Videos on carbon pricing

Videos on carbon pricing (around 10 minutes each) written and narrated by me are now on youtube, with more planned.

The set can be found here:

Regular readers of this blog will probably be familiar with most of the material but I hope they will be nevertheless be useful both as a refresher and a guide for people who are new to the area.

Here are links to the individual videos, with transcripts and slides for the talks also includedThe three talks I’ve produced so far are:

1. An introduction to carbon pricing, which explains the idea of carbon pricing and looks at current using examples from practice around the world, both in summary and looking at the particular example of highly successful carbon pricing in the UK. This can be found here.

2. Types of carbon pricing, which looks at the merits of taxes and emissions trading systems, and looks in particular at hybrid systems, including California. This can be found here.

3. A more technical talk on the social cost of carbon, which includes some material that may be new even to those already quite familiar with climate change policy. It illustrates some of the difficulties of applying conventional economic concepts to a problem with as many dimensions as climate change, but concludes that they still have some value.  This can be found here.

The links together with supporting material (transcripts and slides) can be found on the tab at the top of this page labelled videos, or at this link.

Please pass the links on to anyone you think might find them of interest.

Adam Whitmore – 20th March 2018

Economic growth and emissions cuts can go together

There is often said to be a trade-off between growth and decarbonisation, but the evidence shows that advanced economies can combine large emissions cuts with continuing economic growth.

Policy on greenhouse gas emissions reductions is often framed as a trade-off between greater emissions reductions and greater economic growth.  However, while emissions clearly can’t be reduced to zero immediately, faster emissions reductions can be accompanied by robust economic performance.  The clearest example of this is the UK.  Since 1990 the UK has cut its total greenhouse gas emissions much more rapidly than other G7 countries, while growing its economic output per capita more than the average.  This is illustrated in Chart 1.

Chart 1: UK per capita GDP growth and greenhouse gas emissions compared with the G7 average[i]

The extent by which the UK has cut its per capita emissions relative to other countries is emphasised in the following charts, which show that the UK has achieved by far the largest reductions in per capita CO2 emissions.

Chart 2: CO2 emissions per capita in 2016 and 1990 for G7 countries[ii]

Note: Japanese emissions rose by 0.4 tonnes per capita over the period (not shown)

Chart 3: Change in per capita and total CO2 emissions 1990 to 2016 for G7 countries

Note: Data in these charts is for CO2 only, excluding other greenhouse gases.

Of course, some of the relative changes reflect circumstances.  The UK started with relatively high emissions, including extensive use of coal in power generation.  In contrast, France already had a low carbon power sector in 1990, and in 2016 France’s per capita emissions remained about 8% below those of the UK, even though UK emissions had fallen much more from their 1990 levels.

Germany has also achieved significant reductions, having benefitted from reductions in emissions in the former East Germany and installing large amounts of renewables.  However it has been hampered by continuing extensive use of coal and lignite for power generation.  The USA has accommodated significant population growth with only a small rise in emissions, but this is clearly nowhere near enough if it is to make an appropriate contribution to global reductions.  Emissions remain at almost three times UK levels.  Canadian emissions are also high and have increased in absolute terms.  Japan’s emissions have grown slightly over the period.

Some falls in emissions in G7 economies may reflect a shift in the global pattern of emissions, with reduced emissions from industry in the G7 economies balanced by increases in China and elsewhere.  However this can’t account for all of the reductions that have been achieved, or the vast differences in reductions between countries.

Policy has certainly also played its part.  UK policy has successfully targeted relatively low cost emissions reduction, notably reducing coal use in the power sector.  Above all the Climate Change Act (2008) has provided a consistent and rigorous policy framework.

And whatever the reason, one thing is clear.  Cutting emissions more can accompany growing the economy more.

Adam Whitmore – 8th March 2018





There should be few reservations about auction reserve prices

The auction reserve price in California has proved successful in maintaining a minimum carbon price.  However it shows the importance for an emissions trading system of political commitment and stability. 

This is the second of two posts looking at experience of carbon price floors.  My previous post looked at UK carbon price support, which guarantees a minimum price by means of a tax.   This post looks at an alternative approach, which is used in California  and the other Western Climate Imitative systems, Quebec and Ontario.  Here, instead of imposing a tax, the floor is set by specifying a reserve price in auctions of allowances.  If bids in auctions stay below the reserve price the allowances are not sold.  Reserve prices such as this are common in practice in many commercial auctions, including those held by major auction houses and online.

Reserve prices give what is often called a “soft” floor.  The market price can go below the auction reserve, but eventually the need to buy allowances at auction is likely to ensure that the price recovers.

