A successful global carbon-price treaty should meet these requirements:
- Start small.
- Specify a single global price path.
- Specify rules for Green Fund transfers.
- Define compliance.
- Define the consequences of non-compliance.
- Define voting rules for periodic adjustments.
1. Why start small?
Negotiating a treaty with many parties is difficult, and holding such a treaty together can be more difficult. We propose that an initial treaty include only the EU, US, China, and possibly India. Those four together account for nearly half of all greenhouse gas emissions.
At this size, it should be possible to hold the treaty together without penalties for non-compliance. Each party will know that if it reneges, the treaty will most likely fall apart and they will suffer the inevitable climate consequences.
Without India, there would be no need for a Green Fund and with India, Payments would initially need to be at most about a billion dollars/year — a trivial sum.
Once this core agreement is in place and stable, more countries can be invited to join, and quite a few would be willing to do so voluntarily. This would provide a base that could apply any necessary pressure to corral most of the others, with the possible exception of Russia and OPEC.
2. What’s a single price path?
Nordhaus specifies that the price path should define a minimum price, and that looks politically sound. The path should be upward sloping, and should probably extend well into the future to provide guidance for investors. However, adjustment is inevitable, and only the path until the next vote can be counted on. The voting interval could reasonably be maintained at five years.
3. What should Green Fund rules accomplish?
The Green Fund rules should have a simple objective—maximize the global carbon price. This is possible because the agreement (price and GF generosity combined) is voluntary.
If the GF rules are too generous, rich countries will not go along with a high price, and if they are too stingy poor countries will not implement a high price. So GF generosity could be chosen to get the most emissions covered by the highest price. There will be some compromise level of generosity that accomplishes this.
One possible GF design is described here.
4. What constitutes compliance?
According to Nordhaus, “Implementation [of the price] would be under the control of individual countries.” They could adopt any mix of emission caps and carbon taxes, and possibly other, similar options.
Emission caps can produce unpredictable prices, but these can easily be adjusted from year to year, and they can be supplemented with carbon taxes. High prices should be bankable and low prices should be tolerated as long as the average price comes into compliance every three years or so.
Monitoring a national carbon price need not mean checking prices. The average carbon price is simply: (carbon revenue)/(carbon emissions). Emissions must be measured for caps, and this mechanism is already in place. Carbon revenue would be monitored by the International Monetary Fund. Countries receiving Green Funds would have a strong incentive to cooperate with monitoring since that would be a precondition for receiving the funds.
Countries can dispose of carbon revenues as they see fit.
5. Should there be penalties?
Enforcement would be nil when the treaty is initiated with only three or four parties. Once the Green Fund is in place, that would constitute positive enforcement. Compliance with the price is reward with GF payments for poor countries.
Once most of the world’s economy was part of the treaty and in compliance, the remaining, recalcitrant countries might be induced to join with trade penalties as Nordhaus suggests.
Who gets to vote?
Those in compliance should get to vote, perhaps in proportion to their populations. How to vote on the global price is a bit tricky. It probably can’t be a simple majority that is needed, because those opposed to a price that high might drop out. This will require more thought, but there are probably several simple rules that would do a reasonably good job of getting the strongest possible treaty.
What about carbon capture and storage?
CCS may become essential. Since it is a negative emission, it should be paid the carbon price. This approach will provide the correct incentive.