FUTURE OF CARBON PRICING - WITH CAMERON HEPBURN
HOW CARBON PRICING IS INCENTIVIZING A SUSTAINABLE FUTURE
Can carbon pricing incentivize a sustainable future? What lessons have early-movers learned about acceptance and building momentum? How to neutralize the politics? How to do a better job of implementing carbon pricing in practice? What are the future implications of the European Union's Carbon Border Adjustment Mechanism (CBAM)?
Today I enjoyed a compelling conversation with the wonderful Professor Cameron Hepburn, the Battcock Professor of Environmental Economics and co-Director of the Economics of Sustainability Programme at Oxford University, who answered all these questions and more.
And there’s a ton of good news here, much of which dovetails with my message that decarbonization is THE wealth-generating opportunity of our time.
Welcome to the intersection of global economics, energy and sustainability!
MEETING CAMERON HEPBURN
Cameron was very generous in carving time out of his hectic schedule, and I was especially pleased to meet him because he researches the cutting-edge of energy, sustainability and economics. I’ve learned many times over that, while humans often express all kinds of desires for action on climate change, the primary levers for actual behaviour changes are usually economic (and with businesses, they always are). In other words, economics play a huge part in determining our future; ignore them at your peril!
We met in his rooms at New College, Oxford, surrounded by timbers, stonework and tradition stretching back to 1379. What better place to contemplate the accumulated knowledge that has brought us to this point, and the new wisdom that will be necessary going forward?
He was positive, friendly and clear-spoken, but the characteristic that impressed me most was his confidence in the economic levers, and how optimistic he was about our future.
Click below to listen to Cameron’s wonderful insights. Or subscribe to “FutureBites with Dr Bruce McCabe” on Spotify or Apple, or wherever you get your podcasts.
As always, you’ll find some of my key takeaways further down, as well as a full transcript of our discussion.
Enjoy!
KEY TAKEAWAYS
The great simplifier
One reason carbon pricing is so powerful is it is so simple. It removes the need for consumers and businesses to calculate or even think about ‘upstream’ emissions when making a purchase. Market forces ensure costs accrue and are passed along supply chains. End-prices capture the whole deal, thus simplifying life for everybody. As Cameron was careful to point out, the economic costs of carbon emissions are very real, and carbon pricing is just saying, “well, look, there's this other cost to the production of this good … If you want to buy something, you should pay for the costs associated with the production of that. Carbon pricing is just making sure that people pay the costs.”
The “price at the margin” is what counts
A straight-up tax on every unit of carbon emitted is easy to attack politically because its a big chunk of money taken off people to go into central government for redistribution. It’s also unnecessary. A big lesson learned is: “if you can find a way to more or less give that money back, more or less to the people who you took it from, but keep the incentive at the margin, then you can clean out the politics and get the economics right.”
That’s why trading schemes work better. In the EU, the system was designed so that the revenue collected went back to industry and/or a chunk of the permits to emit the carbon pollution were given away for free. The transfers of money were minimized, but the price signal was still there changing people's decisions.
A further refinement Cameron mentioned is to re-distribute money early, ahead of price rises related to pricing in emissions costs, so citizens and businesses benefit from the get-go.
Carbon price can be lower than TRUE cost
Cameron explained that around $100 a ton is the bottom end of plausible estimates for the true damages costs from extreme weather and other events driven by climate change, but the number could easily be $1,000 or even higher if it factors in the big negative reinforcing effects (eg methane release from thawing tundra) that are coming if we don’t improve our current trajectory. So the true cost lies somewhere between $100 - $1000 a ton.
Although the true cost is high, we need only price in a small proportion to change behaviours and drive towards net zero. Cameron and his colleagues estimate that $50 - $100 a ton is sufficient to incentivise the transition across the global economy.
The World Bank commissioned report on carbon pricing he mentioned, co-authored by Nicholas Stern and Joe Stiglitz, can be found here.
Wealth-generating, but incentives still necessary
Cameron talked about ‘negative pricing,’ in the sense that businesses make money from electrification and decarbonization because, “It's cheaper to be cleaner.” We agreed that the cost-reduction and profit-generating opportunities are huge (my position for the past 10 years, is that decarbonization is the greatest wealth-generating opportunity of our time). He took care to point out, however, that since the gains do not apply to all businesses or all sectors, economy-wide incentivization remains a necessity.
