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Pricing carbon to help address climate change

Paul Jefferiss, Head of Policy, BP
Paul Jefferiss, Head of Policy, BP

By Paul Jefferiss, Head of Policy, BP

Sometimes climate change can seem to be a bit like the weather.  Everybody talks about it, but nobody seems able to do much about it.

With climate change, however, that perception is wrong.  In fact, there’s been considerable progress in developing government policy to help address it.  Carbon pricing is one of the most efficient ways of limiting the greenhouse gases that are considered to be the main cause of climate change.  Around 40 countries have implemented carbon pricing, representing about 15% of global GHG emissions.   When China implements its national trading system this percentage could rise to over 20%.   The aim is to provide a financial incentive to producers and consumers alike to reduce greenhouse gas emissions and so help the world to achieve its climate change goals.

A carbon price does this in several ways by:

  • Discouraging the use of higher-carbon options such as coal
  • Encouraging the use of lower-carbon fuels such as natural gas
  • Rewarding energy efficiency
  • Incentivising investment in and expansion of carbon capture and storage technology
  • Encouraging the use of low carbon renewables such as solar and wind power
  • Incentivising R&D and low carbon innovation.

The price can be implemented in one of two ways:  via a carbon tax or a cap-and-trade scheme. With a tax, the price is fixed and the market determines how far emissions will be limited.  With a cap, the limit is fixed and price is set by the market.  Both options have their pros and cons.

With a carbon tax, a cost is applied directly per tonne of CO2 equivalent emitted.  This cost is set by governments as a tax that can be increased over time.  Facilities that are regulated must either cut their emissions or pay the tax.

With a cap-and-trade system, the first step is for the government to set a fixed cap on total CO2 equivalent emissions and then sell or issue emissions allowances up to the cap.  Regulated facilities must either cut their emissions or acquire emissions allowances from the government or by trading with other operators.  Just as a tax can be increased over time, a cap can be lowered.

How it works

For energy producers like BP and other major industrial companies, either system would require us to pay a price for the CO2 equivalent emissions from our manufacturing operations.   This acts as an incentive to keep these emissions down by adopting more energy efficient technologies and processes, choosing to use less energy, or increasing our use of low-emissions technologies.

Inevitably, there will also be higher prices for consumers, especially when the carbon price is also applied to the CO2 that is emitted when they use carbon-based fuels, for example in cars.   In the same way as for producers, these prices will spur consumers either to choose more energy efficient options or be more sparing in their consumption, or turn to lower carbon alternatives.

As BP’s CEO and his counterparts in BG, Eni, Shell, Statoil and Total wrote to the United Nations Framework Convention on Climate Change on 25 June, 2015:  ‘If governments act to price carbon, this discourages high-carbon options and encourages the most efficient ways of reducing emissions widely.’  These include, the CEOs said, ‘smart buildings and grids; off-grid access to energy; cleaner cars; and new mobility business models and behaviours.’

What price carbon?

At BP, we’re preparing for the future by requiring our businesses to use an internal carbon price, currently set at US$40 per tonne of CO2-equivalent, for the evaluation of large new projects in industrialised countries.  It’s based on a carbon price we think might realistically be applied in particular countries to the emissions from the project over its lifetime.  And it’s consistent with our belief that putting a price on carbon will limit emissions at lower cost than alternative policy measures.   We also stress test such projects at US$80.

National or global?

Both a tax and a cap and trade system can be applied to specific sectors, country-wide or, eventually, globally.  Our preference is for the price to be applied at least economy-wide at the national level.  This is because the wider the coverage of the scheme, the more economically efficient the carbon price will be.

For this reason, a global price of carbon would be even more efficient.  This would ensure a truly level playing field, with all GHG emitters in all countries and all sectors abiding by the same rules.

This is an ideal situation which will not become real for a long time, if ever.  However, there has been some progress towards a carbon price internationally.  The Agreement reached at the UN’s 2015 climate conference in Paris – better known as COP 21 – did include in principle support for the concept.

Meanwhile, carbon pricing at national level is a welcome first step – as long as any national carbon pricing mechanism protects against the impacts of unequal international competition from industries that are not exposed to a carbon price.  Without that protection, there is a risk of ‘carbon leakage’.  This means that energy-intensive industrial activity and investment might merely move from a well-intentioned country with a carbon price to a less-regulated part of the world.  This could result in increased – rather than reduced – CO2 emissions worldwide.

And that would turn a potentially powerful way to help curb global warming into little more than hot air – which is exactly what it is intended to prevent.


About Paul Jefferiss

Paul Jefferiss is Head of Policy at BP, where he manages the development of company positions on energy, climate change and environment. He is BP’s representative on the Executive Committee of the Oil & Gas Climate Initiative (OGCI).  He is also a Non-Executive Director of the Carbon Trust and Council Member of the World Business Council for Sustainable Development (WBCSD). Previously, he has held positions as a UK biofuels regulator, Chief Executive of the Green Alliance, and lecturer on environmental management for UNEP at Tufts University.

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