Overview FAQs
What Is Carbon Pricing?
Carbon pricing simply puts a price on CO2 (and similar) emissions, instead of telling people how much they can emit. With pricing, if you are willing to pay, you can emit more.
So both cap-and-trade and a carbon tax are forms of carbon pricing, and so are a few other related measures.
The beauty of an international commitment to a carbon price, say $40/ton, is that it avoids the fights over caps versus taxes. Every country can meet its $40/ton commitment with either a cap or a tax or some combination. If it uses pure-cap-and trade it will need to adjust the number of permits it issues from year to year to make sure it averages $40/ton.
Why Is a Global Price so Important?
Economists love to tell you how much more efficient prices are than command-and-control quantity limits. By and large, they are right. But that misses the point. The point is that for 30 years the world has failed to reach a meaningful agreement, and this is largely because they have been aiming for a quantity agreement rather than a price agreement.
Reaching a global agreement is far more important than saving money on an agreement that never happens. This was explained by Stiglitz in his 2006 chapter, “Saving the Planet,” in his book Making Globalization Work.
Is a Carbon Price Strong Enough?
Low prices are how fossil fuels took over the world. High prices are just as powerful and work in the opposite direction. Because prices are pretty efficient, if a price of $30/t saves 1Gt of carbon, then that price save 1Gt and at a lower cost than any other method. So yes, command-and-control could save 1Gt, but it would cost somewhat (or a lot) more.
So the efficiency of pricing means that any emission reduction that can be achieved with quantity limits can be achieved more cheaply with a price. Economics tells us that anything command-and-control can do pricing can do cheaper.
Anything you can afford to do with command-and-control you can afford to do with pricing and you’ll have money left over.
What’s in a Global Price Treaty?
- A single (global) price path for all participants.
- Rules to define compliance with the price path.
- Rules for Green Fund transfers from rich to poor countries.
- Voting rules to adjust the agreement periodically.
Why Include a Green Fund?
Asking India to stop increasing its emissions, is like asking the US to dial its emissions back to where they were before sometime before 1900 (on a per-person basis). As India points out, for the next few decades, this would be like asking it to nearly stop all economic growth, while it was in extreme poverty.
That’s the problem with a quantity agreement. But if we ask India to agree to the same price as the U.S. that does not require it to stop its economic growth—in fact, it could grow to become as rich as the US under that agreement.
But still, imposing a tax on its carbon emissions does pose an economic burden on India, and given its poverty, this is still unfair even after taking into account that all of the taxes collected remain in India and can be used to fight poverty. Because of this, it seems only fair that the richest nations should help the poor countries out financially if they comply with the global price agreement. That’s a good trade for both sides.
Why Is Pricing Stronger than Cap-and-Trade?
If China had agreed to the cap-and-trade deal proposed by Jeffery Frankel, a Harvard prof specializing in how to make C-T deals that were “completely safe,” China would have ended up having to buy $100 billion worth of international carbon permits per year by 2010.
This is an inherent problem with setting strong quantity limits. As a result countries will only agree to weak limits, or they will accept a strong limit because the agreement itself is weak and can be easily broken. Price agreements can be much stronger because they are inherently much less risky.