Domino effect
We discussed “carbon leakage,” whereby companies that are asked to pay the full costs of their pollution have an interest to move to a jurisdiction where they can get away with not paying, and I asked Cameron what effect the EU Carbon Border Adjustment Mechanism might have on other trading blocs.
Cameron predicts that, while governments might initially perceive the EU Carbon Border Adjustment Mechanism as a negative obstacle to exporters, they will quickly recognise the advantages of applying similar incentives at home. It’s worth quoting his words in full:
“Once the EU puts in place this carbon border adjustment, then if you're an American or an Aussie producer or Chinese producer selling to the EU, the Europeans are just collecting the cash at the border for your emissions. Now, if you think about that for a second, why do you want the Europeans to be taxing your production? No, thank you! If you're Australia you think no, we'll put our own carbon price on. We’ll collect the cash! And maybe the Americans think, actually, this is a good idea, we'll collect the cash. And, by the way, because we've got our own carbon price, anybody else wanting to sell into America has got to pay a border adjustment too, and so that way you have a, not quite a race to the top, but you have an incentive to ‘equalize these carbon prices up,’ rather than the classic problem, which is that everybody wants a free ride on everybody else and you don't get any action on climate change.”
One bloc to follow another, domino style. Not the answer I expected, but it makes perfect sense when you think about it, especially coupled with the need to stay internationally competitive to retain export markets. And it’s good news!
China’s pathway
I was intrigued to learn that China has conducted its own learning phase with different types of carbon price applied in different regions of the country (some taxes, some trading schemes, different designs, different prices) and has now begun to harmonize them. Because economic governance is more top-down, in some ways it has been easier, and other aspects, such as market monitoring, have been trickier. Cameron predicts China will:
“… be increasing its carbon prices as it sees greater and greater merit in moving faster domestically to a clean economy. At the moment it's been driven by capturing export markets, but it's increasingly realizing that actually all of this technology is good at home too. And once you've got a lobby group on the clean side that it is as powerful as that on the dirty side, then the those who are the clean energy and the clean industry industrial interests want carbon pricing to level the playing field so that their technology gets greater uptake.”
In other words, China is following its own carbon pricing path, but eventually we’ll all be arriving at the same destination.
ENJOY THESE FUTURIST INSIGHTS?
If you enjoyed this, consider subscribing to “FutureBites with Dr Bruce McCabe,” which I started as a way to share my interviews freely with wider audiences.
And if I can help your organization explore pathways to a better future at an upcoming conference or event, please reach out. As a futurist speaker, I deliver keynotes to inspire leaders to think bigger and more optimistically about the opportunities. It’s my way of making a difference.
INTERVIEW TRANSCRIPT
Please note, my transcripts are AI-generated and lightly edited for clarity and will contain minor errors. The true record of the interview is always the audio version.
BRUCE MCCABE: Hello and welcome to Future Bites. It's Bruce McCabe here, your Global Futurist, and my guest today – to talk about carbon pricing and dig in a little bit about what it might mean and what it does mean to our future, and how we might do it a bit better from what we've learned so far – is Professor Cameron Hepburn. I'll introduce you and your proper title and say thank you for coming and doing this
CAMERON HEPBURN: My pleasure
BRUCE MCCABE: Or indeed thank you for having me. We're here in your lovely rooms here at Oxford.
CAMERON HEPBURN: Yes, they are very nice.
BRUCE MCCABE: It's the perfect place to be thinking about research and learning.
You are the Batcock Professor of Environmental Economics here at Oxford and also the co-director of the Economics of Sustainability program, and the reason I really want to talk to you is you're multidisciplinary. You are across and publish so much, in a variety of areas across energy and sustainability, but you do tie that back to economics. And carbon pricing is one of these complex areas – it's a lever, if you like, where you really have to be practical and understand all of those disciplines and how it intersects, I guess.
CAMERON HEPBURN: Yeah, it's an important lever, because a lot of getting to net zero, getting emissions out, cleaning up our economy, is about incentives. Yeah, and the price incentive is maybe one of the best ones we've got.
BRUCE MCCABE: I think I've learned the hard way over the last 20 years presenting that when I was presenting on ecological implications … not really that much impact sort of came out of those conversations, but when I begin with the economic implications, people started listening and taking notes
CAMERON HEPBURN: Yeah, it's a shame that it's that way, but it often is that way, and you can work in parallel perhaps to produce a better system, but time's quite short, so we've got to work with the system that we've got as well, and make it work for us.
BRUCE MCCABE: Yeah, and when we do price things differently, behaviors do change, don't?
