## clnea2021001

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### Key context and projections
- Global carbon dioxide (CO2) emissions, along with other greenhouse gases (GHGs), must be cut by around a quarter to a half by 2030 to be on track to stabilize the climate.
- Central case (post-pandemic) projections suggest global CO2 emissions will rise from around 30 billion tons in 2020 to 37 billion by 2030. Illustrative pathways suggest that containing warming to ‘well below’ 2°C and ideally towards 1.5°C above pre-industrial levels requires global CO2 emissions in 2030 to be limited to about 15 to 25 billion tons.
- Cutting emissions at this pace requires additional measures equivalent to a global carbon tax of around $75 per ton by 2030 (and rising further beyond 2030).
- Global average effective carbon price currently cited as $3 per ton.

### Paris Agreement status and ambition gap
- 195 parties signed the Paris Agreement; most submitted first-round mitigation pledges in their nationally determined contributions (NDCs), many to be met by 2030.
- Countries are submitting revised pledges ahead of COP26 in November 2021 as part of the first five-yearly “ratchet mechanism.”
- To date, 59 countries accounting for 54 percent of global emissions have committed to net-zero emissions by midcentury, including Canada, the European Union, Japan, Korea, the United Kingdom, the United States (all 2050), and China (2060).
- As of 26 May 2021, 85 countries have submitted revised targets, but many do not entail substantial additional emissions reductions by 2030.
- Revised commitments – even if fully implemented – remain insufficient to meet the Paris target of limiting warming to “well below 2°C.”

### Rationale for an International Carbon Price Floor (ICPF)
- Main rationales:
  - Facilitate negotiation in a transparent manner by focusing on a single parameter: a minimum carbon price.
  - Scale up ambition and policy action by addressing competitiveness, free-riding, and domestic political difficulties with unilateral carbon pricing.
- Structure and scope:
  - An ICPF would be negotiated among a small number of key large emitting countries and focus on the minimum carbon price each must put on CO2 emissions.
  - A “minilateral” ICPF can reduce concerns about lowballing or reneging, neutralize relative cost effects and pressure for inefficient unilateral BCAs, provide a mechanism to address international equity transparently (e.g., differentiated floors, transfers), and complement the Paris Agreement.

### Design principles and pragmatic flexibilities
- Key design issues: participants, emissions coverage, floor price levels, differentiated pricing, compensation/inducements to join, allowable instruments, compliance monitoring.
- Participants:
  - Initial core group suggested: China, the European Union, India, the United States, and other G20 members with ambitious pricing (for example, Canada and the United Kingdom).
  - Procedures for subsequent accession should be established without compromising core decision-making capability.
- Emissions coverage:
  - Initial focus: fossil fuel CO2 emissions from power/district heating and industrial sectors.
  - Progressive extension could cover all fossil fuel CO2 emissions (about two-thirds of global GHGs) and eventually broader sources (industrial process emissions, methane leaks, forestry).
- Floor price levels and differentiation:
  - Floor prices set to align aggregate emissions from ICPF participants with global temperature objectives.
  - Participants would meet whichever is more stringent: the price requirement or their Paris mitigation pledge.
  - Example differentiated scenario: $75 for advanced, $50 for high-income EME (for example, China), and $25 for low-income EME (for example, India).
- Compensation mechanisms:
  - Transparent fiscal transfer system could compensate developing member countries.
  - Illustrative fund example: $10 billion a year would be equivalent to about 1 percent of the revenues from a $50 price on G20 carbon emissions.
- Allowable instruments and compliance:
  - Carbon tax or emissions trading systems (ETS) accommodated; ETS uncertainty can be addressed via price stability mechanisms (minimum auction prices) or cap-setting.
  - Flexibility for equivalent non-pricing approaches could be permitted subject to verification, as an exception to preserve transparency and simplicity.
  - Early compliance measurement: observed nominal prices in carbon tax and ETS schemes; transition to effective carbon price metrics as monitoring is agreed.
  - Alternative compliance metric: require an absolute increase in countries’ effective carbon prices relative to a benchmark year to prevent relabeling of non-carbon policies as carbon pricing.