The chart below shows the auction reserve price in the California system (green line), which started at $10/tonne in 2012 and is increased each year by 5% plus the rate of inflation.  The California market price (blue line) has generally stayed above this level.  However it did dip below the reserve price for a while in 2016, illustrating that the floor is soft.  This price dip reflected a combination of legal challenges to the system, and political uncertainty about the continuation of the system after 2020, which together reduced the demand for allowances.  Once those uncertainties were resolved the market price recovered.

Chart: Auction reserve prices and market allowance prices in the California cap-and-trade system to end of 2017

Source: and CARB

The Regional Greenhouse Gas Initiative (RGGI) has similar arrangements but with a much lower reserve price, and there too the price has been above the floor.

The environmental effectiveness of price containment mechanisms depends in large part on what eventually happens to any unsold allowances.  In the case of California this issue particularly affects the upper Price Containment Reserve, from which allowances are released if prices go above defined thresholds.  Allowances from this reserve appear most unlikely to be required in the current phase, as prices seem highly unlikely to reach the threshold levels.  If these unsold allowances in the reserve are cancelled, or otherwise put beyond use, cumulative emissions will be lower.  However if they eventually find their way back into the system, and enable the corresponding quantity of emissions to take place, the environmental benefit may not be realised, or at least not it full.  Some sort of cancellation mechanism is therefore needed, for example cancelling allowances that have been in the reserve for more than a specified number of years.

So price floors can work, however in the case of the California system at least two things need to be agreed as the rules for the system after 2020 are debated this year.

First, continuation of the escalation of the floor price needs be confirmed at least at the current rate, and ideally the rate should be increased.

Secondly, rules for cancelling unsold allowances from the Price Containment Reserve need to be defined.  The cancellation of allowances from the Market Stability Reserve included in the recent reforms to the EUETS sets a valuable precedent in this respect.

The theoretical advantages of a floor price in an ETS are well known.  The experience of auction reserve prices now proving effective in practice over a number of years should encourage other jurisdictions, especially the EU, to introduce similar arrangements.  And those jurisdictions such as California where they are already in place need to continue to develop and enhance them.

Adam Whitmore – 15th February 2018

Emissions reductions from carbon pricing can be big, quick and cheap

The UK carbon tax on fuel for power generation provides the most clear-cut example anywhere in the world of large scale emissions reductions from carbon pricing.   These reductions have been achieved by a price that, while higher than in the EU ETS, remains moderate or low against a range of other markers, including other carbon taxes.

The carbon price for fuels used in power generation in the UK consists of two components.  The first is the price of allowances (EUAs) under the EUETS.  The second is the UK’s own carbon tax for the power sector, known as Carbon Price Support (CPS).  The Chart below shows how the level CPS (green bars on the chart) increased over the period 2013 to 2017[i].  These increases led to a total price – CPS plus the price of EUAs under the EUETS (grey bars on the chart) – increasing, despite the price of EUAs remaining weak.

This increase in the carbon price has been accompanied by about a 90% reduction in emissions from coal generation, which fell by over 100 million tonnes over the period (black line on chart).   Various factors contributed to this reduction in the use of coal in power generation, including the planned closure of some plant and the effect of regulation of other pollutants.  Nevertheless the increase in the carbon price since 2014 has played a crucial role in stimulating this reduction in emissions by making coal generation more expensive than gas[ii].  According to a report by analysts Aurora, the increase in carbon price support accounted for three quarters of the total reduction in generation from coal achieved by 2016[iii].

The net fall in emissions over the period (shown as the dashed blue line on chart) was smaller, at around 70 million tonnes p.a. [iv] This is because generation from coal was largely displaced by generation from gas. The attribution of three quarters of this 70 million tonnes to carbon price support implies a little over 50 million tonnes p.a. of net emission reductions due to carbon price support.   This is equivalent to a reduction of more than 10% of total UK greenhouse gas emissions.  The financial value of the reduced environmental damage from avoiding these emissions was approximately £1.6 billion in 2016 and £1.8 billion in 2017[v].

Chart:  Carbon Prices and Emissions in the UK power sector

The UK tax has thus proved highly effective in reducing emissions, producing a substantial environmental benefit[vi].  As such it has provided a useful illustration both of the value of a floor price and more broadly of the effectiveness of carbon pricing.

This has been achieved by a price that, while set at a more adequate level than in the EU ETS, remains moderate or low against a range of other markers, including other carbon taxes.  CPS plus the EUA price was around €26/tCO2 in 2017 (US$30/tCO2).  The French the carbon tax rose from €22/tCO2 to €31/tCO2 over 2016-2017. In Canada for provinces electing to adopt a fixed price the carbon price needs to reach CAN$50/tCO2 (€34/tCO2) by 2022[vii].  These levels remain below US EPA 2015 estimates of the Social Cost of Carbon of around €40/tCO2 [viii].