CAMERON HEPBURN: That's right, and the beauty of the price mechanism in general is that you allow people to make their own decisions with their own sets of information, their own preferences and choices, and they don't have to think about all of the bits of the supply chain that go into buying a biro pen or a pair of glasses or a glass of water, because it's all been ‘priced up’ by the market. And what really we're doing with carbon pricing is just saying, well, look, there's this other cost to the production of this good, whether it's a cup of tea or a table – we're sitting here, yeah – and that's in the damage done to other people and to the world economy, and to other species, by the emissions. And so you know, like anything else, if you want to buy it, you've got your phone there. It's got some metals in it. You've paid for them when you bought the phone. If you want to buy something, you should pay for the costs associated with the production of that. Carbon pricing is just making sure that people pay the costs.
BRUCE MCCABE: Interesting. I like that lens, so it's a vast simplifying mechanism as well. You don't have to think about all the complexity behind the scenes. It's very straightforward.
CAMERON HEPBURN: Exactly. Yeah. There's an idea that's been floating around for a while that people should have their own personal carbon allowance, and so you should, you know, have to tally up how many carbon units, kilograms, tons, you've got to spend, and and I can see some attractions in it. But I just think of my grandmother before she died, trying to work through how many kilograms of carbon she's got left when she's buying this apple. And the beauty of the price mechanism, you just don't have to do that, you just work out whether you can afford the apple.
BRUCE MCCABE: [laughs] Just thinking of my parents, yep. All the rest of it, Absolutely yeah. It's a vast simplifying mechanism. I'm going to come back to that because it's so powerful as well for organizations. If you set a price, it's potentially a level playing field, and it seems to be quite welcome across industry. So long as they feel they're in a level playing field, they can then just accommodate and work around the pricing themselves. So it's a similar thing for businesses.
CAMERON HEPBURN: Yeah, exactly right. And the nice thing about a price in a trading scheme for businesses is that those who are cleaner actually make more profit, and those who are dirtier don't. So that's a double appeal of a price as delivered through a trading system, rather than a price that's delivered through a tax.
BRUCE MCCABE: Yeah, yeah, but difficult to implement well, I imagine, because you've got to sell these things, get the messaging out. A lot of politics. I guess it's easy for political opponents to attack. “A tax, a new tax,” that sort of thing. So there's a lot to learn. I wonder if we can start with some of the lessons we've learned so far, because lots of people have tried to put some price mechanisms together around the world. What have you seen in your research?
CAMERON HEPBURN: You're quite right, bruce. We've seen a lot of scalps, particularly in australia. Uh, I think it's what five prime ministers that went down because of something to do with carbon pricing? [laughter] And it's not just the Aussies. This is a politically challenging space. There's no doubt about it. But I think there are ways. What we've learned is, there are ways to manage through the politics. So the first thing is that it's the “price at the margin” which matters. Now it's a bit of technical jargon but it just means that …
BRUCE MCCABE: That's okay, let's dig into that.
CAMERON HEPBURN: … Yeah, so what you want is for people to be making decisions and to be incentivized by this price. But it's the decision about the next unit of something, the marginal unit, that matters. And the problem with, say, a tax, just a straight up tax, is that you pay the tax on every unit of carbon that you effectively cause to be emitted, and what that means is that there's a big chunk of money that is taken off people and then goes into the central government. That doesn't actually change their behaviour. A bit does. The bit at the margin does, does. But the bit that isn't at the margin – economists call it the “infra marginal piece” okay, actually is just about transferring money from one person to another person via the central government, and those transfers become what everybody obsesses about in the politics.
One of the lessons we've learned is, if you can find a way to more or less give that money back, more or less to the people who you took it from, but keep the incentive at the margin, then you can clean out the politics and get the economics right. So it's quite a sophisticated idea there, and actually delivering it is still also quite hard, but that's one of the key lesson:s can you separate the politics from the economics? And one of the reasons we saw, say, for instance, in Europe the first and largest most successful carbon trading scheme work – it was a trading scheme, not a tax – was because the system was designed so that the revenue that was collected basically went back to industry and/or a chunk of the permits to emit the carbon pollution were given away for free. What that meant was that these transfers of money from one company to another or one person to another were minimized, but the price signal was in there operating and changing people's decisions.
BRUCE MCCABE: So it couldn't be criticized as a money grab or anything like that. That disappeared as an argument.
