The Carbon Price Equivalent: A Metric for Comparing Climate Change Mitigation Efforts Across Jurisdictions

Abstract

Climate change presents a global commons problem: Emissions reductions on the scale needed to meet global targets do not pass a domestic cost-benefit test in most countries. To give national governments ample incentive to pursue deep decarbonization, mutual interstate coercion will be necessary. Many proposed tools of coercive climate diplomacy would require a one-dimensional metric for comparing the stringency of climate change mitigation policy packages across jurisdictions. This article proposes and defends such a metric: the carbon price equivalent. There is substantial variation in the set of climate change mitigation policy instruments implemented by different countries. Nonetheless, the consequences of any combination of these policies can be summarized in terms of aggregate emissions during a specified period. Given differences in geography, resource endowments, levels of development, demographics, and other boundary conditions, aggregate emissions do not lend themselves to meaningful direct comparisons of climate change mitigation efforts. However, there will always be some carbon price that, if implemented in an otherwise neutral policy environment, would have produced this observed level of aggregate emissions during a specified period. This is the carbon price equivalent of the package of policies that produced that level of aggregate emissions. The carbon price equivalent can also be thought of as the weighted average emissions allowance trading price that would have prevailed under a cap and trade system implemented in an otherwise neutral policy environment, with the cap set to match observed aggregate emissions over some period. The carbon price equivalent metric has several applications, including strategic emissions policies, strong trade linkage, and border adjustment of domestic emissions taxes and regulations. This article sets forth procedures for estimating national carbon price equivalents, including a specification of the otherwise neutral policy environment. Design issues and challenges involving currency conversions, production versus consumption emissions, spillover effects of domestic climate policies, use of a social cost of carbon to set regulatory policy, and greenhouse gases other than carbon dioxide are analyzed and resolved. A normative case for the carbon price equivalent metric is advanced in terms of both justice and efficiency. Alternative metrics are considered and found inadequate.