The Cost of Carbon

by | Traveling

If all the honey producing bees in the USA disappeared today, the cost to the economy would be $25 Billion. Not because there is $25B worth of honey sold per year (in fact there is only $290M sold) but because bees serve an invisible but highly needed function of pollinating agriculture crops.  Without bees we humans would somehow need to mechanically pollinate crops.  These are called ecosystem services which are provided free by nature. A number of groups from the “Millenium Ecosystem Assessment” and others are providing these numbers so as to highlight the fact that we get (a lot) of services for free from nature and if we destroy them we are going to be eventually paying for them.

One such challenge is how to economically quantify the effect of carbon emissions on the environment  and human life in general. The most talked about effect is the increase in global temperature which can have adverse affects on sea level, quality of life etc.  Although challenging to put a dollar figure on the cost of carbon, recently as I was waiting for a soccer practice to end, a random conversation with a neighbor got me reeling on how the financial implications around the cost of carbon are very real.

For the 2013 year, Tesla Motors  announced that they were able to make over $100 million in revenue just from selling carbon credits it earns (because all its cars are electric and zero emission and each car earns them 7 credits) to other car makers such as Honda and Ford.  This was a policy set in place by California to encourage car makers to produce more electric vehicles and if not, they would need to pay up to $5000 per vehicle not produced.  If one was to do some rough calculations, the state of California is saying that the cost of emitting one ton of C02 from a vehicle is $700.   This is probably the most visible example of how the cost of carbon is affecting the financials of some very large companies.

But it does not stop there, Exxon Mobil VP in December 2013 announced for forecasting purposes that they are assuming $60 per ton of carbon expenses in their financial forecasts in the next 20 years.  ConocoPhilips is costing its oil projects to be around the $40 per ton and even Disney is now budgeting for the cost of carbon in their projects.  In a recent conversation with a Canadian financial institution they actively buy carbon credits to reduce their carbon footprint.

On average a typical American emits 10 tons of C02 per year through all its activities (heating, electricity, transportation etc) and although it is hard to grasp the significance of that, a typical American car emits 4-5 tons of C02 per year.  If we could somehow aggregate this carbon at an individual level and allow people to sell their “carbon savings”, the market would be 100’s of billions of dollars.  The bottom line is that cost of carbon for individuals, companies and governments is real today.

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