CAMERON HEPBURN: Yeah, I mean in the European case it didn't entirely disappear, but it was reduced for sure, and industry were happy because they're like well, actually, now we've been given all of these assets, these rights to pollute, they go on the balance sheet, maybe we can use them as collateral … you know, if we're cleaner than the next competitor, we're actually going to make money out of this scheme. And you know, every company is almost by definition, optimistic. They'll look at the situation and “you know, we can make a bit of cash out of this,” and so they all start competing and then you're in a virtuous sort of circle where your companies are accepting of the scheme and even enthusiastic about it.
BRUCE MCCABE: Does it still work – and there's quite a few questions that pop out – does it still work when you're doing an isolated bloc like that? The EU is doing its thing, but the US isn't coming for the ride, or southeast asia, or china, or you know other large economies. Tell us about that.
CAMERON HEPBURN: That's a great question. So the the problem that arises if, say, the EU has a nice juicy carbon price at the margin, as we say, of 100 euros a ton of CO2, and the US or China has nothing. Because what happens is that your companies who are being who are paying the full costs of their pollution, have an interest to move to a jurisdiction where they can get away with not paying for the damage that they're causing. So you have this phenomenon that economists called carbon leakage. It's not actually leaking from pipes or something, but it's companies moving from one country to another, and that obviously minimizes the effect of the scheme, because you're pricing carbon, you're putting a cap on it, you're squeezing it down in Europe, but if it's just popping up in China or the US, then you're not really achieving very much.
Now there's some ways around that, and with some colleagues, I wrote a paper which was much criticized at the time, around 2012, suggesting something called a border adjustment. Where you say well, we're going to have this high carbon price in Europe of 100 euros a ton, and if you want to sell into Europe, you've got to pay it too. It's only fair. And, by the way, our guys, when they're exporting out to the US or China, they may potentially have a rebate against the price. So it's effectively becomes a price that applies to the consumption of goods and services that have carbon associated with them, rather than the production. So that idea of a carbon border adjustment, as I say, was criticized for being anti-trade, protectionist, all the rest of it. But we now see it coming into play, in force, in Europe and then later in the UK, and I think it's because it's fundamentally good economics and it's just very fair, to say well, we're going to level the playing field. You want to sell to a European customer, you've got to pay the same carbon prices the European producers have got.
BRUCE MCCABE: I can visualize that as an equal-handed measure straight away. If you're going to sell into this geography, if you're making it carbon-free within the geography, terrific. If you're bringing it in, you pay the tariff. That's interesting. So … and you jumped into exactly what I was going to comment on … so the EU is going in that direction fairly aggressively I think? Ramping it progressively over the coming years, aren't they?
CAMERON HEPBURN: Yeah
BRUCE MCCABE: So is it a result of that initial provocative paper?
CAMERON HEPBURN: [laughter] Hard to pin, you know, attribute blame or responsibility to any one paper I would say. [laughter]. Certainly getting the EU carbon border adjustment mechanism through has required hundreds, if not thousands, of clever people working on vast amounts of detail, and in a sense, the easiest thing to do is to write a paper setting out the concept. I mean the thing that we were majoring on back then was the idea that there could be a domino effect, because once the EU puts in place this carbon border adjustment, then if you're an american or an aussie producer or chinese producer selling to the EU, the europeans are just collecting the cash at the border for your emissions. Now, if you think about that for a second, why do you want the europeans to be taxing your production?
BRUCE MCCABE: Yeah.
CAMERON HEPBURN: No, thank you! If you're Australia you think no, no, no, no, no. We'll put our own carbon price on. We’ll collect the cash!
BRUCE MCCABE: Absolutely.
CAMERON HEPBURN: And maybe the Americans think, actually, this is a good idea, we'll collect the cash. And, by the way, because we've got our own carbon price, anybody else wanting to sell into America has got to pay a border adjustment too, and so that way you have a not quite a race to the top, but you have an incentive to “equalize these carbon prices up,” rather than the classic problem, which is that everybody wants a free ride on everybody else and you don't get any action on climate change.
BRUCE MCCABE: That is really interesting.
CAMERON HEPBURN: It's a nice dynamic.
BRUCE MCCABE: I never thought about that at all. So that leadership, that really is a true leadership role, might actually knock over a few more dominoes as you say. Is the EU the biggest, you know, is it the best example to now look at as a case study in terms of complexity, maturity, or are there others that we should look at?
