Global Carbon Price Research Articles

Carbon taxes and tariffs, financial frictions, and international spillovers

Ambitious climate policy, coupled with financial frictions, has the potential to create macrofinancial stability risk. Such stability risk may expand beyond the economy implementing climate policy, potentially catching other countries off guard. International spillovers may occur because of trade and financial channels. Hence, we study the design and effects of climate policies in the world economy with international trade and financial flows. We develop a two-sector, two-country, dynamic general equilibrium model with financial frictions, climate policies, including carbon tariffs, and macroprudential policies. Using the calibrated model, we evaluate spillovers from unilateral domestic carbon pricing to foreign economies and back. We also examine more ambitious climate architectures involving carbon tariffs or a global carbon price. We find that accounting for cross-border financial flows and frictions in credit markets is crucial to understand the effects of climate policies and to guide the implementation of macroprudential policies at the global scale aimed at minimizing transition risk and paving the way for ambitious climate policy.

Carbon pricing: Necessary but not sufficient

Global carbon pricing has been recognized as one of the most efficient mechanisms that can be used to reduce CO2 emissions, but questions remain about the magnitude of the price and the speed of implementation. We examine this important issue by extending the Dynamic Integrated Climate and Economy (DICE) model to estimate global carbon prices that will be required to reach various warming scenarios. Our analysis suggests that while carbon pricing can play a critical role in reducing greenhouse gas emissions and limiting global warming, it must be supported by other policy measures and innovations in order to reach the Paris Agreement targets. In particular, we found there was no feasible carbon pricing scenario that was high enough to limit emissions sufficiently to achieve anything below 2.4°C warming on its own. We project significant differences in global physical costs due to climate change across various warming scenarios, which range from a total (to 2100) of $152tr under a 1.5° scenario to $765tr under 4.2° warming.

Industrialization, environmental externality, and climate mitigation strategies

This study proposes a 12-region global modeling framework that integrates industrialization into climate–economy interactions and applies it to explore national strategic interactions and long-term policy outcomes. In this regard, three policy regimes are considered: a non-cooperative Nash equilibrium and two cooperative regimes that maximize the weighted sum of regional welfare. Negishi weights, ensuring uniform carbon price, and equal weights are applied in cooperative setting. Based on the results, global unmitigated emissions will peak around 2040. Given the future industrialization process, developing countries will make greater mitigation efforts under all regimes, whereas the strategies of developed countries will only be affected under the uniform carbon price regime. In the two cooperative regimes, a clear separation of mitigation efforts is observed between developed and developing countries. Moreover, when accounting for industrialization, the global averaged carbon price should grow faster in the first half-century, followed by a period of slower growth. Sensitivity analysis implies that with the support from developed countries, accelerated industrialization in the developing world can help alleviate its environmental strain.

Carbon Pricing and Intergenerational Fairness

Abstract John Broome and Duncan Foley have proposed an ingenious way to transfer benefits backwards in time, from people who are not here yet to people who will not be here in the future. Present people can crowd out conventional, and often brown, investments by issuing global climate bonds (GCBs). The debate about GCBs has focused on whether it is justified to use this financial instrument to allow future people to buy off present people for climate mitigation. In this article, I ask whether it is fair to use GCBs to share the cost of a global carbon price between present and future people. My answer is that it depends on the approach used to calculate the carbon price and, of course, on the normative claims underlying the different approaches. Specifically, I argue that the internalisation principle underlying the cost-benefit approach does not justify intergenerational cost-shifting if, as in most cases, the social cost of carbon is determined using, inter alia, a social discount rate. Instead, the conservative justifications underlying a cost-effective carbon price consistent with the Paris mitigation target allow for intergenerational cost-shifting, but only to the extent of the difference (if any) between the Paris-consistent and the Pareto-efficient carbon price.

Could the EU carbon border adjustment mechanism promote climate mitigation? An economy-wide analysis

Due to concerns about carbon leakage and sectoral competitiveness, the European Union (EU) proposed implementing the carbon border adjustment mechanism (CBAM). The effectiveness and potential negative consequences of CBAM have aroused extensive discussion. From the perspective of the economy-wide analysis, this study uses a global computable general equilibrium model to explore the rationality of CBAM from the aspects of socioeconomic impact and the effects of promoting climate mitigation. Furthermore, the potential alternative mechanism of CBAM is proposed. The results show that CBAM can reduce the EU's gross domestic product (GDP) loss; however, the GDP loss in all other regions increases. Moreover, CBAM raises household welfare losses in most regions, including the EU. Second, although CBAM can reduce the marginal abatement cost in eight regions, it comes at the cost of greater economic losses. Furthermore, the economic and household welfare cost of raising emissions reduction targets in regions like the USA and Japan is substantially higher than the impact of passively accepting the CBAM; therefore, CBAM's ability to drive ambitious emission reduction initiatives may be limited. Finally, for the potential alternative mechanism, from the perspective of reducing economic cost and household welfare losses, the EU could implement domestic tax cuts in the short-term and promote global unified carbon pricing in the long-term.

