A low carbon future is about human behaviour

There are profound changes ahead for our way of life, the choices we have and the choices we don’t, in an affluent global community maintaining a CO2 concentration below 450ppm. A few of the changes are simply common sense efficiency for which there hasn’t been an excuse not to make for some time. Unfortunately, most are expensive risks that will cause inconvenience and at times distress to those whose lives are affected. The only incentive to tolerate this predicable impact on our lives being the precautionary argument which states that the incurred risk and investment embarks you along a path that is far less harmful than the cost and pain of the unplanned or unforeseen events that are spurred by inaction.

It is a good argument, but not one that reflects the reality of human behaviour. This point has not passed unnoticed, leading to policies that seek to steward and encourage the community and economy towards a low carbon pathway. In western democracies the policy responses focus on cap-and-trade market mechanisms to price carbon and in some cases a more direct method, a carbon tax. The IMF has made statements noting the preference for a carbon tax, citing the lack of certainty carbon trading markets provide industry and the dependency of the approach on the benchmarking of the cap.

The signals in the economy from the pricing of carbon are too haphazard to shift human behaviour onto the sustainable pathway.

A price for carbon, whether set by a market or a tax, does not provide clear pricing signals and thus behavioural changes in the use of carbon intensive products. Consider the consumption of petrol or gas for private vehicle use. In order to apply a 10% impost on the price of fuel via a carbon price in the United States, a US$34 per tonne carbon price would be sufficient. However, due to the existing dissimilar tax imposts and variations in supply chains between jurisdictions the carbon price in Australia would need a US$63 per tonne and in United Kingdom US$87.

To exacerbate the disparity, US citizens have higher demand elasticity for the price of gas or petrol than the United Kingdom meaning that the 10% impost created by only a US$34 carbon price would do more to the behaviour of the domestic consumers than the US$87 carbon price would in the United Kingdom!

Next, consider the effect these various domestic carbon prices would have on electricity prices in each of the jurisdictions noted above. Assumed the electricity has the carbon intensity of their respective national averages, US electricity receives a 19% impost from the US$34 carbon price or near double the impact, the United Kingdom 28% or nearly triple the impact and due to the high dependence upon coal, Australian electricity would increase by 44% or approaching five times the impact. This may reflect the carbon intensity of the consumption, but the uneven relative domestic impact and the need for unequal cross-border pricing to create the same signals and behavioural responses represents a significant challenge for policy makers.

It therefore clear that a global price for carbon is undesirable. Any price level would cause supportive price signals for some, destructive price impacts for others, and yet for many, no price signal at all (at least in terms of affecting behaviour). However in order to minimise the global cost of the transformation there must be a mechanism for shifting carbon abatement across borders and by implication shift capital to those least capable of responding. The two appear mutually exclusive – the key is not to convert the carbon emissions or abatement to money too early in the process.

Foreign Carbon Exchange & Carbon Import Duties

In developed economies, the only valid currency for domestic trade is the local currency and so it should be for carbon. The concept is a core component to preventing the leveraging of domestic market disparities and foreign currency fluctuations to evade the impost of any price on carbon. The approach has two significant implications: a foreign exchange in carbon; and the modification of the World Trading Organisations rules to allow an import duty to address carbon price disparities.

The internalisation of the environmental cost of excessive carbon dioxide and other greenhouse gases so as to have price signals is paramount in order to enact change on a broad scale. Nevertheless, it is clear that by simply pricing carbon, in isolation and without regard for the unintended consequences and complexities, will not by any means lead to a shift onto the low carbon pathway.

Price signals, even heavy ones, aren’t enough to shift behaviour.

The daily commute for many is in their car and for some this isn’t a choice. The lack of a viable alternative at any price provides for a very inelastic demand for car use and consequently the use of the petrol or gas. For this group the 10% impost isn’t a price signal, just a tax. However, if the receipt for the next tank of fuel wasn’t just 10% more, but also included the detail “123kg CO2” then behaviourally some would seek to do something about it – whether that entailed an inconvenient mode shift or an attempt to reduce their emission in private vehicle use.