CAMERON HEPBURN: Well, there are plenty of examples. The EU, it's a good case study, because you know there are quite a few things went wrong early on. To the eu's credit, I guess, or in some sort of defence, they always said that we're going to have a bunch of learning phases, things will go wrong and we'll learn from them, and that's more or less what happened, things went wrong. So in the first phase of their emissions trading scheme, I think 2005 to 2008, thereabouts, my memory's failing me they didn't have banking and borrowing between periods. Now, what that means is you know, if you, if you've got a certain number of allowances of you know the right to emit a ton of carbon dioxide, and you either have a surplus of them or maybe you run out of them at the end of the period, yeah, can you bank your surplus into the next period or can you borrow from the next period?
BRUCE MCCABE: Yeah, rather than just vaporizing.
CAMERON HEPBURN: Yeah, right, exactly. And if you don't have the banking or the borrowing, then what happens is that at the end of the period, you either have a, you know, you have a price that spikes up because there's not enough permits around, or it crashes to zero, and either way is not a great outcome. And that's precisely what we had. We had a price that crashed to zero at the end of the first phase. So, as a result of that, we had the introduction of banking and very limited borrowing, implicit borrowing. And then there are other things that have come along as the schemes evolved. There's now something called a “market stability reserve” to keep the price between reasonable bounds. There's big debates about that.
So I mean, yeah, this is a very mature system, it's quite a sophisticated system. It's also not the sort of system that your average developing economy in the global south could just pick up and implement. A lot of sophisticated market actors, there’s your central exchange and clearing arrangements, and all the rest of it associated with that market. I mean, one of the funny ideas about the free market is that government needs to ‘get out of the way.’ Well, actually, you need a lot of regulation to make a market work, and you need quite a lot of sophisticated government to make this market work.
But you asked about other carbon trading systems and there are taxes around the world. It's another way of getting a carbon price into play. Some of them are quite clever. The Canadians for a while – it's a big debate about it now – but for a while they had a quite a good system where the money that was raised from carbon taxation was given back to people in a check …
BRUCE MCCABE: And given back to consumers, to citizens.
CAMERON HEPBURN: Yeah, yeah.
BRUCE MCCABE: That was on my list to ask you about, because it seems to me like a brilliant idea politically. It says, “we're definitely not doing the cash grab and it goes into your pocket.”
CAMERON HEPBURN: Exactly. I loved it. I still do, and I think the beauty of it is that actually, if I recall correctly, it was British Columbia in Canada, they gave the carbon dividend, the check, back to the citizens before even the prices rose. Because the concern is you put carbon pricing in place and the price of everything goes up by a bit because now you've got to pay for a genuine cost that you were dodging beforehand. But if you give them the cash first, they're like oh, hang on, this is good. So does that mean if the carbon price rate goes up, I get more cash? And the answer is yes, it does. You know, higher tax rate, more, more cash in the check to go into your pocket.
BRUCE MCCABE: I love it. So why is it slightly controversial now?
CAMERON HEPBURN: Ah well, the honest answer is I'm not exactly sure. I should be. I'm embarrassed to say …
BRUCE MCCABE: Not at all.
CAMERON HEPBURN: … I'm not sure, but there's a bunch of Canadian politics I’m not on top of.
BRUCE MCCABE: Again the politics come in. [laughs] Tell me, just to tie up the EU a little bit, do you think the politics will get in the way a little bit? Or does it look like we've got great support across the EU members now?
CAMERON HEPBURN: Yeah, I think, I mean certainly the EU ETS, EU Emissions Training Scheme, is well settled. It's widely supported. It's a kind of feature of the landscape now. The carbon border adjustment mechanism, that's a no-brainer if you're inside the EU. So the EU member states like that. So I think we're in a – I hesitate to say this – but I think we're in a fairly stable place.
BRUCE MCCABE: Fingers crossed with the EU yeah, “touch wood!”
CAMERON HEPBURN: Exactly.
BRUCE MCCABE: Okay. So they’re probably going to be one of the stronger forces in this moving forward, would you say in the next say five years, the next five to seven years.
CAMERON HEPBURN: Yeah, I think they'd remain the biggest carbon market. I mean China's still working on theirs, although they've found various aspects of the implementation quite tricky.
BRUCE MCCABE: Let's dig into that, because it's a very different economy.
CAMERON HEPBURN: Yeah, it is. And, as I was saying, you need to have quite a lot of infrastructure in place to make one of these markets work. It's much easier just to slap on a tax and certainly if you're running an entire economy from the commanding heights, then just using a tax might be what you prefer to do. But the chinese themselves had a learning phase where they had different types of design of carbon price in different regions of the country. Yeah, some taxes, some trading schemes, trading schemes with different designs, different prices etc. And they have begun to harmonize them. Prices have started to go up. I mean the the prices were sort of a bit of a joke, you know, sitting well below ten bucks dollars a tonne. Yeah, even not too far from one dollar a tonne.
