If there is one thing that economists do agree on, it’s the need to price carbon effectively if there is to be a shift in economic activity towards a lower carbon future.
About 40 countries around the world currently have some form of carbon pricing which would normally result from carbon taxes and/or emissions trading schemes on carbon emitting activities, such as industrial processes or power generation.
Companies currently use a wide range of assumptions on carbon prices in making their investment decisions, but this can have major implications for investment plans, and reducing spend on oil and gas exploration and production. It could also see a move into renewables and low-carbon technologies.
Carbon pricing across different sectors of the economy is also highly uneven. For example, about two-thirds of the price we pay for petrol and diesel at the pumps takes carbon pricing into account, but there’s currently no carbon tax on the gas we use in our central heating, despite both activities contributing to global warming.
This ultimately means higher costs for consumers as well as creating uncertainty and risk for investors.
It’s a problem that is particularly acute in the energy sector as wind farms, nuclear power stations and gas networks have such long-life spans.
Investors are making decisions today on assets that will still be in the ground well past 2050, and UK investors only have visibility over actual carbon tax rates for one year ahead ensuring uncertainty will mean higher costs for consumers.