The simple arithmetic of carbon pricing and stranded assets

Frederick van der Ploeg*, Armon Rezai

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

A simple rule for the optimal global price of carbon is presented, which captures the geophysical, economic, and ethical drivers of climate policy as well as the effect of uncertainty about future growth of consumption. There is also a discussion of the optimal carbon budget and the amount of unburnable carbon and stranded fossil fuel reserves and a back-on-the-envelope expression are given for calculating these. It is also shown how one can derive the end of the carbon era and peak warming. This simple arithmetic for determining climate policy is meant to complement the simulations of large-scale integrated assessment model, and to give analytical understanding of the key determinants of climate policy. The simple rules perform very well in a full integrated assessment model. It is also shown how to take account of a 2 °C upper limit on global warming. Steady increases in energy efficiency do not affect the optimal price of carbon, but postpone the carbon-free era somewhat and if technical progress in renewables and economic growth are strong leads to substantially lower cumulative emissions and lower peak global warming.

Original languageEnglish
Pages (from-to)627–639
Number of pages13
JournalEnergy Efficiency
Volume11
Issue number3
DOIs
Publication statusPublished - 2018

Funding

Acknowledgements An earlier version of this paper was presented as a keynote at the ECOCOP Workshop, Prague, 3–4 November 2016. We are grateful to the helpful and constructive comments of Milan Ščasný and two anonymous referees. Van der Ploeg is grateful for support from FP7-IDEAS-ERC grant no. 269788. Rezai is grateful for support from the Austrian Science Fund (FWF): J 3633 and OeNB Anniversary Fund (grant no. 15330).

FundersFunder number
Seventh Framework Programme
FP7 Ideas: European Research Council269788
Austrian Science Fund15330, J 3633

    Keywords

    • Carbon budget
    • End of carbon era
    • Peak warming
    • Social cost of carbon

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