11.6.2 Carbon prices by 2030 and after in global stabilization studies

Many analyses in this report emphasize that efficient mitigation will require a mix of incentives: regulatory measures to overcome barriers to energy efficiency; funding and other support for innovation; and carbon prices to improve the economic attractiveness of energy efficiency and of low-carbon sources, and to provide incentives for low-carbon innovation and CCS. Most of the regulatory and R&D measures are sector-specific and are discussed in the respective sectoral chapters (4–10). Some implications of innovation processes are discussed below. Most global models focus on the additional costs of mitigation in the form of shadow prices or marginal costs, and the resulting changes that would be delivered by carbon prices. The carbon prices reached by 2030 are discussed in Section 11.4.4 above. The levels and trends in these prices are crucial to the transition processes.

The time trend of carbon prices after 2030 is important but specific to each model. Some models maintain a constant rate of price increase that largely reflects the discount rate employed (they establish an emissions time-path to reflect this). Two models in the EMF studies, for example, assume increases in carbon prices of about 5.5% per year and over 6% per year that are constant throughout the century. In this approach, carbon prices roughly treble over the period 2030–2050, and every two decades thereafter. Two models in the IMCP studies also use constant, and much lower, growth rates for prices that vary with the stabilization constraint. Edenhofer et al. (2006b) find that real carbon prices for stabilization targets rise with time in the early years for all models, with some models showing a decline in the optimal price after 2050 due to the accumulated effects of LBD and positive spillovers on economic growth. In these cases, a high-price policy in the earlier years may generate innovation that provides benefits in later years. In all these models, the rates of change frequently reflect intrinsic model parameters (notably the discount rate) and do not depend much on the stabilization target, which is reached by adjusting the starting carbon price instead. However, most but not all models with endogenous technical change have rates of carbon price increase that decline over time, and two models actually result in carbon price falls as technological systems mature.

A carbon price that rises over time is a natural feature of an efficient trajectory towards stabilization. The macro-economic cost depends on the average mitigation cost, which tends to rise more slowly and may decline with technical progress. The Stern review illustrates and explains scenarios in which rising carbon prices accompany declining average costs over time (Stern, 2006).