A major review of government’s approach to carbon valuation was conducted in 2009, and provides our current basis for valuing carbon in policy appraisal. Further details are available below.
Update to traded carbon values: 2017
Government’s short-term traded carbon values for use in policy appraisal and modelling were updated in 2017 using the latest market data and assumptions. The overall methodological approach as in 2016 has been used for the 2017 update.
Government’s short-term traded carbon values for use in policy appraisal and modelling were updated in 2016 using the latest market data. The same methodological approach as in 2015 has been used for the 2016 update:
Government’s short-term traded carbon values for use in policy appraisal and modelling were updated in 2015 accounting for the latest market data and revised assumptions that included the EU-wide 2030 energy efficiency, renewables and GHG targets. Overall, the same methodological approach as in 2014 has been used for the 2015 update:
Government’s short-term traded carbon values for use in policy appraisal and modeling were updated in 2014 in line with latest market data and revised underlying input assumptions. Some of the underlying modelling assumptions were peer reviewed by 2 independent peer reviewers in parallel with this update. Both sets of values and the peer reviewers’ reports are available:
In 2013, 2 updates to the traded carbon values were made in 2013. The values used in policy and project appraisal were updated with latest market data. In addition, a further set of traded carbon values were developed, to be used for modelling decision-making in energy markets. Both sets of values are available:
The methodological approach underlying the updated traded carbon values used for appraisal was revised in 2012 following the 2011 update. A market-based approach using futures prices was adopted, and is now used for providing the central estimate of traded carbon values. The work on producing updated values for 2012 was peer reviewed by 2 independent peer reviewers whose reports are included with the update.
The 2011 edition of the traded carbon values applied the methodology set out in the 2009 ‘Carbon Valuation in UK Policy Appraisal: A Revised Approach’ (see below for further details) but incorporated new data.
Background information on the 2011 update to the traded carbon values is available:
DECC’s carbon valuation framework underwent a major Review which concluded in July 2009. The review resulted in DECC adopting an approach that moved away from a valuation based on the damages associated with climate change. Instead, it carbon values relate to the cost of mitigating emissions. More precisely, the new approach will set the valuation of carbon at a level consistent with the UK’s short and long-term greenhouse gas emissions targets.
Prior to this, government based its valuation of carbon on estimates (drawn from the Stern Review on the Economics of Climate Change) of the damages associated with the impact on the climate caused by emissions. This is known as the Shadow Price of Carbon (SPC), and is based on the Social Cost of Carbon (SCC). See below for further information on the SPC and SCC.
As part of the process of reviewing the approach to carbon valuation, DECC invited comments from expert academics in this area which were used to help DECC economists finalise the appropriate approach for valuing carbon in UK policy appraisal. These, and the response from DECC, are published along with the document below.
This approach and the values it recommends have been superseded following the review in 2008 and early 2009.
In December 2007, the approach to carbon valuation adopted the use of the shadow price of carbon (SPC) as the basis for incorporating carbon emissions in cost-benefit analysis and impact assessments. However, it takes more account of uncertainty, and is based on a stabilisation trajectory.
The SPC is based on estimates of the lifetime damage costs associated with greenhouse gas emissions, known as the social cost of carbon (SCC).
The following document examines the difference between the 2 methodologies and explains the rationale for adopting SPC values.
Peer reviews by leading academic experts commenting on an earlier draft of the paper were submitted. These and the response by DECC economists are available with this document.
Copyright for these peer reviews resides with the authors.
Carbon valuation for policy appraisal no longer uses the social cost of carbon.
The social cost of carbon (SCC) measures the full cost of an incremental unit of carbon (or greenhouse gas equivalent) emitted now, calculating the full cost of the damage it imposes over the whole of its time in the atmosphere. It measures the externality that needs to be incorporated into our decisions on policy and investment options.
The SCC matters because it signals what society should, in theory, be willing to pay now to avoid the future damage caused by incremental carbon emissions.
Because the amount of damage caused by each incremental unit of carbon in the atmosphere depends on the concentration of atmospheric carbon today and in the future, the SCC varies according to the emissions and concentration trajectory the world is on.
The SCC is conceptually different from:
the market price of carbon, which reflects the value of traded carbon emissions (for example, through the EU Emissions Trading System, EU ETS)
the marginal abatement cost, which reflects the cost of reducing emissions (rather than the damage if those emissions continue)
In January 2002, a Government Economic Service working paper Estimating the social cost of carbon emissions suggested £19/tCO2 within a range of £10 to £38/tCO2. This cost was set to rise at a rate of £0.27/tCO2 per year to reflect the increasing marginal cost of emissions.
Following the publication of the ‘Stern review on the economics of climate change’, and work commissioned by the Inter-departmental Group on the Social Cost of Carbon, the methodological approach was changed to incorporate use of the shadow price of carbon.
The Inter-departmental group on the social cost of carbon commissioned the research.