This type of low cost emissions reduction is exactly the sort of behaviour that a carbon price should be stimulating, but which is failing to happen as a result of the EU ETS because the EUA price is too low.  More such successes are needed if temperature rises are to be limited to those set out in the Paris Agreement.  This means more carbon pricing should follow the UK’s example of establishing an adequate floor price.  This should include an EU wide auction reserve for the EUETS.  The reserve price should be set at somewhere between €30 and €40/t, increasing over time.  This would likely lead to substantial further emissions reductions across the EU.

Adam Whitmore – 17th January 2018


[i] Emissions date for 2017 remains preliminary.  UK carbon price support reached at £18/tCO2 (€20/tCO2) in the fiscal year 2015/6 and was retained at this level in 2016/7.  In 2013/4 and 2014/5 levels were £4.94 and £9.55 respectively.  This reflected defined escalation rates and lags in incorporating changes in EUA prices. and



[iv] Based on UK coal generation estimated weighted average emissions intensity of 880gCO2/kWh, and 350gCO2/kWh for gas generation.

[v] 50 million tonnes p.a. at a social cost of carbon based on US EPA estimates of $47/tonne (€40/tonne).

[vi] There is a standard objection to a floor in one country under the EUETS is that it does not change of the overall cap at an EU level so, it is said, does not decrease emissions.  However this does not hold under the present conditions of the EUETS, and is unlikely to do so in any case.  A review of how emissions reductions from national measures, such as the UK carbon price floor, do in fact reduce total cumulative emissions over time is provided was provided in my recent post here.

[vii] The tax has now set at a fixed level of £18/tonne.  It was previously set around two years in advance, targeting a total price comprising the tax plus the EUA price.  There was no guarantee that it would set a true floor price, as EUA prices could and did change a good deal in the interim.  Indeed, in 2013 support was set at £4.94/tCO2, reflecting previous expectations of higher EUA prices, leading to prices well below the original target for the year of £16/tCO2 in 2009 prices (around £17.70 in 2013 prices). See  The price is also below the levels expected to be needed to meet international goals (see section 1.2), and below the social cost of carbon as estimated by the US EPA (see and references therein).

[viii] Based on 2015 estimates.

Focussing on big wins in emissions reduction

 The EU could make huge progress in cutting emissions by focussing on a few large power plants.

Emissions from a vast range of sources need to be reduced if targets for limiting climate change are to be reached.   Nevertheless huge progress can often be made by concentrating on the largest few sources.

The EUETS illustrates this well.  It covers over 11,000 installations.   Out of these just 18 lignite and coal power plants, less than 0.2% of total installations, accounted for over 14% of all EUETS emissions in 2016, and 25% of all power sector emissions.  Half of these installations, accounting for 57% of emissions from the group, are in Germany.

Just 18 large power plants account for over 14% of emissions covered by the EUETS …

Source: EUTL, Sandbag

Over half these emissions are in Germany …

Source: EUTL, Sandbag

This concentration of emissions creates a huge opportunity.  Replacing the generation from these 18 plants with renewables would by itself achieve all of the emissions reductions required for the EUETS in the 2020s even if there were no other reductions in emissions at all.  This is in part because emissions will start the 2020s well below the cap[i].  So the EU can meet its 2030 targets just by eliminating emissions from 18 plants, provided only that emissions elsewhere don’t increase from their 2020 level.

Eliminating these emissions is comparatively straightforward.  Renewables are increasingly available at scale and at low cost and over the course of the decade could easily displace this much generation.  Even replacing these emissions with generation from gas would reduce emissions by two thirds or more, because current emissions per kWh are so high.  And it should not be impossible to redeploy the workers from these plants to do more valuable things like improving insulation in buildings.

Limiting global temperature rises to two degrees implies severe limits on cumulative global emissions.  This is not consistent with advanced economies continuing to generate so much from power from highly emissions intensive power plants.  Germany has made a huge contribution to the international effort to reduce emissions through its solar power programme, which has been essential in reducing solar PV costs and stimulating global deployment of this technology.  However this cannot justify continuing with current policies in the power sector.  Measures to target these plants now look like a priority.  Such measures could include further reforms EUETS, but will likely also require other action.

