The Economics of Climate Change Identifies Limitations of Emissions Trading

ICF International has completed a scenario-based analysis of the likely impacts on carbon prices from increasing the sectors and geographic regions covered by a linked global cap-and-trade regime post-2012. The analysis used ICF's proprietary in-house International Carbon Pricing (InCaP) and Integrated Planning Model (IPM) Models.

The Stern Review: The Economics of Climate Change established that a global carbon price is an essential foundation for climate change policy. The European Union (EU) Emissions Trading Scheme (EU ETS) has begun to provide a clear price signal in Europe and other regional trading schemes are now being mooted around the world including in the Northeast United States, California, and Japan.

“We have observed that over the period 2013-2020, widening the sectors and geographies subject to emissions caps may not necessarily provide the sustained high carbon price signal required to shift decisions towards low-carbon technology investments,” says Abyd Karmali, managing director of ICF’s London office. “The reason this occurs is two-fold. First, in OECD countries substantial low-cost emission abatement opportunities are available in sectors not currently subject to a cap. Second, in scenarios where key emerging markets like India, China, and Korea take on caps, the global carbon price actually drops from the current €10-15/tonne CO2e range seen in the EU ETS because of the widespread, low-cost emission abatement opportunities available, as evidenced by the surge in demand for low-cost, Kyoto-compliant carbon credits from developing countries.”

“The results of our scenario analysis imply that we risk locking in a highly carbon-intensive infrastructure in the period 2013-2020, particularly in the energy sector in the fastest growing emerging markets,” says Mr. Karmali. “In short, carbon emissions trading will be necessary, but insufficient to achieve the scale of emission reductions at the speed suggested are warranted by the Stern Review.”

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