Pricing Carbon

Abstract

In 2013, the UNFCCC set a path toward a new agreement for the post-2020 period. This year, nego-tiations have aimed to solidify that agreement and will culminate in Paris at the COP21 December meetings. So far, climate talks have tackled national emissions targets, global temperature targets, technology transfer, assistance to poor countries for adaptation and mitigation (a.k.a. " finance "), clean energy cooperation, forest preservation, compensation for countries affected economically by mitiga-tion measures, and many other topics. In comparison to those issues, there has been little discussion of the most cost-effective means to reduce emissions: reducing fossil fuel subsidies and pricing green-house gas emissions. Christine Lagarde, managing director of the IMF, and World Bank Group President Jim Yong Kim re-cently announced the formation of a " carbon pricing panel " consisting of an alliance of national, state, and local policymakers. This is an important move and should promote carbon pricing as a focus of the post-COP21 negotiations. The prospect of a new long-term agreement and new venues for climate talks could open an important opportunity for carbon pricing consultations (CPC). Although carbon pricing should eventually be in-cluded directly in the UNFCCC process, a smaller-scale carbon pricing dialogue could be undertaken now outside UNFCCC. The goal would be to gather the economic ministries of the largest emitters to discuss the use of carbon pricing to reduce emissions cost-effectively, manage impacts on trade and competitiveness, and foster mutual confidence in the economic ambition of climate commitments. A carbon price, arising from a cap-and-trade market, a carbon tax, or a " hybrid " policy creates broad, efficient incentives to reduce greenhouse gas emissions. Done well, these policies can gradually shift consumer demand, production methods, new investment, and technology development toward less emissions-intensive goods and services without unduly burdening poor households. A carbon tax or auctioned cap-and-trade allowances can also raise revenue to fund government outlays or reduce other, more distortionary, taxes. Longer-term carbon financial instruments can be used to create po-litical constituencies to sustain the policy through political cycles. Finally, a carbon price can promote