The Paris climate agreement needs coordinated carbon prices to be successful

The Paris climate agreement was an important success for climate diplomacy as nation states showed a strong will to cooperate on climate action.

But instead of imposing binding national emission targets, the Paris Agreement is based on voluntary country commitments (known as Intended Nationally Determined Contributions- INDCs). This poses some challenges.

First, the INDCs proposed so far are not enough to limit warming to well below 2℃, aiming for 1.5℃, as agreed in Paris. The INDCs shift a large burden of the effort to reduce greenhouse gas emissions to after 2030.

Second, the INDCs cannot, yet, be verified and compared in a transparent manner to build mutual trust over time.

Third, countries lack incentives to increase their level of ambition without reducing their competitiveness as well as securities that other countries do not free-ride; to counteract this the right institutions are needed.

Lastly, the INDCs do not automatically become national law after a country ratifies the Paris agreement. Only the promise to review and revise INDCs every five years is legally binding. Countries have to make an additional effort to include their proposed climate policy in their other national policies – for example to counteract the expansion of coal power plants.

Raising the bar

To be effective, the Paris agreement, or any international agreement, has to address these challenges. In this respect, sufficiently high national carbon prices that increase over time would be a meaningful climate policy instrument for three main reasons.

First, carbon prices are relatively easy to compare and represent a transparent indicator of the ambition level of national climate policies.

Second, a carbon price drives up the cost of carbon dioxide (CO₂) emissions, rendering high-emission forms of energy (such as coal power) unprofitable over the long term and low-emission technologies (such as wind and solar) competitive.

Third, the additional revenue from carbon pricing could remain in the respective countries and be used to achieve other societal targets, such as the Sustainable Development Goals.

When negotiating international carbon prices, for example in the context of the G20, individual countries would pledge to increase their domestic carbon price levels via emission taxes, fossil energy taxes, or emissions trading schemes featuring a price floor.

However, these price increases would only come into effect if other countries were likewise implementing high prices. This strategy would circumvent the concern that carbon pricing leads to competitive disadvantages. It would also include a sanctioning mechanism if participants were to lower their carbon prices.

Sharing the burden

A truly global coordination and increase of carbon prices can only occur if an effective burden sharing scheme is implemented. To engage developing countries, transfer payments are necessary. A particular country would receive international support if they accept a national carbon price.

Funds would have to increase with the price level, compensating for higher emissions reduction costs. Reducing the level of ambition would lead to a loss of international support.

This mechanism in turn increases the trust that other countries will pursue ambitious climate policies themselves. The climate finance envisaged in the Paris Agreement could be a main pillar of this strategy.

This article was co-authored by Christian Flachsland, head of governance group, and Ulrike Kornek post-doc in the governance group at the Mercator Institute on Global Commons and Climate Change.

Ottmar Edenhofer will be in Australia from 13-17 June and will present public lectures in Brisbane (University of Queensland), Canberra (ANU) and Melbourne (Climate and Energy College).