The Dynamics of Carbon Pricing

It is made possible to trade credits by assigning a monetary value to one carbon credit.

Are all carbon credits equal?

Theoretically yes: they equal one metric tonne of GHG emissions. In reality because credits differ in quality as they impact on the environment in different ways, so they differ in price.

A Done Deal: Why the price of carbon must rise

Professor William Nordhaus (Yale economics Professor) argues that the price of carbon needs to be high enough to motivate the changes in behavior and in economic production systems necessary to limit GHG’s

He suggests that based on the social cost of carbon emissions, that an optimal price of carbon is about per tonne and will need to rise with inflation. At current levels of carbon emission in the U.S. a tax of per tonne would generate billion of revenue per year.

The evidence clearly suggests a probability of a rise in carbon prices. Naturally this is of great interest to shrewd investors who wish to profit from such a rise: they want to reap the maximum benefit from a market projected to “ride a half decade long wave of monolithic growth”

Determining a market price for Carbon

The Laws of supply and demand are simple: as carbon emissions continue to rise and as government policy engineers a rise in the price of carbon, the more companies will need to buy credits to offset emissions, so the higher the rise in carbon prices.

The UK government

In the UK all parties have endorsed the green energy revolution. But no one said the low- carbon revolution was going to be cheap. The carbon price must rise to fund renewable energy.

The key objective is to replace heavy carbon emitters such as coal and oil power stations with renewable energy like solar, wind, tidal and nuclear power.

• A green investment bank (GIB)
• A floor price for carbon.

Putting a floor on the carbon price allows low carbon systems to be more competitive. The current market price of carbon (ETS) is £14 per tonne. Mr Osborne has announced Britain’s floor price will start at £16 per tonne in 2013. Rising to £30 by 2020.

This will go some way to raise the sums required for the low-carbon revolution at about £450 billion.

Equitable Clarity: The floor price of £16 per tonne is applicable to compliance credits and not to the voluntary carbon market. There is evidence to suggest that the "compliance floor price" may impact the price of voluntary credits.

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