Chimney emitting smoke

A Carbon Price-and-Rebate Plan

World leaders meeting at the UN Conference on Climate Change will have an opportunity to forge an effective agreement to reduce greenhouse-gas emissions. The best solution is a mechanism that simultaneously sets a price on emissions above a certain threshold and compensates countries that emit less than the worldwide average.

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.

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.

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