Flexible Global Carbon Pricing: A Backward-Compatible Upgrade for the Kyoto Protocol

Abstract

The Kyoto Protocol’s approach of assigning emission targets, or “caps,” exacerbates problems with international cooperation and commitment. This has caused the developing countries, which account for the fastest growing half of emissions, to reject caps. Global carbon pricing addresses these problems and, with less risk and more reward, can generate and sustain stronger policies.This paper proposes a system, “flexible global carbon pricing,” designed to upgrade the Kyoto Protocol by allowing a carbon tax in place of a carbon cap. It provides backward-compatibility with the Kyoto Protocol by allowing un-modified cap and trade as well. Instead of many national caps, the proposal sets a global target price for carbon and specifies a pair of incentives.The Pricing Incentive rewards nations that set their carbon price higher than the global target and penalizes nations that underachieve. These rewards and penalties sum to zero by design. The strength of the Pricing Incentive is adjusted automatically so that the global average carbon price converges to the global target price.The Clean Development Incentive (CDI), free from the gaming problems that plague the U.N.’s Clean Development Mechanism, encourages full participation by low-emission countries. An example, based on a $20 price target, causes transfers from the United States of only seven cents per capita per day. Nevertheless, India’s CDI receipts cover its compliance costs. The example shows that low costs can be guaranteed.