Government sets Shadow Price of Carbon

The environment department Defra has issued guidance setting out how a new shadow price of carbon should be used in appraising Government policies. It hopes this will lead to policies and projects which reduce emissions compared to business as usual

Defra says the new shadow price - £26.50 per tonne of CO2 equivalent in 2008 prices - will be applied across government, including cost benefit analysis of carbon-intensive projects such as energy and transport infrastructure. It says it could cause some policies which would increase emissions to be dropped altogether.

The figure is derived from Sir Nicholas Stern’s Government-commissioned review of the economics of climate change, The shadow price is an estimate of the global climate change damage resulting from each tonne of CO2 released, based on the assumption that the atmospheric concentrations of greenhouse gases will be stabilised at 550 parts per million in CO2 equivalent.

This shadow price will rise, reaching the equivalent of £60.80 in 2008 prices by 2050, reflecting that as the world warms and climate changes, each extra tonne of CO2 released does more damage. Defra proposes reviewing the price at the end of this year and then every five years.

The Shadow Price of Carbon replaces the Government’s previous Social Cost of Carbon, which it started using in policy appraisal in 2002. It is higher than the Social Cost and higher than the ‘market price’ of carbon prevailing in the EU Emissions Trading Scheme, currently around €22.5.

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