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09-06: Global Carbon Pricing: A Better Climate Commitment

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Abstract

Developing countries reject meaningful emission targets (recent intensity caps are no exception), while many industrialized countries insist that developing countries accept them. This impasse has prevented the Kyoto Protocol from establishing a global price for greenhouse gas emissions.

This paper presents a solution to this dilemma—allow countries to commit to a binding global carbon-price target. This commitment could be met by cap and trade, a carbon tax, or any combination. This would allow developing countries to accept the same carbon price as the most advanced countries instead of accepting a cap that is as low as U.S. emissions in the 1800s. And it would allow the U.S. and the E.U. to keep their cap and trade schemes. The paper defines a carbon-price target, and shows how compliance could be induced using both carrots and sticks.

We also demonstrate that carbon pricing can be guaranteed to be inexpensive under a carbon-price target. A Green Fund is suggested that reinforces rather than subverts cooperation on global carbon pricing. The combined cost of a $30/ton price target and the Green Fund is only 23 cents per person per day for the United States and is negative for India. Together, these advantages should greatly increase the chance that developing countries will commit to a substantial carbon price, and this should increase the chance of cap and trade passing the U.S. Senate.

Such a policy would also reduce the world oil price. For China and the United States, this savings might well cover the full cost of the proposed initial climate agreement.