Economic Analysis of Projects in a Greenhouse World
Recent carbon market prices are substantially lower than mean or median estimates of the social cost of carbon in the literature. Intuition would therefore suggest that 'investment errors' are being made, in the sense that markets favor h...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2012/07/16459800/economic-analysis-projects-greenhouse-world http://hdl.handle.net/10986/11939 |
| Summary: | Recent carbon market prices are
substantially lower than mean or median estimates of the
social cost of carbon in the literature. Intuition would
therefore suggest that 'investment errors' are
being made, in the sense that markets favor higher
carbon-emitting projects, while global welfare would be
larger with lower carbon-emitting projects. This intuition
is correct in specific circumstances, but not others. For
any comparison of two alternative projects, there is a
carbon switching price that equalizes their net social
benefits. From the perspective of maximizing global welfare,
investment errors only occur when this switching price lies
between the carbon market price and the social cost of
carbon. Data on the costs of high-carbon and low-carbon
electric generation projects suggest that there is no
financing gap using mean or median published figures, but
for precautionary (95th percentile) choices of the social
cost of carbon, there is a financing gap between carbon
market prices and the switching price that would trigger
investment in the global welfare-maximizing low-carbon
project. A global carbon fund to finance this gap could be
conceived, but stricter emission caps and reforms of carbon
markets are likely to be a more efficient solution to the problem. |
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