The Societal Carbon Price: A strong and predictable carbon price is required to meet Net Zero

A strong and predictable carbon price is required to accelerate the energy transition and to meet UK’s Net Zero climate targets. The EUETS price was around €25/t prior to COVID-19 and has since been as low as €15/t, insufficient to drive the massive change required in the energy system. There is considerable uncertainty over the future carbon price, given Coronavirus, our exit from the EU and the lack of clarity over how the UK will manage future carbon pricing outside the EUETS. However, there is also an opportunity for the UK to use the carbon price to drive the energy transition.

Many businesses and consumers are impacted by the carbon price. Higher carbon prices drive development of low carbon technologies and projects. Low carbon prices favour continuation of the status quo and continued use of unabated fossil fuel energy. The more environmentally progressive oil companies say they support a meaningful carbon price. Some businesses assess future projects and opportunities using ‘internal’ carbon price forecasts, but this makes communication between projects and businesses difficult given different organisations have different carbon price forecasts.

Putting a real price on carbon is an effective way to progress the energy transition without having government pre-selecting low carbon technology options. The most attractive low carbon technology options can then be developed by the private sector.

A societally acceptable carbon price is required against which businesses can assess future investments, consider alternative technologies and communicate their energy transition plans. Now is an ideal time to start this process, since low oil prices provide headroom for a carbon price without increasing users costs above those before the COVID-19 crisis.

This societally acceptable carbon price should form the target for the future carbon trading scheme or carbon tax being considered and developed by the UK government. A carbon tax may have the benefit of being more predictable if set on a long-term basis in a non-political manner, maybe based upon advice from the Committee on Climate Change, along with the Carbon Budgets. Society should demand the implementation of such an approach in order to accelerate the energy transition.

The drawback of a higher carbon price is that the manufacturing industry will have an increase in product cost, which could make UK industry uncompetitive compared to regions without such a carbon price. For goods coming into the UK, the solution to this should be to charge a carbon tax on manufactured goods on import as is currently being considered by the EU. For exports the situation is more challenging.

I would encourage the UK and regional governments and businesses everywhere to support the development of a Societal Carbon Price. That is a strong and predictable carbon price which will drive behavioural change within all sectors. My proposal is to use the high price forecast from the BEIS 2018 report ‘Updated Short Term Traded Carbon Values; used for UK public policy appraisal’ (published April 2019, link below) as the basis for this Societal Carbon Price.

2020 £27.69/tCO2e, 2025 £74.46/tCO2e, 2030 £121.24/tCO2e.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/794186/2018-short-term-traded-carbon-values-for-appraisal-purposes.pdf

This article represents the views of the author and not necessarily those of Pale Blue Dot Energy.