This ambition must translate into public and private investments, and more generally measures coming under public and private policy alike. Action must be taken across a broad agenda, but also in the right order, by setting joint priorities, channeling resources towards meaningful initiatives and making the call between swiftly rolling out mature technologies or awaiting new solutions enabled by the innovations in progress.
Putting a monetary value on mitigation activities means recognizing that there is value in taking action, as opposed to doing nothing. It means that human activity must take on board, "internalize" – beyond the "private" benefits – the collective benefits to be reaped from reducing greenhouse gas emissions. It provides a baseline for selecting and ranking the initiatives that are meaningful to the community.
The social value of mitigation activities is referred to as the shadow price of carbon in socioeconomic calculation jargon, as it is decided on by the State. It forms part of a long-term public strategy setting forth a shared vision of action to tackle climate change – in this instance the 2015 Paris Agreement and 2017 Climate Plan.
Carrying on a long-standing French tradition for economic calculation, and in the same vein as the previous commissions chaired by Marcel Boiteux (2001) and Alain Quinet (2008)[1], this report crowns the collaborative efforts of a commission made up of some 20 experts and economists on the environment from academia, international organizations and research centers, the economic and social sphere, non-governmental organizations and the government[2]. To draw up its proposals, the commission called on five modeling teams, interviewed a number of specialists and organized a series of workshops for representatives of the economy's various sectors[3].
The social value of mitigation activities measures the value, for the community, of initiatives delivering on the carbon neutrality target
Through the 2015 Paris Agreement, the Parties have collectively agreed to achieve carbon neutrality by the latter half of the 21st century. The Agreement urges developed countries to reach this target before developing countries. This goal is grounded in the assessment by the Intergovernmental Panel on Climate Change (IPCC) of a shrinking of the carbon budget – i.e. the residual margins available for emitting greenhouses gases – if we wish to keep global warming to below 2°C. Based on past trends, we only have three decades' worth of emissions at our disposal: after that, we will be out of options – running the risk of serious and irreversible damage.
Action to tackle climate change and the resulting benefits for the community are not automatically factored into public and private stakeholders' financial profitability calculations. The shadow price of carbon makes up for this market failing: it gives an idea of the distance we still have to cover and, as such, expresses the value that society must attach to the public and private decarbonization initiatives we need to roll out to get there. These are the two sides of the same coin.
The rise in the social value of mitigation activities first and foremost gives an idea of the distance to be covered
For 2030, the time scale of the investments which have already been or are shortly due to be decided on, the commission puts forward a shadow price of €250 per ton of CO2e, which is a substantial increase on the €100 target set in 2008. This rise reflects the limited nature of the carbon budget at our disposal; it lays bare the need to invest sustainably in low-carbon technology and the cost of such technology.
In the period post-2030, the value outlined here gradually falls into line with a Hotelling rule, which is to say the rule for properly managing a non-renewable resource, whose value is meant to grow at the discount rate – and is not therefore "crushed" over the long term under the effect of discounting. By 2050 it is expected to align with the estimated costs of the enabling technologies required for decarbonization – therefore a cautious range of €600 to €900/ton of CO2e.
The further the time scale extends beyond 2030, the more uncertain the forecasts. A lower carbon value at the end of the period – falling below €500 – would reflect closer international cooperation, ramping up the pace at which innovations are being produced and rolled out, and paving the way for disruptive technologies.
The rise in the social value of mitigation activities extends the scope of profitable initiatives for the community
The shadow price attributes a value to public and private decarbonization initiatives. It has traditionally allowed for public investments to be assessed and selected on the basis of their socioeconomic (and not just their financial) value. But its use must increase so as to shore up the definition of public policy priorities. With a shadow price of carbon of €250 in the period up to 2030, all initiatives costing less than €250 per ton of CO2e avoided must be undertaken (retrofit of buildings on a large scale, roll-out of certain renewables for generating heat, for example). Otherwise there is a risk the target will not be reached. On the other hand, initiatives costing more than €250 today should only be undertaken if, by the time they are fully rolled out, the trajectory of shadow prices exceeds their cost.
More generally, a multi-year trajectory where the shadow price of carbon is concerned gives a long-term baseline – in a mindset of anticipating and planning for a world "without fossil fuels". A clear and credible trajectory gives everyone the opportunity to ascertain whether enough is currently being done to achieve the decarbonization target, and whether the right amount of resources are being harnessed at the right time. In this way it allows for investments with long payback periods, which are penalized by uncertainty or volatility.
