Carbon Emissions and Cost Benefit Analyses Svante Mandell Question - - PowerPoint PPT Presentation

Carbon Emissions and Cost Benefit Analyses

Svante Mandell

Question

Project CBAs, e.g., for infrastructure investments, require a value for CO2 reductions Where to look for that value? Here, address the principles – not the value itself Heavily colored by the debate in Sweden Based on;

Mandell, S. (2011), “Carbon Emission Values in Cost Benefit Analyses”, Transport Policy,18(6), 888-892

Alternatives

Policy makers Social Cost of Carbon (SCC) Policy induced cost CBA

Social cost of carbon

”Direct” approach Calculate (monetary) the damage from one extra unit of emission Typically by ”Integrated Assessment Models” The damage depends on concentration (not flow) CO2 remains in atmosphere and is fully mixed Discounting, fairness, climate response, baseline etc will have large impact on outcome

SCC estimates, SEK / kg CO2

Estimated SCC [SEK / kg CO2]

20 40 60 80 100 120 140 160 180

• 0.4
• 0.2

0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 2.2 Larger Number of estimates

Data from Tol (2008) 211 SCC-estimates 47 studies

Three estimates: 3.2 from 1992 2.9 & 4.6 two (out of 20) estimates from the same study (2005)

Mutliply by 100 for €/ton

Stern; 0.6 Long term value used in Sweden Short term value used in Sweden (equal to CO2-tax on fuel)

Policy induced price (or marg. cost)

Existing (and future) policy creates a price for carbon

• This should under mild conditions equal the marginal

cost of reaching the target

• I.e. equivalent with calculating the marginal

abatement cost for reaching the target Sometimes easy to estimate

• Emissions tax
• Tradable permit scheme

In other situations; complicated

Which approach to use

SCC is crucial for climate policy. Using policy induced costs for climate policy yields a circularity

• Pearce (2005); ”whatever the governments agree to do is in some

sense the ’right’ thing”

However, for CBA:s of non-climate policy projects, e.g., infrastructure investment; the value must be in line with the overarching climate policy

Policy maker Social Cost of Carbon (SCC) Climate policy induced cost Project CBA

Why? Emission trading schemes

Consider a project covered by emissions trading

• A project that reduces emissions locally or in a given sector
• …does not reduce total emissions

Only a reallocation of abatement burdens

• Benefit; that someone else may emit more (and saves on

abatement costs)

• Value; the marginal abatement cost
• Which, given a functional market, equals the permit price

Using SCC in this case will yield incorrect results

Why? Taxed sector

In the EU – same argument as for the ETS

• There is still an emission bubble

But true even disregarding the bubble argument

• Consider a weak policy (compared to SCC)

– Policy induced price < SCC

• If infrastructure investment CBAs use SCC
• invest in infrastructure not demanded given the actual policy

Consequently, not cost effective

Thus…

Both approaches are necessary But at different ”levels” The policy induced cost-approach is often used But motivated as a second-best approach Which I believe is wrong…

Additional questions

• Should the value of carbon be same or different

across countries, across sectors, and across modes;

• Should values be consistent or flexible over time,

considering the uncertainties over abatement costs in the future;

• How well the trading scheme and market work in

relation to attaching a value to CO2 emissions;

• Are there factors that give rise to particular concern

in relation to methodologies for the assessment of policies for sustainable transport in Sweden?

My response (1)

Should the value of carbon be same or different across countries, across sectors, and across modes? (Unfortunately) yes! As they should mirror the expected policy that may differ Which, typically, will result in loss of cost effectiveness

My response (2)

Should values be consistent or flexible over time, considering the uncertainties over abatement costs in the future? If policy is believed to increase carbon price over time, this should be mirrored in the carbon values Update values in response to new information? Yes – but may be costly, as it introduces uncertainties In my view, this is a problem on the climate policy level

My response (3)

How well do the trading scheme and market work in relation to attaching a value to CO2 emissions? In principle, very well. However, currently large surplus and an ongoing discussion on how to counter this Is there a (large) discount due to concerns about the future of the ETS?

My response (4)

Are there factors that give rise to particular concern in relation to methodologies for the assessment of policies for sustainable transport in Sweden? Great pubilc climate concern, so it is often ’hijacked’ Example; current CO2 tax ~100 €/tonne This figure is also used in short-term CBA Probably to a large extent fiscal

Thank you!

Svante Mandell svante.mandell@vti.se