11.6.3 Price levels required for deep mid-century emission reductions: the wider evidence

Several other lines of evidence shed light on the carbon prices required to deliver transitions to deep mid-century CO₂ reductions. By contrast with the rising prices in most ‘optimal’ stabilization trajectories, some global models have been run with constant prices. Perhaps the most extensive, the IEA-ETP (2006a) study (MAP scenario), returns global CO₂ emissions roughly equal to 2005 levels by 2050 (more than halving emissions from reference). This is consistent with a trajectory towards category III stabilization at around 550 ppm CO₂-eq, with carbon prices rising to 24 US(2000)$/tCO₂ ($87/tC) by 2030 and then remaining fixed. The IEA study emphasizes the combination of end-use efficiency in buildings, industry and transport, together with the decarbonization of power generation as indicated. In other global studies that report sectoral results, the power sector dominates emission savings even in the weaker category IV scenarios. Some other models with detailed energy sectors do not force a constantly rising price or display periods of relatively stable prices along with stable or declining emissions.^[17]

The carbon price results are consistent with the technology cost analyses in Chapter 4. These suggest that price levels in the 20–50 US$/tCO₂ range should make both CCS and a diversity of low-carbon power generation technologies economic on a global scale, with correspondingly large reduction potential attributed to the power sector in this cost range (Table 11.8). Newell, Jaffe & Stavins (2006) focus on the economics of CCS at prices within this range, noting that the carbon prices required will depend not only on CCS technology but also upon the reference alternative. Schumacher and Sands (2006) also focus on CCS but, in the context of the German energy system, conclude that a similar range is critical ‘for CCS as well as advanced wind technologies to play a major role’ (p. 3941). Riahi et al. (2004) project coal-based CCS costs up to 53 US$/tCO2. Corresponding reductions may accrue, whether a carbon price is considered to be implemented directly or as the incentive from certified emission reduction (CER) credits. Shrestha (2004) projects that ‘business-as-usual’ shares of coal in power generation by 2025 will be 46%, 78% and 85% in Vietnam, Sri Lanka and Thailand respectively, but an effective CER price of 20 US$/tCO₂ from 2006 onwards would reduce the share of coal to 18%, 0% and 45% respectively in the three countries by 2025. Natural gas and, to a lesser extent renewables, oil and electricity imports are the main beneficiaries.

The sectoral results from Chapters 4–10 (Table 11.3) suggest that carbon prices in the range 20–50 US$/tCO₂-eq could deliver substantial emission reductions from most sectors. Of the total potential identified below 100 US$/tCO₂-eq across all sectors, more than 80% is estimated to be economic at a cost below 50 US$/tCO₂-eq. Moreover, the lowest proportions are for agriculture (56%) and forestry (76%). Of the main sectors for which carbon cap-and-trade is being applied or considered at present, costs below 50 US$/tCO₂-eq account for 90% of the identified potential in energy supply and 86% in industry, whereas the proportion of the total below 20 US$/tCO₂-eq is about half (52%) and a quarter (27%) respectively for these sectors. This underlines the conclusion that carbon prices in the 20–50 US$/tCO₂-eq range would be critical to securing major changes in these principal industrial emitting sectors.

The bottom-up estimates of emission reductions available at less than 50 US$/tCO₂-eq for the total energy sector (supply, buildings, industry and transport) span 11.5–15 GtCO₂-eq/yr (Table 11.3, full range). This is strikingly similar to the range of CO₂ reductions by 2030 that global top-down studies consider to be necessary for trajectories consistent with stabilization in the Category III range (Figure 11.7 (a), in the range 25–40% reduction of CO₂ which, against the central baseline projection of 37–40 GtCO₂-eq (WEO/A2) for energy-related emissions that is used for the bottom-up estimates, equates to 10–16 GtCO₂-eq. Incidentally, this also equates to global emissions in 2030 that are roughly at present levels).

The capital stock lifetime of industrial and forestry systems (discussed further below) means that it takes some decades for the impact of a given carbon price to work its way through in terms of delivered reductions.^[18] The assessment of timing is complicated by the fact that most global stabilization studies model a steadily rising price with ‘perfect foresight’. However, Figure 11.7(c) confirms that almost all models project prices of at least 20 US$/tCO₂-eq by 2030, and some breach the 50 US$/tCO₂-eq level earlier in that decade, as might be expected in order to secure the required reductions by 2030. Applying the same statistical framing as Chapter 3, the analysis of price trends confirms that global carbon prices in more than 80% of the Category III stabilization studies cross within the range $20–50/tCO₂-eq during the decade 2020–30. These diverse strands of evidence therefore suggest a high level of confidence that carbon prices of 20–50 US$/tCO₂-eq (75–185 US$/tC-eq) reached globally in 2020–2030 and sustained or increased thereafter would deliver deep emission reductions by mid-century consistent with stabilization at about 550 ppm CO₂-eq (category III levels). To depict the impact in the models, such prices would have to be implemented in a stable and predictable manner and all investors would need to plan accordingly, at the discount rates embodied in the models.

Carbon prices at these levels would deliver these changes by largely decarbonizing the world’s electricity systems, by providing a substantial incentive for additional energy efficiency and, if extended to land use, by providing major incentives to halt deforestation and reward afforestation.^[19] By comparison, prices in the EU ETS in 2005 peaked close to 30 euros (about 40 US$)/tCO₂. Transition scenarios for non-energy sectors (in particular agriculture and deforestation) are reported in the respective sectoral chapters and in some of the multi-gas studies in Chapter 3.

Particularly in models that embody some economies of scale/ learning-by-doing, prices maintained at such levels largely decarbonize the power sector over a period of decades. Some of the models display a second period with a similar pattern, later and at higher prices, as fuel cell-based transport matures and diffuses. In integrated Category III scenarios, such scenarios can also deliver more potential abatement in the transport sector (at a higher cost), partly because several of the low-carbon transport technologies depend on the prior availability of low-carbon electricity. Assumptions about the availability of petroleum and the costs of carbon-based ‘backstop’ liquid fuels also tend to be very important considerations in terms of the associated net costs (Edmonds et al., 2004; Edenhofer et al., 2006b; Hedenus et al., 2006).

The price in the 20 to 50 US$/tCO₂ range required to deliver such changes – and answers to the questions of whether and by how much further carbon prices might need to rise in the longer term – depend upon developments in three other main areas: the contribution of voluntary and regulatory measures associated with energy efficiency; the extent and impact of complementary policies associated with innovation and infrastructure; and the credibility, stability and conviction that the private sector attributes to the price-based measures. We consider each in turn.