Excited to share our new paper in @NatureClimate that proposes an approach for setting net zero-consistent carbon prices and provides illustrative estimates for the United States:
https://rdcu.be/b6jIH 

to follow...

This study asks one of the most basic questions in climate economics: how can we help policymakers set CO2 prices? (2/x)

Let me try to convince you of 3 things:
1) The social cost of carbon (SCC) absolutely, positively cannot help policymakers set CO2 prices
2) The near-term to net zero (NT2NZ) approach is a good way to set CO2 prices
3) NT2NZ finds lower net zero CO2 prices than you are expecting

Let’s do this! First thing to try to convince you of: The SCC absolutely, positively cannot help policymakers set carbon prices.

This one tends to be difficult with economists (like me), and easier with normal people...

So we’re on the same page: the idea of using the SCC to set a carbon price is, basically: just charge polluters for the damages they cause, and then poof, externality fully internalized...

The problem: CO2 is a global pollutant that remains up in the atmosphere, so the damages play out over the entire world over centuries. I have genuine, serious admiration for the economists who’ve created models that do all this to estimate SCCs. But, specific outcomes?

This is all been said, of course, but think about all the unanswerable questions a model like this has to answer:
-Monetary values on *all* climate impacts
-Changes in techs and behavior over centuries
-How do we value the future? How much risk to take on? How to balance equity?

If you're thinking, couldn’t we get any # we want? Pretty much, yes. And we do. A few tens to a few hundred dollars per ton without breaking a sweat. (Special shout out to the Trump admin for managing to miss the broad side of this barn with its estimates)...

Might there be valuable uses of such an enormous range of SCC estimates? Sure. But when policymakers needs help setting specific CO2 prices? Estimates of the SCC absolutely, positively cannot help...

But we do it anyway! ZEC payments in NY and IL, carbon tax proposals in Congress, solar subsidies in MN, countless academic papers in need of an optimal CO2 price (like below from Nobel Prize winner William Nordhaus). Why? Well, 2 possible reasons.

First, because some policymakers aren't looking for help setting carbon prices. They are looking to justify a number. For this, models that can produce pretty much any # are helpful! Or as @RichardTol says, they "leave ample room for political maneuvering"

Second, as @CarbonBrief is getting at in this great quote below, many economists see the SCC as the worst way to set carbon prices...except for all the other ways. In other words, it’s way better than nothing, and there's no real alternative...

Enter near-term to net zero!!

Ok, the 2nd thing I said I’d try to convince you of: the near-term to net zero (NT2NZ) approach is a good way for policymakers to set carbon prices...

We start by proposing a set of ideal principles for an approach to setting CO2 prices:
-Balances benefits and costs of reductions
-Can credibly point to specific #s
-Transparency
-Alignment with policymaker objectives

Side note: The above list is The Indisputable Truth because it’s been peer reviewed (I kid!), but we’re still really eager to get thoughts and feedback. What's on your list?

Then we set out to build a method that best jointly-satisfies the above criteria. Here are the 4 steps of the near-term to net zero approach:

Step 1. Set a net zero CO2 emissions target.

NET ZERO matters, and not just because it’s a good slogan.
Net zero is ~when temperatures stop rising.
Net zero scales to jurisdictional levels.
Policymakers can set net zero targets based on risks, costs, equity, & other factors.

Step 2. Select an emissions pathway to net zero.

You can make arguments for convex or concave emissions pathways, but you run into the same problems as estimating SCCs: there’s no way to estimate optimal pathways.

The simplicity of a straight-line pathway is an advantage.

Step 3. Estimate CO2 prices that, when combined with other policies, are consistent with the desired emissions pathway in the “near-term.”

The near-term focus avoids estimates that are contingent on highly uncertain long-term projections (more on this later)

Step 4. Repeat Steps 1-3 periodically.

Political challenges aside, this type of adaptive management strategy is no brainer, because uncertainties will resolve over time. As @AndrewDessler says:

Is NT2NZ perfect? It is not. But we argue that unlike the SCC, it is a good way for policymakers to set carbon prices. The table below provides a NT2NZ vs SCC comparison across the ideal principles outlined above.

Finally, isn’t this just cap-and-trade?? Well, sort of, but no. We’re assuming policymakers want a price instrument like a tax (lots of potential reasons) and therefore need to set CO2 prices. But our exercise certainly resembles projecting near-term prices from cap-and-trade...

…On to the #3 thing to try to convince you of! (God bless you if you’ve made it this far.) Using NT2NZ, we find lower net zero-consistent CO2 prices than you were expecting...

Here’s what we did: we estimated illustrative NT2NZ CO2 prices for the United States assuming 3 possible net zero targets for CO2 emissions: 2040, 2050, and 2060, with a (again illustrative) straight-line pathways

We assume the CO2 prices are combined with complementary policies that address separate market failures: energy efficiency policies, air pollution regulations, and early-stage support for the deployment of low-carbon technologies (e.g. EVs, heat pumps, etc.)

Our benchmark scenario finds NT2NZ CO2 prices in 2025 of ~$30, ~$50 and ~$90 per metric ton for net zero targets in 2060, 2050 and 2040, respectively (black dots below). NT2NZ CO2 prices in 2030 are roughly twice as large.

Notice the range of NT2NZ CO2 prices, with a net zero by 2050 target, is roughly consistent with the range of CO2 prices in legislation proposed to the US Congress in 2019 (again, policymakers FTW!)

Sensitivity scenarios capture uncertainty in influential model inputs. Oil prices (this reflects a REALLY wide range) and the stringency of complementary policies have the largest influence.

People are often surprised at how low these estimates are for aggressive net zero emissions pathways. 2 main reasons for that...

First, NT2NZ doesn’t assume a carbon price is the *only* policy. Not only is this not how policymakers think about carbon prices, it’s a very standard tenant of economics: multiple market barriers call for multiple policy instruments...

But most estimates in literature use CO2 prices alone to overcome all barriers to emissions reductions. This approach really doesn't make much sense (though it simplifies things), and of course it produces sky-high CO2 prices..