Carbon Pricing Projections

Carbon Pricing Projections that are doomed – except for the last man standing

Posted on Posted in Chairman’s Blog

On the day (June 1st 2017) that the US announced it is pulling out of the Paris COP21 Agreement, we look at the patchwork of carbon pricing projections in the public domain that are doomed. The EU ETS is not fit for purpose. The UK’s ‘official’ (BEIS) ‘curves’ are not only straight lines, counter-intuitively, they are also dependent on the demonstrably unfit EU ETS. The UK Carbon Price Floor is not expected to survive the UK General Election on June 8th. The US SCC is as of today holed below the waterline. Soon PAL’s carbon pricing curve will be the ‘last man standing’.

As shown in the figure below, carbon pricing projections that are ‘in the wild’ consist of straight lines, some flat, some steep, some less steep, some a mixture of all three.[1] The only curve that matters is the PAL 1 Year, an ‘engineering approximation’ carbon price that grows nearly exponentially with time. This green curve is underpinned by its shadow, PAL REACT (Reinsurance Event-Attributed Carbon Tax). This is the more granular black line that hugs below the PAL 1 Year curve. It’s the real price of carbon.


Carbon Pricing Projections


Let’s look at each one in detail.

First up is the EU Emissions Trading System. It is currently trading at €5/tonneCO2. It’s pretty much been that way for ages. It is widely believed that the EU ETS is in need of ‘root and branch’ reform. But as we see below, it has been a key part of UK Government emissions policy but post-Brexit it probably won’t be.

Next is the UK Carbon Price Floor trading at £18($25)/tonneCO2. At least this is close to the real price of carbon – the PAL carbon price – for the short term anyway. Sadly, it is thought that the UK CPF is unlikely to survive the UK General Election, let alone the Brexit negotiations. The big-user energy lobbyists will be happy. They won’t be for long.

Then there is the UK Government BEIS (Department for Business, Energy & Industrial Strategy) ‘Updated Short-term Traded Carbon Values: Used for UK Public Policy Appraisal March 2017’ [2]. They explain that ‘BEIS’s short-term traded carbon values for UK public policy appraisal are used for valuing the impact of government policies on emissions in the traded sector, i.e. those sectors covered by the EU Emissions Trading System.’ They also refer to their BEIS Carbon Price Model (BCPM) as follows “BCPM is an in-house fundamentals-based model for estimating carbon prices. The BCPM estimates EUA prices in the EU ETS in any given year based on the equilibrium between demand for and supply of abatement… Demand for abatement depends on the gap between Business As Usual (BAU) emissions and the EU ETS cap …” Given that the EU ETS is a key component of BEIS’s carbon price formulation, and given that the UK’s connection with the EU ETS is unlikely to survive the imminent Brexit negotiations, the question surely is “will BEIS continue to use EU ETS as its’ outsourced bellwether?”

The final line represents the US Social Cost of Carbon as of yesterday, May 31st when the then existing (3%) carbon price was a whopping $45/tonneCO2. While much reviled in some quarters, US SCC did at least have legal weight under the Obama Administration. In 2016, the 7th U.S. Circuit Court of Appeals upheld the Department of Energy’s use of the SCC when setting its energy efficiency standards. But as of today June 1st 2017 the withdrawal of the US from the Paris Accord of COP21 is very probably the sinking of the US SCC.

At last, to the real price of carbon curve, the one to watch. For 2017, PAL’s carbon price is about $20/tonneCO2. At PAL, we have scientifically determined the carbon price from the cost of loss and damage attributable to manmade climate change triggered by burning fossil fuels i.e. from CO2 emissions – past present and future. Uniquely this is neither politically driven nor market led. It is the real, independent, bedrock carbon price (i.e. cost). Make of it what you will policy-makers – it is what it is!

EU ETS is toothless, UK CPF will probably not survive the UK General Election, BEIS is joined at the hip to the EU ETS until Brexit parts these Siamese twins, and as of today June 1st 2017, US SCC is dead in the water. That leaves PAL’s real carbon price as ‘the last man standing’.


Bruce Menzies, Chairman, Predict Ability Ltd (PAL)

© Copyright Predict Ability Ltd 2017. All rights reserved.

[1] We have corrected some straight lines (EU ETS, UK CPF, US SCC) for inflation at 3.5%.

Bruce Menzies

Author: Bruce Menzies

Bruce Menzies is Chairman and co-founder of PAL. He founded Global Digital Systems Ltd that won the Queen’s Award For Enterprise 2011. Bruce is co-author of six books on geotechnics and geology, one of which won the British Geotechnical Association Prize 2002. He holds doctorates from the Universities of London and Auckland, and is a Fellow of the Institution of Civil Engineers.

Carbon Pricing Projections that are doomed – except for the last man standing was last modified: June 2nd, 2017 by Bruce Menzies

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