Home > Environment > Why the global carbon price should probably be around $50/tonne (nerdy/wonkish, but not too difficult, I hope)

Why the global carbon price should probably be around $50/tonne (nerdy/wonkish, but not too difficult, I hope)

June 2nd, 2011

One of the big frustrations with trying to follow the debate on climate change is that most of the key questions are best answered with large, complicated models. Learning enough to assess these models in one subject area, even in general terms, is a huge task, and learning the details of any particular model is a full-time occupation. But, if we are going to make any real progress, we need numbers we can understand. It seems hopeless, but it isn’t entirely so. One thing I learned very early on about modelling is that, for almost any large complicated model, there’s a small simple model that gives much the same answers to the key questions of interest, if you use it correctly, and choose input parameters consistent with those in the big model. The big model (if it’s a good one) imposes consistency conditions you might miss in a simple model, and also gives detailed answers to lots of more specific questions, but a lot of the time, you can do without that. I’m writing a paper at the moment, trying to answer some of the important in a way anyone can check without spending years mastering a big model.

The biggest question of the moment is: what is the right price for carbon? I’m going to look at this question for the world as a whole, disregarding national differences and so on. If you’ve read the title of the post, you’ll know what answer I reach.

I’m going to start by talking about the damages caused by uncontrolled climate change. The pre-industrial concentration of CO2 (+ equivalents) was about 280, and we are now around 430. The most common candidate for a ‘safe level’, where the risk of damaging climate change is small, is 350 ppm. I’m going to assume that level is associated with zero net damage. A plausible, somewhat optimistic, Business as Usual path might take us to 650 ppm, which implies eventual warming somewhere between 2 and 8 degrees C, with a median value around 4.5 degrees C[1]. Even the low end of this range would entail significant economic and environmental costs, while the high end would almost certainly be catastrophic. Finally, the target in most international discussions is a path that ends up with CO2-equivalent concentrations stabilised at 450 ppm. I’m going to assume (more posts to come on this) that this target could be reached with a global price starting at $50/tonne of CO2 and rising gradually over time.

What’s crucial here is that the expected damage associated with a given emissions trajectory isn’t a linear function of the final atmospheric concentration. Costs increase slowly at first, then much more rapidly, giving rise to a convex damage function. The most convenient kind of convex damage function is the quadratic, which some will remember from high school math, in which the function value increases with the square of its argument. Given our assumption that damages are zero at 350 ppm, we want a function of the form.

(1) C = k (X – 350)^2

where C is cost (expressed as a proportion of global income), X is CO2-e concentration and k is a constant. But what is k? We can work it out if we have an estimate for the damage associated with the Business As Usual scenario. To illustrate the point, I’ll use a (conservative) estimate that the expected cost is the same as a 10 per cent permanent reduction in global income.[2] So, we have the pair D=0.1, C=650, and high school algebra gives us k = 1.1*10^-6. I’ll simplify this to k=1*10^-6

Now we need the tiniest bit of calculus (take it on faith if you have to, this is as hard as the math is going to get). Given the cost formula (1), the marginal damage associated with an additional PPM of final concentration is given by

(2) MC = 2k (X-350)

To finish up, we need to convert the marginal cost on the left-hand side into dollars/tonne of CO2, so we need a conversion factor for ppm/tonne of CO2. The conversion part of this is reasonably simple – after taking account of sinks, emitting around 10 Gigatonnes of CO2 raises the atmospheric concentration by 1 ppm.

For the left-hand side, we need to deal with another controversial question, that of discounting. I’m going to assume that income grows at 2 per cent a year, and use a real discount rate of 4 per cent [fn3]. Current world income is around $US50 trillion, so the present value of the income stream is $US50 trillion/(0.04-0.02) = $US2.5quadrillion. We’ve got some huge numbers on both sides here, but we can cancel them out, to get a marginal cost in $/tonne of 2.5*2*(X-350)/10, or more simply, 0.5*(X-350).

Now plug in the most popular target of X=450 ppm, and voila!, the answer is (drumroll ….) $50/tonne. And, as I said above, it seems pretty reasonable to expect that if the world moved reasonably rapidly to a carbon price of $50/tonne (which should rise at the discount rate of 4 per cent a year), that we could achieve climate stabilization at or below 450 ppm.