Article: Climate Clubs: An International Tax Law Perspective

Global carbon pricing has often been portrayed as an interesting idea that will never be implemented due to political hurdles. Yet, this description is being challenged: growing political support for climate clubs suggests that a global carbon price might become reality in the future. This article investigates the conditions for the adoption and implementation of a climate club based on a global carbon price by comparing it to the international corporate tax club created by Pillar Two, which was also described as politically impossible a few years ago. This comparison highlights that establishing a climate club will require addressing design issues and institutional obstacles that might be even more complex than those that characterized the negotiations of the global anti-base erosion (GloBE) rules. Climate club, carbon border adjustment measures, global carbon price, global carbon tax, GloBE rules, inclusive forum on carbon mitigation approaches, inclusive framework, international corporate tax club, Pillar Two

The global consumer incidence of carbon pricing: Evidence from trade

Carbon pricing is often seen as regressive, disproportionately burdening low-income consumers. I show that higher prices following a global carbon price would be mildly regressive in industrialized countries, mildly progressive in developing countries, and steeply regressive across countries. Refunding revenues via national carbon dividends would reverse all three findings. The net effect would be globally progressive, even without international transfers. My approach to estimating the global distributional effects of carbon pricing uses bilateral trade data and features non-homothetic consumers who differ both between and within countries. The supply side includes substitution of inputs along global value chains.

Measuring Total Carbon Pricing

Abstract While countries increasingly commit to pricing greenhouse gases directly through carbon taxes or emissions trading systems, indirect forms of carbon pricing—such as fuel excise taxes and fuel subsidy reforms—remain important factors affecting the mitigation incentives in an economy. Taken together, how can policy makers think about the overall price signal for carbon emissions and the incentive it creates? We develop a methodology for calculating a total carbon price applied to carbon emissions in a sector, a fuel, or the whole economy. We recognize that rarely is a single carbon price applied across an economy; many direct carbon pricing instruments target specific sectors or even fuels, much like indirect taxes on fossil fuels; and carbon and fuel taxes can be substituted for one another. Tracking progress on carbon pricing thus requires following both kinds of price interventions, their coverage, and specific exemptions. This inclusive total carbon pricing measure can facilitate progress in discussions on minimum carbon price commitments and inform assessments of the pricing of carbon embodied in traded goods. Calculations across 142 countries from 1991 to 2021 indicate that although direct carbon pricing now covers roughly one-quarter of global emissions, the global total carbon price is not that much higher than it was in 1994 when the United Nations Framework Convention on Climate Change entered into force. Indirect carbon pricing still comprises the lion's share of the global total carbon price, and it has stagnated. Taking these policy measures into account reveals that many developing countries—particularly net fuel importers—contribute substantially to global carbon pricing. Tackling fuel subsidy reform and pricing coal and natural gas emissions more fully would have a profound effect on aligning carbon prices across countries and sectors and with their climate costs.

GLOBAL INITIATIVESTO PREVENT “CARBON LEAKAGE”: RISKS AND OPPORTUNITIES FOR RUSSIA

Tightening climate policies in some countries brings about a need to toughen them in others. More stringent requirements for national producers of carbon-intensive products within one country, for example, in the form of increased coverage or level of domestic carbon price, stimulates partial replacement of domestic production with foreign analogs from the countrieswith relatively looser greenhouse gas emissions regulation. This phenomenon is referred to as 241“carbon leakage”. This paper systematizes practical and theoretical approaches to combat “carbon leakage” and compares these approaches in terms of possible implications for a long-term social and economic development of Russia. The authors examine exceptions to the general rules of emissions regulation for some vulnerable industries subjected to “carbon leakage”, implementation of cross-border carbon barriers in trade, formation of climate clubs of countries and the introduction of a global minimum carbon price. Specialization in producing and exporting carbon-intensive products leaves no opportunity for Russia to stay aside of thedevelopment of the global system of greenhouse gas emissions regulation. The findings showthat introducing a global minimum price for carbon seems to be the best alternative to the formation of a climate club, which may be established if other countries importing fossil fuels and carbon-intensive products join the EU carbon border adjustment policy.

