Relationship between social value of carbon and market price

Summary

Petrochemical worksThere is generally little relationship between the value to society of reducing greenhouse gas emissions or sequestering carbon and the market price at present. This is due to low emission reduction targets being set by governments in establishing cap-and-trade schemes and shortcomings in the design and operation of such markets as described below.

Carbon prices lower than social values

Market prices for carbon tend to be lower than social values. Prices in voluntary carbon markets worldwide are reported to have ranged from around $1/tCO2e to $47/tCO2e ($4/tC to $182/tC) in 2008, illustrating the importance of differences of quality and type.

Forest carbon not yet covered by government quality assurance scheme

The Government’s Quality Assurance Scheme for Carbon Offsetting (DECC, 2009b) focuses on internationally-compliant mechanisms under the Kyoto Protocol Clean Development Mechanism (CDM) and Joint Implementation (JI) scheme, and phase II of the EU ETS. It, therefore, does not apply to forestry projects at this time. (By mid 2009 no credits for forestry CDM or JI projects had been issued).

Current government proposals on carbon units and carbon accounting similarly cover only internationally-compliant credits. Exclusion of forest carbon units from voluntary market projects stems partly from forestry being covered by mandatory reporting of emissions from land use and land use change (LULUCF) activities under the Kyoto Protocol.

Potential double-counting issues

Sale of carbon units by sectors covered by binding national or international carbon reduction commitments gives rise to potential double-counting issues that can undermine their market value. Mechanisms do not currently exist to ensure the additionality of any voluntary carbon units issued by the UK forestry sector by excluding them from national reporting, or allowing equivalent carbon credits to be retired.

Research report

Forests and carbon: valuation, discounting and risk management (PDF-1168K)
Reviewing methods to value carbon over time, examining approaches for dealing with risk and considering approaches that could be used in extending standards to forestry more generally in voluntary carbon markets in the UK.

Contact

For further information contact Gregory Valatin