There is one certainty that hides another. The price of carbon is too low, and its upward revision raises issues of economic growth and inflation.
Carbon pricing is already making its inflationary effects felt. Economists Stéfane Marion and Matthieu Arseneau, of the National Bank, reminded us that energy prices face high demand and shortages exacerbated by difficult climatic conditions and droughts which hamper hydroelectric production. Soaring carbon permit prices in many OECD countries are also contributing to the phenomenon while exacerbating supply chain constraints.
For its part, the Peterson Institute for International Economics explained that “decades of procrastination in the face of climate change have transformed what was hoped to be a smooth transition into one that will probably be abrupt.”
Thus, “the looming situation in the European Union and the United Kingdom, where the taxation of CO emissions2 has soared, illustrates the considerable difficulties of making a too rapid transition to the detriment of fossil fuels without an adequate replacement system in place ”.
By accepting the idea that carbon pricing – in the form of a tax or an emissions trading system – constitutes a strategic element of action to reduce greenhouse gas emissions (GES), Oxford Economics attempted to determine the price that would make this incentive effective and the effect of that optimal price on inflation.
The multiplicity of scenarios
Speed of transition to low-carbon technologies, substitution rate in a context of transition to low-carbon consumption and to low-carbon investments, price elasticity, rigor in mitigation measures, etc.
The research firm recognizes the difficulty of the exercise and the multiplicity of scenarios, but concludes that the current average world price of US $ 3 per tonne of CO2 is far, very far from the point. And beyond the already measurable effects on energy prices, Oxford submits the rest to the imagination of
readers.
To date, 64 carbon pricing initiatives have been implemented in areas totaling 21.5% of the planet’s GHG emissions. Sweden’s highest rate or price, at US $ 137 per tonne, would be only 20% of the amount required to achieve carbon neutrality in 2050.
We use the implicit price approach as opposed to the negotiated or market price, while accepting that trying to match the carbon price to its social cost is limited to the ability to measure the damage that GHGs cause or will cause. . The benchmark model is the approach adopted by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
After years of conclusive reports, but also after all these conferences leading to facade interventions, these banks oriented their analysis a few years ago on a scenario whereby the consequences and negative effects of global warming will supplant the economic fallout of transition and adaptation.
From $ 600 to $ 800 per tonne
Oxford holds that in order to achieve the objective of stabilizing global warming aligned with the target of the Paris Agreement of
1.5 ° C or less from pre-industrial level, with emissions slated to be halved over the next ten years, the actual price of carbon would hover between $ 600 and $ 800 per tonne of CO2 (in 2010 US dollars).
In fact, the benchmark model points to a price heading towards US $ 100 per tonne around 2030 and then gradually increasing towards $ 600 around 2050.
The NGFS net zero emission scenario involves roughly the equivalent of an average annual increase of 6 to 8% in the price of carbon by 2050, which raises issues of growth and inflation. .
In other words, doing nothing would put us on a temperature rise trajectory of 3 ° C by 2100, when the nationally determined contributions filed point us more towards 2.5 ° C. This observation confirms the warning served by the United Nations a few days before the opening of COP26. For the UN, all the climate commitments made will not prevent the planet from heading towards a “catastrophic” warming of + 2.7 ° C by the end of the century.
A scenario based on the continuity of procrastination, on a disorderly transition and on the awakening of decision-makers that in 2030 would push the required carbon price towards US $ 700 per tonne and put us on a path slightly below 2 ° C. At the cost of increasing economic and social costs.