### Comparative advantages vs alternatives
- Pragmatic ICPF (allowing differentiated pricing and equivalent approaches) vs pure carbon pricing vs annual country-level emissions targets:
  - Pragmatic ICPF: focused negotiation; accommodates equity and domestic political realities; can neutralize competitiveness concerns better than unilateral approaches; more practical than negotiating country-level emissions targets.
  - Pure carbon pricing: fewer degrees of freedom to address equity and participation constraints; precludes non-pricing approaches.
  - Annual emissions targets: more scope to address equity/competitiveness but harder to negotiate and leaves greater uncertainty about concrete policy actions and enforcement needs.
- Emissions embodied in exports from EITE industries are typically around 2 to 10 percent of domestic CO2.

### Illustrative quantitative considerations and country shares
- China, India, and the US account for 57 percent of baseline CO2 emissions in 2030; the G20 makes up 85 percent (including EU countries).
- Figure 2 baseline shares for 2030: China 32%, United States 14%, India 9%, EU 8%, Other G20 21%, Rest of world 16%.
- In China, India, and the United States, around 70 to 90 percent of the economywide CO2 emissions reductions under a comprehensive $50 carbon price in 2030 would come from the power and industrial sectors alone.
- Pre-existing road fuel taxes contribute less than $5 per ton to the effective carbon price in China, India, and the United States.
- Canada prototype: federal government sets carbon price rising progressively from CAN$10 per ton of CO2 in 2018 to $50 in 2022 and $170 in 2030.

### Emissions-impact scenarios and Annex 3 findings
- Scenarios compared:
  - Baseline projection (no new/tightened policies).
  - Countries meeting Paris pledges (NDCs) as of June 2, 2021.
  - Additional scenarios where six parties (China, India, the US, EU, UK, Canada) participate in an ICPF or all G20 countries participate.
  - Price-floor scenarios include common $50 per ton floors, and differentiated $75/$50/$25 floors for advanced/high-income EME/low-income EME respectively.
- Annex 3: impacts of a $50 carbon price on energy prices in G20 countries in 2030:
  - Coal prices affected most; natural gas, electricity, and retail gasoline price impacts are smaller on average but can be large in some countries.
- Emissions outcomes (text summaries):
  - "at least 21 percent by 2030" is the minimum required just to reach the top of the 1.5-2°C range compared with 'business as usual'.
  - "just 14 percent below baseline levels" is the outcome if all G20 countries achieved current NDCs.
  - Reinforcing NDCs with an ICPF (single or differentiated price) would cut emissions sufficiently to enter the upper end of the range for 2°C, even when only the six economies participate.
  - Either a pure $50 carbon price floor for all six countries or a differentiated price floor of $25, $50, and $75 depending on development levels "would reduce energy-related CO2 emissions 23-24 percent compared with business-as-usual."
  - Extending the ICPF to other G20 countries causes a modest further increase in G20 abatement.

### Country-level effects under differentiated $25/$50/$75 floor (selected findings)
- "US and Canada ... (25 and 24 percent)"; "EU and UK (21 and 14 percent)"; "China ... (27 percent)"; "India (13 percent)"
- "India’s emissions rise in absolute terms (by 21 percent, compared to 9 to 30 percent reductions in other countries)."
- Participation by six major economies would greatly enhance the Paris Agreement’s effectiveness.

### Methodology notes and caveats
- Quantitative analysis based on the Carbon Pricing Assessment Tool projecting fossil fuel CO2 emissions and effects of carbon pricing across countries and sectors.
- Key model inputs/assumptions: GDP projections from latest (post-COVID) IMF forecasts; income elasticity and own-price elasticity of demand for electricity and other fuels; assumptions about the rate of technological change; future international energy prices (projected using an average of different sources).
- Model caveats:
  - Results are not reported for carbon prices above $75 per ton.
  - The model abstracts from possible mitigation actions in the baseline, does not explicitly account for upward sloping fuel supply curves, general equilibrium feedbacks, or changes in international fuel prices that might result from simultaneous mitigation by large emitters.
  - Fuel price elasticities used are broadly consistent with empirical evidence and energy models (typically between –0.5 and –0.8).

### Policy design recommendations (summary)
- Limit initial arrangement to a core group of high-emitting countries, allowing others to join after core decision processes are established.
- Focus on a common price floor for participants rather than separate emissions targets.
- Allow differentiation in price floors according to level of development and possibly financial transfers to address equity.
- Permit provisions for meeting requirements through non-pricing policies with equivalent emissions impacts, subject to verification.
- Require initial carbon pricing for power and industrial sectors, with progressive extension to other fossil fuel CO2 emissions and broader GHG sources.
- Start with nominal carbon price observation for compliance, transition to effective carbon price monitoring as procedures mature.

