The catch-22 of carbon pricing

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Energy policies must reflect true price of carbon.

‘Policymakers are more likely to price carbon appropriately if it is cheaper to move onto a low-carbon path …’

Staff Report

LINZ — If government leaders want to encourage a shift to renewable energy, their polices must reflect the true price of carbon, including the hidden environmental, health and societal costs of burning coal and oil.

The current price of carbon is below zero, once fossil-fuel subsidies are taken into account, and that is slowing the shift toward a low-carbon future, a new paper in Nature concludes.Recognizing that there is little support currently for a comprehensive carbon price, the authors say that many other policy approaches can spur  adoption of renewable energy production. The paper — whose authors include Princeton University’s Michael Oppenheimer, and Albert G. Milbank Professor of Geosciences and International Affairs at the Woodrow Wilson School of Public and International Affairs — urges policymakers to implement a range of policies until the time that a carbon price becomes politically realistic.

“The current inadequacy of carbon pricing stems from a catch-22,” the authors wrote. “Policymakers are more likely to price carbon appropriately if it is cheaper to move onto a low-carbon path. But reducing the cost of renewable energies requires investment, and thus a carbon price.”

First steps include modernizing power grids and ensuring that they are accessible for renewable sources like solar and wind energy (similar to the access fossil fuel sources enjoy), and subsidizing key technologies, particularly for energy storage. Additionally, investments must be made that support research and development related to low-carbon energy technologies.

Many obstacles to renewable energy are policy-driven, according to the paper. Current policies were set with the fossil-fuel industry in mind, but the same principle could apply with the emerging renewable energy technologies as well.

The authors point toward Germany and China as examples. Germany’s Renewable Energy Sources Act guaranteed 20 years of grid access and fixed prices for solar- and wind-power producers. Meanwhile, in China, climate, energy and industrial policies have boosted the manufacturing scale of renewable technologies.

But despite these efforts, many countries still use coal and natural gas as their main source of electricity. Likewise, many forms of bioenergy actually increase net emissions rather than reduce them.

The paper outlines a policy check list for governments:

  • Check that all climate-change interventions pass a benefit-cost test (taking environmental, health and societal costs into account);
  • Ensure policies related to renewable energy ease the way toward a national carbon cap or tax;
  • Open up access to electricity grids for renewables and break up any non-competitive arrangements;
  • Support the modernization of power grids to facilitate adoption of new renewable energy sources; and
  • View the energy sector in its entirety since transportation may become increasingly dependent on electricity.

“Ambitious renewables policies should be followed by strengthened climate policies,” the authors concluded. “These are the sorts of pieces that need to come together to deepen solar and wind penetration levels and achieve the ‘holy grail’ of climate policy: an effective carbon price.”

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