Carbon Pricing

The Environmental Leader reports on an analysis from Carnegie Mellon claiming that a $35 price for CO2 would results in a 10% decrease in emissions.

I haven’t read the report yet, but just at the face of it I’m skeptical when I look at the impact on the pricing and usage of gasoline and electricity. First, lets do gasoline. Roughing out the math, gas produces just under 20 lbs of CO2e per gallon of gas, or 110 gallons per metric ton. So the $35/ton pricing would add $0.35 per gallon. Given the current gas prices, you’d be looking at an additional increase of less than 10%, and much less than the increase over the last 12 months.

Electricity shows a higher increase, but I’m still not sure its enough to change behavior that much. Using 1.3lbs of CO2 per KWh as a US average, that yields around 1,700 KWh per metric ton of CO2e. So a $35 price for CO2 would add about 2 cents per KWh. Average retail electricity price is around $0.10, so this would be a 20% increase in retail electricity prices, and higher for commercial electricity which tends to be lower. This is enough of an increase to cause some changes in behavior, but 10% seems like a stretch. For electricity, however, it would help with the economic case for emerging green alternatives, so would probably do some good on the generation mix side over time.

So when I read the report I’ll find out how they get there, but I’m very doubtful for gasoline and transportation, and mildly skeptical for electricity usage at $35/ton. This analysis definitely makes one thing clear: at CO2 prices below $5/ton, there will be no change in behavior.