Once the scope of profitable initiatives has been identified, the State or local authorities can choose to bear their costs directly via public investment. Where necessary, they can also steer private choices, via carbon pricing, subsidies for acquiring carbon-free equipment, risk-sharing mechanisms or regulations. In this context, the shadow price of carbon does not predetermine the right combination of available environmental policy tools. Instead it provides a baseline for checking that the "sum" of these tools for a given use is appropriately sized.
Moving towards a no-carbon economy is possible in return for far-reaching changes in terms of technology and use
Our research confirms, if proof were necessary, that France has not gone far enough in efforts to tackle climate change: whilst greenhouse gas emissions have fallen since 1990, our country is still behind schedule. Our research also points out that this delay can be made up by greater 'sobriety'[4] (equipment appropriately sized for its use), greater energy efficiency, better use of ground space and the large-scale roll-out of new carbon-free technologies.
Successfully decoupling GDP from greenhouse gas (GHG) emissions calls for a sustained investment drive
"Smart" decarbonization – without reducing GDP, without generating "carbon leakage" – requires investment, as of now, in clean technology and decarbonization of the capital stock in the broadest possible sense – encompassing factories, the energy generation capacity, farms, buildings and vehicle fleets.
Investment is the key: this is what will enable a decoupling between GHG emissions and GDP; it is also what will enable changes in behavior by bringing about alternative solutions.
But there is still a long way to go: we have slashed our greenhouse gas emissions by around 80 million tons since 1990; we need to bring this amount down another fourfold by 2050. The need to rechannel funding and investment towards carbon-free applications is well documented at international level, not least in recent studies by the OECD[5], the New Climate Economy Project[6] and the European Commission[7]. Our modeling efforts confirm this sustainable need for "green" investment: a significant proportion of current investment flows must be rechanneled towards tackling climate change whilst scaling up investments by around 1.5 GDP points a year. The investment required reflects a need not only for major projects (developing the grid and electricity generation capabilities) but also for a large number of smaller-scale projects bearing on existing assets (retrofit of buildings, conversion of fleets of vehicles powered by internal combustion engines into low-carbon vehicles, etc.) or new local assets (local facilities for generating renewables, electric vehicle charging points, etc.).
The role of public policy is also to support innovation. The goal to decouple emissions and GDP can partly be achieved by investing in existing technologies. But non-mature technologies also need developing, by seizing the opportunity to grow industrial sectors in France. Beyond 2040, innovation could open up new opportunities for increasing the size of carbon sinks (via CO2 capture and storage), sustainable energy storage and extending the range of alternatives to oil.
Post-2030, successfully achieving the low-carbon transition depends to a large extent on how closely the international community works together in tackling climate change.
By more effectively pooling the efforts of different countries it will be possible to:
- disseminate existing technologies more quickly, as attested by the positive momentum in terms of renewables, whose production costs are tumbling;
- foster the development of new technologies, absorb their initial cost over a broad base and therefore enable each country to benefit from learning-by-doing and economies of scale in the form of price reductions;
- avoid the risk of "carbon leakage", which is ineffective from a climate point of view and penalizing for the French economy. The most difficult sectors to decarbonize are also those which are highly globalized – long-distance freight transport and certain energy-intensive industries such as the chemical, steel and cement industries. This finding calls for the development of joint tools, at European level (including the emissions trading system/ETS, harmonization of energy taxation or a carbon inclusion mechanism for example) and, more broadly, at international level for international transport.
This commission's research is groundbreaking and seeks to show the way ahead, in that France is one of the very first countries in the world to have a shadow price of carbon driving a strong carbon neutrality ambition. Those signing this report hope that this proposal for a new trajectory for the shadow price of carbon will be used in the public policy and investment assessments and inform the debate on the necessary drivers and strategies for achieving the Climate Plan targets.
[1] General Commission of the Plan (2001), Transports : choix des investissements et coût des nuisances, report by the group chaired by Marcel Boiteux, Paris, La Documentation française; Center for Strategic Analysis (2008), La Valeur tutélaire du carbone, report by the commission chaired by Alain Quinet, Paris, La Documentation française.
[2] The list of commission members can be found in Appendix 2.
[3] The list of specialists interviewed can be found in Appendix 3.
[4] From the French term sobriété, referring to efforts to change our current excessive energy-consumption habits to more sustainable lifestyles and uses where we show greater energy restraint.
[5] OECD (2017), Investing in Climate, Investing in Growth, OECD Publishing, Paris.
[6] Unlocking The Inclusive Growth Story of the 21st Century, 2018
[7] A European Strategic Long Term Vision for a Prosperous, Modern, Competitive and Climate Neutral Economy, 2018.
