Dr John Rhys, Oxford Institute for Energy Studies
Carbon dioxide (CO2) emissions are essentially cumulative in the earth\’s atmosphere. The thesis of this paper (drawing on an earlier OIES Working Paper) is that much economic analysis and policy making in relation to the mitigation of CO2 emissions has failed to reflect fully this essential element of the science. In particular the cumulative and irreversible nature of CO2 necessarily implies that a significantly heavier weight should attach to current as opposed to future emissions. This is in major contrast to some conventional wisdom and also to the outcomes and expectations that can be observed from current application of market-based approaches to limiting carbon emissions. Application of a progressive tightening of “carbon caps” – limits on total CO2 emissions - has tended to deliver a very different message on the relative importance of present and future emissions, with the price of current emissions being very low but with a prospect of rapid rises in the future.
This inconsistency in time profiles, between a focus on costs or externalities – the social cost of carbon (SCC), and the market price outcome from an emissions cap approach, has the potential to create major distortions in policy and is likely to have seriously sub-optimal results. Similar criticisms could be leveled at policies focused too closely on individual year targets rather than cumulative emissions. Policy making needs to redress this imbalance. Recognition of the cumulative nature of CO2 should strengthen the case for urgency and also lead to more recognition of the option value of early action on emissions.
Some of the implications of these straightforward principles are of direct and compelling importance in relation to major policy issues, such as gas for coal substitution in the power sector, the inclusion of aviation within the EU ETS, and the choice of carbon capture and storage technologies. At a minimum the implications need to be reflected in guidance on the valuation of emissions for public policy purposes.
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