|
Decarbonizing is slow, pricey and uneven, but it is possible
June 02, 2021: The forces behind climate change are easy to understand. Since the industrial era started about two hundred years ago, humankind has released an enormous amount of greenhouse gases (GHG). These gases have altered (and continue to alter) the Earth's atmosphere, changed the natural CO2 cycle, and set the planet on an unsustainable warming path. The IEA recently presented a roadmap to get to 'net zero' GHG emissions by 2050 from the current levels of 34 Gt of CO2e. In the race to decarbonize, the electricity generation and transportation sectors should lead the charge in the 2020s. Infrastructure, buildings and industry will follow in the 2030s, while the agricultural sector may lag. This energy shift will likely mean more solar panels, wind, nuclear, hydrogen and batteries. Lots of electrical batteries. Importantly, current technology can only take us half way to net zero, so breakthroughs and innovation should be crucial.
In a net zero scenario, CO2 prices could near $200/t…
Beyond technological advances, shifting behavior will likely require major policies centered on costs. After all, solving carbon starts by solving the math around it. What's the estimated cost of achieving 'net zero'? According to the IEA, the bill will be about $5tn a year for three decades (about $150/t multiplied by 34 Gt of CO2e). With global GDP at ~$90tn and global tax revenues at ~$20tn, the planet will need a major redistribution of resources until 2050. Given how cheap thermal fuels still are, high carbon prices (traded, fixed, or implied) will be a critical component to prevent global temperatures from rising. In this note, we update the BofA scenarios for decarbonization (see Putting the CO2 genie back in the bottle) and add a 'net zero' path with an average CO2 price of $200/t. Yet we also show costs will not likely be evenly distributed across countries. Also, we note decarbonization could become much more expensive over time after coal-fired power and internal combustion engines are displaced.
…implying $450/t for EUAs and rising steeply by 2045
How could these exorbitant costs be allocated? Progressive US taxation means that the top 10% of the income tax payers foot about 70% of the bill while the bottom 50% of Americans pay just 3% of Federal taxes. Assuming a similar distribution, the wealthy OECD economies would have to pay an average implied price of ~$450/t of CO2e, with lower income economies like India facing an average carbon price of just $31/t. After all, 20mn New Yorkers already pay about the same in taxes as 1.4bn Indians. Also, allowance prices will eventually become inversely linked to actual tons of CO2 emitted. In a corner solution, carbon prices could skyrocket past $10,000/t by 2045, particularly if carbon capture capabilities prove limited, as the global economy approaches net zero emissions. Three needs could result in extremely high CO2 prices: (1) keeping all fossil fuels below ground; (2) raising enough revenue to keep investing in decarbonization as emissions dwindle; and (3) rooting out the last bits of carbon from the global economy.
|
RSS Feed 
