Presentation by Alan Lee to the Beijing Energy Network, May 2011: "Evolving carbon prices in an uncertain world: the case for cooperation but not too much".

1. Evolving carbon prices in an uncertain world
the case for cooperation but not too much
capanddividend.org
Alan Lee
Presentation to Beijing Energy Network, May 2011

2. These slides are a partial record of a presentation to the
Beijing Energy Network delivered in May 2012 in the
author’s personal capacity.
Slides were used as prompts only, with slide animation not
available here, and should not be taken to represent the
content as delivered in context.
Material cited does not necessarily represent the views of
the author, nor any entity with which the author may be
affiliated, and should not be relied upon for any purpose.
2

3. Key messages
• Carbon is arguably being “priced” already in China
and other countries, albeit in various different ways.
• Governments and businesses at all levels can do
much more to bring about effective carbon prices,
even without a specific clear plan agreed at higher
levels.
• With appropriate measures to track progress in
place, this can help achieve ambitious climate
action.
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4. Overview
1. Carbon pricing concepts and history
2. Carbon pricing in China and beyond
3. Discussion and recommendations
4

5. What is a carbon price?
A measure of the value of keeping
greenhouse gases out of the atmosphere.
¥/t CO2e
Whose value? What price level? How to create the price?
?
5

6. Polluters to pay
e.g. Pork production emits more per unit than chicken.
This can be reflected explicitly in menu prices
or implicitly in consumer choices
? ?
6

7. A carbon price reflects the difference between the cost
of a product’s emissions to individuals and society
DEMAND
(PRIVATE MARGINAL
BENEFIT)
HIGH PRICE
Subsequent
Carbon price
price
Original
price
LOW PRICE
LOW Subsequent Original HIGH
EMISSIONS emissions emissions EMISSIONS
7

8. More than one way to price carbon
Trading scheme Coal plant subsidy
• Cap on emissions • Government gives money
set by government to coal plant operator
Policy • Liable entities • Cost of electricity from
trade allowance coal gains a relative price
units and offsets advantage
• Positive • Negative
Carbon
• Explicit • Implicit
price
• Market-based • Non market-based
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9. A negative carbon price reflects a social value on an
emissions-intensive product
DEMAND
(PRIVATE MARGINAL
BENEFIT)
HIGH PRICE
Negative carbon price
Original
price
Subsequent
price
LOW PRICE
LOW Subsequent Original HIGH
EMISSIONS emissions emissions EMISSIONS
9

10. More than one way to price carbon
• Positive Negative
• Explicit Implicit
• Market-based Non market-based
• International Local
• Public Private
• Compulsory Voluntary
10

11. Policy at any level can affect emissions directly,
indirectly or unintentionally
UN
Multinational
bodies
Nations
Big
business
NGOs Provinces
SMEs
Local governments
11

12. Explicit carbon pricing has a history including
taxes and more recently cap-and-trade
• Norway/Finland/Netherlands (1990/91)
• Costa Rica (1997)
Carbon
• Canadian provinces (2007/08)
tax
• South Africa: vehicles 2010
• India: coal production & import (2010)
Cap- • EU + Norway (2005)
and- • New Zealand (2010)
trade • US Regional Greenhouse Gas Initiative (2009)
12

13. Implicit prices result from various policies
Clean energy • EU Renewable Energy Directive
obligations • US Bio-energy mandates
Emissions • EU and California standards for vehicles
performance or
• Building standards
efficiency
standards • China 12th Five-Year Plan targets
• New South Wales and Australian Capital Territory
Baseline-and- electricity
credit
• California Low-Carbon Fuel Standard
• CDM, Joint Implementation
Project
• Voluntary emissions reductions
mechanism
• REDD+
Social
• Japan
commitments
13

14. Contents
1. Carbon pricing concepts and history
2. Carbon pricing in China and beyond
3. Discussion and recommendations
14

15. Vivid Economics estimate an implicit carbon
price of China’s fossil fuel ‘subsidies’
For year 2009 Coal Oil
Total value of subsidies US $11.7 billion US $24.1 billion
Total fuel consumption 2.5 Gt 0.6 Gt
Subsidy per tonne of fuel $4.68 $38.91
Emissions per unit of fuel 2.7 t 3.1 t
Data from Vivid Economics 2010
Implied carbon price in use of fuel -$1.74 -$12.55
Proportion electricity from this fuel 81% 1%
Implied carbon price weight by
-$1.41 -$0.13
share of electricity production
15

16. China’s electricity policies price carbon in effect
Policy and percent coverage US $/t CO2-e (market exchange rate)
of electricity sector $- $1 $2 $3 $4 $5 $6 $7 $8 $9 $10
Large-for-small generator
$7.58
substitution (2%)
Mandating better
$1.52
coal technology (9%)
Gas subsidies (1%) $0.25
Wind/solar feed-in tariff (0.3%) $0.11
Infrastructure loans (10%) $0.10
Biomass feed-in tariff (0.03%) $0.03
Data from Vivid Economics 2010
Solar subsidies (0.03%) $0.03
Oil subsidies (1%) -$0.13
Coal subsidies (81%) -$1.41
TOTAL $8.08
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Only covers policies at Dec 2009