Obviously, I’ve picked numbers that give that particular answer. What if the cost of BAU is estimated at 5 per cent, or 20 per cent instead of the 10 per cent I’ve chosen. Won’t that make a big difference. Surprisingly, perhaps it doesn’t. If you repeat the exercise I’ve just done, using a 5 per cent damage estimate, and plug in a target of 550 ppm, you get, once again, a carbon price of $50/tonne. That’s because, with a quadratic cost function, doubling the difference (X-350) doubles the marginal cost, and exactly offsets the halving of the damage estimate. But that doesn’t mean the change in costs has no effect. Since a carbon price of $50/tonne is more than we need to hold the equilibrium concentration to 550 ppm, this pair can’t actually be realised.The equilibrium is something like a 500 ppm target with a price a little under $40/tonne. Doing a similar exercise with 20 per cent damages, a likely target would be around 425 ppm with a price of $75/tonne. Changing the discount rate can make a somewhat bigger difference, but not that much bigger. The logic of the problem forces us to an optimal carbon price somewhere close to $50/tonne.

Currently, of course, no country is anywhere near that. That’s not surprising. The nature of a collective action problem like this is that everyone tries to free ride, sharing in the benefits but not contributing enough to the costs. The best we can hope for in the short run is a collection of national policies that mostly give an effective price around $25/tonne, about half of what we ought to have.

fn1. These numbers are based on sensitivities from climate models. I’m not going to go over them in detail in this post, but will make the point that, for many purposes, you can sum up the output of a gigantic climate model by looking at the range of values it gives for sensitivity, that is, the equilibrium temperature change from a doubling of CO2.

fn2. Again, there are some fairly simple ways of getting a handle on this number, which is largely determined by the risk of catastrophic climate change. I’ll try to cover these later.

fn3. This is substantially higher than Stern used, and closer to the rates used by some of his critics. I don’t want to get hung up on this particular issue for the moment, so I’ll ask that we leave it to one side in the discussion.

Categories: Environment Tags:
  1. Chris Warren
    June 2nd, 2011 at 14:57 | #1

    Pretty good.

    I am not sure whether assuming the warming from 350ppm is zero, is strictly kosher.

    There is a lot of literature about the huge deforestation in Europe and elsewhere from the Elizabethan times.

    This is all laid out in a large tome:

    “Deforesting the earth : from prehistory to global crisis”, Michael Williams, 2003

    It is in the nature of exponential growth that the real trend could have been started some time ago but just not noticed within the noise in other climate events.

    But I suppose if concentration was fixed at 350ppm, humanity could survive the consequences, because we have already?

    If we want decent agriculture, the pre-industrial 280ppm should be kept in mind.

  2. W
    June 2nd, 2011 at 15:08 | #2

    I am happy for Terje to try and stand you corrected.

  3. Fran Barlow
    June 2nd, 2011 at 15:44 | #3

    Personally, I don’t thionk we know anywhere near enough about the relationship betyween damage to the system and its sustainability to focus on 350 as the safe climate point — notwithstanding that Hansen, who is obviously credible — nominates that point. Had we stopped at 350, we would still be warming — just at a slower rate than now. We might have reached the temperature we are now at in the latter part of the century, which ould be less bad in the short run, but ceteris paribus as bad for anyone born then as matters are now. Their challenge would be lesser since they’d only have to come back 70 ppm and perhaps their technology would be more up to the job.

    I believe we need to roll back to where we were when we first started seeing forcing — essentially 280ppmv. I wonder what the price implications of that would be?

    The community cost of emissions has been widely cited as being between $80-$150tCo2 — and I’m not sure that this accounts for all of the other costs and hazards of the fossil HC fuel cycle. If you look back over that last 60 years and forget entirely about CO2 and Charney sensitivity, it’s an ugly picture. Roll forward and consider resource depletion and the environmental damage from fuel harvest and transport and really, that cost goes up again.

    It’s hard to imagine that if we put an effective cost of $150tCo2 by, say 2025 that we wouldn’t get it all back in benefits of one kind or another. If that turned out to be way above what was needed, then presumably, under a competitive tendering system pretty much everything would be done and the budget would not be spent — and could then be invested in the myriad other things the poorer half of humanity needs. Of course, we would probably find that out well before we got to raise the cash.