Carbon pricing, border adjustment and climate clubs: Options for international cooperation

In a dynamic, three-region environmental multi-sector general equilibrium model, we find that carbon pricing generates a long-lasting downturn as production costs rise. Dirty production is shifted towards countries with laxer climate policies, known as carbon leakage. A border adjustment tax mitigates but does not prevent carbon leakage. Its impact on emissions is limited, and it mainly “protects” dirty domestic production sectors with tradeable goods (in relative terms). Benefits from lower emissions damage materialize only in the medium to long run. From the perspective of a region that introduces carbon pricing, the downturn is smaller and long-run benefits are larger if more regions participate. However, for non-participating regions, there is no incremental incentive to participate as they forego trade spillovers and face higher production costs along the transition. Because of the costly transition, average world welfare may fall as a result of global carbon pricing unless “the rich” assist “the poor”.

Health effects of a global carbon price

Health effects of a global carbon price

Global climate policy with differentiated carbon price floors

ABSTRACT We use a state-of-the-art global general equilibrium model to quantify the effects of an International Carbon Price Floor (ICPF) proposal for the coordination of global climate policy. With the ICPF proposal, countries would implement a carbon price floor that is differentiated according to their level of development. The price floor could be implemented by an actual carbon price or other policies with equivalent stringency. Implementing such a joint effort would be a big step towards aligning global emissions with the Paris Agreement. The study highlights three main findings. First, the ICPF is progressive in terms of emission reductions and demands considerably more effort from high-income countries (HICs). Unlike proposals based on equity principles, however, it requires neither extremely high emission reductions from HICs nor massive financial transfers. Second, the differentiated carbon prices cost only an additional 0.3 percent of global GDP compared to a global uniform carbon price. Third, the ICPF can be as effective as border carbon adjustment (BCA) mechanisms at preserving competitiveness of HICs despite the differentiation in carbon price floors. This means, there would be no need for BCA with an ICPF. Compared to a BCA, HICs can avoid the administrative burden and low-income countries (LICs) will not face the cost of BCA. As a first step to global climate policy, a sectoral ICPF for the EITE sector could be introduced. It would address competitiveness concerns almost as well as the full ICPF. Key policy highlights An International Carbon Price Floor (ICPF), with carbon price floors differentiated by development level, would incur only small economic costs compared to baseline economic growth. The ICPF would allow for international burden sharing, with HICs incurring higher cost than middle – and low-income countries. The ICPF reduces distortions to competitiveness as much as BCA, so that no BCA would be necessary. A ‘sectoral ICPF’ in energy-intensive and trade-exposed sectors would be effective against leakage and loss in competitiveness and would thus be an attractive alternative to border carbon adjustment.

Extended producer responsibility for fossil fuels * * At a time of high fossil fuel prices and rents, we show that applying the principle of extended producer responsibility to fossil fuels, implemented through a combination of geological storage and nature-based solutions, could deconflict energy security and climate policy at an affordable cost.

Energy policy faces a triple challenge: increasing resilience and guaranteeing the security of supply of both fossil and non-fossil energy, minimising the impact on consumer energy prices, and retaining consistency with Paris Agreement climate goals. High prices and producer rents, however, also present an opportunity: to open a conversation about applying the principle of extended producer responsibility (EPR) to fossil fuels. We demonstrate that this could deconflict energy security and climate policy at an affordable cost by stopping fossil fuels from causing further global warming. Implementing EPR through a combination of geological CO2 storage and nature-based solutions can deliver net zero at comparable or lower costs than conventional scenarios driven with a global carbon price and subject to constraints on CO2 storage deployment. It would also mean that the principal beneficiary of high fossil fuel prices, the fossil fuel industry itself, plays its part in addressing the climate challenge while reducing the risk of asset stranding.

Optimal pricing for carbon dioxide removal under inter-regional leakage

Carbon dioxide removal (CDR) moves atmospheric carbon to geological or land-based sinks. In a first-best setting, the optimal use of CDR is achieved by a removal subsidy that equals the optimal carbon tax and marginal damages. We derive second-best policy rules for CDR subsidies and carbon taxes when no global carbon price exists but a national government implements a unilateral climate policy. We find that the optimal carbon tax differs from an optimal CDR subsidy because of carbon leakage and a balance of resource trade effect. First, the optimal removal subsidy tends to be larger than the carbon tax because of lower supply-side leakage on fossil resource markets. Second, net carbon exporters exacerbate this wedge to increase producer surplus of their carbon resource producers, implying even larger removal subsidies. Third, net carbon importers may set their removal subsidy even below their carbon tax when marginal environmental damages are small, to appropriate producer surplus from carbon exporters.

