Why we need a price tag on carbon

Scientists are more convinced than ever that climate change is happening, and we are on track for a 4ºC increase in global mean temperature by the end of this century.

Nevertheless, global leaders are not at all ready to take joint action to stabilize our planet’s climate. If the scientists are right, it is just a matter of time before the problem becomes all too obvious to the world’s population – and this will force political leaders to do something.

It is impossible to forecast exactly when this will happen, but I believe change will come within the next 10 years – less time than is required to make fundamental changes to global infrastructure needed to cope with the effects of climate change.

A global agreement will certainly mean that all major countries in the world will need to accept a cap on their greenhouse gas emissions, a cap with a trajectory that will lead to a stabilization of our climate.

It doesn’t matter what this stabilization point is set to – the market effects will, in principle, remain the same. An emissions cap will undoubtedly mean that carbon will be given a price in every country, and a global trade of emission rights will become a reality. The result will be a global price on carbon, and this will be in the interest of all of us.

Countries with a huge surplus of emission rights at their disposal, most likely large developing nations with a cap far greater than their actual emissions, will primarily look to sell these rights to make money. However, this will also speed up the transition towards a sustainable energy system. Electricity will, at least during the transition period, be more expensive. As a consequence, the interest of the consumer in energy efficiency and lower consumption will increase.

A binding commitment on emissions, with a transparent trajectory lasting several decades, will mean that all major economies will base their investment decisions on emission caps and the future price of carbon. Market forces will make them seek the low cost route to decarbonizing the world.

It will soon become clear that the easiest and more important sector to decarbonize will be power generation. We can see the road towards a zero emission electricity system.

Investors will quickly revalue all publicly traded companies, and the carbon components of assets held by a particular company will be seen as a liability, possibly leading to a fall in value. Stranded assets such as these will threaten to become a problem for many companies. However, this is a long-term transition and this will allow sensible asset conversion programmes to be carried out and destruction of assets should be limited.

A reduction in demand for fossil fuels will also have a fundamental impact on the value chain of these industries. On the other hand, focus will shift to promoting the development of renewable energy. It is very likely that we will see a surge in demand for wood fiber. Wood is also likely to gain market share as a building material for many types of construction. Sustainable forestry will expand all over the world, and we will see afforestation take place globally.

Global research and development efforts will increase dramatically and focus will shift to supporting the transition to a sustainable energy system. Efforts to commercialize carbon capture and storage will be carried out with fresh determination and focus. Huge efforts will be made to find ways to commercialize the use of CO₂.

Efforts to solve the climate change problem will increase, and this determination will have a positive impact on our necessary transition to a sustainable society.

Author: Lars G. Josefsson is President of Contributor AB, Sweden, and a Member of the World Economic Forum’s Global Agenda Council on New Energy Architecture.

Image: The sun is seen behind smoke billowing from a chimney of a heating plant in Taiyuan, China, December 9, 2013. REUTERS/Stringer