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A Carbon Price-and-Rebate Plan

PARIS – So far, international climate talks have failed to find a mechanism that will successfully reduce global greenhouse-gas emissions. The 1997 Kyoto Protocol attempted to use a system of tradable quotas to establish a price on carbon-dioxide emissions, but foundered after the United States and several emerging countries refused to join.

The 2009 Copenhagen Climate Change Conference introduced a pledge-and-review process, in which countries unilaterally decided how much they would cut. As a result, the US and several emerging economies made commitments to reduce emissions for the first time. But this system, too, is badly flawed. What it does not do is resolve the classical free-rider problem or guarantee reductions in developing countries. Indeed, some countries may have been encouraged to do less than they otherwise would have in order to maintain a strong negotiating position.

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As world leaders meet in Paris from November 30 to December 11 for the United Nations Conference on Climate Change, they will have a new opportunity to forge an effective agreement. To encourage governments to act in concert, it is essential to work toward a system of carbon pricing that is both straightforward and transparent. We propose a carbon “price-and-rebate” mechanism, which simultaneously sets a price on emissions above a certain threshold and defines how the revenues raised should be used.

Studies ahead of the Paris conference suggest that international cooperation could allow for rapid reduction of greenhouse gases. They also highlight the knock-on benefits that taking quick action on climate change could have, including reduction of local pollution, greater energy and food security, and faster innovation. To accelerate the move toward a low-carbon economy, an international agreement must be applicable to all countries; include a common and consistent system for monitoring, reporting, and verification; and provide strong economic incentives at a global scale.

Our price-and-rebate mechanism is inspired by the “bonus/malus” scheme in France, in which buyers of new cars are taxed or given a bonus depending on the vehicle’s CO2 emissions. In our system, a country exceeding the worldwide average for per capita emissions would pay a specified amount on every ton of CO2 (or its equivalent) above a set threshold. Countries with lower-than-average emissions would be compensated for polluting less.

This system would initially benefit countries with the lowest per capita emissions, meaning that most of the funds would flow towards the least-developed countries. Once it is fully operational, the price-and-rebate mechanism would encourage all countries to reduce their per capita emissions, thereby reducing the gap between payments and rebates.

The ideal carbon price would depend on the objectives of the agreement. A price of $1-2 per ton would generate $14-28 billion, enough to fund the deployment of the monitoring, review, and verification process in developing countries. The Copenhagen Accord included a commitment by rich countries to spend $100 billion a year after 2020 to help underdeveloped countries mitigate and adapt to climate change. A rate of $7-$8 per ton would generate enough revenue to deliver on this promise, with the money flowing to countries with low per capita emissions.

Of that $100 billion, a little over $60 billion would come from Western countries and Japan, and just under $20 billion would come from hydrocarbon-exporting countries (Russia and Saudi Arabia in particular) and high-growth Asian economies (including China and Korea). The introduction of a price-and-rebate system would thus redistribute funds among countries in conformity with the principle of “common but differentiated responsibilities and respective capabilities.”

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A price-and-rebate system would be both efficient and fair. Every citizen in the world would have the same right to emit greenhouse gas, and every country would face the same incentives at the margin to reduce emissions.

The main obstacle to be overcome in establishing such a system will be to convince donor countries’ governments to pay for their carbon emissions. This cost will be modest relative to the size of their economies, and any successful climate-change agreement will require similar commitments. If rich countries are unable to agree to pay even a modest price for carbon, the talks in Paris will surely be judged a failure.