Adam Whitmore –7th December 2017

[i] Emissions from stationary sources in 2016 were 1750 million tonnes.  This looks likely to reduce by about 40 million tonnes each year to 2020 simply as a result of existing trends, including deployment of renewables.    This will leave no more than about 1590 million tonnes p.a. by 2020.  Eliminating the 2016 emissions from the largest 18 power sector emissions alone would save a further 256 million tonnes, reducing emissions to 1334 even if there were no other emissions reductions.  This would be enough to get down to the 2030 stationary emissions cap of 1333 million tonnes.  This incidentally highlights the need for the EUETS to be robust to emissions remaining below the currently legislated cap.

The case for additional actions in sectors covered by the EUETS is now even stronger

Recently agreed reforms to the EUETS mean that excess allowances in the MSR will be cancelled.  This further strengthens the case for actions such as phase-out of coal plant, increasing energy efficiency and deploying more renewables.

About a year ago I looked at whether additional actions to reduce emissions in sectors covered by the EUETS do in practice lead to net emissions reductions over time [i].

It is sometimes claimed that total emissions are always equal to the fixed cap.  By implication additional actions do not reduce total emissions, because if emissions are reduced in one place there will be a corresponding increase elsewhere.  This is sometimes called the “waterbed hypothesis” by analogy – if you squeeze in one place there is an equal size bulge elsewhere.

Although often repeated, this claim is untrue.  Under the EU ETS at present the vast majority of emissions reductions from additional actions will be permanently retained, reflecting the continuing surplus of allowances and the operation of the MSR.  Furthermore, over the long term the cap is not fixed, but can respond to circumstances.  For example, tighter caps can be set by policy makers once emissions reductions have been demonstrated as feasible.

When I last looked at this issue, the fate of additional allowances in the MSR remained necessarily speculative.  It was clear that additional excess allowances would at least not return to the market for decades.  It also seemed likely that they would be cancelled.  However, no cancellation mechanism was then defined.

This has now changed with the trilogue conclusions reached last week, which include a limit on the size of the MSR from 2023.  The limit is equal to the previous year’s auction volume, and is likely, given the size of the current surplus, to lead to large numbers of allowances being cancelled in the 2020s.

With this limit in place there is a very clear pathway by which allowances freed up by additional actions, such as reduced coal burn or increased renewables, will add to the surplus, be transferred to the MSR then cancelled (see diagram).  Total emissions under the EUETS will be correspondingly lower.

There is now a clear mechanism by which additional actions reduce total emissions

Modelling confirms that with the limit on the size of the MSR in place a large majority of reductions from non-ETS actions are retained, because additional allowances freed up almost all go into the MSR, and are then cancelled.  This is shown in the chart below for an illustrative case of additional actions which reduce emissions by 100 million tonnes in 2020.  Not all of the allowances freed up by additional actions are cancelled.  First there is a small rebound in emissions due to price changes (see references for more on this effect).  Then, even over a decade, the MSR does not remove them all from circulation.  This is because it takes a percentage of the remainder each year, so the remainder successively decreases, but does not reach zero.  If the period were extended beyond 2030 a larger proportion would be cancelled, assuming a continuing surplus.  Nevertheless over 80% of allowances freed up by additional actions are cancelled by 2030.

The benefit of additional actions is thus strongly confirmed.

The large majority of allowances freed up by additional actions are eventually cancelled

Source: Sandbag

When the market eventually returns to scarcity the effect of additional actions becomes more complex.  However additional actions are still likely to reduce future emissions, for example by enabling lower caps in future.

Policy makers should pursue ambitious programmes of additional action in sectors covered by the EUETS, confident of their effectiveness in the light of these conclusions.  Some of the largest and lowest cost gains are likely to be from the phase out of coal and lignite for electricity generation, which still accounts for almost 40% of emissions under the EUETS.  Continuing efforts to deploy renewables and increase energy efficiency are also likely to be highly beneficial.

Adam Whitmore – 15th November 2017

[i] See  For further detail see .  A study by the Danish Council on Climate Change reached similar conclusions, extending the analysis to the particular case of renewables policy.  See Subsidies to renewable energy and the european emissions trading system: is there really a waterbed effect? By Frederik Silbye, Danish Council on Climate Change Peter Birch Sørensen, Department of Economics, University of Copenhagen and Danish Council on Climate Change, March 2017.

New long term targets for emissions reduction are needed.

The UK and other jurisdictions need to set target dates for reaching net zero greenhouse gas emissions.  These need to be reinforced by new targets for 2060 that are at least close to zero, and by reaffirmed or strengthened targets for 2050.

Ten years ago setting emissions reduction targets for 2050 was a major step forward

2018 sees the tenth anniversary of the UK’s Climate Change Act[i].  This remarkable piece of legislation established a legally binding obligation for the UK to reduce its greenhouse gas emissions by 80% from 1990 levels by 2050, with obligations along the way in the form of five year carbon budgets.  So far progress has been remarkably good, though significant challenges remain.