BRUCE MCCABE: Might not change too much behaviour.
CAMERON HEPBURN: Probably not changing a vast amount of behaviour, not at the sort of 50 to 100 euros, which is sort of where we need to be to get on a net zero by 2050 pathway. But then the other challenge, of course, is you've got to have pretty good monitoring. Somebody's got to be checking that you don't have fraud, and there's some very cunning work showing that there is probably a bit of fraud in the European scheme too. More statistical work, not pinning it on any individual person, but just looking at the numbers in total and thinking, this doesn't quite add up.
BRUCE MCCABE: There always is isn't there. It's always a matter of ‘the best we can do’ rather than perfection. You can never make a perfect system.
CAMERON HEPBURN: Exactly. Yeah, but hey, I mean any sort of price that actually starts to say we value the environment, we value clean air, we value not being hit by hurricanes and droughts and extreme events. That's going to be better than no price.
BRUCE MCCABE: Now that brings me back to something, because you just started down the path, and I really wanted to ask you, what about the numbers? Because there's lots of different numbers put about as to what the real cost to humanity is of carbon emissions. Maybe we should call it a carbon emissions or carbon pollution tax, because there is a real cost in terms of storms, droughts, sea level rise, and it's obviously enormous, and it has an economic impact, and it will have a very vast economic impact, no matter what we do now. So it's urgent. Now some come to figures of hundreds of dollars a tonne sometimes, I'm not sure what they are, but there's probably a number which is far less than that, which is enough to steer behavior, and you kind of started that process. So can we explore that?
CAMERON HEPBURN: Some numbers? Yeah, sure. So well, I'm going to give you numbers in terms of a ton of carbon dioxide emissions Now what is a ton? Well, it's 1,000 kilograms. A ton of carbon dioxide emissions Now what is a ton? Well, it's 1,000 kilograms. That's about the weight of a very small car or half a big car. And so you think about that sort of weight, but in …
BRUCE MCCABE: Gas.
CAMERON HEPBURN: Invisible gas, going up. What damage does that do? And there have been many estimates over many years, ranging from the low end, $10 a ton – because you pay a lot more than that for a car, but if you can imagine a car's worth of CO2, it's $10 worth of damage – through to over $1,000 of damage. Now, it's such a wide range, it's sort of hard for a government to say great, you've given me the number, now I know what to do, I'll go and stick a price on it here, because the best the scientists and the economists can collectively do is say, well, it's somewhere between $10 and a $1,000. Now, we can do better than that. There have been various estimates to try and pin things dow, look at the damages from all of these extreme events, from climate-related events, and probably around about $100 a ton is the sort of low end of the damage estimates that are plausable. Now you can easily go way higher, if you're starting to explore the sorts of scenarios that, if we continue on our current path, we'll be heading towards.
BRUCE MCCABE: All the feedback loops and …
CAMERON HEPBURN: Yeah, the tipping points, exactly. So there's a lot of room to have a much higher damage estimate than $100 a ton. Now, what's it cost to clean up? Well, there's a bunch of folk out there who think that what we should do, because this is so important, is we should just degrow the economy and shrink the economy, and that's a whole other discussion.
BRUCE MCCABE: It is indeed.
CAMERON HEPBURN: But per ton of carbon, that roughly seems to me to cost a couple of thousand bucks a ton. You know, if you, if you shrink the economy in order to reduce your emissions, and if you do it in a blind kind of way, you're talking a couple of thousand. So it's not worth doing that.
BRUCE MCCABE: Yeah.
CAMERON HEPBURN: Yeah, and it's not worth doing it, not because you know the the costs are higher than the benefits of not wiping out humanity. That would be a ridiculous thing to say. It is not worth doing it because there are much cheaper ways of doing it, like way cheaper, and I would say even negative cost ways of doing it. And this is the thing that we miss so often in these discussions. If you take a look at the cost of your renewable energy or the cost of an electric vehicle or the cost of doing things in a clean way instead of a dirty way. These are higher tech approaches to economic activity that are continuing to fall in cost. We've been doing vast amounts of analytical work on predicting those cost declines here at Oxford and we're at the point where the cost of addressing climate change in some of these sectors – probably not overall for the global economy – but in some parts is negative.
