Could Carbon Prices Hit $180?

Posted by: Mark Scott on June 09, 2009

Here’s one for the alarmists out there. According to Nobuo Tanaka, executive director of the International Energy Agency (IEA), the price to offset a metric ton of carbon must top $180 to ensure temperatures rise by just two degrees by 2030. That’s well ahead of the current $19 per metric ton price tag on Europe’s cap-and-trade scheme, and will raise concerns that the cost for business to tackle climate change will become too much to bare.

Personally, the IEA’s ‘$180 by 2030’ projection seems overblown. Even the most pro-cap-and-trade analysts figure a $50 to $70 per metric ton number will be on the cards in the next 11 years. And even when oil — which has a direct effect on other energy prices, including CO2 — peaked last July, Europe’s carbon price topped out around $40 per metric ton.

To extrapolate on what happened last summer (quite pertinent as oil prices continue to rise), we won’t need such a drastic spike in CO2 prices to jumpstart investment in clean energy technology. For those new to carbon markets, the higher the price to offset carbon emissions, the greater the incentive to invest in energy efficient/low-carbon products.

Back in July, 2008, the high energy/CO2 prices led many utilities and industrials to switch to cleaner energy generation to clamp down on their carbon financial exposure. Even at $40 per metric ton, the price in Europe's trading scheme was sufficient impetus to alter business practices. Consultants McKinsey, for instance, reckon investment in so-called carbon, capture, and storage technology (for more info, check out an article I wrote on the subject last year) would become financially viable at carbon prices between $45 and $64 per metric ton. We would only need a slight up-tick in prices to provide companies the economic incentive to fork out billions for this technology.

For sure, opponents of cap-and-trade say consumers will end up paying higher energy bills as utilities and heavy industrials pass on the cost of carbon to end users. Unfortunately, higher energy bills -- particularly at the start of any U.S. federal carbon scheme -- could happen. But by placing a price on CO2 emissions, companies will have an economic incentive to change how they do business. I doubt, though, that prices will have to hit $180 before firms start to act.

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Reader Comments

Rmoen

June 9, 2009 04:52 PM

The premise of cap and trade--that CO2 drives global warming--is based on United Nations' climate reports that are tainted by politics and an agenda. The reports don't pass the smell test -- see www.energyplanusa.com. Plus, there's been many new climate discoveries since the UN's 1997 Kyoto Protocol that are largely omitted from the reports because, I think, they undercut Kyoto.

America needs our own scientific assessment of global warming. I am a Democrat who for the past 20 years believed global warming was caused by CO2. But now after reading the UN reports I suspect the fix was in. The UN reports contain much good science, but in the end, the UN is a political organization where politics trump science. We need our own objective climate commission to think through global warming and determine whether it's driven by CO2. ...before we burden our economy with CO2 taxes.

The European Union's similar cap and trade system has yet to deliver reductions in greenhouse-gas levels, has proven complex and expensive to implement and even paid windfall gains to polluters. No matter how you view it, cap and trade makes no sense for America.

Mark Scott -- BusinessWeek

June 10, 2009 11:17 AM

I don't want to get into a debate over the science of climate change, but I would like to get thoughts on what other options could work to reduce emissions other than a cap-and-trade system. Many have suggested a carbon tax -- pros: provides more long-term economic certainty, cons: government-set target that may not reflect true market costs -- for the U.S. instead of a federal/regional trading scheme.

Regarding Rmoen's comments about Europe's CO2 reduction via cap-and-trade, last year the Continent's total emissions fell 6% compared to 2007 levels. In part, that was due to lower manufacturing output due to the recession. But analysts New Carbon Finance suggest that almost half of the reductions were driven by the economic incentive provided by high carbon prices. As the market peaked in July, 2008, participants, particularly utilities, switched to cleaner forms of generation, thus reducing emissions.

Mark Scott -- BusinessWeek

Jonathan TE

June 11, 2009 01:26 PM

Other possibilities include technological mandates, such as requiring X percent of electricity generation to come from wind or some such, or the CAFE standard used for autos. The problems with those are that they risk being inflexible (they target today's technology but don't deal well with the unexpected technologies that emerge after the law is passed) and also policies that improve efficiency only do not necessarily reduce overall emissions. 1 car getting 10 mpg produces less total emissions than 2 cars getting 18 mpg each. That's cap-and-trade's trump card. It actually and directly targets the issue that matters: the total amount of emissions. All other policies I've seen only get at total emissions indirectly, and therefore face greater probabilities of failing to achieve their desired effects.

Bryan

June 11, 2009 02:48 PM

By taxing corporations with CO2 emissions costs, the companies have a fiduciary responsibility to pass those costs onto their customer base. Explain to me how does that strengthen our nation's position in the manufacturing and production markets again? I'm unclear on this.

The Mad Hedge Fund Trader, San Francisco, CA

June 12, 2009 12:29 AM

Since energy is going to be the dominant factor in making our investment decisions for the next decade, I thought it would be a good time to sit down with Carl Pope, Executive Director of the Sierra Club. Carl is as sharp as a tack, with the fervor of an evangelist, always a dangerous combination. In the spirit of full disclosure, I have to tell you that I was a member of the Sierra Club back in the sixties when they were mostly interested in identifying mountain wildflowers and bird calls. They changed a little after that. Carl says that the “Earth has a fever,” with temperatures rising, glaciers melting, forests burning, oceans rising and acidifying, and the overwhelming cause is hydrocarbon burning. The US needs to cut CO2 emissions to 2 tons per person, per year, by 2050, or down 90% from today’s levels. To do this we need to ban the burning of coal by 2030, unless it is sequestered, and stop all petroleum consumption by 2040. We can accomplish this by converting all cars to electric and moving freight via an electrified rail system. Petroleum needs to be classified as toxic waste, and a cleanup superfund needs to be set up, funded by 10% of the earnings of the oil companies for the next ten years. If we eliminate oil consumption, our trade deficit will improve by $100 billion/year, that money can be invested in the US to create 10 million jobs, and we will all be a lot healthier. The biggest and quickest way to cut CO2 emissions is to convert all coal fired power plants to natural gas immediately, and Carl likes the Pickens plan (see http://www.madhedgefundtrader.com/May_15__2009.html ). Carl is not shy about using his 40 man Washington DC office to twist the arms of recalcitrant Senators and Congressmen to achieve these ambitious goals. I had to pinch myself. The Sierra Club has backed off from its earlier, more radical positions, and that much of what they are saying makes good economic sense. No more going back to a bicycle based economy. While 40 years is not exactly tomorrow, look how fast the last 40 have gone by. Remember pedal pushers, thin ties, fins on Chevy’s, and the Bay of Pigs? When contemplating your risk positions, you always have to consider all views. Who knew that $147/barrel would turn us all into environmentalists? www.madhedgefundtrader.com

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BusinessWeek correspondents John Carey and Mark Scott, cover the green scene, keeping on top of the business aspects of energy, the environment and climate change, as well as the technologies, policies, markets and people that are shaping how the earth's resources will be used in the century ahead.

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