    I’m of the view that we really need to look seriously at geoengineering solutions that both buy us time and efficiently draw down CO2, permanently sequestering it. As far as I’m concerned, we ought to take a “whatever it costs” approach to that. We simply can’t afford 4degC above pre-industrial, and even the track to that between now and 2030 would probably mean that it would be closer to 5 or even 7degC when one allows for feedbacks, the collapse of significant sinks etc.

  4. sam
    June 2nd, 2011 at 16:41 | #4

    This analysis calculates the cost to the world of one additional tonne emitted at a concentration of 450 ppm. Maybe I’m missing something, but it’s not clear to me that this is the price per tonne which would lead to an eventual 450 ppm stabilisation. To make my confusion clear, let’s assume the world is at 450 ppm now, and imposed a $50 a tonne tax. If all the polluters gained more than $50 in private value from each tonne they emitted, the tax would make no difference. If half the polluters gained more than $50, and half gained less, emissions would be halved.

    It seems to me the correct carbon price needed to achieve stabilisation depends very much on the private benefits of pollution itself. This in turn depends on the costs of all technologies to reduce emissions.

    A response?

  5. chad satterlee
    June 2nd, 2011 at 16:46 | #5

    Setting a flat rate makes sense. Why should polluters pay $30/ton one week, and then $10/ton and $1/ton in the next few weeks or months (as has essentially occurred in Europe) when all the units of carbon involved cause the same amount of damage? Differences in the modelling ultimately come down to different calibrations in relation to the trade-off between short term cost and averting future disaster, but the fundamental principle holds.

    In terms of politics, there’s no doubt in my mind that the carbon tax is the best mechanism to induce global agreement in the long term. The structure of the collective goods problem tells us that states are presently given too much choice: they are allowed to defect, or not contribute to reducing emissions. The only solution is to enforce the rule that everyone cooperates. That is, we have to set up an international authority that binds states.

    This is not as hopelessly utopian as it might seem. Having a flat rate of say $30/ton set by such an authority (to be adjusted accordingly over time and requiring all participating countries to impose it domestically, assuming the work was done to make it as uniform as possible) gets rid of the problem of fluctuating differential prices that comes with emissions trading. If most nations got on board, it would eliminate the prospect of capital flight, as well as much of the politicised squabbling that would undoubtedly occur with an international ETS agreement. A harmonised carbon tax would be far more attractive for smaller countries weary of bullying from larger ones.

    For proponents of a global ETS, there is also the issue that we’ve never tried a truly global scheme before. This seems curiously irresponsible and risky in the face of a serious threat. Tax, on the other hard, is a familiar instrument for all domestic governments. It is also far easier to understand. And as we should soon see in Australia, there is political gain in being able to offer tax cuts and suchlike. All round, the carbon tax seems a much better alternative to the volatility, uncertainty and political problems of the emissions trading approach.

  6. Hermit
    June 2nd, 2011 at 16:57 | #6

    Without commenting on a how this price was arrived at it could be pointed out it provides a basis for carbon tariffs on imports from greenhouse ‘rogue nations’. For example the making of a tonne of steel is supposed to generate 1.7 tonnes of CO2. That’s a carbon tariff of 1.7 X $50 = $85 less any smaller carbon tax the producing country might impose.

    Ingots of metal will be easier to assess than multistage fabricated goods (like computers) or intangibles like travel. On an outsourced service like Indian call centres used by an Australian bank the carbon tariff might have to be an arbitrary 10% or so on top of the contract price. The Indian service provider will be using fuel and electricity that should be carbon taxed at $50 a tonne but in practice they pay much less.

    If that approach is unpalatable we could just as easily carbon tax coal at the export terminal. Using 2.4t CO2 per tonne of black thermal coal the carbon levy would be 2.4 X $50 = $120. That would nearly double recent spot prices.

  7. iain
    June 2nd, 2011 at 17:20 | #7

    What assumptions, if any, need to be made about abatement costs?

  8. sam
    June 2nd, 2011 at 17:43 | #8

    Further to my point, I anticipate you saying, “If the private benefit from polluting exceeds the correctly calculated social cost, then pollution should go ahead.” This is true, but it would then imply a desirable stabilisation level different from 450 ppm. In order to find out what that desirable level is, you would still need to know the private benefits of polluting/ the private costs of mitigating.

