Lowering emissions without breaking the bank

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Combining an economy-wide carbon price with standard renewable portfolio is far more politically viable as it would significantly bring the price per ton of CO2 down to $6.17/tCO2 from $23.38/tCO2 (in 2011 U.S. dollars) under a standalone carbon-pricing policy—according to a study by researchers from the MIT Joint Program on the Science and Policy of Global Change.

“Globally, it has been politically impossible to introduce CO2 prices high enough to mitigate climate change in line with the Paris Agreement goals,” says Valerie Karplus, co-author and assistant professor at the MIT Sloan School of Management.

“Combining pricing approaches with technology-specific policies may be important in India, as they have elsewhere, for the politics to work.”

The MIT researchers assessed the economic implications of three policy scenarios—carbon pricing, a Renewable Portfolio Standard (RPS), and a combination thereof. For the assessment, they developed an economy-wide model of India with energy-sector detail, and applied it to simulate the achievement of each component of the nation’s Paris pledge.

They found carbon pricing—imposing an economy-wide emissions reduction policy alone to meet the target emissions intensity—would cost the least to India’s economy.

By contrast, an RPS, which would enforce a minimum level of currently more expensive carbon-free electricity, would have the highest per-ton cost—more than 10 times higher than the economy-wide CO2 intensity policy.

“In our modeling framework, allowing emissions reduction across all sectors of the economy through an economy-wide carbon price ensures that the least-cost pathways for reducing emissions are observed,” said Arun Singh, lead author of the study.

“This is constrained when electricity sector-specific targets are introduced. If renewable electricity costs are higher than the average cost of electricity, a higher share of renewables in the electricity mix makes electricity costlier, and the impacts of higher electricity prices reverberate across the economy.”

Combining an economy-wide carbon price with an RPS would, however, bring the price per ton of CO2 down to a far more politically viable $6.17/tCO2from $23.38/tCO2 (in 2011 U.S. dollars) under a standalone carbon-pricing policy.

If wind and solar costs decline significantly, the cost to the economy would decrease considerably; at the lowest wind and solar cost levels simulated, the model projects that economic losses under a carbon price with RPS would be only slightly higher than those under a standalone carbon price.

Thus, declining wind and solar costs could enable India to set more ambitious climate policies in future years without significantly impeding economic growth.

Developed by Singh in collaboration with Karplus and Niven Winchester (MIT joint program principal research scientist and also a co-author of the study), the economy-wide model of India enables researchers to gauge the cost-effectiveness and efficiency of different technology and policy choices designed to transition the country to a low-carbon energy system.

The study was supported by the MIT Tata Center for Technology and Design, the Energy Information Administration of the U.S. Department of Energy, and the MIT Joint Program.

The findings have been published in the journal Climate Change Economics.