Rationale and definition:

To reduce greenhouse gas emissions to the socially optimal level, the social cost of greenhouse gas emissions needs to be applied, which in turn requires government policies to apply carbon prices using a range of measures, including but not limited to regulation, taxes, or carbon markets. This indicator measures (in $/tCO2e) the level of effective carbon price in the electricity sector, as defined by the OECD report on effective carbon prices, as a net cost for society for each unit of GHG abatement induced.¹ A similar definition was proposed by the Australian Productivity Commission report on carbon emission policies in key economies.²

Prices on carbon can be explicit, such as carbon taxes or prices of emission allowances in GHG emission trading systems, or they can be implicit, reflecting the cost to society per ton of CO2e abated as a result of any type of policy measure that have an impact on GHG emissions. Comparisons of the effective price put on carbon by policies in different sectors and countries provide valuable insights into the existence of incentives to reduce emissions and the cost-effectiveness of alternative policies to reduce greenhouse emissions, and their potential impacts on competiveness. The numerical results of this comparison should, however, be treated with caution, since there is no one carbon price equivalent that can comprehensively capture what a diverse set of policies in a given country intend to achieve, nor at what cost.

As a starting point, we propose that the post-2015 framework track the effective carbon price for electricity generation. This indicator covers a large share of GHG emissions and is methodologically easier to track since the relevant technologies are global in nature, emissions and policies are concentrated, and some information is available on a comparable basis from governments and international and other organizations.

Disaggregation:

Opportunities for disaggregation to be reviewed.

Comments and limitations:

We underscore that this indicator is agnostic to the type of policies pursued by governments. It does not give preference to taxes, markets or regulatory instruments. So governments retain their full flexibility for identifying and pursing the instruments that are best adapted to their context.

The methodology developed by the Australian Productivity Commission and the OECD could be used as reference. Once better methodologies are available for other emission areas, the indicator can be extended to a wider sectoral focus.

The indicator estimates costs of greenhouse gas abatement and their impact on prices without comparing them to societal benefits.

Preliminary assessment of current data availability by Friends of the Chair:

C

Primary data source:

Administrative data.

Potential lead agency or agencies:

UNFCCC with the IEA.