  9. David
    June 2nd, 2011 at 17:47 | #9

    I agree with those saying that this gives us the marginal benefit of hitting these different stabilization targets but it doesn’t say anything about the marginal cost of reducing emissions to that level. So we can impose a $50 per tonne tax, but there is no reason why we should hit the target as a result. It will depend on what marginal costs of abatement are.

  10. Bill Owen
    June 2nd, 2011 at 18:26 | #10

    John, your position would only make sense, if changes to the amount of CO2 in the atmosphere do, in fact, affect the world’s climate. It’s hard to believe that this is so, as the amount of CO2 in the atmosphere is only about 0.04 percent – with nitrogen making up 80 percent and oxygen about 20 percent. But it seems to me that although a majority of the world’s scientists support this proposition, they have not yet explained to us the PROCESS of HOW a “trace gas” like CO2 could significantly affect the temperature of the atmosphere world-wide. Surprisingly, our political leaders and Professor Garnaud haven’t even attempted to answer this question – nor has Tony Abbott put it to the Prime Minister in Parliament.

  11. Alice
    June 2nd, 2011 at 18:26 | #11

    Pardon me but where does the carbon tax revenue go (where does the petrol excise go??)? Is that on anyone’s radar or is it STILL just about the faulty neoclassical idea of price signalling? Are we getting cleaner trains with the carbon tax revenue? Pardon me but I think everyone is missing something BIG and relying on assumptions that are faulty ie the price mechanism works and thats enough.

  12. sam
    June 2nd, 2011 at 19:11 | #12

    @Bill Owen
    That’s a very good question. How does such a tiny amount of gas cause all that warming? How does anyone even know it does? For more information on this, I suggest you read the rather long footnote at the end of the title “IPCC Fifth Assessment Report:,” the actual document itself.

  13. sam
    June 2nd, 2011 at 19:13 | #13

    4th sorry. My apologies.

  14. John Quiggin
    June 2nd, 2011 at 19:16 | #14

    I haven’t been very clear, obviously. I was making the claim that abatement costs are such that a price of $50/tonne would yield something close to 450 ppm. I’ll revise to spell this out, when I get a free moment.

    Bill Owen, I suggest you consider the experiment of ingesting a tiny amount of botulin toxin, less than 0.04 per cent of your body mass. But please, don’t actually do it, just use the thought experiment to realise how silly your comment is. And also a hint – if you want to convince Internet readers that you are a troll, use ALL CAPS.

  15. sam
    June 2nd, 2011 at 19:50 | #15

    That side of the equation is really more interesting to me. Frankly, I’m suspicious about how objective is your figure of 10% damage to the global NPV under business as usual. Any consideration of the dollar cost of environmental damage is bound to have disputable subjective weights inserted somewhere. I’m already happy to believe climate scientists who warn anything over 450 ppm is very dangerous and just take that as a given.

    Unfortunately, I think that side of the equation is also the most uncertain. Many of the abatement technologies haven’t been scaled yet, so the actual cost is difficult to estimate. I should think a consideration of that question would merit a post in itself.

  16. Ikonoclast
    June 2nd, 2011 at 20:26 | #16

    Pippin: “It’s too big for us. We can go back to the shire.”
    Merry: “Don’t you understand, Pip? There won’t be a shire.”

  17. Chris Warren
    June 2nd, 2011 at 20:35 | #17

    @Bill Owen

    You obviously haven’t seen this science…

    http://zipcodezoo.com/Trends/Trends%20in%20Atmospheric%20Carbon%20Dioxide.asp

    You have not explained this trend.

    Tony Abbott cannot explain either.

    Shock Jock announcers have not explained either.

    Why not?

  18. Alan
    June 2nd, 2011 at 21:57 | #18

    Bill, many things in our every day lives are hard to believe.

    Influenza caused by microscope dots in the air? How could a creature too small to see kill people?

    Spinning a magnet in a wire cage an produce light? Ridiculous! I’ve never seen electricity and neither has anyone else.

    Injecting someone with a drug that amounts to 0.001% of their body weight can make them collapse unconscious? And they wake up with no memory of what happened? Nonsense!

    If it is the amount of carbon dioxide that seems implausible to you, remember that the difference between safe to drive and unsafe is a difference in blood alcohol of [drum roll please] 0.04%

    If you are sincere about understanding why carbon dioxide has such aneffect, please ask.

