Who will pay?

April 7, 2009
Paul Studebaker, CMRP, editor in chief, opines about how to win the carbon dioxide emissions game.

Ongoing climate-change treaty negotiations in preparation for the November 2009 United Nations Climate Conference have focused a lot of attention on the costs of carbon emissions. President Obama has pledged to put the United States on a path to cut emissions to 1990 levels by 2020 (with an additional 80% reduction by 2050).

The current Kyoto Protocol covers only about 30% of global emissions, mainly because the United States and China didn’t ratify it, and the rest of the world is unlikely to go forward without us. So, the world’s leading greenhouse gas emitters are grappling to determine which country will lose more ground as a consequence of cleaning up our acts.

U.S. Energy Secretary David Chu recently suggested that the United States might use tariffs against trading partners who don’t reduce greenhouse gas emissions. “If other countries don’t impose a cost on carbon, then we would be at a disadvantage,” Chu told the House Science and Technology Committee. Import duties could be used to offset that competitive advantage.

The next day, China climate change negotiator Xie Zhenhua responded, “I oppose using climate change as an excuse to practice protectionism on trade.” A dust-up ensued over who should shoulder the cost of cutting emissions for goods produced overseas. If a product manufactured in China is sold in the United States, who’s responsible for its carbon footprint?

Li Gao, director of China's Department of Climate Change, says countries that buy Chinese goods should be held responsible for the carbon dioxide emitted during manufacturing. “About 15% to 25% of China's emissions come from the products which we make for the world, which should not be taken by us,” Gao said at a forum sponsored by the Pew Center on Global Climate Change. “This share of emission should be taken by the consumers, not the producers.”

A draft climate change bill introduced into Congress on March 31 includes language authorizing the U.S. president to levy a charge on goods from countries that haven’t agreed to put a price on emissions. But the proposed legislation also offers rebates for energy-intensive industries exposed to global competition.

Principles are important, but what’s a ton of CO2 actually worth on the global market? Numbers commonly bandied about range from about $10 per ton to $40 per ton, equivalent to about 10 cents to 40 cents for the 20-odd pounds generated by combusting a gallon of a fuel like gasoline. This cost isn’t trivial, but it’s not large compared to the variations in the cost of the fuel itself during the past year (from about $2 per gallon to $4 per gallon) brought on by vagaries of supply, demand and speculation.

People tend to focus on the cost of carbon credits, how they’ll affect prices of fuel and electricity, who will have to pay, and whether the government will get the money. But for a broad range of carbon-emission-reducing activities, the price is negative — more than offset by lower energy costs. In effect, a market in greenhouse gas emissions credits offers smart people a lot of opportunity to improve their competitive positions and bottom lines.

McKinsey and Co. analyzed more than 250 sources of U.S. carbon dioxide emissions and the per-ton costs to reduce them. (See the full report at www.mckinsey.com/clientservice/ccsi/pdf/Greenhouse_Gas_Emissions_Executive_Summary.pdf.) They found that the United States could reduce greenhouse gas emissions by about three gigatons CO2 equivalent by 2030, using tested approaches and high-potential emerging technologies, at marginal costs of less than $50 per ton. The total outlay between now and 2030 would average $50 billion a year, a total of about $1 trillion.

That’s chump change at AIG, but more interesting are McKinsey’s calculations of measures that offer sizeable paybacks for CO2-equivalent reductions. These include:

  • Higher-efficiency commercial and residential electronics: $90 per ton
  • Residential and commercial lighting: $80 per ton to $90 per ton
  • Combined heat and power: $15 per ton to $40 per ton
  • Industrial process improvements: $15 per ton

Bear in mind, these measures pay back whether or not a value is attached to those tons of greenhouse gases. Any significant U.S. market for carbon credits will add the per-ton prevailing price to those returns.

While Chu, Zhenhua and Gao brandish words about who should get stuck with the bill for greenhouse gas emissions, the smart money is lining up behind the people, companies and countries that understand how avoid them in the first place.

E-mail Paul Studebaker, CMRP, editor in chief, at [email protected].

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