Advocating for differentiated carbon prices mechanisms at COP 21 summit

05/11/2015
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If, after the COP 21 summit, no perspective of implementing a price-signal based carbon mechanism was to emerge, we would be very disappointed. We know that such a mechanism is compulsory, though not sufficient, if we want economic agents to ever reduce their greenhouse gas emissions. The question, however, is how to reach such an objective in the current context.

 

A single price for carbon emissions is a false good idea

 

A few weeks ahead of COP 21 in Paris, an old idea is currently being refreshed: a unified world price for carbon emissions would be enough to fix the climate problem, for instance by means of establishing a world market of emission quotas. Such a mechanism could be enforced, so goes the argument, through sanctions against countries refusing to abide by its rules, and financial transfers from “high polluter” to “low polluter” countries.

 

One could just smile at such a naive proposal if it were not a major obstacle to any international, ambitious and binding agreement to be reached in December. The idea of a single price for carbon emissions is just a bad idea. Its implementation would require a unanimous agreement, which, as anyone involved in the negotiation process acknowledges, is currently out of reach, be it in December or in any future major international conference. The only way of reaching such an agreement would be to build it on the lowest possible price, so as to meet the demands of everyone. Today, this price would be negative, as some countries actually subsidize fossil energies. Is this the road towards an ambitious agreement?

 

Besides, even if it happened that countries as different as China, Brazil, Germany or Mali were to agree to a single carbon price, would that still be a good thing for international affairs and the climate? Who can believe that there is one single “good” price level of carbon for each of these countries, in each sector of industrial or agricultural activity? Even economists belonging to the IMF –sometimes described as strong supporters of a “one size fits all” approach-- do not believe in such an all-embracing price: a report published by the IMF in September 2014 clearly shows that country-based, differentiated prices would bring more benefits to the world economy than a single carbon price. Any transition towards low carbon economies requires, in fact, differentiated treatments, which depend on the very structure of the sector that is under scrutiny and on the national context. Broadly speaking, any particular country might have an interest in establishing a specific carbon price. A fine pricing might respond efficiently to reducing both CO2 emissions and, for instance, several kinds of pollution related to the use of fossil fuels (particles, NOx, Sox…), which have a negative impact on public health in this particular country. A single price mechanism is a simplistic solution that cannot cope with complex reality. Therefore, it is just irrelevant.

 

A carbon pathway, embedded into a global mechanism

 

Do we have any guarantee that other mechanisms could prove to be more efficient? Yes: Sweden is our best case for this. This country has become an international reference because it has managed to combine a great deal of complementary instruments – legal constraints, a more sober way of life driven by a shift in consumption patterns, public investment programs targeted towards green infrastructure or thermal renovation of buildings and, eventually… a carbon tax. This pragmatic combination of tools, of which a country-specific carbon price signal is just one among others, has proved to be efficient.

 

Therefore we believe that aiming at a politically unreachable and economically unfit objective would be dangerous. One also needs to bear in mind that carbon pricing does not actually belong to the scope of questions that negotiators attending the COP 21 have a mandate to negotiate upon. The best result that one can expect from Paris, on that matter, would be that, together with the UN agreement as such, an international coalition of key players (countries, local governments, private businesses) could engage on the implementation of “price corridors” for carbon emissions, raising prices from $20-30 in 2020 to, say, $80-100 in 2030. Each country could then decide how to adjust the shape of its trajectory towards its own target, and to establish the policy mix that would allow for keeping within the selected trajectory.

 

What would be the result of such a mechanism? A world patchwork of carbon prices, with differentiated price levels that would globally increase as time goes on. Such a process is already under implementation for the past ten years in Europe, in China and in North America. As compared to a single price, such a corridor will certainly contribute to global well-being. A bunch of liberal, “all-market” oriented economists might argue it will make their lives less comfortable. We believe this is a rather minor collateral damage.

 

 

- Gaël Giraud is Chief Economist at the French Agency for International Development (AFD), holds the “Energy and Prosperity” Chair, and is a senior researcher at CNRS.

- Alain Grandjean is an economist and founder of Carbone 4 consultants.

- Benoït Leguet is general director of I4CE (Institute for Climate Economics, an initiative of the Caisse des Dépôts and the Agence Française de Développement).

 

 

https://www.alainet.org/fr/node/173422

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