I've just been reflecting on my post below about carbon constraints, and the one further below about a sustainable world being an expensive world. It is clear (to me) that the policy/intervention that gives the greatest chances of keeping human footprints within planetary limits is the one that pushes the supply curve downwards. The example used below is the carbon tax. When comparing the two measures (demand reduction and carbon tax) the tax is the only measure that can be designed so that planetary limits are never breached. Other meaures, for example ones that move the demand curve, might still result in a scenario where limits are breached through a product or service being sold ridiculously cheaply (perhaps through dramatic economies of scale) and someone being prepared to supply huge quantities at that price (resulting from a significant shift in the supply curve, perhaps through the effects of government subsidies, or through loss-leading activities). By contrast, with a supply curve kept within planetary limits (eg through carbon taxation) then however the demand curve shifts, there will never be enough produced and supplied (let alone sold) to breach planetary limits because it would become infinitely expensive to produce (even if not sold) the final unit of production that went over the volume limit.
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I attended a talk by Michael Wilkins from Standard & Poor's yesterday at the Smith School of Enterprise and Environment which summarised the result of their work on carbon constraints, as published recently in a report on the Carbon Tracker website.
Here's a link to the referenced report "What a carbon-constrained future could mean for oil companies' creditworthiness" It appears that, because of various reasons including the European ETS carbon price having 'tanked' (ie hit rock-bottom) and the impact of the economic situation on Government priorities, it is unlikely that the "unburnable carbon" agenda will result in significant credit downgrading of major oil companies for a few years to come. The scenario modelling S&Ps had used for their analysis arrived at a Brent crude oil price of $65 per barrel by 2017, based on assumptions about Government-led demand reduction initiatives kicking in (thereby depressing prices because of the supply-demand dynamics). During the discussions that followed the talk, I became gripped by a thought - what would be the impacts of both such demand reduction initiatives AND a stringent carbon tax? The former would tend to reduce price at equilibrium, the latter would tend to increase it (all other things being equal) - so off the top of my head I was struggling to reconcile the net effects of these if they occured together - would they be complementary or would they fight against each other and result in unintended consequences? Having pondered further, I think that the situation would be as shown in the diagram below. The demand reduction initiatives would shift the demand curve downwards, and the carbon taxation would shift the supply curve downwards (because, at every volume, it would become more expensive for the suppliers to supply with the tax in place than if the tax was not in place, so that, for any given volume, they would need a higher sale price than before in order to be happy to supply that volume). The opportunity this offers is to arrange matters such that the two effects, taken together, reduce equilibrium demand but leave equilibrium price about the same. This strategy would reduce the risk of the effects disproportionately disadvantaging the poor, by keeping prices stable. Therefore, the two policy objectives of tackling climate change and addressing poverty could be addressed at the same time with this approach. |
About the BloggerI'm David Calver - an Accountant with a passion for sustainability. Categories
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