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Carbon Valuation in UK Policy Appraisal

27th January, 2010

In July 2009 the government published new guidance on assessing the carbon costs of proposed projects. The DECC webpage on carbon valuation provides the full policy document, a number of peer reviews and a guidance note on how to use the values.

Carbon costs (or ‘carbon values’) are a means of assessing the carbon impacts of a project. The Government’s revised approach to carbon valuation moves away from the idea of damage costs (such as homes and livelihoods lost as a result of climate change) which characterised the ‘Shadow Price of Carbon’ and ‘Social Cost of Carbon’. The new approach instead estimates the ‘abatement costs’ of meeting specific emissions reduction targets, in other words the price that needs to be charged for carbon in order to drive the right behaviour and technology take-up to meet a given emissions target.

The issue is important for AEF and for aviation policy because emissions from flying are very large compared with many other activities, and while there is now a fixed target for aviation emissions to be no higher in 2050 than in 2005, there are currently few policies in place that will help to achieve this.
The previous ‘cost of carbon’ increased over time at a fairly steady rate:
* 2000 £19 per tonne of CO2
* 2010 £27
* 2030 £40.1
* 2050 £59.6

The new values are more complex because a distinction is drawn between activities which are included in the Emissions Trading Scheme (ETS) and activites which are not. By 2030 the values are the same, as it is assumed that all sectors will by this time be covered by a trading scheme. Prices increase substantially towards 2050 as carbon reductions become harder to make and fewer ‘offsets’ are available from elsewhere in the world. All values are given in a ‘low’, ‘central’ and ‘high’ range. Central values are:
* 2010 £22 per tonne of CO2e (carbon dioxide equivalent) traded, £52 non-traded
* 2030 £70 for both traded and non-traded
* 2050 £200 for both traded and non-traded

The reasons for moving from a ‘damage’ cost to an ‘abatement’ cost are complex. The main argument made in favour of the change is that abatement costs are consistent with the Government’s CO2 targets. Emphasis is also given to the difficulty of estimating damage cost.

The long term values under the new approach are much higher than the previous damage cost estimates, so should help to drive more low-carbon policies. We do, however, have some concerns about the new approach.

a) While estimating damage cost is fraught with difficulty, the same is true of calculating the abatement costs to achieve a given target.

b) Further, the targets are not necessarily the ‘right’ ones insofar as they influenced by political and pragmatic considerations. A low short-term price for carbon, eg £25 per tonne of CO2e, is convenient for Government because it means that little action to constrain emissions is needed for the time being, leaving the responsibility for dealing with high carbon prices to future governments.

c) The theoretical justification for the traded carbon prices relies on equating the cost of carbon used in appraisals with the real-world traded price of carbon, on the basis that as the ETS operates under a cap the target for traded sectors is already fixed by the market. It is interesting to note, however, how much lower the traded prices are than the non-traded prices. Part of the reason is presumably that the ETS allows reductions to be made wherever in Europe it is cheapest to do so. Another reason, however, is that the ETS allows a substantial proportion of ‘reductions’ to be made through the purchase of cheap offset credits from countries outside Europe – a controversial policy as it is almost impossible to guarantee that these reductions are additional to what would have happened anyway. A difference in approach to offsetting between the traded and non-traded sectors seems to represent an important inconsistency in the setting of carbon values. The paper itself admits that having two different prices means that action to reduce overall emissions is less efficient. Aviation will attract the lower of the prices – the traded price – meaning that expansion of aviation will appear to have less economic costs than many other high-carbon activities.

d) Values are available only up to 2050. Yet the impacts of some projects, such as building a new runway, are likely to last well beyond this. The economic benefits of Heathrow expansion, for example, has been calculated by consultants OEF over a sixty year period. But if the runway were built in 2020, only thirty years of carbon costs could be calculated. Carbon values could therefore appear artificially low for this project.