  19. Chris Warren
    June 2nd, 2011 at 22:16 | #19

    “Bill Owen”

    There is an easier way to look at the impact of moving between 280 to 380 parts per million.

    This is a step of 100 parts per million or 1ml per 10 litres.

    This is equal to 2 drops per litre. [Just google "20 drops in ml"]

    So just get a litre of water and put in 2 drops of black ink, and you will see a distinct tint spreading throughout.

    To get the total greenhouse effect you need a total of 6-7 drops.

  20. Ikonoclast
    June 2nd, 2011 at 23:01 | #20

    @Chris Warren

    The scary thing about the last graph is that it took from 1950 to about 1987 (37 years) to go from 300 ppm to 340 ppm but only from 1987 to 2000 (13 years) to go from 340 ppm to 380 ppm. That last part of the graph is going up like a skyrocket. When an exponential trend in something bad gets that steep you know the *** is going to hit the fan real soon.

  21. Ikonoclast
    June 2nd, 2011 at 23:04 | #21

    By way of explanation (if needed), my LOTR quote above is meant to mock the Business As Usual position. Business as usual will mean that soon there will be no business as usual.

  22. Tim Macknay
    June 3rd, 2011 at 00:11 | #22

    And a very good choice of quote it was, Ikonoclast.

  23. PeakVT
    June 3rd, 2011 at 01:53 | #23

    @chad satterlee The rate really needs to have a constant upward slope, instead of being flat. That way the initial bite is small, and the price at any time in the future is predictable, but eventually we get to a point where the tax has a real bite We can use SWAGs like Quiggin’s to set a target price of $X/ton at year Y to figure out the yearly increment, subject to review every 5 years.

  24. Hermit
    June 3rd, 2011 at 08:33 | #24

    An afterthought on a world carbon price is Australia’s extraordinary hypocrisy in pushing the carbon drug through exports while posturing about small reductions at home. Australia’s CO2 emissions are now well under 600 million tonnes a year (still massive for a small country) yet I roughly calculate emissions from exported coal and LNG are well over 600 Mt. Just this week Anna Bligh was cock a hoop over the tonnage of coal to be exported from an expanded Abbot Point terminal. Yet I’m sure the Premier will be attending sombre themed conferences with a suitably worried expression over local emissions.

    Consistent with the idea of carbon tax revenue neutrality if we did tax coal and LNG exports the importing country could ask for a refund. The carbon tax refund would go a green program in the importing country not the private importer, a power station for example. Of course the government could hand the money straight back to the power station or build presidential palaces but it still remains an additional hurdle. Backup measures will be needed when other coal and gas exporters exploit the new opportunities. It’s disappointing for example that the US has just started cashing in on the bonanza of exporting coal to China.

    If this all sounds too hard at the moment I think it won’t be long before it becomes a front page issue. Why should China and India get Australian coal without the penalties Australians have to pay?

  25. June 3rd, 2011 at 08:57 | #25

    Is there some paper with a clear and cogent
    analysis of the EU ETS price collapse in 2006?
    Thanks.

    Tapen

  26. hc
    June 3rd, 2011 at 09:18 | #26

    John its a nice back of the envelope calculation.

    You didn’t want to discuss discounting but can I point out that if you set a targeted emissions cut in the future and use a low discount rate the current price will be high but there will be low future growth in carbon prices. If you use a Nordhaus type rate then the current price is low but you get high growth rate in the future. I assume politicians would prefer the procrastinating latter option but those concerned with climate change might be skeptical of the willingness of future politicians to grow prices strongly when they won’t set a moderately high price now. I’d be happy with $50.

  27. aidan
    June 3rd, 2011 at 09:38 | #27

    I have nothing substantive to add, but I thought if I could help fix some typos this (IMO excellent) post it might help others who read it in the future.

    Forgot function at the end of this sentence:

    “Costs increase slowly at first, then much more rapidly, giving rise to a convex damage function.”

