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Paying for Pollution: the shadow price of carbon
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Paying for Pollution: the shadow price of carbon

As concerns grow over the impacts of climate change, policy makers and industries are looking for ways to effectively gauge the economic cost of carbon emissions, related to environmental and social impacts. Here, Jesse Hamman shares her thoughts around the shadow price of carbon.


As concerns grow over the impacts of climate change, policy makers and industries are looking for ways to effectively gauge the economic cost of carbon emissions, related to environmental and social impacts. Here, Jesse Hamman shares her thoughts around the shadow price of carbon.

The social cost of carbon measures the global damage of carbon emissions in the atmosphere to determine the scale of negative externalities that policy and investment need to address in order to preserve future generational growth. As social cost benefits are difficult to quantify in monetary terms, the shadow price of carbon can be described as the estimated marginal abatement cost of reducing emissions required to achieve the social cost reduction goals.

In early 2019, the European Bank for Reconstruction and Development (EBRD) set a market value to carbon emissions to reflect how much they cost society. According to the article ‘What is shadow carbon pricing?’ (Vanora Bennett, 23 January 2019):

In setting the ‘shadow price’, the EBRD follows recommendations by the High-Level Commission on Carbon Prices, which… recommends that carbon should be priced at US$ 40-80 in 2020, rising over time and reaching US$ 50-100 by 2030.

Figure 1: Global CO2 Emissions by Sector (Architect 2030, 2019)

Building design, construction and operations have large impacts on global carbon emissions (CO2). The United Nations (UN) Environment Global Status Report 2017 (Abergel, Dean and Dulac, 2017) identifies the building sector as contributing 39% energy related greenhouse gas emissions (GHGs) of which operational energy accounts for 28%, and new construction embodied energy for 11% (11 GtCO2). This suggests that there is a blind spot in the construction sector with regards to shadow cost abatement which needs to be addressed.

Countries have started to implement building sector policy instruments demanding change from government, industry and the public to ensure that GHGs are phased out by 2050, thus safeguarding global temperatures below the critical 2°C (Pachauri, et al., 2014). Factors such as willingness to pay for carbon emissions reduction and political will are critical as countries pull together to meet the Paris Agreement of 2015. To date, country leaders in renewable energy transitions include the Nordic countries, various European countries and the UK.

Procurement can be used as a strategic instrument critical to ensure lower GHGs during construction. Traditional building material procurement relies on single contract proven technologies in a principled project execution; whereas strategic building material procurement shifts the focus to an innovative and integrated approach where all team members work together to achieve functional performance-based goals.

In this way, the stick becomes the policy that drives sustainable procurement and the carrot becomes the economic incentives and taxation reductions that push construction teams towards circularity adherence using secondary building materials for reduced shadow costs (Rijkswaterstraat Ministry of Infrastructure and the Environment, 2019).

Figure 2: Building sector energy-carbon intensities by country 2015 (Abergel, Dean and Dulac, 2017, p.17)

Coal-hungry South Africa (SA) introduced a carbon tax on 1 June 2019 to be levied on GHG emitting fuel sources. “President Cyril Ramaphosa has communicated the urgent need for action around the climate crisis,” (WWF, 27 May 2019).  A lowered tax rate of R46 per ton of carbon dioxide is set to take effect for the first 3 (three) years; and will rise to R120 per ton of carbon dioxide by 2022 (AFP, 27 May 2019). The SA market requires eco-innovation support to ensure that locally produced, lower GHG materials are manufactured and used on site, with minimal reliance on finished imported products. This carbon tax is the first step in the right direction, which should ideally be followed by shadow cost reduction relief to construction teams that procure strategic building materials with lower GHG impacts.

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