*Source: clnea2021001 (IMF staff analysis and Annex 3 as presented in the supplied content).*

### Introduction

### clnea2021001 - Introduction

### Key context
- Global carbon dioxide (CO2) emissions, along with other greenhouse gases (GHGs), must be cut by around a quarter to a half by 2030 to be on track to stabilize the climate.

### Projections under currently implemented policies
- Central case (post-pandemic) projections suggest global CO2 emissions will rise from around 30 billion tons in 2020 to 37 billion by

*Source: clnea2021001 - Introduction*

### 2030. Illustrative pathways suggest that containing

### clnea2021001 - 2030. Illustrative pathways suggest that containing

### Near-term emissions targets and required pricing
- Containing warming to ‘well below’ 2°C and ideally towards 1.5°C above pre-industrial levels requires global CO2 emissions in 2030 to be limited to about 15 to 25 billion tons.
- Cutting emissions at this pace requires additional measures equivalent to a global carbon tax of around $75 per ton by 2030 (and rising further beyond 2030).
- Global $75 carbon tax scenario described: starts at $15/ton, rising steadily from 2022 to 2030.
- Note: $25/50/75 carbon price floor figures are for China, US, India, EU, Canada, UK - conditional on achieving NDCs.

### Paris Agreement status and ambition gap
- 195 parties signed the Paris Agreement; most submitted first-round mitigation pledges in their nationally determined contributions (NDCs), many to be met by 2030.
- Countries are submitting revised pledges ahead of COP26 (Glasgow climate conference) in November 2021 as part of the first five-yearly “ratchet mechanism.”
- To date, 59 countries accounting for 54 percent of global emissions have committed to net-zero emissions by midcentury, including Canada, the European Union, Japan, Korea, the United Kingdom, the United States (all 2050), and China (2060).
- As of 26 May 2021, 85 countries have submitted revised targets, but many do not entail substantial additional emissions reductions by 2030.
- Revised commitments – even if fully implemented – remain insufficient to meet the Paris target of limiting warming to “well below 2°C.”

### Rationale for an International Carbon Price Floor (ICPF)
- Two main rationales:
  - Facilitate negotiation in a transparent manner by focusing on a single parameter: a minimum carbon price.
  - Scale up ambition and policy action by addressing obstacles such as concerns over competitiveness, free-riding, and domestic political difficulties with unilateral carbon pricing.
- An ICPF would be negotiated among a small number of key large emitting countries and focus on the minimum carbon price each must put on CO2 emissions.
- A “minilateral” ICPF can:
  - Reduce concerns that other countries will lowball or renege on commitments.
  - Neutralize effects of carbon pricing on relative costs of domestic vs foreign goods and reduce pressure for inefficient unilateral border carbon adjustments (BCAs).
  - Provide a mechanism to address international equity transparently (e.g., differentiated floors, transfers).
  - Complement (not substitute for) the Paris Agreement and allow “mini-lateral” ambition-raising arrangements.

### Design principles and pragmatic flexibilities
- Key design issues: participants, emissions coverage, floor price levels, differentiated pricing, compensation/inducements to join, allowable instruments, compliance monitoring.
- Participants:
  - Initial core group suggested: China, the European Union, India, the United States, and other G20 members with ambitious pricing (for example, Canada and the United Kingdom).
  - Procedures for subsequent accession should be established without compromising core decision-making capability.
- Emissions coverage:
  - Initial focus: fossil fuel CO2 emissions from power/district heating and industrial sectors (rationale: consistent monitoring; responsiveness to pricing; ETS precedents; fuels largely untaxed).
  - Progressive extension could cover all fossil fuel CO2 emissions (about two-thirds of global GHGs) and eventually broader sources (industrial process emissions, methane leaks, forestry).
- Floor price levels:
  - In principle set to align aggregate emissions from ICPF participants with global temperature objectives.
  - Participants would meet whichever is more stringent: the price requirement or their Paris mitigation pledge.
- Differentiated pricing and equity:
  - Multiple price minima could be specified by development status to address equity (trade-off: some loss in global economic efficiency).
  - Example differentiated scenario: $75 for advanced, $50 for high-income EME (for example, China), and $25 for low-income EME (for example, India).
- Compensation mechanisms:
  - Transparent fiscal transfer system could compensate developing member countries.
  - Illustrative fund example: $10 billion a year would be equivalent to about 1 percent of the revenues from a $50 price on G20 carbon emissions.
  - BCA exempting trade among ICPF participants could be considered but may complicate negotiations and have limited inducement power.
- Allowable instruments:
  - Carbon tax or emissions trading systems (ETS) are accommodated. ETS uncertainty can be addressed via price stability mechanisms (minimum auction prices) or cap-setting to target expected prices equal to floor.
  - Flexibility for equivalent non-pricing approaches could be permitted subject to verification, but such flexibility should be the exception to preserve transparency and simplicity.
- Measuring compliance:
  - Early stages: observed prices in carbon tax and ETS schemes (particularly power/industry) could be compared against the benchmark.
  - For broader coverage, focus on countries’ “effective” carbon prices by: (1) expressing fuel taxes on a CO2-equivalent basis; (2) weighting taxes and explicit pricing by relative effectiveness; (3) aggregating across systems.
  - Alternative: require an absolute increase in countries’ effective carbon prices relative to a benchmark year to prevent relabeling of non-carbon policies as carbon pricing.

