Cameron Hepburn

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The energy mix, carbon pricing and border carbon adjustments

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Human civilisation is powered by fossil fuels. Over the past 100-200 years, the vast increases in material standards of living in the West were made possible by the efficient utilisation of energy and dramatic falls in the cost of energy services. Over the last 10-20 years, the rapid industrialisation of economies such as China and India, with corresponding increases in material living standards and reduction of poverty, have also been driven by fossil fuels and, in large part, by the dirtiest of them all – coal. These developments have been a wonderful boon for humanity, but have some very negative side effects that are already causing harm today (e.g. local pollution and corresponding health problems, leading to deaths from coal mining) and are storing up major problems for tomorrow, particularly in the form of future climate change impacts.

I have been asked to address the question of the ‘energy mix’, which I discuss directly in section 2 below. I will look at this from a global (section 2.1) and briefly from a UK (section 2.2) perspective and from a historical point of view as well considering some potential scenarios for the future. The data suggest that we appear to be heading into a world of significantly increase mean surface temperatures – of perhaps 3-4C – with potentially severe consequences for the climate and water systems in large parts of the world. This is despite best efforts over 20 years of international negotiations on climate change, since the UNFCCC opened for signature in 1992.

In section 3 below, I consider how to start to shift away from that fossil-fuel-intensive pathway might be achieved, building on joint research with Dieter Helm and Giovanni Ruta. The focus in this article is on carbon pricing and border carbon adjustments, which is not to deny the importance of much greater research and development (R&D) in renewable technologies, accompanied by policies to stimulate cost-effectively the switch from dirtier to cleaner energy today. I will present a simple game-theoretic model of how a border carbon adjustment in one region could stimulate carbon prices to spread into exporting regions. Dieter, Giovanni and I advance the argument, given the failure of other more convivial and friendly efforts to address the problem collective, border carbon adjustments are now worth serious consideration.

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