Lesson Plan: Carbon Pricing: Shadow and Market Prices

Here is a step-by-step guide to using this lesson plan in the classroom/laboratory. We have suggested these steps as a possible plan of action. You may customize the lesson plan according to your preferences and requirements.

Step 1: Topic introduction and discussion (Go to the Reading)

1. Use the reading, ‘Carbon Pricing Dashboard’ by World Bank to introduce the topic of carbon pricing.
2. Play the embedded video, “Climate Countdown: Carbon Pricing” by Connect4Climate (~5 min), to explain the importance of carbon pricing.
3. Use the sub-sections in the reading resource to describe what is carbon pricing, what are the main types of carbon pricing, and why it is important for governmental or organizational policy making.
4. Use the text to also distinguish between international and national/subnational/regional carbon pricing.
5. Finally, introduce the concept of internal carbon pricing and the factors that determine it.

Step 2: Extend the understanding (Go to the Reading)

1. Use the reading, ‘The Social Cost of Carbon and the Shadow Price of Carbon: what they are, and how to use them in economic appraisal in the UK’ by Richard Price and Simeon Thornton and Stephen Nelson, Economics Group, Department for Environment, Food & Rural Affairs (Defra), London, to introduce the concepts of shadow prices and market prices and explain the link between them.
2. Use this paper to explain the need for climate informed policies in the economic assessment of a country.
3. Given its significance in greenhouse gas emissions, use carbon as an example to explain the social costs of carbon and its shadow price in internal carbon pricing.
4. Further, compare the marginal abatement costs and social costs of carbon for different stabilization goals as determined by the Stern Review.
5. Finally, introduce the concept of discounting and discount rates for calculating carbon prices.
6. This reading uses the United Kingdom (UK) as the area of study but this reading can be discussed in the context of other regions.

Step 3: Classroom/Laboratory Activity (Go to the Carbon Pricing Dashboard)

1. Use the interactive map and data, ‘Carbon Pricing Dashboard- Map & Data’ by World Bank, to visualize the information available on the carbon pricing initiatives implemented by several nations over the past thirty years.
2. Use the tabs to navigate to data available on the greenhouse gas emissions, the carbon prices implemented across different countries and the value of the carbon pricing initiatives selected (ETS or Carbon Tax).
3. Encourage your students to explore different regions or countries, download the data/graphs on their carbon pricing data and draw comparisons to improve understanding of the real-world scenario of carbon pricing across various geographies.

Suggested questions/assignments for learning evaluation :

1. Carbon pricing is used as an instrument for making climate policies. Explain.
2. What is the difference between market prices and shadow prices?
3. What is the importance of shadow pricing in evaluating the costs of greenhouse gases?
4. In the context of climate change, what are discount rates, marginal abatement costs and statistical value of life?

The tools in this lesson plan will enable students to:

1. explain the concept and importance of pricing carbon
2. evaluate carbon pricing as an instrument for climate policy packaging
3. describe shadow prices in environmental economics
4. distinguish between shadow price, social cost and market price
5. define discount rate, marginal abatement costs and statistical value of life

If you or your students would like to explore the topic further, these additional resources will be useful.

A teaching module, ‘The Economics of Global Climate Change’ by Jonathan M. Harris, Brian Roach and Anne-Marie Codur, Global Development and Environment Institute, Tufts University, USA.