    Errant $ sign:

    “if you repeat the exercise I’ve just done, using a 5 per cent damage estimate, and plug in a target of $550 ppm”

    Missing is:

    “The equilibrium issomething like a 500 ppm target”

  28. John Quiggin
    June 3rd, 2011 at 09:53 | #28

    @Tapen Sinha
    I don’t know if there is a paper, but the story is pretty well known. All national goverments expected meeting the targets to be really hard, so they pushed for generous allocations, most of which were then given away free to polluting industries. As it turned out, meeting the targets was so easy that, towards the end of the first market period, there were more permits available than people who wanted them (they couldn’t be banked for the next period, so there wasn’t much value in increasing emissions for a few months).

  29. wilful
    June 3rd, 2011 at 10:12 | #29

    So this would be a price that would last forever? We’d be paying $50/tonne emitted right through the century?

  30. Greg
    June 3rd, 2011 at 10:19 | #30

    Nitpick: “So, we have the pair D=0.1, C=650″ should be “So, we have the pair C=0.1, X=650″.

    What price human life? We are already, at 390 ppm CO2 (not CO2-e, John[1]), seeing increasing tightness in world food stocks, due to increasing incidence and severity of regional droughts and floods in the Americas, Eurasia, and East Asia. Simple extrapolation and climate models both tell us to expect greater volatility in food production, with the risk all on the down side. Some of the posited 10% reduction in Gross World Product is likely to come from much larger reductions in food production.

    Removing the demand from many of the 800 million Indians who live on less than USD 0.50 per day [2], and the hundreds of millions of others in a similar situation elsewhere, wouldn’t affect GWP greatly — it’s unlikely that the effect in the data could be distinguished from random noise. But from an ethical point of view, it’s unconscionable. And unfortunately, linearly proportional measures like a carbon tax won’t prevent it.

    FN1. http://blog.greens.org.nz/2007/10/10/flannery-says-ghgs-hit-455ppm-co2e-in-mid-2005/

    FN2. http://www.bostonreview.net/BR36.3/siddhartha_deb_india_food_crisis.php “The Indian government’s own data show that 800 million Indians live on about twenty rupees (about $0.50) a day.”

  31. John Quiggin
    June 3rd, 2011 at 11:04 | #31

    @wilful
    In fact, $50/tonne rising at 4 per cent (real) a year in this analysis. But the idea is to get net emissions down to zero by mid-century, so the point that they would still be taxable after that is a bit hypothetical.

  32. John Quiggin
    June 3rd, 2011 at 11:12 | #32

    @Greg
    Your numbers on poverty in India are way off the mark. Here’s some World Bank figures, showing that the proportion of the Indian population on less than $1.00 a day (2005 prices) is now about 24 per cent, down from 42 per cent in 1980. That’s way below the 800 million you cite for $0.50. Of course, that’s still a huge problem, but if you start your analysis with wrong information, and get the trend wrong as well, you’re going to come up with bad answers.

    http://www.sajaforum.org/2008/08/poverty-world-b.html

    The Flannery number is also wrong

    http://www.realclimate.org/index.php/archives/2007/10/co2-equivalents/

    I’ll check my sources and make sure I get the right current number right

  33. Chris Warren
    June 3rd, 2011 at 11:23 | #33

    Of course Quiggin’s model is based on a parabola, which is fair enough for illustration. However the real curve is steeper. This implies a greater cost per additional greenhouse emission.

    Lets not get too fixated on a illustrative model, unless the function itself is validated. I would expect this to be better represented by an exponential function, particularly if population growth, deforestation and industrial development, effects all pile up on each other.

    The SEARCH foundation wants $70.

    But it must be a realistic price. Big business wants it at a laughable $10 per tonne, Prime Minister Gillard appears to want it set at less than $30 per tonne. This is also too low to drive investment in renewable wind and solar energy. It will only enable a shift from coal to gas, promoting destructive coal seam gas extraction, and locking in high carbon emissions for another 30 years. The starting price must be at least $70 per tonne to help the shift to renewables. But first we have to defeat the climate deniers led by Tony Abbott, Barnaby Joyce, Nick Minchin and the energy corporations.

    [ http://www.search.org.au/archives/2525 ]

  34. John Quiggin
    June 3rd, 2011 at 11:42 | #34

    @Chris Warren
    That’s right. The point about the quadratic is that you can easily do the whole thing in a blog post. And I’m not claiming precision to within $10 or $20, just giving a ballpark number.

  35. iain
    June 3rd, 2011 at 14:40 | #35

    @John Quiggin

    The discussion seems to be only about damage costs.

