Carbon prices are mainly driven by supply and demand in the carbon markets. As such, they only cover a small proportion of the societal costs of emissions. Hence, there is a significant divergence between the price of carbon across different markets and the price that experts say is necessary to reach the temperature goals set by the Paris Agreement. In their paper ‘The Social Cost of Carbon, Risk, Distribution, Market Failures: An Alternative Approach’ Nicholas Stern and Joseph E. Stiglitz argue that the social cost is close to $100 per tonne – this compares with high quality carbon credits currently priced around the $7-17 per tonne.
Clearly, a gap needs to be bridged. Charging $100 / tonne today would cause social and economic upheaval: given the limited range of cost-effective alternative technologies, simply driving up the price of carbon would not immediately reduce emissions. Many businesses wouldn’t be able to afford the price and, facing a lack of alternatives, wouldn’t be able to easily switch (or even stay in business). Nor would they be able to fully decarbonise their operations.
Yet other factors also put upward pressure to prices. Typically, nature-based projects don’t start to deliver credits until year 3 or 4 of operation. Tech-based carbon credits tend to start at a high price, which will start moving lower as investments bring efficiencies. But innovation takes time. And with demand on the rise, we can expect the demand/supply imbalance to persist for a while.
But in the long run, platforms that increase the frequency of carbon credit trading, broaden the types of organisations participating in carbon markets, and enhance market transparency will bring much needed liquidity and hopefully a stable price.
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