Dr Bruce McCabe, Global Futurist, interviewed INET Oxford Co-Director of Economics of Sustainability Cameron Hepburn for his FutureBites podcast in November 2024. Listen back and read Dr McCabe's reflections, highlights and key takeaways at https://www.brucemccabe.com/fu... and also below.
How carbon pricing is incentivising a sustainable future
Can carbon pricing incentivize a sustainable future? What lessons have early-movers learned about acceptance and building momentum? How to neutralize the politics? How to do a better job of implementing carbon pricing in practice? What are the future implications of the European Union's Carbon Border Adjustment Mechanism (CBAM)?
Dr Bruce McCabe, the Global Futurist, enjoyed a compelling conversation with Professor Cameron Hepburn, the Battcock Professor of Environmental Economics and co-Director of the Economics of Sustainability Programme at Oxford University, who answered all these questions and more.
And there’s a ton of good news here, much of which dovetails with Dr McCabe's message that decarbonisation is thewealth-generating opportunity of our time.
Welcome to the intersection of global economics, energy and sustainability!
Dr Bruce McCabe's key takeaways from his discussion with Cameron Hepburn
One reason carbon pricing is so powerful is it is so simple. It removes the need for consumers and businesses to calculate or even think about ‘upstream’ emissions when making a purchase. Market forces ensure costs accrue and are passed along supply chains. End-prices capture the whole deal, thus simplifying life for everybody. As Cameron was careful to point out, the economic costs of carbon emissions are very real, and carbon pricing is just saying, “well, look, there's this other cost to the production of this good … If you want to buy something, you should pay for the costs associated with the production of that. Carbon pricing is just making sure that people pay the costs.”
The “price at the margin” is what counts
A straight-up tax on every unit of carbon emitted is easy to attack politically because its a big chunk of money taken off people to go into central government for redistribution. It’s also unnecessary. A big lesson learned is: “if you can find a way to more or less give that money back, more or less to the people who you took it from, but keep the incentive at the margin, then you can clean out the politics and get the economics right.”
That’s why trading schemes work better. In the EU, the system was designed so that the revenue collected went back to industry and/or a chunk of the permits to emit the carbon pollution were given away for free. The transfers of money were minimized, but the price signal was still there changing people's decisions.
A further refinement Cameron mentioned is to re-distribute money early, ahead of price rises related to pricing in emissions costs, so citizens and businesses benefit from the get-go.
Carbon price can be lower than TRUE cost
Cameron explained that around $100 a ton is the bottom end of plausible estimates for the true damages costs from extreme weather and other events driven by climate change, but the number could easily be $1,000 or even higher if it factors in the big negative reinforcing effects (eg methane release from thawing tundra) that are coming if we don’t improve our current trajectory. So the true cost lies somewhere between $100 - $1000 a ton.
Although the true cost is high, we need only price in a small proportion to change behaviours and drive towards net zero. Cameron and his colleagues estimate that $50 - $100 a ton is sufficient to incentivise the transition across the global economy.
The World Bank commissioned report on carbon pricing he mentioned, co-authored by Nicholas Stern and Joe Stiglitz, can be found here.
Wealth-generating, but incentives still necessary
Cameron talked about ‘negative pricing,’ in the sense that businesses make money from electrification and decarbonization because, “It's cheaper to be cleaner.” We agreed that the cost-reduction and profit-generating opportunities are huge (my position for the past 10 years, is that decarbonization is the greatest wealth-generating opportunity of our time). He took care to point out, however, that since the gains do not apply to all businesses or all sectors, economy-wide incentivization remains a necessity.
Domino effect
We discussed “carbon leakage,” whereby companies that are asked to pay the full costs of their pollution have an interest to move to a jurisdiction where they can get away with not paying, and I asked Cameron what effect the EU Carbon Border Adjustment Mechanism might have on other trading blocs.
Cameron predicts that, while governments might initially perceive the EU Carbon Border Adjustment Mechanism as a negative obstacle to exporters, they will quickly recognise the advantages of applying similar incentives at home. It’s worth quoting his words in full:
“Once the EU puts in place this carbon border adjustment, then if you're an American or an Aussie producer or Chinese producer selling to the EU, the Europeans are just collecting the cash at the border for your emissions. Now, if you think about that for a second, why do you want the Europeans to be taxing your production? No, thank you! If you're Australia you think no, we'll put our own carbon price on. We’ll collect the cash! And maybe the Americans think, actually, this is a good idea, we'll collect the cash. And, by the way, because we've got our own carbon price, anybody else wanting to sell into America has got to pay a border adjustment too, and so that way you have a, not quite a race to the top, but you have an incentive to ‘equalize these carbon prices up,’ rather than the classic problem, which is that everybody wants a free ride on everybody else and you don't get any action on climate change.”
One bloc to follow another, domino style. Not the answer I expected, but it makes perfect sense when you think about it, especially coupled with the need to stay internationally competitive to retain export markets. And it’s good news!
China’s pathway
I was intrigued to learn that China has conducted its own learning phase with different types of carbon price applied in different regions of the country (some taxes, some trading schemes, different designs, different prices) and has now begun to harmonize them. Because economic governance is more top-down, in some ways it has been easier, and other aspects, such as market monitoring, have been trickier. Cameron predicts China will:
“… be increasing its carbon prices as it sees greater and greater merit in moving faster domestically to a clean economy. At the moment it's been driven by capturing export markets, but it's increasingly realizing that actually all of this technology is good at home too. And once you've got a lobby group on the clean side that it is as powerful as that on the dirty side, then the those who are the clean energy and the clean industry industrial interests want carbon pricing to level the playing field so that their technology gets greater uptake.”
In other words, China is following its own carbon pricing path, but eventually we’ll all be arriving at the same destination.
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