    Is it right to assume that abatement costs will be lower or similar in the short to medium term?

    Up to $20 / tonne CO2-e this might be a reasonable assumption. But, above this figure, most marginal abatement cost curves for carbon emissions generally depict; unproven new technology, scaling up of renewables in a manner that has yet to be proven, energy efficiency measures which ignore Jevon’s paradox, and/or reserves (and EROEI) of natural gas being very optimistic.

    I’m assuming some combination of all these abatement measures may prove viable at $50 / tonne. But, I’m not optimistic, or really convinced.

    In the short term, a $50 / tonne price will shift emissions to countries that don’t have the price.

    In the mid term, most polluters will just pay the bare minimum tax they can wiggle down to and keep on polluting (especially in the absence of quick and viable abatement opportunities).

  36. Chris Warren
    June 3rd, 2011 at 14:55 | #36

    In the short term, a $50 / tonne price will shift emissions to countries that don’t have the price.

    Interesting point but I assume that this would be visible. All policies cause such games.

    In time countries with a carbon price should not have to accept carbon-content imports from countries without a carbon price. There will then be little benefit shifting emissions as a form of gaming the new policy.

  37. iain
    June 3rd, 2011 at 15:14 | #37

    @Chris Warren

    The most practical example is integrated steel manufacturing. Above $20 / tonne there are no big marginal abatement opportunities available in the short – mid term for this industry.

    You are basically hoping for a miracle to happen overnight with blast furnace technology.

    A $50 / tonne price signal will create no further meaningful abatement opportunities for this industry.

  38. derrida derider
    June 3rd, 2011 at 15:46 | #38

    iain, there’s an obvious abatement opportunity – make less steel. Which we will, because the price will be higher and demand curves tend to slope downwards. It’s not as though there are no substitutes these days.

  39. Hermit
    June 3rd, 2011 at 15:59 | #39

    For primary metals there is always improved recycling rates. I helped deliver a ute load of steel to a scrap yard yesterday. The going rate I believe was $205/t for those with an ABN. There was a queue of trailers at the weighbridge with wrecked cars, tyres removed. Every time we quaff a can of softdrink (outside SA) we really should get a deposit refunded. Recycling is one industry that will go well with carbon tax. It should have been done years ago.

  40. Chris Warren
    June 3rd, 2011 at 16:55 | #40

    @iain

    It is not clear what you are saying. I assume you are concerned that a carbon price will impact on steel smelting, so that metal products from Australia cannot compete with metal products from overseas where there is no carbon price?

    In this case – if the steel industry vacates Australia, a vacuum arises for substitutes eg recycling. But also high-steel comprised cars become more expensive which is useful.

    You lessen the tendency for an industry to move offshore, if all OECD countries block unfair trade from states with no or weak carbon pricing.

    If your concerns are purely about the fate of the steel industry in Australia, then this is the whole point of carbon pricing. Those sources of emissions which “no big marginal abatement opportunities” will contract. Due to the seriousness of the climate problem this is the road to the future.

    There may be other ways to produce steel other than using coke, but I do know. This is not the key point. Climate first – steel second.

  41. June 3rd, 2011 at 16:59 | #41

    iain, charcoal can be substituted for coke and this could be cheaper than paying the carbon price. It can be mixed in with coke, or new blast furnaces can be built to use all charcoal. Since I think a blast furnace is only good for about 15 years, it won’t take long to turn over the existing stock of blast furnaces.

  42. Hermit
    June 3rd, 2011 at 17:31 | #42

    The big end of town must be listening
    http://news.smh.com.au/breaking-news-business/rio-tinto-boss-defends-carbon-record-20110603-1fkhp.html
    Iron ore could be reduced with hydrogen but I think we’re looking at $2-$5 at kg for hydrogen vs. maybe 20c a kg for coke.

    I think there may be an element of bluff in threats by smelters to relocate to China since that country’s coal output has hit a flat spot of 3,200 Mt a year and may steeply decline from now on. Our paltry coal exports of 260 Mt to all countries will help little.

  43. June 3rd, 2011 at 19:22 | #43

    Looking at coke and charcoal prices, there doesn’t seem to be much difference between the two. Of course, for a blast furnace near a coal mine, the marginal cost of using coke might be quite low. None-the-less, it looks like it might only take a fairly modest price on carbon to cause a swich to using charcoal for steel production.

