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A Conceptual Framework to Assist Decision Making on International Climate Change Policy: Discussion Paper

Conceptual framework

Decision 1: Global stabilisation goal

Decision 2: Global cap/emission reducing strategy

Decision 3: The rules

Decision 4: The New Zealand cap

Decision 5: The New Zealand ETS

Impacts on NNW

Likely scenarios and implications for negotiations

Initial recommendations for further work

Decision 3: The rules

The next key decision that needs to be made is the rules around what activities can be used to realise these emission reductions. The first set of activities to include is those that are covered by the cap – for example whether aviation fuels are introduced or if full carbon accounting is used (emissions from soils etc.). The second type of activities is those that can be sourced from outside the cap - often referred to as ‘flexibility mechanisms’, or ‘Clean Development’ projects – for example avoided deforestation in developing countries.

The cost of achieving the required level of emission reductions will primarily be driven by the rate of participation by countries in a new international agreement, and the rules by which these emissions reductions can be realised. If we assume that all countries participate in the post-2012 regime, and that all activities associated with GHG production or storage are included, the emission reducing opportunities can be illustrated through a ‘global’ abatement costs curve – i.e. the total amount of potential reductions available during a set period (2013-2020 - see figure 5).

In order to build this curve, emission reducing activities need to be categorised, and for each category a cost per tonne of reductions determined (vertical axis), as well as an approximation of the amount of emissions (horizontal axis) that can be reduced at this price. Figure 5 is for illustrative purposes only¹⁹, and presents some of the global emission reducing potential during the period 2013-2020. It is worth noting that while there are considerable ‘negative cost’ measures²⁰ that are assumed to have yet been realised, many commentators, including the IPCC, are not convinced that they will actually be realised without intervention beyond pricing carbon.

From the previous analysis in the paper, it was determined that to ensure concentrations were stabilised at 450ppm, the emissions reductions required during 2012-2020 were at least 6GT/year, or 48GT over the entire period. Assuming that the international trading market operated efficiently, and the least-cost abatement opportunities were realised first, using the data in figure 5, the ‘world price’ of carbon would be approximately $20/tonne. If however, under the rules some activities were not permitted to be used – for example avoided deforestation, this would shift the cost curve and could result in an increase to the world price of carbon (in the hypothetical example in figure 6 - to about $25).²¹

If, however, emission reducing activities, such as avoided deforestation were not allowed under the rules, and some countries chose not to participate in the negotiation or some gases/activities were excluded (and these countries or activities continued to emit BAU) the world price of carbon, to achieve the same level of emission reductions, could increase dramatically.

However, it is important to recognise that if certain countries do not participate in a future regime, or if particular activities are not included, it is likely that through some form of trade barriers, the price will indirectly flow into these countries or products. For example, the French President is advocating for an EU import tariff to be placed on all non-Kyoto signatories.

Notwithstanding this point, the clear conclusion from figures 5-7, is that to minimise the world price negotiators will want as many emission reducing activities and as many countries as possible included in a future agreement.

Outcome B: The world price

As illustrated, decisions around participation, and the rules by which participants operate, have huge implications on the world price. While it is impossible to know what decisions will be made in the future, there have been a range of studies that have made some assumptions to predict a future world price on carbon. The IPCC 2007 Fourth Assessment Report has synthesised a number of the more recognised models, and provided an approximate range between 2030 and 2050.

The dashed vertical line in figure 8 represents the maximum concentration that would ensure GHGs in the atmosphere remain below 535ppm. The prices to the left of this line represent the range of likely scenarios from various models. While it is impossible to accurately determine an average price, as many of the models use different assumptions around participation and rules, a conservative figure in 2030 is likely to be somewhere around US$50/tonne and in 2050 around US$100. This range is lower than another synthesis report’s findings, conducted by Stanford University²², which found the mean of carbon prices from 18 of the world’s leading models, between 2000 and 2100, as follows:

Table 2: World price of carbon ($US) (Source: Stanford University)

The figures in table 2 highlight another important point, discussed earlier; trying to reach any specific stabilisation with only certain gases (in this case CO₂) results in a much higher world price. The McKinsey Institute has also done a report on global abatement costs, and predicted that stabilising between 450 and 550 ppm will result in a much lower price in 2030, of approximately 30 Euros (US$43). Figure 9, reproduced from the McKinsey report, also illustrates some of the abatement opportunity types, and the approximate quantity of GHG emissions reductions required (around 22GT/year) in 2030.²³

While a price in 2030 is a useful signal for what may result in the future, given that the next commitment period is likely to be between 2013 and 2020, it is important that a gauge of approximate prices in the nearer term is determined.

With prices trending steadily upwards between 2000 and 2100, it is clear that a price in 2013-2020 is likely to be somewhere below $US50 and above the current price of around $US11²⁴. This range is reasonably consistent with results from modelling undertaken by the Australian Greenhouse Office, which predicted that prices would rise from $US8 per ton of carbon in 2008 to $US34.40 per ton of carbon by 2020.²⁵ Assuming a straight line increase, and averaging the result over 2013-200, it is likely that the world price would be approximately $US25/tonne during 2013-2020.

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