The simple arithmetic of carbon pricing and stranded assets

Abstract

A simple rule for the optimal global price of carbon is presented, which captures the geophysical, economic, and ethical drivers of climate policy as well as the effect of uncertainty about future growth of consumption. There is also a discussion of the optimal carbon budget and the amount of unburnable carbon and stranded fossil fuel reserves and a back-on-theenvelope expression are given for calculating these. It is also shown how one can derive the end of the carbon era and peak warming. This simple arithmetic for determining climate policy is meant to complement the simulations of large-scale integrated assessment model, and to give analytical understanding of the key determinants of climate policy. The simple rules perform very well in a full integrated assessment model. It is also shown how to take account of a 2°C upper limit on global warming. Steady increases in energy efficiency do not affect the optimal price of carbon, but postpone the carbon-free era somewhat and if technical progress in renewables and economic growth are strong leads to substantially lower cumulative emissions and lower peak global warming.Keywords Social cost of carbon . Carbon budget . Peak warming . End of carbon era JEL codes H21 . Q51 . Q54

Equitable, effective, and feasible approaches for a prospective fossil fuel transition

“…Each of the identified approaches is subject to complications vis‐à‐vis “carbon leakages” and “green paradoxes” (for more see Baldwin et al, 2020 ; Edenhofer et al, 2020 ; Foster et al, 2017 ; Le Billon & Kristoffersen, 2019 ; Sinn, 2008 , 2012 ; van der Ploeg & Rezai, 2018 ). One proposed way to mitigate against leakages and green paradoxes is through “globally coordinate[d] climate change policy” (Foster et al, 2017 , p. 259), since climate change “cannot be successfully resolved in the absence of effective global governance” (Cole, 2011 , p. 1).…”

“…Many of the particularly mainstream LFFU approaches (e.g., carbon taxes) were discussed predominantly (though not entirely) in the context of the Global North, for example (inter alia), in the UK (e.g., Bebbington et al, 2020 ; Caldecott & Dericks, 2018 ; Johnstone et al, 2017 ), Norway (Bang & Lahn, 2019 ; Kopytin et al, 2020 ; Marsden et al, 2019 ), and the US (e.g., Hubacek & Baiocchi, 2018 ; Kefford et al, 2018 ; van de Graaf, 2018 ; van der Ploeg & Rezai, 2018 ), among others. Empirical research covering the Global South is steadily growing, with Muldoon‐Smith and Greenhalgh ( 2019 , p. 60) calling for a move “beyond the mostly Western European and North American perspectives” and others corroborating (Ansari & Holz, 2020 ; Bos & Gupta, 2018 ).…”

“…Improving energy efficiency at the intra‐ and international level can only effectively LFFU when “more efficient” fossil fuels cannot be used to replace “less efficient” variants. Moreover, calls to improve energy efficiency with Bioenergy with Carbon Capture and Storage (BECCS) must also be rejected, given the unproven, uneconomical, and socio‐ecologically hazardous state of BECCS technology (Hubacek & Baiocchi, 2018 ; Kefford et al, 2018 ; Mo et al, 2018 ; Rodriguez et al, 2017 ; van der Ploeg & Rezai, 2018 ). The OECD ( 2020 ) Export Credit Arrangement includes efficiency regulations, but does not meet the conditions above as they allow for BECCS integration and new fossil projects in exchange for decommissioning older and dirtier ones.…”

Conflicting commitments? Examining pension funds, fossil fuel assets and climate policy in the organisation for economic co-operation and development (OECD)

“…Progress on this front has been questionable given that as of 2019, we are globally set to "produce about 50% more fossil fuels by 2030 than would be consistent with a 2°C pathway and 120% more than would be consistent with a 1.5°C pathway" [7: p.4]. Some have speculated over the possibility of reducing emissions through Carbon Capture & Storage (CCS)which would negate the extent to which fossil fuel production ought to be reduced [8] but ample research shows that CCS technologies are underdeveloped, uneconomical and socially and environmentally problematic [9,10]. As such, more aggressive and immediate action is needed by public and private actors alike to fetter fossil fuel markets and address the climate emergency by Leaving Fossil Fuels Underground (LFFU).…”

Diversification and Cooperation Strategies in a Decarbonizing World

“…This analysis also contributes to the debate on stranded assets but transcends the conventional narrative with a broader perspective. The stranded assets literature originated from the observation of the quantitative mismatch between the volume of carbon embedded in the size of proven reserves of fossil fuels and the volume of future emissions consistent with different global temperature increase constraints, or "carbon budget" (Carbon Tracker and Grantham Institute 2013, Helm 2015, Meinshausen et al 2009McGlade and Ekins, 2015;van der Ploeg, 2018). The distributional estimates of whose reserves are "unburnable" are usually based on the calculations using global extraction cost curves and break-even prices.…”