Carbon Pricing and Energy Standards🔗

Set a global carbon price that makes energy sources more expensive depending on how much carbon dioxide they release, or enact a clean electricity standard or emissions performance standard. Energy producers frequently pass additional costs to their customers, so policy must be designed to minimize the impacts on the poorest.

Note, the Carbon Price slider in En-ROADS only affects CO₂ emissions from energy.

Examples🔗

• Countries and regions implementing carbon taxes.
• Grassroots campaigns generating public support for carbon pricing.
• Clean Electricity Standards, similar to Renewable Portfolio Standards in use in several US states or the Renewables Obligation in the UK.
• Emissions Performance Standards that set limits on the amount of carbon dioxide per unit energy that power plants can emit.
• Cap-and-trade programs in which governments set an emissions limit and issue a limited number of emissions allowances that can be traded by municipalities and corporations.

Big Messages🔗

• Pricing carbon is a high leverage strategy, as it both reduces the carbon intensity of the energy supply and reduces the overall energy demand.

• Clean Electricity Standards only affect part of the energy system, and so their leverage depends on being used in conjunction with electrification of transport and buildings and industry.

Key Dynamics🔗

• Impact. When the carbon price is increased, notice that Coal (in brown) reduces the most in the “Global Sources of Primary Energy” graph. It is the most carbon intensive source of energy, which makes it the most sensitive to a carbon price. Natural Gas (in dark blue) decreases as well, although more modestly. Oil (in red) decreases only slightly, even though it is more carbon intensive than gas, it is not easily substituted for other energy sources (e.g., a diesel truck can’t be powered with solar). Bioenergy (in pink) increases as its relative cost makes it more attractive, unless you decide to apply the carbon price to bioenergy net emissions by turning on the “Carbon price applies to bioenergy emissions” switch in the advanced view. Renewables (in green) increases as the relative cost of wind and solar make them more attractive.

• Price-Demand Feedback. Just like taxing coal, a significant carbon price increases energy costs, which reduces energy demand. View this in the “Final Energy Consumption” graph, where a high carbon price Current Scenario (blue line) is lower than the Baseline Scenario (black line). Learn more.

• Methane leakage. When a carbon price is implemented, watch in the “Methane Emissions” graph as the blue line of the Current Scenario goes down. Natural gas is primarily composed of methane (CH₄), a powerful greenhouse gas. Methane from gas leaks to the atmosphere from wells, pipelines, and other gas infrastructure. A carbon price decreases the leakage by incentivizing the fixing of leaks and discouraging the use of gas.

Potential Co-Benefits of a Carbon Price🔗

• Renewable energy becomes relatively cheaper, which can incentivize job creation in the sector.
• Reducing the use of fossil fuels improves air quality, increasing healthcare savings and worker productivity. View this in the “Air Pollution from Energy” graph.
• Revenue from carbon pricing can be allocated to social programs that can be shared with everyone.

Equity Considerations🔗

• As carbon taxes reach effective levels, companies may try to pass costs to customers, where the poor are most at risk of being impacted. Policies can be developed that limit this impact.
• Workers employed in fossil fuel industries risk losing their jobs if companies shrink workforces in response to higher costs of production, so job transition plans should be in place and protections for workers ensured.
• Due to the political nature of fossil fuel production, government corruption and rent-seeking could create the possibility of certain industries avoiding the carbon price due to loopholes or exemptions.

Videos🔗

Carbon Pricing and Energy Standards

Slider Settings🔗

*Source for $5 default carbon price: Dolphin, G. (2022). World Carbon Pricing Database. Resources for the Future.

Carbon price applies to bioenergy emissions

The switch “Carbon price applies to bioenergy emissions” in the Carbon Price advanced settings determines whether the CO₂ emissions from bioenergy are exempt from a carbon price. Many current policies exempt bioenergy from climate regulations or treat it as "net zero" even when it is not, so we default to the same for carbon pricing. If switched on, this will apply carbon prices to the net intensity of bioenergy the same as other sources of CO₂.

Carbon price encourages carbon capture and storage (CCS)

The switch “Carbon price encourages carbon capture and storage (CCS)” in the Carbon Price advanced settings determines whether CCS receives funding due to a carbon price. If turned off, CCS could only be encouraged by a Clean Electricity Standard.

Clean Electricity Standard

The switch “Use clean electricity standard” in the Carbon Price advanced settings sets a policy which requires a certain percentage of electricity to come from qualifying sources. This creates a system of incentives: producers of qualifying electricity receive additional revenue, like a subsidy, except that the money comes through electricity prices rather than government spending. The added costs and revenues affect electricity markets and investment, pushing the mix of generation toward the target standards. The value of the incentive depends on the gap between target and actual generation, and on how ambitious the target is.

Under "Sources that qualify as clean electricity," check the boxes for which sources qualify as "clean." You can see the percent these sources contribute on the graph “% Electricity Consumption from Qualifying Sources.” Use the "Target % electricity from qualifying sources" slider to set the required amount of qualifying electricity.

Emissions Performance Standard

The "Emissions performance standard" slider in the Carbon Price advanced settings models a performance standard based on the carbon intensity of electric generation (tons of CO₂ emitted per terajoule (TJ) of energy generated). Electricity sources above the standard are disincentivized—the more a fuel exceeds the standard, the fewer electric power plants of that type will be built. Energy sources have different carbon intensities, with coal emitting the most carbon dioxide per unit of energy (approximately 90 tons CO₂ per TJ energy), followed by oil (66 tons CO₂ /TJ), and then natural gas (51 tons CO₂/TJ).

Case Studies🔗

Northeast United States: A 2016 MIT study examined a scenario where the Northeast United States implemented a carbon cap and trade program and found that the annual health savings to the region could be five times greater than the costs of the changes needed to satisfy the policy.¹

FAQs🔗

• What's the difference between a carbon price and a tax on a fuel (coal, oil, natural gas, or bioenergy)?

• What happens to the revenue from taxes or a carbon price in En-ROADS?

• How does an emissions performance standard work?

• How do I simulate a carbon price that increases over time, such as the carbon price structure in the U.S. "Energy Innovation and Carbon Dividend Act" (EICDA)?

Please visit support.climateinteractive.org for additional inquiries and support.

Footnotes

[1]: Thompson, T. M., Rausch, S., Saari, R. K., & Selin, N. E. (2016). Air quality co-benefits of subnational carbon policies. Journal of the Air & Waste Management Association, 66(10), 988–1002.