'Parallel tracks towards a post-Paris treaty on carbon pricing' Stopping climate change has turned out to be an immense challenge. Although denial of the problem seems to weaken somewhat, a serious hurdle to a solution is that many scientists and politicians are insufficiently focused on ultimate effectiveness of policies. We quantify the magnitude of the decarbonization challenge and discuss general solution strategies and policy instruments. We then look into the carbon emissions involved in a renewable energy transition, assess the effects of recessions on carbon emissions and discuss the trade-offs between economic growth and reducing carbon emissions. We zoom in on carbon pricing, listing classic and heterodox arguments in favor of it, dealing with effectiveness, efficiency, equity, national and international feasibility, and systemic effects. Complementary instruments and the reasons for their use are mentioned as well. On the basis of this, implications for the policy trajectory after the Paris international climate agreement are formulated.

1. Jeroen C.J.M. van den Bergh
VU University Amsterdam
Parallel tracks towards a post-Paris
treaty on carbon pricing

2. 2
Time window for action closing quickly
As per May 2017; Source: https://www.carbonbrief.org/analysis-four-years-left-one-point-five-carbon-budget

3. Decoupling requirement is astonishing
Source: van den Bergh and Antal (2016)
Reduction in carbon intensity of
output to meet 2°C target with 66%
probability
GDP increase
1.5% 0%
Total reduction 2013-2050 81% 67%
Annual reduction during 2013-2050 4.4% 2.9%
Historical annual reduction 1970-2013 <1%

4. A brief history of global climate policy
 1988: Intergovernmental Panel on Climate Change (IPCC), part of
UN, founded by WMO and UNEP – AR1-5
 1992: UN Framework Convention on Climate Change (UNFCCC)
 1997: Kyoto Protocol
– 43 industrialised countries reduced 2012 GHG emissions on average with
5% relative to 1990 levels. Burden-sharing in EU: -21% Germany - +27%
Portugal
– Developing countries no obligations
– “Entry into force”: 16 February 2005.
 2015: Paris agreement
– Voluntary pledges, to get nations without Kyoto limit aboard – where
emissions grow fast
– “Entry into force”: 4 November 2016.
4

5. Why still no stringent climate policy?
 Climate public good, no property rights => free riding
 Climate change and future damages are uncertain,
underestimated or even ignored
 Cost of climate mitigation policy is seen as prohibitive
 No easy and cheap substitutes for fossil fuels available
 Little care for future (high discount rate, myopia).
 Voters, politicians and social/policy scientists have
insufficient understanding of effective policy. 5

6. Paris agreement, December 2015
 Voluntary country pledges or (Intended) Nationally Determined
Contributions (NDCs); revised each 5 years
 Four types of pledges:
– Absolute emission reduction targets relative to base year (distinct base yrs)
– Reduction relative to future emissions growth in BAU scenario
– Reduction of emission intensity of national income (carbon/GDP)
– Mere ‘projects’ without identifying implications for emissions
 Hoped to limit increase in global mean surface temperature to 2
or even 1.5°C but expected increase is 2.5-3°C (Rogelj et al., 2016
Nature; Schleussner et al., 2016 Nature CC).
 While initial reactions predominantly positive, later many
questioned compliance with NDCs – so far, no country has
consistent policies (not even EU/Sweden)

7. 7
Voluntary pledges, no policy coordination
Focus on weak regulation, facilitating voluntary action,
and role cities. Paris Agreement will suffer from systemic
effects:
 National policies likely weak out of fear to loose international
competitive position => rebound
 National policies likely distinct, as pledges differ (per unit of
current emissions or average income) => carbon leakage
 Deployment/adoption subsidies likely, as polluters prefer these
and meet less political resistance => green paradox (fossil fuel
market responses)

8. 8
Guestimating systemic
effects of Paris
 Carbon leakage 10-20%, rebound 20-70%, green
paradox 5-10%, so total 35-100%.
 If total systemic effects imply just 50% lower emission
reductions, global average temperature up to ±3.7°C.
Back-of-the envelope calculation: more careful analysis needed.

