Cutting carbon and sustaining growth:
the importance of valuing and trading carbon
Richard Price, March 2008

This speech - to the UK Network of Environmental Economists' Annual Conference (at The Royal Society, London, March 2008) - sets out the links between the economics of climate change and UK policy.  It argues that it is nonsense to treble the current value of the shadow price of carbon, as some have argued, as the arguments for doing so effectively assume that the UK will act alone in tackling climate change. It also points to the creation of global markets in carbon, including the use of international credits towards UK emissions goals, as an imperative to generate capital flows to finance low-carbon technologies around the world on the scale required to avoid dangerous climate change.

This paper significantly raises the value attached to carbon emissions or savings from all new policies and projects across government in the UK.  It brings the value of carbon used in government decision-making into line with the Stern Review – increasing it by 17 per cent for emissions in 2020, 32 per cent in 2030; and 67 per cent in 2050, compared with previous guidance. The level of the shadow price is set at £25.50 per tonne of CO2 in 2007, and is on a rising profile.  Equivalent values apply to other greenhouse gases.

The higher level of the shadow price means that, wherever new policies or projects have a significant impact on emissions, advice to Ministers will take greater account of the carbon impact.  That includes not just environmental measures, but applies across government – including for example transport, construction and infrastructure projects.  It will make sure that lower-carbon options are recommended wherever they are economically and socially justified.

The paper received good press coverage in the UK, including this lead article in The Guardian on Saturday 22 December 2007 - link here: Ministers ordered to assess climate cost of all decisions

Major policies have both positive and negative effects on different aspects of the environment, and policy makers need to make difficult trade-offs between economic, social and environmental priorities. That means we need analysis which takes into account:

• how our existing use of environmental assets degrades their condition; and how far consistent over-consumption might jeopardise our ability to benefit from the services they provide into the future - such as clean air and water, temperature regulation, water management and biodiversity;

• the cumulative, complex and interacting pressures we put on the natural environment – recognising the interdependencies between different parts of ecosystems; and

• allows us to take account of the full value of the benefits ecosystems provide when assessing the costs and benefits of policies.  

The Guide is intended to engage policymakers, economists and scientists across government and agencies to help them to take better account of the value of ecosystem services in policy appraisal.  It sets out steps that can be applied in any policy context; a checklist of ecosystem services, and advice on which techniques can be used to value them.   

Click here to download this paper from the Defra website

This paper sets out the rationale for assessing the impact of improvements and degradation of environmental assets on our ability to consume the services they provide - affecting for example health, flood risk, and broader economic activity. 

The implementation of the EU Water Framework Directive rests much more heavilly than previous EU regulation on the assessment of costs and benefits of different options for raising the quality of inland waters. The Directive comes at a time when both the UK and across the EU greater emphasis is being placed on minimising the administrative burden of regulation, and also making sure that compliance costs are justified in terms of the benefits we get in return.  It is therefore critical to us that we understand fully how we maximise the benefits and minimise the costs.  Economic evidence is critical to the UK’s approach to interpreting and implementing the Directive. 

This paper was the basis for a keynote address at the Defra-Environment Agency (UK) collaborative research programme workshop on river basin management economics. 

Why excellent economics matters more than ever in environmental policy
Richard Price, London, March 2006

Commissioned by the UK Department of Environment, this study examined the costs of compliance with the European Commission's proposed Solvent Emissions Directive. It looked in particular at the potential for economic instruments to reduce the cost of compliance compared with a more traditional command and control regulatory approach.

Weighing the likely cost savings against the practical drawbacks, the study concluded that a tradeable permit system was promising. Though an upstream tax was found to offer large resource cost savings, it was recognised that a tax would impose substantial new financial burdens on some firms. Moreover likely difficulties in preventing tax evasion and with designing a workable system of exemptions and refunds made it problematic in practice as a sole instrument for Directive compliance. However, a lower-level tax in combination with regulatory controls might offer some benefits.

The process of designing economic instruments, which included analysis of the drivers of compliance costs, also suggested that large savings could be achieved by reconsidering the focus of regulatory control; ie: by making IPC-type regulation more cost-effective.

The large potential for resource savings suggested that compliance cost analysis within an economic instruments framework would be usefully extended to other areas of pollution control.