Although UN negotiations are now focused on individual country commitments, economists almost universally favor a uniform carbon price. This leaves two main choices:
- Quantities: National permit allotments (aka global cap-and-trade)
- Price: A uniform price commitment (aka global pricing)
Under global cap-and-trade, a country’s emissions are not capped (only the world is capped) and it does not have any meaningful target. Rather countries receive a certain number of free permits to emit, which they can use, buy more of, or sell.
Under scheme 2, a country can use national or regional cap-and-trade, fossil taxes, or any hybrid scheme in order to achieve the global price.
Negotiating an Agreement
A poor approach to negotiations can result in a nearly useless agreement or block any agreement at all. For 30 years the quantity approach blocked any global agreement, but now we finally have the Paris Agreement. It has no teeth and every country can “do their own thing” to such an extent that comparisons are often impossible.
So far it shows no signs of charting a reasonable course. Instead, countries are making promises that won’t come due for 30 or 40 years when those who made them are long gone.
Pro Price: The argument for negotiating a global price is that (1) it simplifies negotiation, and (2) it causes countries to think globally. This approach was specifically designed to make negotiating a strong agreement easier.
Pro Permits: The argument that a strong quantity agreement is easier to reach has not been made. This approach was not designed with negotiations in mind.
When negotiating a global price, countries tend to want the best price for the world because everyone is in the same boat — all contribute the same, and all share in the benefits created by everyone. No one thinks of arguing for a super low price because that means they get almost no benefits from others.
When negotiating their own nation’s emission-permit allotment under global cap-and-trade, every country knows it will be best off if it gets as large an allotment as possible. Then it won’t have to abate much and may be able to sell surplus permits. But if all get a large allotment, then the global cap (the total of all permits) will be so high it does no good at all.
Conclusion
In short, negotiators for a global price want the best price for the planet. But negotiators for a county’s permit allotment all want to push for a weak treaty by asking for as many permits as they can get.
The result is a global-price treaty can easily be strong, and a global cap-and-trade treaty must fight against every country’s self-interest.
Here you can find further discussion and a sample of quotes from well-known economists.