellence for climate research CLICCS.