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

The report analyzes DEFRA's 2007 approach to setting the UK's internal carbon price at £25 per tonne of CO2e. The authors argue that DEFRA's 'shadow price of carbon' (SPC) is fundamentally flawed because it is based on an assumed future stabilization trajectory of 550ppm CO2e rather than the actual 'business-as-usual' trajectory. This circular logic creates a low price that fails to discourage high-carbon projects. The report further critiques DEFRA's use of a 3.5% discount rate over the lower rate suggested by the Stern Review, and argues that the UK's carbon price should reflect historical responsibility and the need for early technological innovation.

• DEFRA's shadow price of carbon (SPC) is not a true shadow price in economic terms because it is derived solely from the social cost of carbon at an assumed stabilization trajectory, ignoring the marginal abatement cost curve in its primary calculation.
• The report identifies a 'fatal circularity' in DEFRA's methodology: by assuming a successful stabilization trajectory (450 to 550ppm CO2e), DEFRA calculates a lower social cost of carbon, which leads to a lower carbon price, which in turn provides insufficient incentive to actually achieve that stabilization.
• DEFRA's carbon price of £25/tCO2e in 2007 is significantly lower than it would be if based on a 'business-as-usual' trajectory; for comparison, the Stern Review's PAGE model suggested £65/tCO2e in 2000 for such a scenario.
• The report argues that DEFRA's choice of a 3.5% discount rate (from the Green Book) instead of the Stern Review's 1.4% rate unfairly discounts future climate damages and biases decision-making against long-term benefits.
• DEFRA's approach is criticized for ignoring the 'first-mover advantage' and the importance of 'learning by doing,' suggesting that a higher initial carbon price would spur essential early innovation in green technologies.
• The report contends that DEFRA conflates equality with equity by assuming a uniform carbon price is fair, ignoring the UK's historical contribution to cumulative global emissions (5%) and its accumulated wealth from those emissions.
• The authors suggest that if a target stabilization trajectory is the goal, the social cost of carbon should be treated as 'vertical' (perfectly inelastic), meaning the carbon price should be set based on the marginal abatement cost required to reach that target.

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} }