Carbon Price and Oil Price

The prices for carbon permits in the EU have recovered to a level of over 8 euro, up from less than 4 back in January 2013.

That’s good news. All things equal, higher carbon prices mean a faster transition to clean energy.

On the other hand, the way the system works low carbon prices also mean that the EU is on schedule for achieving the reduction targets. Higher prices mean that there are more buyers on the market who are unable to meet their goals.

Anyway, how much does that increase of 4 euro per tonne from January 2013 add to the price of one barrel of oil?

To calculate that, I need an estimate of how much CO2 is emitted on average from one barrel of oil. That would be around 317 kg, which means you need about 3.15 barrels of oil for one tonne of CO2.

That in turn means that the 4 euro price increase adds around 1.27 euro to the cost of one barrel of oil.

In contrast, oil prices were around $100 in January 2013. They are between $43 and $46 now.

That means the cost from the oil price is down by over 50 dollars, while the carbon cost is only up by around $1.40 per barrel.

That’s rounding error territory.

Obviously, the largest part of the “price on carbon” is the price of the oil in the first place.

And obviously, if you want to get that price up to accelerate the transition to clean energy, the first goal must be to get the oil price up.

The way to do this is to have an effective supply cap. OPEC doesn’t seem to work. Climate policy should introduce a world wide cap on oil supply that is reduced in a clearly predictable schedule, like the schedule for the mining of bitcoins.

Since it may be difficult to get a supply cap done on a world wide scale, the EU might just go ahead and unilaterally introduce quantitative restrictions on oil imports. These would of course need justification under Art. 11 GATT.

The argument for that would be that such quantitative restrictions are necessary to avoid catastrophic global warming, said argument being based on Article 20 (g).

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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