4. How It Works - Energy & Climate

FGCP Summary

   P^T = Global Carbon Price Target
   G  = Green Fund incentive rate
   Z = Global pricing incentive rate
   P = Global average carbon price
   Eg = Global emissions per-capita
   E = National emissions/capita
   R = National carbon emissions
   P = National carbon price, R/E

The Carbon Pricing Incentive:

A country's target revenue/capita:

Rule 1: R* = P^T × E

A country's pricing incentive payment per capita

Rule 2: paid = Z × (R – R*)
Rule 3: Adjust Z so P hits P^T

The Clean Development Incentive:

Rule 4: paid = G × ( Eg – E )
Rule 5: Reduce payment by P/P^T

4. How It Works

Flexible Global Carbon Pricing

The climate game is a multi-player prisoners' dilemma. That makes cooperation unlikely without:

Inducements to cooperate -- carrots and sticks
High benefits and low costs of cooperation
Simple, low-conflict parameters to negotiate
A widely held perception of fairness

FGCP achieves these goals using a simple two-part design. Each part is controlled by a single global parameter determined by international negotiation, as illustrated below:

The values of $30/ton and $2/ton are strictly for illustrative purposes, as P^T and G must be selected by international agreement. The price target, P^T, 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* = P^T× 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 P^T, 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 P^T, its Green-Fund payment is scaled back by: P / P^T.

This completes the basic rules of Flexible Global Carbon Pricing.

TwoGlobalsDiagram.jpg

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Steven Stoft,

Mar 14, 2010, 9:53 PM

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