Achieving Comparable Effort through Carbon Price Agreements

Overview

Allowing for a price collar within a policy focused on long-run cumulative emissions targets is an effective and politically viable way to move international negotiations on climate policy forward. The economic uncertainty surrounding target commitments is enormous and combining a clear cumulative emissions target with a price collar optimally balances the environmental objective with the need to ensure that commitments remain feasible. Using plausible assumptions, the example in this paper illustrates how a price collar does this.

Focusing exclusively on reductions from historical emissions as the only meaningful form of commitment has greatly hampered negotiations on climate commitments, especially for developing countries where the uncertainty about the future and the cost is greatest. In contrast, the price collar can ease major developing countries into the system by allowing them to adopt only a price floor in the early years. It also offers a transparent and verifiable assurance of the comparability of effort across countries. Further, parties can design price collars so that they have no effect if predictions about the level of effort required to achieve a target are correct.

Incorporating price-based commitments into the treaty along with an emissions goal also demonstrates compliance during, as well as after, the commitment period.