Are carbon emissions fairly priced at their cost to society?
Carbon pricing has proved to be an effective mechanism to reduce emissions over time. An increase in effective carbon rates (carbon price through fuel excise taxes, carbon taxes and emission trading systems) by EUR 10 per tonne CO2 is estimated to reduce emissions by 7.3% on average over time, according to the Organisation for Economic Co-operation and Development (OECD) Carbon Pricing Trends 2021. Currently, three higher benchmark price levels are used in estimating the social cost of carbon emissions, which could lead even to higher reduction of emissions over time.
- EUR 30 per tonne of CO2 - historic low-end price benchmark of carbon costs and a minimum price level to start triggering meaningful abatement efforts.
- EUR 60 per tonne of CO2 - forward looking 2030 low-end and 2020 mid-range price level.
- EUR 120 per tonne of CO2 - central estimate of the carbon costs in 2030.
Despite the importance of effective carbon rates according to the same OECD study, the 44 OECD and the Group of Twenty (G20) together account for about 80% of global carbon emissions from energy use, and around 60 percent of their emissions faced no price at all in 2018. The study also assessed the carbon pricing score (0-100%) which presents the share of emissions priced at a level that equals or exceeds the three price benchmarks for these countries. It found that only 24% of carbon emissions in these countries were priced at EUR 30 per tonne of CO2 (the minimum price level to start triggering meaningful abatement efforts) and just three countries had more than two-thirds emissions priced at EUR 60 per tonne of CO2.
To incorporate this topic into infrastructure projects evaluation, the Global Infrastructure Hub’s Cost-Benefit Analysis of Transit Investments Tool provides an early-stage cost-benefit analysis (CBA) for estimating economic, social and environmental (ESE) impacts and includes the option to assign a social cost of carbon. An array of costs is offered to the user either based on an academic meta-analysis estimate of EUR 60 per tonne of CO2 or the estimates published by the US Environmental Protection Agency (~EUR 46 per tonne), European Commission (~EUR 105 per tonne) or New South Wales Australia Transport (~EUR 60 per tonne).
This short-hand Tool integrates the hidden costs of the damage caused by carbon emissions into market prices, in order to guide decisions towards projects with low-cost emissions. View the Tool, here and download the Tool here.