Negotiate One Price or Many Quantities?
Committing to a global carbon price (as opposed to a harmonized tax) is quite a new idea, and few have considered its implications for the negotiation process. Unlike a global cap, a global carbon price was specifically designed to improve the prospects of reaching agreement on a strong climate treaty.
Among those who have considered both problems — negotiating a uniform price treaty and negotiating a multi-quantity treaty — views seem closely aligned.
To summarize, those considering the negotiation game make three main points. (1) After enormous effort, no one has found a vaguely acceptable formula for sharing a global quantity cap, so there is no defense against free-riding in quantity negotiations. (2) The Kyoto approach has steadily disintegrated for 20 years with the result that coordinating on quantities is no longer considered. (3) There has, as yet, been no consideration of the newly proposed global-pricing approach.
The Central Argumet for a Global Price Commitment
Those criticizing a global cap-and-trade system (and pledge and review) and who favor an efficient global price on carbon, are now proposing a global price commitment.
This is not a harmonized carbon tax.
The new proposal is that all countries be allowed to choose between fossil taxes, caps, hybrids, and possibly even other pricing mechanisms like fee-bates.
Negotiations that just might work
There are quite a number of arguments in favor of this approach and it has a number of difficulties. But the decisive factor for all economists (and a couple of non-economists) proposing it, is the following. Negotiating one global price will, as Weitzman says, create a countervailing force that largely neutralizes the free-rider problem.
Negotiating a single price instead of many quantity targets should also simplify negotiation, especially since the price-level could be decided by vote, a simple procedure that seems impossible with many quantities.
So the bottom line argument for price is that it might reverse a twenty-year slide toward desertion caused by the insistence on negotiating individual caps for each country. A Nordhaus has said, this is like a club that tries to set a different membership fee for each member.
As Tirole has pointed out, waiting for a quantity agreement, actually harms the outcome of the eventually result as well as causing countries to do less than is in their narrow self interest in the mean time. Simply deciding to negotiate a common price would put an end to these ultra-perverse incentives.