17. Vivid found China’s electricity carbon price
beats Japan, rivals US, lags behind UK
$30
Market exchange rates (Sep 2010)
$25
$20
US $/t CO2-e
$15
$10
$5
Vivid Economics 2010
$-
UK China US US Japan Australia South
(all (RGGI Korea
states) states) 17

18. Regional Greenhouse Gas Initiative (RGGI) states
have lead the US in carbon pricing
$5.1/t
US
average
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Data: Vivid Economics 2010. Map: Pew Centre

19. Pricing carbon can vary in cost-effectiveness
Vivid Economics 2010
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20. Implicit carbon prices are lower than needed to
meet Copenhagen commitments
Electricity sector
Economy-wide 2012 price consistent with Copenhagen commitments
$60
$50
US $/t CO2-e
$40
Vivid Economics and McKibbon et al (2010)
$30
$20
$10
$-
UK China US Japan Australia
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21. Future direction of carbon price/s in China?
• Pilot emissions trading in key provinces/
cities ahead of national scheme?
• Environmental tax?
• Resource tax?
• Power price control?
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22. Overview
1. Carbon pricing concepts and history
2. Carbon pricing in China and beyond
3. Discussion and recommendations
22

23. Paul Baran (1964) On Distributed Communications
What is an optimum level of coordination?
Centralised Decentralised Distributed
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24. Evolution of climate policy features
more or less coordination at different levels
Montreal Protocol
UNFCCC Copenhagen/
Kyoto Protocol Compliance Cancun pledges
mechanisms
National policies
CDM methodology KP land-use
& project approval coverage choices
Voluntary carbon
IPCC market standards
GHG Inventory Inventory reports
guidelines
Carbon prices
Centralised Decentralised Distributed
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25. Each level of coordination presents its own
challenges and opportunities
More centralised Less centralised
• Global outcome • Early action and innovation
• Institutional legitimacy • Resilience to failed
+ • Harmonised rules with experiments, lessons learnt
streamlined bureaucracy • Localised solutions,
and efficiency responsive to rapid change
• Lowest common • Leakage
denominator outcome • Laggards
-- • Agenda subject to hijack • Risk of perceived illegitimacy
and compromise
• Inefficiencies from
• Slow fragmentation
• Inflexible • Harder to track global action
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26. Adapted from Geoffrey Lewis (2009)
ENVIRONMENTAL
PERFORMANCE
(CARBON PRICE)
TIME
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27. How to achieve a middle ground?
• Some diversity is unavoidable.
How much diversity can be tolerated?
• To what extent is trust versus unity needed
for effective cooperation?
• Is complete consensus on all elements
necessary from the outset?
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28. What minimal level of centralisation
best suits different policy elements?
UNFCCC
National targets
Global objective and policies
(2°C)
Carbon market Detailed carbon
Tracking of guidelines market rules
global progress (voluntary/
Carbon price mandatory)
pledges?
IPCC Compliance
mechanisms
Centralised Decentralised Distributed
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29. Recommendations
A. Governments at all levels can act now to increase
carbon prices, while working to coordinate and improve
policies over time.
B. Governments and observers should regularly and
rigorously quantify policies’ climate impact and share
findings, to track and inform global action.
C. Measures of effective carbon price provide useful
insights to effort and to certain risks of trade exposure.
D. Businesses and individuals can position themselves
now for high, long-term carbon prices.
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30. Can society self-regulate without centralisation?
Judith Korb and Karl Eduard Linsenmair (1999)
Certain termites
regulate
temperature and
CO2 of their
surroundings
through
cooperation rather
than central
leadership
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31. 31

32. References (1)
• Paul BARAN (1964) On Distributed Communications Networks. The RAND
Corp., Santa Monica.
• Daniel BODANSKY (2010) A tale of two architectures: the once and future UN
climate change regime. Available at SSRN: http://ssrn.com/
abstract=1773865
• CENTRE FOR INTERNATIONAL ECONOMICS (2010) Comparing effective
carbon prices: methodological issues. Available at http://
www.thecie.com.au/content/news/Carbon_Price_Comparisons.pdf
• Fergus GREEN, Warwick McKIBBIN and Greg PICKER (2010) Confronting the
crisis of international climate policy: rethinking the framework for cutting
emissions. Lowy Institute for International Policy, Sydney.
• Judith KORB and Karl Eduard LINSENMAIR (1999) The architecture of termite
mounds: a result of a trade-off between thermoregulation and gas
exchange? Behavioral Ecology Volume: 10, Issue: 3, Pages: 312-316.
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33. References (2)
• Geoffrey LEWIS (2009) China Green Buildings: a two-pronged approach.
Available at
http://chinagreenbuildings.blogspot.com/2009/04/two-pronged-approach-
top-down.html
• PRODUCTIVITY COMMISSION (2011) Carbon Emission Policies in Key
Economies. Australian Government, Canberra. Available at http://pc.gov.au/
projects/study/carbon-prices/report
• VIVIC ECONOMICS (2010) The implicit price of carbon in the electricity sector
of six major economies. The Climate Institute, Sydney.
• WORLD BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT
(2011) Carbon pricing: the role of a carbon price as a climate change policy
instrument. Available at www.wbcsd.org/web/energy.htm
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