Reader David Jeffery at Oikos posted this graph taken from The Economist a few weeks back. I didn't read the original article, so I'm not sure of all of the broader points being made, but the graph does illustrate something I try to convince basic econ students all the time: Supply curves exist!
The graph depicts the additional (marginal) cost of reducing carbon by 1 ton by different methods. Another way of saying that is the graph depicts the potential supply of carbon abatement. As you move left to right, carbon abatement becomes more expensive.
As David points out, the graph raises some interesting questions. If carbon were priced properly, we would expect to see the cheapest abatement technologies utilized first. In fact, based on this graph, there are abatement technologies out there right now--for example better insulation, efficient lighting--that would save money relative to the current technologies. To me that says there must be a reason the market is failing to allocate these resources properly.
Also, according to the graph, the technologies we hear most often for carbon abatement are the most expensive--wind, solar, sequestration. Does that mean we have exhausted the cheaper technologies and are ready to move up the supply curve to more expensive technologies--assuming the demand for abatement intersects somehere to the right of nuclear technologies? Or are we missing low-hanging fruit?
A cap and trade system would answer this question really quick. I'm guessing there are really cheap ways to reduce carbon emissions that aren't being used right now. A cap on emissions would result in a scramble for the low-hanging technologies. But since those are surprisingly inexpensive and possibly even profitable, we would see a very low price for carbon permits in early stages. According to this graph, only if we were looking at massive scale carbon cutbacks would we see the price of permits rise substantially.
This is similar to what we saw with the sulfur dioxide cap and trade system. In the early years, power producers found that it was easier-than-thought to reduce SO2 emissions, resulting in lower than expected permit prices and significant banking of permits. If the grpah is true, we might anticipate something similar with a carbon cap and trade. Easy pickin's in early years, low permit prices and time to adapt.