9. 9
So overly optimistic?

10. Normalizing 4 types of pledges/NDCs
(Base year 2015)
10Source: King & van den Bergh (2018)

11. 11
Carbon pricing (CP) as a solution
 Three motivations:
– Carbon pricing is easiest instrument to coordinated and make
uniform among all countries in the world.
– A focus on CP can overcome free riding in climate
negotiations.
– Already many CP initiatives around the world – both carbon
taxes and markets (cap-and-trade / emissions trading).
 Note: Paris agreement NDCs imply implicit carbon
prices to vary among countries from approximately 5 to
250 $ (Aldy et al., 2016, Nature CC).

12. Current carbon pricing initiatives
12
- Already many unilateral initiatives indicating serious interest in CP.
- But low and inconsistent prices, and repeated public/political resistance
motivated by concerns about international competitive position.
- Only upscaling to whole world can overcome these shortcoming.
Source: World Bank (2018)

13. 13
4 classical arguments for carbon pricing
1. It internalizes the global-warming/climate-change externality
(“the mother of all externalities” – R. Tol)
2. Can deal with heterogeneous polluters: equalizes marginal
abatement costs among polluters => cost-effective
- contributes to political acceptability
3. Pricing means “decentralisation” of regulation
=> low information needs.
4. Permanent incentive for both technology adoption & innovation
- moreover, environmental innovation trajectories misguided if prices wrong.

14. Carbon pricing cost-effective: most effective
(= max. emissions reduction) for a given cost
–
+
(main finding of environmental economics)

15. 15
Carbon pricing: additional arguments
1. Subtle, complete control: all goods/services have price correction
proportional to pollution generated over life-cycle – less rebound
2. Most emissions due to market decisions. Price intervention logical
3. No separate LCA needed, integrate in financial accounting firms
4. Pricing generates revenues for correcting undesirable distribution
effects (or for innovation subsidies, or climate finance for poor countries)
5. Pricing said to be politically unattractive, but international
coordination of policy arguably easiest through pricing – less
carbon leakage
6. Guarantees minimal oil price – green paradox avoided
7. Shifts revenues from OPEC to oil importers

16. Carbon pricing ≠ energy/fuel prices
Instead: tax / charge per unit of carbon
Energy source EROI
Carbon emission
factor37
(kgCO2/TJ)
EROC
(EJ/GtCO2)
Coal 46:1 94.6 10.3
Coal with CCS 9:1 9.5 65.1
Oil 19:1 73.3 12.9
Oil shale 7:1 107.0 8.0
Tar sands 4:1 107.0 7.0
Natural gas 19:1 56.1 16.9
Natural gas with CCS 4:1 5.6 101.9
Source: King & van den Bergh (2015)
EROI = ‘Energy return on energy investment’
EROC= ‘Energy return on carbon’ of combusting fossil fuels

17. Carbon pricing = systemic policy
17
Source: van den Bergh et al. (2018)

18. Systemic effect of carbon pricing
Relevant to correctly price energy generating and transforming
technologies: renewable energy technologies, LEDs, batteries, electric cars, etc.
Source: FengLiu & van den Bergh (2018)
CO2 emissions in production of 5 PV technologies in China, EU and USA

19. Equity carbon price vs other instruments
19
 Often suggested CP is inequitable – energy poverty
 But CP in fact is the only instrument that generates revenues
to be used for compensation of inequitable policy effects
 Other instruments are inequitable but lack such revenues to
compensate:
– Technological standards
– Subsidies
 Political acceptance: any design of carbon pricing should
make explicit how revenues are spent/recycled. Mistake in
France (yellow vest protests)

