A Proposal to Scale Up Global Carbon Pricing

IMF Blog, June 18, 2021

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Between one quarter and one half. That’s how much carbon dioxide (CO2) and other greenhouse gases must fall over the next decade to keep alive the goal of restricting global warming to below 2°C.
Climate change presents huge risks to the functioning of the world’s economies and is a central concern for IMF surveillance and financial stability work.
Additional measures equivalent to a carbon price of $75 per ton or more are required by 2030 to meet global mitigation needs.

Carbon pricing is identified as the most important policy tool to achieve drastic emissions cuts by:
- Making polluting energy sources more expensive than clean sources.
- Providing incentives to improve energy efficiency and redirect innovation toward green technologies.
Carbon pricing requires complementary measures to enhance effectiveness and acceptability, including:
- Public investment in clean technology networks (e.g., grid upgrades to accommodate renewables).
- Measures to assist vulnerable households, workers, and regions.

More than 60 carbon pricing schemes have been implemented globally.
60 countries have already pledged to be emissions-neutral by midcentury.
Global ambition remains uneven:
- Four-fifths of global emissions remain unpriced.
- The global average emissions price is only $3 per ton.
- Carbon embodied in trade flows is typically less than 10 percent of countries’ total emissions.
Some jurisdictions with high or rising carbon prices are considering charges on carbon content of imports, but border carbon adjustments are insufficient as a primary global instrument.

1. Launched by the largest emitters:

China, India, the US and the EU will account for nearly two-thirds of projected global CO2 emissions in 2030 (if no new mitigation actions are taken).
Including the full G20 takes this to 85 percent.
The scheme could gradually expand to encompass other countries after launch.

2. Anchored on a minimum carbon price:

A concrete, efficient, and easily understood instrument that addresses competitiveness concerns via simultaneous action among large emitters.
The focus on a minimum carbon price parallels current discussion on a minimum tax rate in international corporate taxation.

3. Designed pragmatically:

Needs to be equitable, flexible, and account for differentiated responsibilities (e.g., historical emissions and development levels).
Could use two or three different price levels varying by accepted measures of a country’s development.
Could accommodate countries where domestic carbon pricing is not currently feasible by allowing equivalent emissions reductions through other policy instruments.

An illustrative example (reinforcing Paris Agreement pledges) uses a three-tier price floor among six participants: Canada, China, European Union, India, United Kingdom, United States.
Price tiers proposed in the illustration:
- $75 for advanced economies,
- $50 for high-income emerging markets,
- $25 for low-income emerging markets.
Under this scenario and in addition to current policies, the arrangement could help achieve a 23 percent reduction in global emissions below baseline by 2030 — presented as sufficient to bring emissions in line with keeping global warming below the 2oC threshold.

The Canadian application of carbon pricing across provinces is cited as a prototype:
- Federal requirement: minimum carbon price rising progressively from CAN$10 per ton in 2018 to CAN$50 in 2022 and CAN$170 in 2030.
- Provinces and territories may meet the requirement through carbon taxes or emissions trading systems.

A well-designed international carbon price floor would yield:
- Collective benefits from stabilizing the global climate system.
- Domestic environmental benefits, including fewer deaths from local air pollution.
The paper urges prompt coordinated action centered on an international carbon price floor to avoid regretting missed opportunities and to achieve progress toward keeping global warming below the 2oC threshold.

Authors: Vitor Gaspar, Ian Parry — June 18, 2021.