Green bonds' liquidity in COVID-19 and low carbon investments in China: A stochastic trend analysis.

Central banks and regulators increasingly consider climate-related financial risks (CRFR) relevant to their responsibilities for maintaining financial stability and using daily data from 2016 to 2021 for China. Specifically, we used the S&P Green Bond Price Index, the Solactive Global Solar Price Index, the Solactive Global Wind Price Index, and the S&P Global Clean Energy and Carbon Price Index as our data set. We use the TVP-VAR method to probe return spillovers and interconnectedness. We test several portfolio strategies, including the minimum variance portfolio, the minimum correlation portfolio, and the more recent minimum connectedness portfolio. However, the evolving policy structure for dealing with CRFR has generally focused on market-based solutions that attempt to address perceived data gaps that preclude the appropriate pricing of CRFR, even though CRFR is thought to have certain distinctive features. Disclosure and openness fall within this category. We propose limiting the approach's influence since CRFR is characterized by extreme attainability. A 'precautionary' financial policy option is presented as an alternative, providing a conceptual foundation for justifying more aggressive financial policy intervention in the present to better cope with these long-term dangers.

Increased energy use for adaptation significantly impacts mitigation pathways

Climate adaptation actions can be energy-intensive, but how adaptation feeds back into the energy system and the environment is absent in nearly all up-to-date energy scenarios. Here we quantify the impacts of adaptation actions entailing direct changes in final energy use on energy investments and costs, greenhouse gas emissions, and air pollution. We find that energy needs for adaptation increase considerably over time and with warming. The resulting addition in capacity for power generation leads to higher greenhouse gas emissions, local air pollutants, and energy system costs. In the short to medium term, much of the added capacity for power generation is fossil-fuel based. We show that mitigation pathways accounting for the adaptation-energy feedback would require a higher global carbon price, between 5% and 30% higher. Because of the benefits in terms of reduced adaptation needs, energy system costs in ambitious mitigation scenarios would be lower than previous estimates, and they would turn negative in well-below-2-degree scenarios, pointing at net gains in terms of power system costs.

Global carbon price asymmetry

This paper studies a social planner who chooses countries’ carbon prices so as to maximize global welfare. Product markets are characterized by firm heterogeneity, market power, and international trade. Because of the market-power distortion, the planner’s optimal policy is second-best. The main insight is that optimal carbon prices may be highly asymmetric: zero in some countries and above the social cost of carbon in countries with relatively dirty production. This result obtains even though a uniform global carbon price is always successful at reducing countries’ emissions. Competition policy that mitigates market power may enable stronger climate action.

Measuring comprehensive carbon prices of national climate policies

ABSTRACT We measure the comprehensive carbon price from 2008 to 2019 resulting from climate policies imposed by 25 high-polluting countries that represent 82 percent of global carbon dioxide (CO2) emissions in 2019. Comprehensive carbon prices build upon previous notions—including explicit, effective, and implicit carbon prices—by incorporating a broad range of policies that reduce carbon emissions. We consider seven types of major market-based policies commonly used to create marginal incentives to reduce emissions: carbon taxes, emissions trading systems, fossil fuel taxes, fossil fuel subsidies, renewable portfolio standards, feed-in tariffs, and low-carbon fuel standards. Comprehensive carbon prices represent the weighted average of marginal incentives imposed on polluters by country policy mixes. We measure country-level comprehensive carbon prices by summing across all seven policies the product of (1) the marginal incentive imposed by a policy (expressed in dollars per ton of CO2 emitted), and (2) a CO2-emissions-coverage weight for that policy (equal to the proportion of CO2 emissions regulated by the policy relative to that country’s total CO2 emissions). We measure the global comprehensive carbon price by summing across all 25 countries the product of (1) each country’s comprehensive carbon price, and (2) that country’s proportion of CO2 emissions relative to total CO2 emissions from our sample of 25 countries. The global comprehensive carbon price has risen upward from +8.68 USD in 2008 to +19.13 USD in 2019, with a dip to +6.94 USD per ton in 2012. These values are far too low to appropriately address climate change. The comprehensive carbon price varies widely between countries, ranging from −128.35 USD to +146.25 USD in 2019. This heterogeneity means that polluters face uneven marginal incentives to reduce CO2 emissions. Our focus is on measuring marginal incentives rather than policy outcomes, such as overall emissions abatement, which we identify as a promising area for future research. KEY POLICY INSIGHTS Comprehensive carbon prices represent a useful metric for summarizing and tracking global and country-level efforts to mitigate carbon emissions through public policy. Comprehensive carbon prices report a dollar per ton of carbon dioxide emissions imposed by a wide range of climate policies including carbon taxes, emissions trading systems, fossil fuel subsidies and taxes, renewable portfolio standards, feed-in tariffs, and low-carbon fuel standards. Country-level comprehensive carbon prices vary widely, from −128.35 to +146.25 USD in 2019, reflecting wide heterogeneity in the overall effort countries are putting into climate mitigation. The global comprehensive carbon price has approximately doubled over the last decade, reaching a value of +19.13 USD in 2019, and remains too low to seriously address climate change.

