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Home » Energy » Higher Carbon Prices Are Coming — A Good Thing For Climate-Conscious Countries And Companies

Higher Carbon Prices Are Coming — A Good Thing For Climate-Conscious Countries And Companies

by PublicWire
June 27, 2022
in Energy
Reading Time: 6 mins read
0

The developed world has advanced mightily over 60 years, increasing its lifespan and per capita income. But such growth has been a double-edged sword: using cheap fossil fuels has enabled the good fortune, but it has also created an environmental hazard that could lead to irreversible damage.

Now is the time to address this inequity. Indeed, there’s been a cost to fossil fuel development that oil, gas, and coal companies have not borne. In other words, CO2 and other greenhouse gases have not generally been taxed — a cost that the greater society has picked up. Enter carbon credits, which are part of the solution, but they must be reasonably priced.

“Markets decide the price of carbon,” says Allistair Mullen, head of the rainforest capital initiatives for the Coalition for Rainforest Nations, in a conversation with this reporter in Bonn, Germany. “But we have an existential problem: the voluntary actors are in charge, and the carbon prices need to be more regulated.”

Roughly 50 billion tons of CO2 come into the market each year. And we have less than 30 years to hit net-zero — to offset each ton of CO2 emitted. Carbon credits are priced too low: anywhere from $5 to $15 a ton — if they are priced at all; the vast majority of the time, CO2 goes uncharged. The price of those emissions must be high enough to motivate companies to buy new technologies that will decrease their pollution rates — technologies, in some cases, that are still on the drawing board.

For now, companies are buying carbon credits at cut rates. That money is given to landholders — not national governments — so that they do not cut down their trees to create lumber or grow food. The credits are often sold on the voluntary market with few quality controls. The trees absorb atmospheric CO2, and they are the cheapest and most efficient method to combat climate change.

The value of those credits must therefore be as great as the available economic options. For example, Papua New Guinea’s government has priced its timber at $40 a ton. Yet, the carbon credits are worth only $7-$10 on the voluntary market. The trees have to be worth more alive than dead.

The good news is that the American Petroleum Institute has come out in favor of a carbon tax. It would start with a price of $35 to $50 a ton of CO2 emissions, which would be adjusted yearly for inflation. The money collected would be used to reduce the energy cost for low-income households and to research and develop cutting-edge technologies. It says this is “the most impactful and transparent way to achieve meaningful progress on the dual goals of reducing greenhouse gas emissions while simultaneously ensuring continued economic growth.”

Verifying Emissions

That’s just a start. Roughly 33 trillion tons of CO2 is emitted each year. If it is priced at $50 a ton, it is still less than the corporate profits in the year 2020: $2 trillion. Allistair Mullen notes that the “global taxonomy” — how countries cope with environmental degradation — is too varied. For example, Europe prices carbon and the United States does not. Until those discrepancies are aligned, he says that “sovereign carbon credits” should lead the way. The Paris agreement, which has 197 parties, has scrutinized and approved them. (Sovereign credits apply to entire rainforest whereas voluntary credits protect specific projects.)

The global climate pact aims to limit temperature increases to no more than 1.5 degrees Celsius by mid-century from pre-industrial levels. According to the global consultancy McKinsey, the cost of hitting net-zero targets is about $275 trillion by 2050 or $9.2 trillion yearly. That would result in 187 million lost jobs by 2050. But it would create 202 million new ones tied to the New Energy Economy — like hydrogen and renewables.

The U.S. Securities and Exchange Commission will soon require companies to reveal their climate risks. Institutional investors are demanding to know the outstanding perils. They are also pushing companies to reduce their carbon footprints. Corporations would need to map out their carbon emissions and buy carbon credits to cover those releases they are unable to reduce by just switching to renewables or deploying energy-efficient technologies.

Europe is perhaps the most progressive — charging about $75 a ton, which is sufficient to lead to CO2 reductions, says the International Monetary Fund. William Nordhaus, an economics professor at Yale University, writes that the social cost of carbon was $31 in 2015, but that will increase to $52 in 2030. Meanwhile, the Committee for a Responsible Federal Budget estimates that a $20 to $40 per-metric-ton carbon tax indexed to inflation would raise as much as $1.55 trillion by 2030. That would reduce greenhouse gas emissions by 14%-21%.

For carbon credits to sell, “verification of greenhouse gas emissions is key,” says Melissa Lindsay, chief executive of Emstream, a carbon marketplace. “It is the key to companies buying them. The corporate motive is access to capital and the cost of capital, which is cheaper for companies with higher environmental, social, and governance scores.”

Changing Corporate Behavior

Enter the sovereign market for carbon credits: Ernst & Young is studying how many credits can be issued by 2030 and how much revenue they would raise. When companies buy them, the auditing firm will ensure that the rainforest nations get the funds — not a third party selling credits outside of the Paris agreement. Currently, the firm is working with Papua New Guinea to guarantee transparency and reliability by using a national climate and biodiversity trust fund. Other nations such as Belize are creating similar safeguards.

The voluntary markets lack scale. More significantly, they are skewed toward planting trees, not preserving rainforests.

“If you are a shareholder of the company and it is impacted by carbon emissions, you need to ask what is your risk exposure,” says Patrice Lefeu, global climate finance leader at Ernst & Young, in an interview with this writer in Bonn. “If a company buys credits to neutralize its carbon debt, its carbon obligations is at zero. But it needs to ensure the credits are compliant” with the Paris agreement and they have been audited by experts from the Intergovernmental Panel on Climate Change.

In other words, a third party may buy voluntary credits for $4 and sell them to corporations for $15. The lack of transparency shortchanges rainforest nations. The credits should therefore be purchased directly from the source to ensure that the country gets all the money and the entire rainforest is protected. Now is the time — because companies have only recently gained access to sovereign credit markets. The credits have to be retired, which avoids putting downward pressure on prices.

Amazon, Apple, General Motors, JetBlue, and Microsoft, which rely on carbon credits, must know what they are buying — and where their money goes.

The price has to increase for the carbon offset market to function correctly. An oversupply of voluntary credits may limit price increases, but they will attract more players, says BloombergNEF. Conversely, it adds that verified sovereign credits will push prices to $120 a ton by 2050.

Corporate behavior would thus change, leading to decarbonization of the global economy— a painful transition that necessitates a social safety net. However, the price of inaction would be more significant, especially for low-lying nations hit by the effects of climate change.


This post was originally published on this site

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