Beyond Kyoto: Flexible Carbon Pricing for Global Cooperation

Abstract:     
“Hopes are fading that a strong treaty will emerge from next month’s negotiations in Copenhagen,” according to Nature Geoscience (2009/11). This short book starts from Nature’s critique of the “targets and timetables” approach to international agreement and describes an international policy structure that expands on the ideas of Joseph E. Stiglitz, William D. Nordhaus and James E. Hansen. The design reflects their two key objectives, first, to implement a global price for carbon, and second, to avoid the antagonisms and gaming opportunities engendered by attempts to impose national caps.

First, national cap-and-trade and carbon-tax policies are compared. Then a carbon tax with a full, equal-per-capita refund, as advocated by Hansen, is compared with tax shifting. Distributional aspects of the refund are found to trump the efficiency benefits of the tax shift. An international pricing incentive is then suggested to enforce average compliance with a global carbon-pricing target. As with cap and trade, countries which overachieve are rewarded by those which underachieve. The proposed structure accommodates the EU’s carbon market without modification or restriction.

A Clean Development Incentive effectively implements a Green Fund. The suggested incentive is shown to be equivalent to both a carbon tax with equal refunds and to a global cap-and-trade system that allocates carbon permits on an equal-per-capita basis. The result is assistance to low-emission countries and an additional incentive for nations to reduce emissions.

A simplified example considers a global carbon-pricing target of $30/tonne and a Clean Development Incentive based on $2/tonne. The cost to the United States would be 25 cents per capita per day, with one third of that going toward the Green Fund. India would face abatement costs of one cent per capita per day, but Green Fund payments of two cents would more than cover those costs.

Number of Pages in PDF File: 49

Keywords: Kyoto, Copenhagen, carbon pricing, cap and trade, carbon tax, green fund, clean development

JEL Classification: Q28, Q38

working papers series