Upstream decarbonization through a carbon takeback obligation: An affordable backstop climate policy

<h2>Summary</h2> In the absence of immediate, rapid, and unprecedented reduction in global demand for carbon-intensive energy and products, the capture and permanent storage of billions of tons of carbon dioxide (CO₂) annually will be needed before mid-century to meet Paris Agreement goals. Yet the focus on absolute emission reductions and cheaper, more temporary forms of carbon storage means that permanent CO₂ disposal remains starved of investment, currently deployed to capture only about 0.1% of global Energy and Industrial Process (EIP) emissions. This stored fraction, the percentage of fossil EIP emissions that are captured and permanently stored, must reach 100% to stop EIP emissions causing further global warming. Here, we show that a cost-effective transition can occur by mandating an increasing stored fraction through a progressive carbon takeback obligation (CTBO) on fossil carbon producers and importers. By emulating the behavior of an integrated assessment model (IAM) and employing conservative assumptions for the costs of permanent carbon storage, we show that projected economy-wide costs of a CTBO policy are comparable to the costs associated with achieving similarly ambitious climate goals in IAMs employing a global carbon price, or potentially lower if the perceived policy risk cost associated with a CTBO is lower than that associated with a politically determined carbon price. Compared with a global carbon price, an upstream CTBO has advantages of simple governance, speed, and controllability: equivalent carbon prices under a CTBO are reliably capped by the cost of direct air capture and storage, by ensuring deployment keeps pace with continued fossil fuel use, reducing the risk of punitive carbon prices or more draconian measures being needed to drive out the final tranche of emissions. When combined with measures to reduce CO₂ production in the near-term, a CTBO could deliver a viable pathway to achieving net-zero emissions consistent with 1.5°C by mid-century.

Carbon price dynamics in ambitious climate mitigation scenarios: an analysis based on the IAMC 1.5 °C scenario explorer

We analyse global carbon price trajectories from integrated assessment studies of 2 °C and below-compatible emission pathways based on a new scenario ensemble that has been made publicly available together with other relevant data sets in the IAMC 1.5 °C Scenario Explorer. We complement and extent the findings of the initial study on carbon price variations in integrated assessment models of (Guivarch and Rogelji 2017 Carbon price variations in 2 °C scenarios explored, Carbon Pricing Leadership Coalition) by providing a broader and more robust empirical assessment based on a comprehensive statistical analysis. We discuss the prospects and challenges of in‐depth bivariate econometric analyses of key impact factors in data sets from integrated assessment models. We show that the amount of meta‐information reported for individual models differs significantly across all variables where a large part of all recorded scenario explorer variables can be attributed to only a small number of applied models. We analyse the trend patterns emerging from the analysed global carbon price trajectories based on a statistical trend identification procedure. About half of the analysed carbon price projections seem to be best characterised by long run exponential growth patterns in carbon prices. Moreover, we break down the explanatory contribution of individual components on global carbon prices by the Kaya identity, i.e. global GDP, primary energy intensity and emission intensity. We show that the price of carbon is lower in baseline scenarios with faster economic growth per capita, low‐energy consumption patterns and high potentials for low carbon technologies compared to fossil fuels. In contrast to previous findings, the observed carbon price developments are impacted much more strongly by scenario‐specific than by model‐specific influences. Next to the diagnostic indicators for models, further indicators for the categorization of scenarios describing key context and policy parameterisations applied in individual model runs should be developed and included in descriptions of integrated assessment studies.