Surprisingly small tweaks to carbon pricing could balance cost with fairness

Researchers believe they found a way to resolve the tradeoff between too many different carbon prices and the need for big cash transfers between countries

By Sarah DeWeerdt

Researchers have long known that there’s a tradeoff in global climate policy. The cheapest way to decarbonize is to implement a global cap-and-trade system with a uniform carbon price around the world. But this triggers a need for massive payments from wealthy to developing countries to equalize the financial burden.

Developing countries sometimes perceive this influx of outside money as a threat to national sovereignty, and wealthier countries don’t always follow through on their promises anyway. On the other hand, setting carbon prices on a country-by-country basis prevents the need for transfer payments, but raises the overall cost of global decarbonization.

Now, a group of economists in Germany has quantified these problems. Not only that, but they’ve figured out how to strike a balance between cost efficiency, national sovereignty, and fair effort sharing.

The researchers employed a computer model used by the Intergovernmental Panel on Climate Change to analyze various policy scenarios. All of the scenarios were designed to cut global emissions enough to keep warming under 2 °C while distributing costs equitably, meaning that each country would lose the same fraction of national income as a result of climate policy.

The most cost-efficient way to achieve that goal would be to set the 2030 price of carbon at a uniform US$56 everywhere in the world, the researchers report in Nature. But this scenario would require transfer payments from industrialized to developing nations to the tune of more than US$4 trillion in the next 80 years—equivalent to 35% of total global mitigation costs.

To avoid the need for transfer payments altogether, the price of carbon in wealthy countries would have to be more than 100 times that in developing countries. But this would increase the overall cost of decarbonization by 21%, or US$2.6 trillion worldwide over the rest of the century.

Varying carbon prices can have other unintended consequences, the researchers found. A wide spread of carbon prices could lead to wealthy countries to invest in a technology known as bioenergy with carbon capture and storage and developing countries to export bioenergy. This would worsen deforestation and land use change in the Global South.

But there is a way out of this dilemma. The researchers graphed the tradeoff between cost and transfer payments (that is, between efficiency and sovereignty). “Both policy instruments turn out to have non-linear effects: small changes can make a big difference,” lead author Nico Bauer of the Potsdam Institute for Climate Impact Research said in a statement.

The analysis suggests that a carbon price that varies modestly between regions (by about one-quarter of that in the no-transfers scenario) coupled with modest transfer payments (again about one-quarter of the amount in the uniform-carbon-price scenario) could yield fair decarbonization at a feasible price—the best of all the imperfect scenarios available.

Source: Bauer N. et al. “Quantification of an efficiency-sovereignty trade-off in climate policy.” Nature 2020.

Note: This blog is a re-post of the original posted on the Anthropocene Magazine website.