20. Carbon tax (CT) vs. carbon market (CM)
20
 Outcome (total emissions) more certain with CM (cap)
 Price endogenous/adaptive under CM, to technological
change, new products, fashions, scientific progress on CC.
 Once established, CM independent from politics – for CT
climate law needed to assure stability.
 Global carbon price: linking existing CMs (EU-ETS, China),
or global CT (managed by UN) or coordinated national CTs
 CT generates regular revenues – inequity compensation.
 Combination realistic + feasible; large emitters in CM

21. Transition through parallel tracks:
CP club and UNFCCC-COPs
21

22. Climate club (Nobel laureate 2018 W.D. Nordhaus)
 Motivation: other agreements started as club (GATT/WTO)
 Joint, coordinated policy: single carbon price.
 Carbon tariff on imports from countries without climate
policy. Stimulates outsiders to become member
 Start of CP: important export partners to avoid trade conflicts
 Multi-level approach: countries and US states
– Martin & van den Bergh (2018) identify 23 states as potential club
members (38.5% of US emissions). A 2nd group (additional 46.7%)
potentially receptive to enticement via trade with 4 key nations.
22

23. Suitable countries to start club
(based on: opinion surveys, NDCs & participation in relevant coalitions)
23
Nation
Effectiveness Likelihood of involvement
% of total global
CO2 emissions
% of total global
GDP
Net likelihood
score
Net likelihood
ranking
Australia 1.1 1.8 0.758 1
Brazil 1.6 2.4 0.746 2
Canada 1.6 2.1 0.721 3
South Korea 1.7 1.9 0.711 4
Mexico 1.4 1.6 0.661 5
Japan 3.6 5.9 0.585 6
EU 9.6 21.9 0.571 7
India 6.6 2.9 0.517 8
South Africa 1.4 0.4 0.515 9
Indonesia 1.4 1.2 0.438 10
US 15.5 24.5 0.383 11
China 30.4 15.0 0.366 12
Iran 1.9 0.5 0.326 13
Russia 5.0 1.9 0.284 14
Saudi Arabia 1.8 0.9 0.227 15
Source: Martin and van den Bergh (2018)

24. 24
UNFCC COP meetings – post-Paris negotiations
 Negotiating carbon price reduces free riding and is simpler goal
than negotiating 200 national targets or a multitude of technical
standards (+ lobbying)
 The club can promote its uniform carbon pricing goal at
UNFCCC COP meetings.
– New members could be invited.
– Clubs could even make joint pledges.
– Would put pressure on UNFCCC climate negotiations.
 To overcome remaining political barriers:
– Partial agreement on carbon pricing in UNFCCC: overcomes resistance
of reluctant (oil-rich, USA) & hesitating (Canada, Australia) countries
– Temporary heterogeneous prices btw rich & poor countries as a transition

25. 25
Time path carbon price
 Gradual carbon price increase allows investors to anticipate:
minimizes economic costs and risks
 Decisions on initial carbon price (e.g. 50 US$) and annual
increase (e.g., 10 US$); final price not fixed now but based
on global emissions response: part of CP Club/UNFCCC
agreement
 Guidance for final price:
– Guiding social cost of carbon, meta-estimate: 125 US$/ton CO2 (van
den Bergh & Botzen, 2014)
– Recent OECD study finds carbon tax 1€/ton CO2 reduces emissions
by 0.73 % in long run, i.e. 140€ tax may reduce emission completely
(Sen & Vollebergh, 2018)

26. 26
Main conclusions
1. Voluntary pledge approach Paris basic flaws: expect ↑3.7°C
2. Global CP guarantees effective/systemic & affordable solution
through consistent national policies (= equal implicit carbon prices)
3. CP club among ambitious trade partners, with carbon border
tariffs to pressure unwilling countries to join
4. UNFCCC negotiations include attention for carbon pricing
– CP club talks with one voice at UNFCCC-COP meetings
– During transition phase sub-agreements and heterogeneous prices.
5. CP revenues essential part of design for political feasibility
– recycle (partly/wholly) to compensate/avoid inequitable effects

27. 27