BRUCE MCCABE: Because they make money.
CAMERON HEPBURN: They make money! It is cheaper to do the right thing! It is cheaper not to be a bloody idiot! And just stop polluting …
BRUCE MCCABE: I love that.
CAMERON HEPBURN: … Because it's cheaper to be cleaner. Yeah, and so you know. You're talking hundreds of dollars a ton of CO2 emissions pollution in damage versus negative dollars of cleanup. It's a no-brainer.
BRUCE MCCABE: I, just the other day, was looking at a mining company that's currently saving through electrification – their estimates – which are $300 to $400 million a year, just on fuel. So there is the profit, the wealth incentive, before we go anywhere near carbon pricing.
CAMERON HEPBURN: Exactly!
BRUCE MCCABE: There's wealth in every corner of that transition, every corner of it, and it's massive.
CAMERON HEPBURN: Exactly right. And then you have people say, well, hang on, if it's all so cheap and negative, then why do we need carbon pricing at all? And of course the answer is that not all of it is negative cost, and it indeed wasn't negative cost until relatively recently, and it's the process of pricing that brings these – among many other things, and I'm a fan of many other policy instruments beyond pricing – but a combination of pricing and other support and complex things like advanced market commitments, contracts for difference, all this other stuff, can bring down the costs of your clean technology and make it cheap enough that, actually, it is negative cost. But even today in many sectors, it isn't negative cost, which is why carbon pricing is important.
BRUCE MCCABE: Yeah, and all of that suggests that whatever the real, whatever the number is required to change behaviors, could be quite low, in a lot of contexts, in terms of actually imposing a price right?
CAMERON HEPBURN: Yep.
BRUCE MCCABE: When we started with the actual cost, ecologically and all the rest of it. But if we get down to it, um, numbers per ton that might be in the what, in the tens, or hundreds, might be enough?
CAMERON HEPBURN: Exactly. There's a good world bank commission on carbon pricing that my co-authors and friends nick stern and joe stiglitz led, and their best estimate was probably $50 to $100 a ton would do it for the entire global economy. So that's factoring in account that some of it's cheaper, some of it's more expensive, but you know that's about the right range for carbon prices to sit. And that, of course, is a lot cheaper than the cost of the harm, which is at least a hundred dollars of harm and possibly you know, up to a thousand.
BRUCE MCCABE: Perfect. That's really interesting, very insightful. So if we now just turn our attention to the future a little bit and maybe, um, just look at what's probable and what's possible optimistically, you know, if things, if we did this really well from here, what could that look like? You know, if perhaps we follow the EU into a domino effect like we talked about, what would that transition look like? Are there particular phases to it? Are there countries you think might be earlier leaders and others later. Is there a story to be told as to what this could look like?
CAMERON HEPBURN: Yeah, I mean, there's absolutely multiple stories to be told. Maybe let's start with where we end up. So we end up sometime after 2050, or around 2050, in a place where obviously we're net zero. So that's great. We're now stabilizing the climate. We're sucking a lot of CO2 back out of the air in order to reduce the residual big impacts that we've caused ourselves. But you know, we're not making the problem any worse. But as a result of doing that, we're driving around in much higher tech kit. It's probably been driven around for us. And it's going much further on a single charge, which takes minutes, I suspect. Maybe seconds, I don't know, it depends on how the electronics progresses. We're not dying of respiratory disease – 4 to 7 million people a year currently dying from breathing crap air. You can wind that number way down.
BRUCE MCCABE: You could do the economic analysis on that alone.
CAMERON HEPBURN: Yeah, it's a pretty nice win for productivity.
BRUCE MCCABE: As well as the lives saved!
CAMERON HEPBURN: Yeah, yeah and then I think we're also reusing land, uh, and using land in a very different way. By the time we get to 2050, um, a lot more of it is available for nature because, I mean, in this country – we're in England now – over 50% of the land is used for parts of the meat supply chain.
BRUCE MCCABE: Yeah, that'd be nice. As one scientist said to me, 80% of all arable land on this planet is producing 20% of the calories. So, that’s insane.
CAMERON HEPBURN: Yes, it is insane. So we're in a much higher tech world. It's much more productive, it's cleaner, it's safer, it's a better world. So that's the end point which eventually, maybe it's not all by 2050, but certainly before 2100, every country is more or less in this world. And then the question is how do we get there? And who? Who leads, who follows? And we've seen um since, you know, over the last decade, a major shift in the chinese green industrial complex. You know they've got incredibly cheap cars coming out of that country.
