Thursday, August 02, 2007

The Cost of Carbon

Today's Washington Post includes two articles highlighting the legislative complexities of regulating US greenhouse gas emissions in a way that would provide the right balance of incentives and penalties on emissions, without damaging the economy. One article reports on the introduction of a new cap-and-trade bill co-authored by Senator Lieberman, while Congressman Dingell's op-ed extols the benefits of a straightforward carbon tax. Without rehashing the tax vs. cap argument, the country's businesses and consumers are looking for a much clearer and simpler signal: what will be the cost of emitting carbon to the environment in the future, and specifically, will it be something other than zero?

In the late 1990s I led a scenario planning project on climate change at Texaco. We concluded that the key uncertainty was not the science, but rather the public's perception of the urgency of the problem, combined with actual manifestations of climate change. (Coincidentally, one of our leading signposts was a major hurricane devastating Atlantic City--right idea, wrong place.) In the course of discussing our findings, the team realized that if the world focused on dealing with climate change, then emitting the major byproduct of combustion, carbon dioxide, would cease being free for the first time since the discovery of fire.

Having just renewed my TerraPass subscription to offset my car's emissions, I know my own cost of carbon: $8/ton of CO2, which roughly equates to 8 cents per gallon of gasoline--a handy coincidence between the stoichiometry of combustion and the English system of measures. I'm sure TerraPass collects a profit on that, but the cost to me is still much less than it's likely to be under either a carbon tax or a strong carbon cap-and-trade system.

The Lieberman-Warner bill will join a number of recent bills in proposing dramatic reductions in US CO2 emissions. It would limit our greenhouse gas output to 30% of the current level by 2050, which works out to about 65% lower than our 1990 baseline under the Kyoto Protocol. Exact predictions of the level of carbon cost required to achieve such big reductions aren't possible, but a recent MIT study estimated it could exceed $50/ton by 2020 and $150/ton by mid-century.

So whether it's the single digit per-ton cost associated with voluntary offset programs, which remain controversial, or the double- or triple-digit levels associated with strict CO2 targets, it looks like the days of free carbon emissions are ending. Legislative debates about the best way to achieve cuts tend to obscure this central reality. The sooner the government makes it clear that there will shortly be a real cost to these emissions, the sooner corporations and consumers will start to plan and act accordingly.

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