Other jurisdictions also adopted 2050 targets at around the same time.  In 2005 California also set a target of an 80% reduction from 1990 levels[ii].  In October 2009 the EU established a long term EU goal for reducing emissions by 80-95% from 1990 levels by 2050[iii].

At the time these targets were path breaking.  However, ten years on there are good reasons for reviewing and extending them.

But now the world has moved on …

  • When the targets were established, the period to 2050 seemed long enough to give appropriate strategic guidance to policy makers and investors. However, future dates are now ten years closer.  A 2060 target now gives about the same time horizon for planning as the 2050 targets did when they were established.
  • The Paris Agreement sets targets to limit temperature rises which imply stringent limits on cumulative emissions. It also sets a goal of net zero global emissions in the second half of the century.
  • A fifth or more of the world’s carbon budget that remained in 2008 has since been used up[iv], increasing the urgency of emissions reductions.

Extending targets to reflect these changes would have some clear benefits … 

Together these changes imply a strong case for setting new targets now.

The most compelling target would be a date by which emissions must fall to net zero.  Such a target would make it clear to all sectors that they need to completely decarbonise by a specified date.  At the moment emissions of up to 20% of 1990 levels are allowed even in 2050.  This allows each of those sectors where decarbonisation is more difficult – for example parts of industry, agriculture or residential heating – to largely continue in a belief that there will still be plenty of room for them within the 2050 emissions limit, even though this cannot be true for most sectors.  This in turn allows them to continue to believe they can carry on indefinitely without taking the steps needed to decarbonise.  A date for reaching zero makes it clear this can’t happen.

Setting stringent target for 2060 – at or close to zero – would also give investors in low carbon infrastructure greater confidence, and deter investment in higher carbon alternatives. In the case of the UK and California, a simple extrapolation of their current targets would suggest a 2060 target of a 93% reduction from 1990 by 2050, reaching zero by 2065.

As part of the process of setting these longer term goals the existing 2050 targets need to be at least reaffirmed and preferably tightened.  If this is not done there is the risk that policy makers will simply see the problem as having become more distant, and delay action.  This is the last thing that the climate needs.

2050 targets may also need to be revised …

As a first step, the EU’s target of 80-95% cuts clearly needs to be made more precise.  The current uncertainty of a factor of four in the level of emissions allowed in 2050 is too wide for sensible policy planning.

However the events of the last ten years also raise the question of whether the stringency of the 2050 targets need to be increased, with implications for later periods.  The UK Government’s former Chief Scientific Adviser Sir David King and others have suggested that there is a strong case for the UK seeking to reach net zero emissions by 2050[v].  The difference in cumulative emissions in declining linearly to net zero by 2050 instead of by 2065 is substantial, at a little over 3 billion tonnes – equivalent to about 8 years of current UK emissions.

The goal of reaching zero emissions by 2050 is clearly desirable in many ways.  However there is a risk that it may have unwanted side effects.  The government’s advisory body, the Committee on Climate Change has pointed out that policies are not in yet place even to meet current goals for the fifth carbon budget in around 2030[1].  The route to net zero emissions in 2050 – just over 30 years from now – looks even less clear.  Indeed reaching that goal even by 2065 remains challenging.  If even tighter targets are introduced they may come to be regarded as unrealistic, which may in turn risk weakening commitment to them.  A somewhat slower emissions reduction track may prove a relatively acceptable price to pay for retaining the credibility and integrity of the targets.

Whatever the judgement on this, the need for longer term targets is clear.  Governments need to set dates for reaching net zero emissions.  These need to be supported by targets for 2060 that specify continued rapid reductions in emissions after 2050, and by reaffirmation of 2050 targets, tightening them as necessary.  These new targets will in turn help stimulate the additional actions to rapidly reduce emissions that are ever more urgently needed.

Adam Whitmore – 6th November 2017





[iii] measures_data/docs/pressdata/en/ec/110889.pdf

[iv] The calculation is based on data in the IPCC Fifth Assessment Report, Synthesis Report.  This quotes a  cumulative budget of 3700 billion tonnes of CO2 for a two thirds probability of staying below 2 degrees.  Of this 1800 billion tonnes had been used by 2011.  Assuming CO2 emissions of roughly 40 billion tonnes p.a. including land use gives a remaining budget in 2008 of 1920 billion tonnes.  Over the subsequent ten years about 400 million tonnes CO2, which is just over a fifth of 1920 billion tonnes, have been emitted.