BRUCE MCCABE: Almost all the solar.
CAMERON HEPBURN: Yeah, lots of solar, increasingly good wind. Yes, you're seeing the border tariffs go up on the clean technologies, crazily, in Europe and America now, in response to the fact that China's got such a lead in these key technologies, which was highly forecastable, predictable. The Americans and the Europeans and the Aussies, to an extent, the West basically missed a bit of a trick.
BRUCE MCCABE: Absolutely. We have to give them full credit for having the long vision, playing the long game, doing it well, investing, and they're going to own a bunch of industries for a bunch of years. I don't underestimate the ability for others to bounce back, but they're really going to enjoy the fruits of those investments for a long time in China.
CAMERON HEPBURN: Yeah. And one response is to say well, you know that's no good. We're going to live on in our squalid, dirty economies, and protect our incumbent fossil industries in Europe and the States, but a much better response, in the short-term and long-term, is to say well, let's start competing.
BRUCE MCCABE: And so economically from here to there. Looking at these levers and simple taxes in some areas and more complex mechanisms like the EU, Do you think perhaps the Chinese will be the next ones to – well, they're already doing the pricing mechanisms – but do you think they'll follow perhaps the EU model? Do you think that'll become the template?
CAMERON HEPBURN: So I think what this discussion shows is that pricing, while important, isn't the be-all and end-all of creating a green industrial economy, and China has created its position through a combination of green subsidies as much as anything else. So carbon taxes and carbon prices, while very important, very useful, as I was saying earlier, not the only mechanism and not the only way of getting from A to B, and each country is going to have a different kind of portfolio of interventions, some more important than others. But I think China is going to be increasing its carbon prices as it sees greater and greater merit in moving faster domestically to a clean economy. At the moment it's been driven by capturing export markets, but it's increasingly realizing that actually all of this technology is good at home too. And once you've got a lobby group on the clean side that it is as powerful as that on the dirty side, then the those who are the clean energy and the clean industry industrial interests want carbon pricing to level the playing field so that their technology gets greater uptake.
BRUCE MCCABE: Quite inevitable, isn't it? As the consumer markets grow inside china, all the same concerns and issues float to the surface. The ability to look at environmental issues, and take them more seriously and put more effort and energy in, at a domestic level, at a citizen level, also grow, don't they?
CAMERON HEPBURN: That’s right.
BRUCE MCCABE: I mean, it's one of the good outcomes of all of this. I guess the more prosperous we become, the more time and energy we can devote to setting things right.
CAMERON HEPBURN: That's right. Yeah, and there's very good evidence for that across multiple countries. Once you're wealthier, you care more about the environment. And that's not to say that, of course, people living in developing countries who are stewards of the natural environment, it's not that they don't care. I use the word care, I probably ought not to …
BRUCE MCCABE: It's the capacity to do something.
CAMERON HEPBURN: Exactly, it's the capacity to invest in protecting non-human species. Your capacity is diminished if you've simply got to look after yourself and find somewhere to eat and shelter, whereas once you've got those basics provided for, you're in a better position to look after others.
BRUCE MCCABE: Now I'm very conscious that there are a lot of people waiting on your time. I wonder if we can wrap up with any other messages on the “how.” If we get back to today, are there any other things or insights that you wish more people knew or aware of? Or you’d just like to communicate more broadly out there?
CAMERON HEPBURN: Well, I think one of the key ideas we've been using to guide our research, but I think it's more useful than that, is this idea of a “sensitive intervention point,” and so this is an intervention in an economy, government, in a business that has these kind of domino effects, that has these feedback effects. And awareness of the fact that these are all around us, these spaces where we can intervene, to have a cascading effect with positive feedbacks. And they're really important, because we're not going to get to net zero on time without them, and we need to be quite strategic about identifying [them] Like the idea of a carbon border adjustment that then cascades and causes others to put carbon pricing in place. That's one of dozens of these ideas that actually we want to be smarter about moving into the future.
BRUCE MCCABE: Yeah, okay, well, we'll look at your research and watch for other things that drop out in terms of those points. But there's a lot more, a lot to chat with you about. So hopefully one day in the future we'll have chats about plastics and your work on biodiversity and valuing that, and that sort of thing as well. Thank you so much for the time, Prof Cameron Hepburn. It's been a privilege to talk to you.
CAMERON HEPBURN: Thanks very much, Bruce.