Views of Axel Ockenfels on Carbon Pricing
The following quotations are significantly incomplete.
Axel Ockenfels. Director of the Cologne Laboratory for Economic Research. Winner of the 2005, €1.5M Leibniz Prize, and Contributing Author for IPCC. [ Negotiations, Treaty Mechanics, Comparisons, References ]
Summary of Carbon Pricing Views
2012-05 Ockenfels, Axel, Peter Cramton and Steven Stoft. “How to Negotiate Ambitious Global Emissions Abatement-05 – A Statement of Key Principles and an Explanatory Note.” (10 pp.) Working paper.
Fundamentals of Global Carbon Pricing:
1. The International Climate Problem Is a Free-Rider Problem
Abating their own emissions to the globally optimal level is against the self-interest of countries acting individually, because, for example, a country that makes up one percent of the world will receive only about one percent of the climate benefit from their individual effort, with ninety-nine percent going to others.
2. A Global Carbon Price Is Needed
Aligning self-interests by using a global price agreement is vastly superior to depending on altruistic political will to overpower unmodified self-interest.
3. Cap-and-Trade Can Comply
These commitments would: 1. Accommodate each country’s combination of cap-and-trade, fossil-fuel taxes, and use of carbon-pricing revenues.
4. Green Fund Transfers Are Essential
Rather, the common commitment should include a Green Fund formula for providing assistance from richer, high-emission countries to poorer, low-emission countries. In this way, the common pricing commitment would respect the UN’s principle of “common but differentiated responsibilities.” … This requires a two-step design. First the Green Fund formula is selected, and second, countries nominate their highest acceptable global price target, taking the Green Fund formula into account.
The linkage that solves the differentiated-responsibilities problem works as follows: The Green Fund formula links payments to (1) a generosity index and (2) to the global price level. When either is increased, Green Fund payments increase. This linkage brings about a fair differentiation of responsibilities through a natural system of checks and balances as follows.
1. A Price Simplifies Negotiations
2. A Global Price Provides a Countervailing Force against Free Riding
“Lack of political will”—an unwillingness to go beyond self-interest—is now the number-one diagnosis for the poor performance of international negotiations, and “political will” has become a euphemism for altruism. Of course, there is a lack of political will (altruism); that is the nature of the public-goods (commons) problem described by political science and economics. But this diagnosis suggests the wrong solution. … While altruism is helpful, those counting on political will are missing a most important concept concerning practical cooperation: Contracts, treaties, and agreements can change self-interest.
What matters is that the negotiations respect what is known about solving a problem of the commons, especially since climate is the most difficult such problem ever encountered. ||| Those who know that cooperation is the crux of the climate problem must lead the debate over how international negotiations should evolve.
3. The Benefit of a Focal Point
4. Why Caps Appear Unfair to Poor Countries
5. International vs. National Cap-and-Trade
To expand such an agreement without reducing the price commitment, it may be necessary to use some form of trade restrictions, such as a “border carbon adjustments” both to protect insiders and to motivate outsiders to join.
3. Uniformity of the Global Price
4. Hitting a Target with a Price
5. The Cost of Pricing is Low
6. The Use of Carbon Revenues
7. How to count exiting carbon taxes
8. Who Should Initiate the Treaty?
1. Price Volatility
2. International Wealth Transfers