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The right price for a tonne of carbon: £25

If you've looked into buying carbon offsets, you'll know that there's a huge range of prices. This might seem strange, given that they're all meant to do the same thing: reduce carbon emissions by one tonne.  What exactly is behind the different prices?  And, given the number of economists, environmentalists and businesses complaining about the price, how much should a tonne of carbon cost?

Carbon Retirement ran a survey to find out, and 62 of you responded. 

Most people overestimated the price of a tonne of carbon.  About half of respondents thought a tonne of carbon costs somewhere between £10 and £20.  A further 10% thought a tonne of carbon costs in the £20-30 range and 16% thought the cost is over £30.

The reality is that there is no set price for a tonne of carbon.  Only two of the many types of carbon credit have a fixed price: Clean Development Mechanism (CDM) credits and EU Allowances (EUAs), currently around £12 and £14 respectively. 

So what is it that determines the price?  Those surveyed believe the most important factors in determining the price are the standards the offsets use and the type of project funded, with over half of people citing these factors. 

Most offsets come from projects like tree-planting, hydroelectric dams, or wind turbines and obviously these projects cost different amounts to implement. Moreover, projects have a choice of which accreditation or standard to go for. The more rigorous standards often require project developers to go through stricter due diligence processes and provide more evidence, which takes time, increasing the cost to the developer which is then passed on to end buyers, who are usually happy to pay more for the increased confidence that their money is making a difference.

The other obvious areas that make a difference are the overheads associated with the complex supply chain and the charges levied at the point of sale by the retailer.  Just over a third of people cited these factors as having a significant impact on the price. And they aren’t wrong: Carbon Retirement recently conducted some research, validated by the UN Environment Programme Risoe Centre and published by the BBC, which showed that typically only 28p in every £1 spent on carbon offsetting actually funds the environmental projects. The rest goes to brokers, investors and other intermediaries involved in the supply of credits.

Less well-known is the fact that some projects have opportunities to raise money from sources other than selling offsets. For example wind farms can sell the electricity they generate, or a tree-planting scheme may also be part-funded by a government subsidy. In these cases the offsets are sometimes – but not always - cheaper. Unfortunately this is where things are a little less than transparent and occasionally the offset buyer is charged for the project despite the fact it would have gone ahead anyway. While the project may be environmentally beneficial, the offset money makes no difference to carbon emissions and simply improves the project's finances.

Despite all of these factors nudging up the cost of a tonne of carbon, 47% of those surveyed believe it is currently ‘cheap’. Firstly, because the price is currently too low to incentivise the level of investment required to move us towards a low carbon economy. Secondly, because it is too low to effect behaviour change from individuals – especially when the cost of offsetting a flight is compared to the price of the flight itself. And thirdly, it doesn’t accurately reflect the environmental and social damage that is being done.

So what is the right price? Over two-thirds of respondents believe it should be £20 or more for a tonne and the median response was £25; a considerable increase on the current price. But not high enough for some. Over a quarter of respondents think the price should exceed £50, and a tenth think it should be £100 per tonne or higher.

The experts feel the same. Speaking last week at a House of Lords climate change event, former Government Scientist Sir David King echoed these views.  He said, “The price of carbon really needs to be around 100 euros a tonne.  If it was 50 euros I’d give a low voiced cheer.” 

As if in response, the prices of CDM credits and EU Allowances have increased in recent weeks, with last week's prices being the highest for over a year. A combination of factors are responsible: European economies emerging from recession, power generators signing three-year supply contracts with customers and buying up credits to match their predicted output, and anticipation of a large shortfall of allowances from 2013, when the cap on emissions from industries covered by the EU Emissions Trading Scheme is to tighten further.

Sir King isn't cheering yet, but perhaps these signs reflect that the market is starting to accept that, one way or another, the price of carbon is going to increase to the sort of levels both he and our respondents believe is necessary... and it might well happen sooner rather than later.

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