DECC's approach to carbon valuation underwent a major review which concluded in July 2009. The new approach moves away from a valuation based on the damages associated with climate change. Instead, it refers to the cost of mitigating emissions.
More precisely, the new approach will set the valuation of carbon at a level consistent with the UK short and long-term targets.
Previously, we have based our valuation of carbon on estimates (drawn from the Stern Review on the Economics of Climate Change) of the damages associated with the impact on the climate caused by emissions. This is the so-called Shadow Price of Carbon (SPC).
As part of the process of reviewing our carbon valuation approach, DECC invited comments from expert academics in this area. Peer review comments described the proposed revisions. To help DECC economists finalise the appropriate approach for valuing carbon in UK policy appraisal, we asked peer reviewers for their thoughts on the document. These, and the response by DECC economists, are published here:
The updated short term carbon values take into account the impact of the recession, changes to the scope of the EU ETS and new research on abatement options available in the EU industrial sectors.
Policies and projects are required to value any changes in emissions. This ensures that project and policy appraisals account for their climate change impacts:
- Where a policy reduces emissions valuing, this change will increase the benefits of the policy
- Where a policy increases emissions, carbon valuation will increase the costs of the policy.
The values published in the carbon valuation paper, and provided in summary form in the brief guide below, should be used in policy appraisal and evaluation, in accordance with HM Treasury’s Green book and the current Inter-departmental Analysts Group (IAG) guidance.