Carbon pricing and net zero

Out of all the strategies that have been proposed to help the world toward a net-zero future, carbon pricing is one of the most compelling.

It's a conceptually straightforward concept and the argument goes something like this:

1. Damaging the climate by emitting carbon dioxide to the point of endangering human existence has a cost.
2. Currently, emitting carbon dioxide is free.
3. Emitting carbon dioxide should not be free. This will incentivise reductions in emissions.

The intention here is to create a true "cost" of emitting carbon dioxide that takes into account the externalities i.e. takes into account all the downstream costs associated with the emission of that carbon dioxide.

By doing so, you align economic and societal interest, thereby letting "the free market" take care of how the reduction in emissions is achieved.

Of course, behind the simplicity lies a raft of complexity. How do you implement such a scheme? Who enforces and decides the details? Who must pay, and when? What does the money raised pay for?

All of these are, broadly speaking, political decisions. A useful implementation of any carbon pricing scheme will require inter-governmental cooperation. How this is achieved is beyond the scope of what I want to get into here.

Instead, I want to focus on one question right at the core of carbon pricing: how much should carbon dioxide emissions cost? After I address that, how can I use this knowledge to accelerate my own personal transition to net zero?

Determining a "true" carbon price

It's a massively complex problem to determine the "true" cost of carbon dioxide emissions. At the extreme ends of the range, I'm confident you'll find very few people who would argue that if we could pay just £0.01/tonne to eliminate carbon emissions, that would be a very good deal.

At the other end of the spectrum, paying £1,000,000/tonne is clearly too high.

So what is the right price and who should set it?

Who sets prices now?

At the time of writing this article, the United Nations site says that there are 40 national and 25 sub-national jurisdictions that are putting a price on carbon¹. These are mixture of Emissions Trading Systems (ETS) and carbon taxes. These are alternate mechanisms of pricing carbon² that the UN site discusses in more detail. There's an overview of global carbon pricing on the World Bank's carbon pricing dashboard³, as well as live prices in key markets published in many places, including by Carbon Credits⁴, or by Ember Climate⁵.

To generalise though, I'm going to look at three major markets and their pricing.

In the EU, there is an emission trading system working on the ‘cap and trade' system⁶ which sets a maximum "cap" which operators are allowed to emit up to and then a trading system for permits if they exceed this amount. The open market then determines the price for carbon. Today, for example, the EU carbon price is €80.30/tonne ($84.95/tonne, or £70.05/tonne).

Although the USA doesn't have a trading system in place, there is a single fixed value of $51/tonne that was published by the Interagency Working Group on Social Cost of Greenhouse Gases⁷. This value is a lot lower than the EU's value and doesn't fluctuate as a market-traded value would.

The UK also has an ETS, much like the EU's. Originally, the UK shared the same ETS as the EU but Brexit has been driving additional divergence between the two markets. Currently, the UK carbon price is £39.01/tonne – much lower than the EU's value.

As well as the major market prices, there also exists "voluntary markets". These exist for industries like aviation and typically set a much lower price per tonne of carbon. For example, the Aviation Industry Offset is currently trading at $0.65/tonne⁴. It's beyond the scope of this article, but I firmly believe that these voluntary markets are firmly in the realm of green washing. They are almost meaningless prices that bear no relation to reality. Aviation is one of the trickiest sectors to decarbonise, and the idea that the 1.8 tonnes of carbon dioxide emitted on a return trip from London to New York could be meaningfully offset for just $1.17 is absurd. If this were a true price, then the entirety of global carbon emissions of around 38 billion tonnes/year could be offset by just $24 bn – a trivially small sum on a global scale.

Independent estimates of carbon price

Beyond tax and ETS-based schemes, there's also a lot of independent research as to what the "true" price of carbon should be. These studies often try to take into account more of the long-term costs associated with damage that would be inflicted by an unchecked climate change.

One of the more notable examples here is a study by Rennert et al., published in the journal Nature in 2022⁸.

In this study, Rennert and colleagues try and determine a "true" cost of carbon dioxide emission by considering the full social cost of emission i.e. by including the fact that a trading system alone still leaves some factors unaccounted for, much in the same way that just burning things without a trading system leaves all the externalities to be borne by third parties.

Rennert et al. concluded that the true cost for carbon dioxide emissions should be $185/tonne (in 2021 USD). Adjusting for inflation⁹, this is $210/tonne in 2023.

If we put all these together, we see a stark comparison between the actual market value of carbon and the supposed "true" cost including all societal costs:

Conclusions and personal carbon pricing

Although there appears to be a variety of robust market trading schemes for carbon emissions globally, it's quite clear that these schemes don't capture the full extent of the societal impact of those emissions.

It's clear that studies like those of Rennert et al., which try to capture the "true societal cost" of carbon emissions are producing estimated prices far higher than any of the prices in large global markets.

It's also clear that voluntary offset schemes like the Aviation Industry Offset scheme are producing absurdly low prices and should be discounted as nothing more than corporate green washing.

What is missing from this analysis is what value I should be using for my own planning toward personal net zero. I'm tempted to lean toward the values published by Rennert, but I'm also aware that this may not reflect my personal appetite for carbon reduction. To this end, I'm going to try and estimate my own personal carbon price to give me a firmer footing for basing my own carbon reduction strategies on.