M1 PPD - October 2010Public Economics: Tax and Transfer Policies

Roy DauvergneMarlon Seror

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Carbon Pricing:

Political Voluntarism orMarket Forces?

Stern Review on the Economics of Climate Change (2006)

1.5 year - More than 40 researchers from different countries - Based on existing studies

- Economic, social, environmental consequences of climate change in developed and developing countries

- The discounted value of damages due to global warming (5-20% of 2005 world GDP per year) is lower than the cost of fighting climate change

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I- A growing concern for climate change and carbon pricing (1)

- Climate is a public good.

- Carbon emissions are seen as a negative externality that should be internalised by economic agents.

- Major dimension of the economics of climate change: to assign a price to carbon.

- In France, Boiteux Report (2001), which gives the first official "shadow price" (valeur tutélaire), i.e. a value that does not result from a market price but from a governmental decision: €27/t of CO2.

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I- A growing concern for climate change and carbon pricing (2)

- Grenelle de l'environnement, Environment Round Table (2007)

- Things have changed:

• Scientific advances

• Political commitments (Kyoto, EU ETS)

• Economic modelling of sustainable development

- Expert commission directed by Alain Quinet, 2008

- Aim: to actualise the Boiteux value and focus on the environmental impact of public projects to compare investments according to their carbon footprints. 4

I- A growing concern for climate change and carbon pricing (3)

II- Three approaches to carbon pricing (1)

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Cost-benefit approach (Stern): the current value corresponds to the costs of damages due to an additional molecule of carbon rejected into the atmosphere.

II- Three approaches to carbon pricing (2)

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Cost-effectiveness approach (Quinet): "to define ex ante an emission reduction target determined within the range of reasonable values identified by cost-benefit analysis."

Year2010 2020 2030 2050

€/t of CO2 32 56 100 200

Shadow price of carbon as defined by Quinet:

II- Three approaches to carbon pricing (2)

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II- Three approaches to carbon pricing (3)

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Market price (EU Emission Trading System)

- Major problem: covers only 45% of carbon emissions in Europe and sectors such as agriculture, housing and transport are left out.

- Price of carbon determined by market forces, but market expectations have short-term views and do not have the data necessary to estimate the future value of carbon.

- To increase the market price, a solution: to reduce quotas

- Lack of political will? Quinet value (€32/t) not applied...

III- Uses of the carbon price (1)

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Carbon price to guide public investments:

• Urbanism strategies

• Spatial planning

• Transports, energy, etc.

Example: a public project that spares 10t of CO2 per year until 2050 = €17,000 cheaper than a project that generates 10 more tonnes of CO2 assuming that:

• €32/t of carbon

• Increase of 3% a year

• 4% social discount rate ("taux d'actualisation") - Very important issue

III- Uses of the carbon price (2)

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- Carbon price is also a way to encourage public and private investment to use cleaner technologies.

- Wide variety of instruments available to governments

- Dangerous effects of imposing a unique carbon price to private economic actors. Why? Unequal effects:

How important is carbon in the production?

Is there a strong international competition?

Are there clean subsidles? Is it possible to change consuming habits?

III- Uses of the carbon price (3)

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- Two categories: price and quantity instruments

- Debate: tax or cap-and-trade system to curb carbon emissions?

Conclusion and sources

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Barett, S., 2006. Kyoto Plus. In: Dieter Holm, ed. Climate-Change Policy, ch 13, pp.282-303. Oxford University Press

Commissariat général du Plan, Le prix du temps et la décision publique, Rapport du groupe présidé par Daniel Lebègue, Rapporteur général Luc Baumstark, Coordinateur Philippe Hirtzmann. Paris : La Documentation française, 2005.

Commissariat général du Plan (1994), Transports : pour un meilleur choix des investissements, Rapport du groupe de travail présidé par Marcel Boiteux, Paris, La Documentation française.

Commission Quinet, 2008. La valeur tutélaire du carbone. La Documentation française.

Le Cacheux, J., & Laurent, É., 2009. Le marché européen du carbone en quête de stabilité. Regards croisés sur l'économie, 2/2009 (n° 6), pp.117-127.

Montialoux, C., 2009. La valeur tutélaire du carbone. Regards croisés sur l'économie, 2/2009 (n° 6), pp.132-134.

Nordhaus, W., 2008. A Question of Balance. Yale University Press.

Stern, N., 2006. Review on the Economics of Climate Change. HM Treasury.

Weitzman, M. L, 1974. Prices vs. Quantities. Review of Economic Studies, Vol.41, No.4, pp.477-491.