### Comparative advantages vs alternatives
- Pragmatic ICPF (allowing differentiated pricing and equivalent approaches) vs pure carbon pricing vs annual country-level emissions targets:
  - Pragmatic ICPF: focused negotiation; accommodates equity and domestic political realities; can neutralize competitiveness concerns better than unilateral approaches; more practical than negotiating country-level emissions targets.
  - Pure carbon pricing: focused but fewer degrees of freedom to address equity and participation constraints; precludes non-pricing approaches.
  - Annual emissions targets: more scope to address equity/competitiveness but harder to negotiate (zero-sum), and leaves greater uncertainty about concrete policy actions and enforcement needs.
- Global average effective carbon price currently cited as $3 per ton.
- Emissions embodied in exports from EITE industries are typically around 2 to 10 percent of domestic CO2.

### Illustrative quantitative considerations and country shares
- China, India, and the US account for 57 percent of baseline CO2 emissions in 2030; the G20 makes up 85 percent (including EU countries).
- Figure 2 baseline shares for 2030: China 32%, United States 14%, India 9%, EU 8%, Other G20 21%, Rest of world 16%.
- In China, India, and the United States, around 70 to 90 percent of the economywide CO2 emissions reductions under a comprehensive $50 carbon price in 2030 would come from the power and industrial sectors alone.
- Pre-existing road fuel taxes contribute less than $5 per ton to the effective carbon price in China, India, and the United States (IMF 2019b reference in source).
- Canada prototype: federal government sets carbon price rising progressively from CAN$10 per ton of CO2 in 2018 to $50 in 2022 and $170 in 2030.
- Global coordination rationale: addressing competitiveness and free-rider problems reduces pressure for inefficient BCAs and aids political acceptability of higher domestic energy prices by sharing action among major economies.

### Emissions-impact scenarios (summary of approach)
- Quantitative scenarios compare baseline projection (no new/tightened policies) with:
  - Countries meeting Paris pledges (NDCs) as of June 2, 2021.
  - Additional scenarios where six parties (China, India, the US, EU, UK, Canada) participate in an ICPF or all G20 countries participate.
  - Price-floor scenarios include common $50 per ton floors, and differentiated $75/$50/$25 floors for advanced/high-income EME/low-income EME respectively.
- Modeling framework: projects sectoral emissions at country level and uses assumptions about price responsiveness of fuel use to infer emissions impacts of carbon pricing; Annex 2 in source details methods and caveats.

*Source: IMF staff estimates and analysis as presented in the supplied content.*

### Annex 3 illustrates how a $50 carbon price

### Annex 3 illustrates how a $50 carbon price

### Impacts on energy prices in 2030
- Annex 3 illustrates how a $50 carbon price would affect energy prices in G20 countries in 2030; coal prices are affected most dramatically though coal is largely an intermediate product—impacts on natural gas, electricity, and retail gasoline prices are smaller but can still be large in some cases.
- Qualitative finding: coal prices rise most; natural gas, electricity, and retail gasoline price impacts are smaller on average but can be large in some countries.

