Flexible Global Carbon Pricing: A Backward-Compatible Upgrade for the Kyoto Protocol

Abstract

The Kyoto Protocol’s approach of assigning emission targets, or “caps,” promises certainty that it cannot deliver, because it exacerbates problems with international cooperation and commitment. Global carbon pricing addresses these problems and, with less risk and more reward, can generate and sustain stronger policies. This paper proposes a system, “flexible global carbon pricing,” designed to replace the Kyoto Protocol. It provides backward-compatibility with the Kyoto Protocol by allowing un-modified cap and trade as one form of national carbon pricing. Instead of many national “caps,” the proposal sets a global target price for carbon and specifies a pair of incentives. A Pricing Incentive rewards nations that set their carbon price higher than the global target and penalizes nations that underachieve. These rewards and penalties sum to zero by design. The strength of the Pricing Incentive is adjusted automatically so that the global average carbon price converges to the global target price. A Clean Development Incentive (CDI), free from the gaming problems that plague the U.N.’s Clean Development Mechanism, encourages full participation by low-emission countries. An example, based on a $20 price target, causes transfers from the United States of only seven cents per capita per day. Nevertheless, India’s CDI receipts cover its compliance costs. The example shows that low costs can be guaranteed.