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09-07: Price Is A Better Climate Commitment

Cramton, Peter and Stoft, Steven (2010) "Price Is a Better Climate Commitment," The Economists' Voice: Vol. 7 : Iss. 1, Article 3.
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Developing countries reject meaningful emission targets (recent intensity caps are no exception). This prevents the Kyoto Protocol from establishing a global price for greenhouse gas emissions and leaves almost all new emissions unpriced.

This paper proposes a new pair of commitments—a commitment to a binding carbon-price target and to a Green Fund financed by a form of carbon pricing. The result is a price mechanism that neither requires developing countries to accept emission caps nor requires industrial countries to accept carbon taxes.

We demonstrate that the cost of complying with these commitments can be guaranteed to be inexpensive. 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. 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.