Carbon pricing and the elasticity of CO2 emissions

Richard, the results of this study, which affirm those of many others, can't be emphasized enough.

"We find that the introduction of carbon pricing has reduced growth in CO2 emissions by 1% to 2.5% on average relative to counterfactual emissions..."

I feel I should caution readers to not read carelessly (as I did, the first time through): carbon pricing has not reduced emissions, it's slowed their charge higher - by at most 2.5%.

Carbon pricing, trading, offsets, or credits are like over-the-counter pills promising weight loss, or sharper memory: if only it were that easy.

I haven't had the time to read the whole report yet, Dick, so apologies if my question is already answered in the details-- but if carbon pricing alone is not a solution to climate challenges, can't it still be an important and critical tool in a vast toolbox of solutions? No solutions out there are really the silver bullets that can alone create the change needed, but do the authors find that there may be a rate of benefit that would be advantageous when used in concert with other policies, technologies, and market mechanisms? 

What an interesting article. It is tempting to jump to incorrect conclusions.

However:

Though it doesn´t say so explicity, I am guessing that the 39 countries studied include the EU countries and some of those mentioned on pages 15 and 16 of the publication, plus a few others. I am sure the authors are aware of the reductions in CO2 emissions in these countries since the ETS started in 2005.  But I wish they had included them in this paper. I really wish they had looked at the period since the start of the ETS (2005) instead of 1990-2016.  The ETS did not exist for the first 15 years of the study. For some reason (page 1):

"We study the impact of carbon pricing on CO2 emissions across five sectors for a panel of 39 countries over 1990-2016"

I looked at the history of CO2 emissions in the EU and in some of those countries, Sweden, for example (Please don´t ask me how they got data on emissions in 1834):

]

And the EU as a whole:

Both Sweden and, more importantly, the EU as a whole had large reductions in CO2 emissions since the start of the ETS in 2005 and through 2016,  and not during the first part of the study period 1990-2005.

So, I guess the point of the paper is that the substantial reductions in emissions during the study period were not the result of the carbon price mechanisms, but to other factors. In fact, the reductions must have been due to something else, as the impact of ETS on fuel prices was very little to negligible, as stated on page 3

“Globally, the average (emissions-weighted) carbon price is below $3/tCO2 (Dolphin et al. 2020), equivalent to adding approximately US$0.03 per gallon of gasoline (€0.009 per litre of petrol).”

and,  the study period was largely before the ETS existed. Very strange.

I can only imagine that the  emissions reductions in the early years of the ETS were due to other factors, for example, separate local taxes on gasoline and diesel, tax breaks for EVs, increased road taxes, better mass transit alternatives, natural infrastructure, less coal fired generation, renewable energy construction.   The increase in the price of carbon since about 2017 has also resulted in renewed interest and investment in CCUS.

Of course, this is not surprising since during the study period, after the start of the ETS, the cost of carbon permits was very low.

]

Taking into account the differences between costs of “exemptions and coverage restrictions” the actual cost of carbon permits was close to zero during the study period.

“In the first two trading periods (2005-2007 and 2008-2012) the majority of allowances were given out for free and in generous amounts, so the price for first-period allowances fell to zero in 2007.»

«...CO2 allowances were as cheap as 2.81 euros in early 2014. However, since the latest reforms for the programme’s fourth phase were agreed upon, permit prices have risen. The clearing price at the auction of 23 February 2018 stood at 9.68 euros; in August 2018, trading prices for EUAs rose to 18.50 euros per tonne.»

With the ETS now in its third phase (2013-2020), 40 per cent of allowances are being auctioned and power generators have to buy all of their allowances (with exceptions in some member states like Poland, Bulgaria, Hungary, Lithuania, etc.).

Still, free allocation prevails in the manufacturing industry (80 per cent) and the aviation sector (85 per cent)”

Nevertheless, The price of carbon in the ETS is now Euros 49.34 (May 5, 2021).

So, apparently, the EU was anticipating the advice of the authors with respect to their conclusions (page 51-52) that:

«We therefore recommend the elimination of carbon tax exemptions and free allowance allocations in carbon markets for most emissions-intensive industries...."

And:

"Based on our simulations of potential future emissions reductions in response to alternative carbon price paths up to 2050, we conclude that CO2 emissions are unlikely to decline to levels consistent with Paris climate targets in response to plausible levels of carbon pricing in the decades ahead, absent additional non-pricing policies and substantial complementary investments to deploy low-carbon technology and infrastructure."

"Finally, our analysis corroborates the findings of Grubb (2014), Mercure et al. (2014), and others suggesting that climate change mitigation policies, when strategically combined, maybe highly synergistic. Carbon pricing still has the potential to be a powerful tool contributing to economy-wide emission reductions, but it is clearly no panacea."

No panacea, but I suggest that the ETS got many of the balls rolling.

Indeed, other readers, Matt, Derrick and Richard, respectively,  have suggested just this: "...do the authors find that there may be a rate of benefit that would be advantageous when used in concert with other policies, technologies, and market mechanisms?" and "Carbon Pricing is largely useful in helping fund other technologies/approaches, and in incentivizing organizations to work towards more meaningful solutions." and "... the need for actual investment in non-polluting generating sources."

I do hope that the authors have another look at the data with the current higher carbon prices, assuming the prices  stay that way.

Might their elasticity calculation give some idea which synergistic mitigation policies might best be combined with carbon pricing? 

Though the EU and the other countries in the study are closer to being on track to meet their Paris Agreement commitments, it remains to be seen whether carbon pricing, with fewer exemptions, fewer free allocations, reduced overall supply of permits, in addition to other separate emissions reductions measures, will further reduce emissions to those required in order to (page 1) 

“be sufficient to achieve emission reductions consistent with the Paris climate agreement.”

However, I do confess that the answers may well lie in the parts of the report that went right over my head!

I especially could not follow the discussion on page 29 on “Implementation Elasticity Using Between-Country Variation", especially this:

]

A little help here would be appreciated.