Flexible Global Carbon Pricing
The climate game is a multi-player prisoners' dilemma. That makes cooperation unlikely without:
The values of $30/ton and $2/ton are strictly for illustrative purposes, as PT and G must be selected by international agreement. The price target, PT, is the hit with using the pricing incentive, which works on a country's actual and target revenues.
Rule 1: A country's target revenue = R* = PT× E, where E = total national carbon emission. It's actual carbon revenue is R.
Carbon revenues can come from cap-and-trade, fossil-fuel taxes and feebates. As with caps, over- and under-achievement of the target price (or equivalently, target revenue) is inevitable, and as with caps, an over-achiever can sell carbon-revenue credits and an under-achiever must buy them. This works through a central market in which the effective price, Z, is adjusted annually.
Rule 2: A country is paid Z × ( R – R* ), where Z ~ 10%.
Note that if actual carbon revenue R < R*, then the country is paid a negative amount, or in other words must pay. The parameter Z is set automatically to control the global average price of carbon. Increasing Z rewards over-achievers more and charges under-achiever more, so raising Z encourages all countries to raise their carbon prices and collect more carbon revenue. The leads to
Rule 3: Adjust Z annually to make the global average carbon price, P, equal PT, the price target.
This completes the main carbon pricing mechanism, so we turn now to the Green Fund, which transfers funds from high-emission countries to low-emission countries according to Rule 4.
Rule 4: A country is paid G × ( Eg – E ), where E is the country's and Eg is the world's emissions per capita.
Rule 4 holds for high-emission countries and for low-emission countries that are collecting their target carbon revenues. But the Green Fund should be used to provide an incentive for low-emission countries to participate and comply with global carbon pricing, and this is accomplished with the Clean Development Incentive.
Rule 5: If a country's carbon price, P, is less than PT, its Green-Fund payment is scaled back by: P / PT.
This completes the basic rules of Flexible Global Carbon Pricing.