  44. AndrewD
    June 3rd, 2011 at 19:58 | #44

    Ronald,
    Not that it’s important, but I think your 15 years relates to a blast furnace lining, not the furnace itself which will be designed to last much longer. More importantly, you can’t build a big charcoal blast furnace (it’s all driven by the compressive strength of the coke). So I think we’ll be stuck with the big dinosaur coke BFs for a while. Rio Tinto tried to develop a coke-free ironmaking process (HIsmelt) and it’s currently being developed further in Europe. Maybe its time has finally come….though it is a much smaller capacity. Alternatively, there are proven gas-based direct-reduced iron (DRI) plants eg Midrex.
    For what it is worth, the BF is a very efficient use of coal because the coke oven gas and the blast furnace gas are mixed and used as fuel through the plant.

  45. June 3rd, 2011 at 21:11 | #45

    Ah, right. Thanks Andrew. It makes sense that it is just the lining. I thought they looked a bit robust to only last 15 years. I don’t know how big a charcoal blast furnace can be, but Brazil produced a lot of steel using charcoal. I have no idea how big their blast furnaces were.

  46. Alice
    June 3rd, 2011 at 21:33 | #46

    I really dont know why the obession with costs and prices. I wonder if, last century, in this country whether our leaders decided on the basis of immediate costs and immediate prices whether it wwas worth rolling out rail to everywhere in the state of NSW, whether they costed in such minute detail whether it was worth rolling out telgraph and phone lines, whether they costed in such detail whether it was worth doing kerbing and guttering or the sewerage system or whether they had a “private market for it”.
    We need to do something about dirty energy, we could have vision if it wasnt for the short term focus on markets and costs and profits. We could just say “solar is the future and we need a grid capable of handling it and that needs minds in government not focused on short term costs and prices in tiddling little private markets.

    Vision isnt about costs. Vision is about investment and being entrepreneurial and willing to take risks.

    Its about building a railway when yoyu find out later some lines are uneconomival. Big deal. Close them down later (which governments did) but dont delay building or taking risks because you are obessed with current costs.
    Sounds like just a delay to me.

  47. Ken Fabos
    June 4th, 2011 at 08:38 | #47

    At the rate we are going Australia looks likely to be one of the nations facing international sanctions/imposts on goods produced without a carbon price. When it does hit the fan all those effected nations looking for someone else (besides their own foot-dragging, scamming of mitigation and sequestration schemes etc) will see a hypocritical nation that’s been lining it’s pockets at the climate related expense of others – a perfect scapegoat.

    I’d like to think we are near a tipping point in acceptance of the existence and seriousness of the problem but the fossil fuel industry is very cashed up and has barely begun to shift from back door influence to openly fighting – with big and sudden economic hits just one of the ploys yet to be pulled out and used. And the electricity industry continues it’s ‘too hard, can’t be done, we can’t be taken in by mad green schemes’ approach to the problem. Whether they will continue to get behind closed doors assurances that reliability and growth of supply is far more important than a path to zero emissions and don’t worry, you’ll get exemptions or even grants to keep fiddling is a question but I can’t see the Coalition gov’t's of NSW or Victoria making emissions reductions a priority. And I can’t see any Australian Gov’t taking action that would reduce the growth of fossil fuel exports.

  48. June 4th, 2011 at 09:18 | #48

    I looked up Brazillian steel making and it appears they use about 6 million tonnes of charcoal a year for steel making in furnaces about a sixth the size of a big blast furnace. They pay about one third as much for charcoal as they do for coke, so I guess that they feel that losing out on any economy of scale that may come with a larger blast furnace is worth it. They mostly use eucalyptus, which I guess makes sense because it can make charcoal that’s hard as a rock (but not as hard as a hard rock). Interestingly, they don’t pyrolyse it on site, which is wasteful of energy and results in it containing water by the time it reaches the furnace. (Brazil can be really humid.) I also found out that some types of charcoal can be as hard as coke, but I have no idea how easy they would be to produce on a large scale.

    Maybe with a carbon price it would be worthwhile to build smaller charcoal blast furnaces in Australia. Of course, that would require there be an actual demand for steel. If we are at peak steel demand at the moment, it’s possible not many new blast furnaces will be built in the future.

Comments are closed.