### Emissions outcomes and ICPF scenarios
- Existing NDCs remain insufficient for achieving the Paris Agreement’s temperature targets.
- Minimum required: "Just to reach the top of the 1.5-2°C range requires global emissions cuts of at least 21 percent by 2030 compared with 'business as usual' (lightest green area in Figure 1)."
- Current NDCs outcome: "Current NDCs would fall short—even if all G20 countries achieved their pledges emissions reductions would be just 14 percent below baseline levels."
- ICPF (International Carbon Price Floor) impacts:
  - "Reinforcing NDCs with an ICPF – either with a single or differentiated price – would cut emissions sufficiently to enter the upper end of the range for 2°C, even when only the six economies participate."
  - "Either a pure $50 carbon price floor for all six countries or a differentiated price floor of $25, $50, and $75 depending on development levels would reduce energy-related CO2 emissions 23-24 percent compared with business-as-usual."
  - "Extending the ICPF to other G20 countries causes a modest further increase in G20 abatement."
- Table summary (as reported in the text):
  - NDCs only: emissions reductions reported as "just 14 percent below baseline levels."
  - NDCs + $50 Floor: reductions reported in text as "23-24 percent" (energy-related CO2).
  - NDCs + Differentiated Floor $75/50/25: results described in the body (see country-level breakdowns below).

### Country-level effects under differentiated $25/$50/$75 floor (selected findings)
- "Among advanced economies, US and Canada have slightly higher emissions reductions (25 and 24 percent) than EU and UK (21 and 14 percent)."
- "China and India have larger price responsiveness in general than AEs, but China has larger emissions cuts compared with business-as-usual (27 percent) than India (13 percent), reflecting the differentiated responsibilities that this regime would allow for."
- "Only India’s emissions rise in absolute terms (by 21 percent, compared to 9 to 30 percent reductions in other countries), reflecting its lower historical contribution and current per capita emissions."
- Participation note: "In short, participation in the ICPF by six major economies would greatly enhance the Paris Agreement’s effectiveness."

### Policy design recommendations for a successful ICPF
- Limit the initial arrangement to a core group of high-emitting countries (though allowing others to join once design specifics and decision-making processes have been established among the core countries).
- Focus the agreement on a common price floor for all participants (rather than, for example, a separate emissions target for each participant).
- Allow differentiation in price floors according to level of development, and perhaps financial or other transfers, to address international equity.
- Allow provisions for countries to meet requirements through non-pricing policies with equivalent emissions impacts as the price floor.
- Require, initially, carbon pricing for the power and industrial sectors, with progressive extension to other fossil fuel CO2 emissions and broader sources of GHGs.
- Focus the agreement on nominal (easily observed) carbon prices initially, but perhaps transition to a focus on effective carbon prices (as monitoring procedures are agreed).
- Note: "The type of price floor arrangement proposed here could also be implemented at the regional level."

### Methodology notes relevant to Annex 3 results
- Quantitative analysis is based on the Carbon Pricing Assessment Tool (spreadsheet model) projecting fossil fuel CO2 emissions and effects of carbon pricing across countries and sectors.
- Key model inputs/assumptions include:
  - GDP projections from latest (post-COVID) IMF forecasts.
  - Income elasticity and own-price elasticity of demand for electricity and other fuels.
  - Assumptions about the rate of technological change affecting energy efficiency and energy productivity.
  - Future international energy prices (projected using an average of different sources).
- Model caveats highlighted in the text:
  - Results are not reported for carbon prices above $75 per ton due to speculative outcomes and uncertainty over major technological advances (for example, carbon capture and storage, advanced nuclear).
  - The model abstracts from possible mitigation actions in the baseline, does not explicitly account for upward sloping fuel supply curves, general equilibrium feedbacks, or changes in international fuel prices that might result from simultaneous mitigation by large emitters.
  - Fuel price elasticities used are broadly consistent with empirical evidence and energy models (typically between –0.5 and –0.8).

### Key numeric findings (quoted exactly as in the source)
- "a $50 carbon price"
- "at least 21 percent by 2030"
- "just 14 percent below baseline levels"
- "would reduce energy-related CO2 emissions 23-24 percent compared with business-as-usual"
- Differentiated floors referenced as "$25, $50, and $75"
- Country reductions (differentiated floor): "US and Canada ... (25 and 24 percent)"; "EU and UK (21 and 14 percent)"; "China ... (27 percent)"; "India (13 percent)"; "India’s emissions rise in absolute terms (by 21 percent, compared to 9 to 30 percent reductions in other countries)"
- Modeling limit: "results are not reported for carbon prices above $75 per ton."

*Source: IMF staff calculations and analysis (Annex 3 and related text of Proposal for an International Carbon Price Floor among Large Emitters, IMF Staff Climate Notes 2021/001).*

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_Source: https://www.imf.org/-/media/files/publications/staff-climate-notes/2021/english/clnea2021001.pdf_