Today’s post is inspired by some recent reading.
Please bear with me, it may sound ‘difficult’ but i hope it will make sense in the end.
I want to talk about the idea of putting a price on carbon emissions, a carbon tax. I already wrote in a previous post about the carbon market and carbon credits and how they work.
But how really is the price of carbon calculated?
It can be a very complex concept. How does one put a price on such a thing ? Who decides?
But taxes passed by certain countries range wildly from less than $1 to $121 per ton.
Well, there are various methods that economists can use, but one of them which is widely used is termed ‘Social Cost of Carbon’.
What does it mean?
The social cost is the economic damage caused by emitting an extra ton of CO2
After calculating a cost, a discount rate must be applied. The discount rate is how much an investment is expected to increase. for example if I invest €1000 today, how much will this be worth in 100 years time? The interest rate will be used as a discount rate. This means, in theory, the early we start acting and the longer we plan, the more we ‘save’ as a discount. It should be an incentive.
This whole process poses some challenges towards its calculation:
For example, discounting at 7 percent may seem reasonable for government projects that last for five to 15 years, but it is not reasonable for climate-related actions, where the benefits from today’s investment could last for 200 years or more. But because people do not typically make 200-year investments, there is no relevant market rate to go by.
These challenges means we are still very far from having a sure value for carbon. The only thing we can be said for sure is that the SCC must be greater than zero: there is cost!
We shouldn’t think that we are any close to set a carbon tax, but it is evident that we need one. It is great to have more economists collaborating with ecologists and climate scientists - which means that hopefully soon we’ll be able to narrow the range used and apply carbon tax that will be an incentive to reduce emissions and can provide some money to governments to deal with climate emergency and employ mitigation strategies.
And you? Are you pro a carbon tax? Do you think governments will be able to use it wisely? What do you think money from it should be used for?
Disclaimer: some posts may contain affiliate links. At no extra costs to you, buying through the link will help me in this blogging journey!