Putting a price on carbon

On Monday Professor Grubb from UCL spoke to us about pricing carbon and what it will take in practice to drive big reductions in greenhouse gas emissions on a large scale. It is a large topic and there was an interesting discussion afterwards. Here are just a few points that I took away – with a bit of commentary from me.

You can’t measure the cost of carbon emissions.
It is impossible to measure the cost of the impacts of carbon emissions for a whole raft of reasons. Some of the impacts, like diminishing biodiversity and human health as well as lives, are not marketable. Also, there are very severe potential impacts that are uncertain: climate change can lead to disruption of major weather patterns and ultimately to famine and war and how do you put a price on that? (You will find your house insurance does not cover it).  Finally, standard accounting doesn’t handle long-term costs very well. It rarely looks more than 20 years ahead, or 50 at the absolute tops, but climate change impacts will last a lot longer than that and affect our children more than ourselves.

So we can’t put a cost on the impacts but we can estimate what it will cost to make the necessary changes so that we avoid the impacts by not emitting the carbon. Theoretically, if we set a price of carbon which is just a bit more than the cost of avoiding it, then we will all stop emitting – but of course it isn’t that simple.

There are three domains of decision making in order of increasing scale, and only the middle one – optimising - responds directly to carbon pricing.
Traditional carbon economics relies on people making rational decisions about costs and benefits. Which new car shall I buy (or even if I buy a new car) ought to depend on the service it provides, price and running costs. Whether I insulate my house this year ought to depend on the balance of costs now and savings over the next ten to twenty years. When we make decisions by optimising costs and benefits – that is the second domain and in this domain prices really count.

The three domains of decision making and policies to drive them from Professor Grubb's presentation (download from here). 

The first domain is about what we do day to day – satisficing.
But most decisions are made without such deep analysis because it is too much trouble. We do things the way we have always done them, we don’t think too far ahead, especially if that involves unpleasant things or if there is a lot of uncertainty. From day to day we travel to work in the same way because it is convenient and we don’t have to think about it. So we might not buy a new car until this one breaks down irretrievably and then we don’t have time to do a lot of research – we just get another diesel because we liked this one (most of the time). One way to change our decision making in this mode is to take away ‘bad’ choices. So, maybe the most gas guzzling vehicles slowly disappear from the market, or free car parking is replaced by a shuttle bus service.

The third domain is transformational change.
The third domain is the hardest to predict because that is where we have big shifts in attitude and technology. Who could have predicted the way we now watch TV at our convenience instead of when it is broadcast or the fact we now do our research online instead of at the library? These services didn’t even exist and now we feel outraged if we don’t have them (for example in rural areas where internet connectivity is poor). We need evolutionary changes like this in our energy systems, our homes, transport and agriculture. We need to change how we buy and use energy, how we travel, and where we get our food from. But it is hard to justify investment in big technology changes on an optimising basis because they there are too many uncertainties. Big ideas need strong passion and mega strategic thinking to make them happen.

A steadily increasing carbon price will help across all domains.
Obviously we can’t just suddenly set a price on carbon that is enough to stop us generating emissions all at once. Even if it were technically feasible it would be political suicide. But if we set a price low to start with and increase it gradually, this could have an impact across all three domains. Rising prices will shake people out of their habits in time, and will encourage strategic thinking needed for transformational change. But rising prices have to be credibly inevitable – not merely lasting until the next government like the Australian carbon tax, or crashing through the floor in the next recession like the EU Emissions Trading Scheme. Cap and trade systems can have price stabilisation mechanisms, and taxes aren’t necessarily better. The key thing is to get a policy that works and is politically acceptable.

Increasing prices don’t matter – increasing bills are the problem.
Increasing the carbon price will not increase bills if we improve our energy efficiency and energy choices fast enough to keep in step. In practice however change won’t come smoothly. Some people will be affected more than others and will need extra help, like interest free loans for improving home heating systems and improved public transport.

We don’t like taxes because we don’t trust our governments to spend the revenue wisely. 
In Sweden they have much higher taxes than us (and even a carbon tax) but they don’t grumble so much, probably because they trust their government to use the revenue them sensibly. They get good education, health services, free child care and so on. Everyone benefits. The fee and dividend system proposed by Citizens Climate Lobby is appealing to US citizens because the revenue comes straight back to citizens and the government doesn’t get a chance to lay their hands on it. It is very sad that we trust our governments so little.

This all sounds rather theoretical – what can we actually do about it?
Transition Cambridge members like to do things, not just talk, still less complain – so what should we be doing? Some things that will help are creating opportunities for people to change their habits – like making it easier to buy sustainably grown food and giving people confidence to upgrade their homes.  To start this off we simply do it ourselves. Also, when we make sustainable buying choices – from locally grown beans rather than factory farmed pork to an electric car rather than a diesel, or even Zipcar membership – and when we do these things because we want to, rather than simply because of the money, then we help to kick start transformational change.