In my blog about aviation carbon emissions in August, I noted that one commentator was arguing for a near term price of carbon of  €100/tCO2, based on an expected shortage in the market that serves the EU Emissions Trading Scheme.   A contrasting view comes from Professor Michael Grubb, Chief Economist at the Carbon Trust, who expects prices in the lower part of the range €20-40/tCO2.

The basis for Michael Grubb’s view is interesting.   He argues that while future prices in any market are uncertain, history reveals two patterns of great relevance to carbon price projections.   First, the cost of environmental controls has been littered with inflated projections – for instance the costs of reducing SO2 emissions in the US trading scheme have been half to a third of initial estimates. The technological responses were underestimated.  Second, energy forecasts have been embarrassing in their errors, for example vastly underestimating the decoupling of energy demand from economic growth.  Such forecasts are based on backward looking modelling which finds it difficult to take account of changes in the underlying driving forces of economic growth.

The prospects for low-carbon transport technologies depend on the future price of both oil and carbon.   Given the great uncertainty in both of these, some kind of financial incentive looks to be necessary if such new technologies are to be developed and marketed.