The 1997 Kyoto protocol was intended to lead to global cap-and-trade. But a year later Cooper pronounced it “bound to fail” and proposed a “common carbon emissions tax,” and Nordhaus called it a “dead duck,” and proposed a “harmonized carbon tax.” Most others lined up behind some form of tradable permit system. Global carbon pricing grew out of Cooper’s and Nordhaus’s proposals.
Global Carbon Pricing: A broad international agreement specifying:
- A target carbon price path that each signatory country will achieve on average
- by using pricing mechanisms such as fossil-fuel taxes and/or tradable permits.
- Green-Fund transfers to induce low-income countries to participate.
While permits, taxes and hybrid schemes all lead to a uniform global carbon price, they all envision unified international and national policies. None envision some countries with tradable permits, some with taxes, and some with both.
Since developing countries reject caps and the EU will not give up its emission trading system, none of these original schemes could succeed. The answer to this conundrum is an international treaty that agrees on a single price (path) but does not dictate national policies. In effect it is a global carbon meta-price, or price target. The global price may not be the price of any particular tax or permit, but all countries would agree to achieve the global meta-price on average. This will lead to a non-uniform carbon price.*
Three Primary Attribute of Global Carbon Pricing
Green Fund Transfers. It has also been agreed by all those favoring global carbon pricing that it will be necessary and desirable to include Green Fund transfers from rich to poor countries. This will allow for commitment to a much higher global price.
A Focal Point for Simpler Negotiations. Although the original arguments for a harmonized tax were based mainly on operational advantages taxes over caps, negotiating advantages played a prominent role from the start. This was mainly due to the outright rejection of caps by developing countries. More recently a new negotiations argument has gained prominence, and may will be the most decisive argument for global carbon pricing.
The Kyoto negotiations proved it is next to impossible to find a focal point for agreement on a formula for national caps. Had such a formula been discovered, this could have reduced cap negotiations to a one or two dimensional negotiating problem, e.g. agree to a single percentage emission reduction below 1990. Instead we have been left with a N-dimensional problem, where N is the number of negotiating parties. Since a single uniform global price is a focal point agreed on by both tax and cap advocates, global price negotiations could be vastly simpler.
A Force Against Free-Riding. And, as Weitzman has argued, negotiating a single price provides “an automatic ‘countervailing force’ against free-riding self interest by incentivizing agents to internalize the [climate] externality.” This should ensure a much strong agreement when a global price is negotiated because voting for a higher price does not simply burden your own country, it harnesses the efforts of all other countries on your behalf. This cooperative force is almost entirely missing from national cap negotiations.
*The non-uniform price of global carbon pricing should be considered an acceptable trade-off because of the enormous negotiating advantage it brings with it, and because it will still be far more uniform than today’s carbon prices. Recently the EU’s carbon prices have ranged from less than $2/ton for coal under the ETS to more than $200/ton on gasoline. Prices below minus $100/ton are common in countries that heavily subsidize gasoline.