Could Carbon Prices Hit $180?

Here’s one for the alarmists out there. According to Nobuo Tanaka, executive director of the International Energy Agency (IEA), the price to offset a metric ton of carbon must top $180 to ensure temperatures rise by just two degrees by 2030. That’s well ahead of the current $19 per metric ton price tag on Europe’s cap-and-trade scheme, and will raise concerns that the cost for business to tackle climate change will become too much to bare.

Personally, the IEA’s ‘$180 by 2030’ projection seems overblown. Even the most pro-cap-and-trade analysts figure a $50 to $70 per metric ton number will be on the cards in the next 11 years. And even when oil — which has a direct effect on other energy prices, including CO2 — peaked last July, Europe’s carbon price topped out around $40 per metric ton.

To extrapolate on what happened last summer (quite pertinent as oil prices continue to rise), we won’t need such a drastic spike in CO2 prices to jumpstart investment in clean energy technology. For those new to carbon markets, the higher the price to offset carbon emissions, the greater the incentive to invest in energy efficient/low-carbon products.

Back in July, 2008, the high energy/CO2 prices led many utilities and industrials to switch to cleaner energy generation to clamp down on their carbon financial exposure. Even at $40 per metric ton, the price in Europe's trading scheme was sufficient impetus to alter business practices. Consultants McKinsey, for instance, reckon investment in so-called carbon, capture, and storage technology (for more info, check out an article I wrote on the subject last year) would become financially viable at carbon prices between $45 and $64 per metric ton. We would only need a slight up-tick in prices to provide companies the economic incentive to fork out billions for this technology.

For sure, opponents of cap-and-trade say consumers will end up paying higher energy bills as utilities and heavy industrials pass on the cost of carbon to end users. Unfortunately, higher energy bills -- particularly at the start of any U.S. federal carbon scheme -- could happen. But by placing a price on CO2 emissions, companies will have an economic incentive to change how they do business. I doubt, though, that prices will have to hit $180 before firms start to act.

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