Out of the Shadows: What’s Behind DEFRA’s New Approach to the Price of Carbon?

This report by the Stockholm Environment Institute critiques the UK Department for Environment, Food and Rural Affairs (DEFRA) for its 2007 approach to setting the shadow price of carbon (SPC). The authors argue that DEFRA's methodology is fundamentally flawed because it bases the carbon price on an assumed optimistic future stabilization trajectory rather than current emissions trends, resulting in a price that is too low to incentivize necessary abatement.

• DEFRA set the official UK government carbon price for internal decision-making at £25 per tonne of carbon dioxide equivalent (CO2e) in 2007.
• The report argues that DEFRA's 'shadow price of carbon' (SPC) is not a true shadow price in environmental economics; while a true shadow price is the intersection of social cost and marginal abatement cost curves, the SPC is simply the social cost of carbon at an assumed stabilization trajectory.
• DEFRA's methodology contains a 'fatal circularity' where an optimistic assumption about future greenhouse gas concentrations leads to a low carbon price, which in turn may fail to discourage projects that increase emissions, making the assumed stabilization target harder to achieve.
• The report identifies three modeling choices that make DEFRA's carbon price lower than the results of the PAGE model used by Stern: basing the price on a 550ppm CO2e stabilization trajectory instead of a business-as-usual trajectory, using different exchange rates, and applying a lower annual uprating (2% instead of the recommended 3%).
• DEFRA's use of a 3.5% discount rate from the Green Book instead of Stern's 1.4% rate biases the appraisal toward weighing near-term costs more heavily than long-term benefits, which the report argues is inappropriate for the 'trajectory-defining' investments needed today.
• The report critiques DEFRA's fear of 'abating too much,' noting that the UK's responsibility for climate change should include historical emissions and the wealth amassed from them, rather than just a share of current emissions.
• The authors argue that DEFRA ignores the importance of the pace of abatement, failing to recognize that early investment in green technology creates positive externalities like job creation and 'learning by doing' that lower future costs.
• The report suggests that the social cost of carbon is often undervalued because it excludes costs such as mass migrations and local wars resulting from flooding and droughts.
• The authors recommend replacing the SPC methodology with one that treats the social cost of carbon as 'vertical' (perfectly inelastic) at a target emissions level, focusing instead on an accurate schedule of marginal abatement costs.

APA

Stanton, E. A., & Ackerman, F. (2008). Out of the Shadows: What’s Behind DEFRA’s New Approach to the Price of Carbon? Stockholm Environment Institute. https://www.sei.org/mediamanager/documents/Publications/Climate/out_of_the_shadows_defra.pdf

Chicago

Stanton, Elizabeth A., and Frank Ackerman. Out of the Shadows: What’s Behind DEFRA’s New Approach to the Price of Carbon? Stockholm Environment Institute, 2008. https://www.sei.org/mediamanager/documents/Publications/Climate/out_of_the_shadows_defra.pdf.

Wikipedia

{{cite report |last1=Stanton |first1=Elizabeth A. |last2=Ackerman |first2=Frank |title=Out of the Shadows: What’s Behind DEFRA’s New Approach to the Price of Carbon? |publisher=Stockholm Environment Institute |date=July 2008 |url=https://www.sei.org/mediamanager/documents/Publications/Climate/out_of_the_shadows_defra.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{stanton2008out, author = {Stanton, Elizabeth A. and Ackerman, Frank}, title = {{Out of the Shadows: What’s Behind DEFRA’s New Approach to the Price of Carbon?}}, institution = {Stockholm Environment Institute}, year = {2008}, month = jul, url = {https://www.sei.org/mediamanager/documents/Publications/Climate/out_of_the_shadows_defra.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }