Global carbon price must rise fast, combine with other measures, to reach Paris Agreement targets: New ISF report

As the world grapples with the dramatic effects of record temperatures in recent months, carbon pricing policies such as carbon taxes dominate the conversation around climate action. A new report from the Institute for Sustainable Finance has found that while carbon pricing remains a key tool in the fight against climate change, its implementation globally to date has been far too low to make a significant impact. Limiting global warming to 1.5-2^oC remains possible, but carbon prices must rise dramatically and combine with other policy measures to avoid the catastrophic damage associated with higher temperature scenarios.

The report, Carbon Pricing: Necessary but Not Sufficient, is based on a working paper by ISF Chair Sean Cleary and Queen’s PhD candidate Neal Willcott. Looking at a rising price on carbon, as a standalone measure, the authors’ modelling reveals its potential impact on global temperature increases to the end of the century. It also produces an estimate of the financial losses the world could see due to climate change under increasing warming scenarios.

Key findings in the report:

• Carbon pricing is a powerful tool to reduce greenhouse gas emissions. An increasing price on carbon globally can eventually reduce emissions to zero and curb global warming.
• However, the current estimated global average carbon price of $2.79 per tonne is far too low.
• And no feasible pricing scenario is high enough for carbon pricing to limit warming below 2.4^oC on its own, which falls short of Paris Agreement targets.
• To avoid higher warming scenarios, carbon pricing must rise substantially around the world, and be combined with other policies, regulations, subsidies and financing mechanisms.
• If we can keep climate change to lower scenarios, the savings from avoided climate-related damage will be enormous. Estimated cumulative damages under a 3^oC warming scenario, for example, are $480 trillion US by 2100. This figure is almost double that under a 2^oC scenario, and more than triple 1.5^oC, which confirms the importance of hitting Paris Agreement targets.
• There is a strong case for action even if lower warming targets are missed. By keeping global warming to 3^oC by 2100, in contrast to the zero-carbon price scenario of 4.2 degrees warming, carbon pricing alone could prevent cumulative damages of $284.73 trillion US, almost three times the current global GDP of $105 trillion.

“Carbon pricing is an important piece of the puzzle, and it’s great because it’s a market-based solution,” said co-author Sean Cleary, “But we need to throw everything and the kitchen sink at the problem to get our emissions down.”

“The message from these findings is not to give up but to speed up, and to co-ordinate globally,” said Neal Willcott. “There’s actually a lot we can do with a fairly modest increase in carbon taxes on a global level. A consistent global carbon price also incentivizes innovation, increasing our ability to limit warming under targets outlined in the Paris Agreement.”

According to Willcott, if the revenues for carbon pricing are reinvested in climate solutions — in addition to the effect of reducing the demand for polluting energy sources — the scenarios can change, so a 3^oC trajectory can decline further, closer to meeting Paris Agreement targets.

According to Dr. Cleary, the high cost of additional damages in higher warming scenarios should inspire robust climate action. He added, “but these figures don’t capture the terrible human cost of climate disasters that we’re already seeing in homes destroyed, livelihoods ruined and lives lost.”

About the authors

Dr. Sean Cleary is a Professor of Finance at Smith School of Business, Queen’s University. He is Chair of the Institute for Sustainable Finance based at Smith. 

Neal Willcott is a PhD candidate in Finance at Smith School of Business Queen’s University. He is a recipient of the Smith School of Business Research Excellence Awards for 2022 for his work a previous report co-authored with Dr. Cleary titled The Physical Costs of Climate Change: A Canadian Perspective.

Methodology

In this paper the authors investigate the impact of a global carbon price using the Dynamic Integrated Climate and Economy (DICE) model, developed by 2018 Nobel Laureate William Nordhaus. The DICE model is an integrated assessment model (IAM) that projects the relationship between CO2 emissions, GDP, and climate damages over time, based on various macroeconomic inputs. The DICE model projects the social cost of carbon (SCC), which is used as the carbon price. In an ideal policy design, the carbon price is equal to the SCC. For more detail on methodology see the Appendix in the report.

About the Institute for Sustainable Finance

ISF was launched in 2019 as a Canadian-specific centre of expertise and collaboration for advancing sustainable finance. Housed at Smith School of Business at Queen’s University, ISF is independent and non-partisan. It focuses on developing research, education, and collaborations among academia, business and government that will improve Canada’s capacity for sustainable finance as the shift to a low-carbon economy occurs. ISF’s work is generously supported by Ivey Foundation (inaugural supporter), McConnell Foundation, McCall MacBain Foundation, Chisholm Thomson Family Foundation, Smith School of Business, Queen’s University and Founding Contributors BMO, CIBC, RBC, Scotiabank and TD Bank Group. For more information, visit https://smith.queensu.ca/centres/isf/

Media contact

David Watson
Associate Director, Communications, Institute for Sustainable Finance
david.watson@queensu.ca
C: 613.796.3605