How do we set a price on carbon?

The authors argue that the failure of markets to price carbon emissions leads to excessive fossil fuel use and global warming. They propose a 'back-of-the-envelope' rule to determine the optimal social cost of carbon, which they claim is a robust and transparent alternative to 'black box' integrated assessment models like DICE. Using a benchmark of 2% trend growth in living standards, an intergenerational aversion of 2, and no discounting of future welfare, the rule suggests an initial optimal price of $15 per ton of emitted CO2. The document demonstrates that this rule accurately predicts the timing of energy transitions and the necessary carbon budget to avoid the 4 degrees Celsius warming associated with 'business as usual' scenarios.

• The authors propose a simplified rule for the global carbon price based on geophysical factors, such as carbon dissipation into oceanic sinks, and economic parameters including long-run productivity growth, time impatience, and intergenerational inequality aversion.
• Under a benchmark scenario with 2% annual trend growth in living standards, an intergenerational aversion of 2, and no discounting of future generations' welfare, the optimal price is $15 per ton of emitted CO2, $55 per ton of emitted carbon, or $0.13 per gallon of gasoline, increasing annually by 2% in line with world GDP.
• The optimal carbon price is sensitive to ethical and economic assumptions: discounting future welfare at 2% per annum reduces the price of CO2 to $5.5 per ton, while increasing intergenerational inequality aversion to 4 lowers the initial price of carbon to $10 per ton.
• The proposed rule accurately predicts the optimal carbon budget and energy transition timing; while 'business as usual' leads to 4 degrees Celsius of warming and 1640 Giga tons of carbon burnt, the rule suggests a budget of 960 GtC and brings the transition to a carbon-free era forward by approximately 18 years.

APA

Rezai, A., & van der Ploeg, R. (2015). How do we set a price on carbon? World Economic Forum. https://www.weforum.org/stories/energy-transition/how-do-we-set-a-price-on-carbon/

Chicago

Rezai, Armon, and Rick van der Ploeg. How do we set a price on carbon? World Economic Forum, 2015. https://www.weforum.org/stories/energy-transition/how-do-we-set-a-price-on-carbon/.

Wikipedia

{{cite report |last1=Rezai |first1=Armon |last2=van der Ploeg |first2=Rick |title=How do we set a price on carbon? |publisher=World Economic Forum |date=15 January 2015 |url=https://www.weforum.org/stories/energy-transition/how-do-we-set-a-price-on-carbon/ |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{rezai2015how, author = {Rezai, Armon and van der Ploeg, Rick}, title = {{How do we set a price on carbon?}}, institution = {World Economic Forum}, year = {2015}, month = jan, url = {https://www.weforum.org/stories/energy-transition/how-do-we-set-a-price-on-carbon/}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }