Views of Peter Cramton on Carbon Pricing
The following quotations are significantly incomplete.
Peter Cramton: Professor of Economics, University of Maryland [ Negotiations, Treaty Mechanics, Comparisons, References ]
Summary of Carbon Pricing Views
References and Full-Text Links
2012-04 Cramton, Peter and Steven Stoft. “How to Fix the Inefficiency of Global Cap and Trade-04” (5 pp.) The Economists’ Voice, 9.
2012-03 Cramton, Peter and Steven Stoft. “Global Climate Games How Pricing and a Green Fund Foster Cooperation,” (10 pp.) Economics of Energy & Environmental Policy, 1:2.
2010-02 Cramton, Peter and Steven Stoft. “Price is a Better Climate Commitment” (7 pp.) The Economists’ Voice, 7:1, February.
Fundamentals of Global Carbon Pricing:
1. The International Climate Problem Is a Free-Rider Problem
The real problem is cooperation in the most uncooperative of games—a public-goods game with many players facing distant and uncertain global payoffs. [2012-03]
2. A Global Carbon Price Is Needed
Our prescription is to replace the game with one that directly negotiates a global price. A design based on a common price instead of on individual caps, if properly structured, can dramatically change the incentives of the players by aligning their interests. [2012-03]
3. Cap-and-Trade Can Comply
“We recommend a global price target, because equal pricing is a focal point in the global climate game. … Commitment to a price target does not require national carbon taxes, or even fossil-fuel taxes. Cap and trade can be used to meet a price target.” (How to Fix the Inefficiency of Global Cap and Trade, 2012-04)
4. Green Fund Transfers Are Essential
When national income diversity is included in the game, a Green Fund becomes necessary to enhance cooperation, because low-emission (poor) countries generally favor a low global price target. To maintain cooperation, the Fund must be coupled to the level of the price target. ||| We propose basing it on emissions per capita because that will turn Green-Fund payments into an incentive for all countries to reduce their emissions (Cramton and Stoft, 2010). Countries that reduce emissions will either pay less or be paid more as can be seen from the formula
Green-Fund payment received = G⋅ΔEj ⋅ PT, (3)
where G determines the strength of the Green Fund, ΔEj is a country’s emissions shortfall relative to the global average, and PT is the global price target. [The emissions shortfall is the amount by which a country’s emissions are less than they would be if it had average per-capita emissions. [2012-03]
Why a Global Price Is Easier to Negotiate
1. A Price Simplifies Negotiations
2. A Global Price Provides a Countervailing Force against Free Riding
The game of negotiating caps is doomed to failure because it punishes cooperative behavior at the bargaining table and rewards the free-riding behaviors that are the heart of the climate problem. … We view national caps as an inherently divisive negotiating goal, so we do not condemn the players as do environmentalists. Instead we find fault with the game of negotiating caps. [2012-03]
3. The Benefit of a Focal Point
A TREATY AS A FOCAL POINT: The failure of the global-cap game is, in large part, due to the absence of a focal point. Unfortunately, although a uniform global price is a remarkably strong focal point, it is not strong enough to provide a complete solution to the problem of coordination in a realistic global-price-target game. A treaty, if it seems natural and gains prominence, may also provide a focal point. ||| A Green-Fund rule should be simple and appear naturally suited to its task in order to improve its chance of being accepted as focal. [2012-03]
4. Why Caps Appear Unfair to Poor Countries
5. International vs. National Cap-and-Trade
Countries act out of self-interest, including, in some cases, a desire to profit from trading carbon credits. Such strategies have been overlooked because global cap and trade is assumed to share the desirable properties of national cap and trade. But coal-burning countries have acted much like coal-burning power plants would act if they were allowed to choose their own targets.
Modeling global cap and trade as a game based on self-interest reveals the behaviors that have led to the breakdown of the Kyoto approach. The game is so uncooperative that it may even increase total emissions relative to what would occur without any global climate policy. … Secondary enforcement can come from trade sanctions, but this typically would be unnecessary. [2012-04]
Treaty Mechanics
1. Monitoring
2. Compliance/Enforcement
A third advantage is that a price target is more easily enforced because it is a steady commitment. Performance can be assessed and rewarded on a continuous basis. A commitment to distant caps is much more apt to break down when procrastination is followed by the day of reckoning. [2010-02]
3. Uniformity of the Global Price
4. Hitting a Target with a Price
5. The Cost of Pricing is Low
6. The Use of Carbon Revenues
7. How to count exiting carbon taxes
8. Who Should Initiate the Treaty?
Comparisons that Assume Successful Negotiations
1. Price Volatility
2. International Wealth Transfers
3. Corruption