No wonder this ever-quarrelling approach is incapable of achieving any real climate targets like the 2 degrees Celsius (2°C) target.
In order to achieve the 2°C target, we should not let governments simply do their best and pray for success. Rather, we should put a firm scientific lid on global emissions by creating a carbon budget, and make sure all CO2-emitting enterprises don’t collectively go beyond this budget. Game change is indispensable, and the carbon budget approach must take centre stage.
Once the new carbon budget approach is adopted, the theatre will look different. The new game will necessarily be science-driven, as a carbon budget will be scientifically calibrated depending on what climate target governments aim to achieve. It will be market-driven, as a carbon budget will be acceded to by all those who need it. Polluters, being beneficiaries of using the budget, will have to pay the cost of externalities. The market-driven approach will provoke all needed investments for achieving the climate target without manipulating the carbon price, maximise value-added production globally and realise the transition to a low-carbon globe at the lowest cost. Finally, the new game will be equity-driven, as sales from the carbon budget will create new, large and self-sustaining revenue streams that could pull poorer countries out of energy poverty.
If governments would only look up from their ‘reduction paradigm’, which has so far failed to deliver, and institute a new, global market approach, they could achieve climate targets such as the 2°C on time, help poorer countries and integrate these states into the global march toward low-carbon sustainable growth. The new market approach should cap global emissions to ensure they do not exceed the carbon budget, put collective property rights on such a budget, establish an upstream global carbon market and sell by auction the limited carbon budget as allowances. Additionally, all fossil fuel combustion should be done with allowances, sending the revenue from these sales to developing countries as a new form of climate finance. Finally, the new market approach should establish a system of compliance to eliminate fraud.
This proposed system is nimble, effective and market-driven, and there is no supra-national authority to govern it. The new system does not need to ‘sustain’ a carbon price to provoke investment. With its single common carbon price, it eliminates concerns about competitiveness. As it abolishes national borders, it also eliminates disputes on consumption-based emissions. And it provides large, built-in, self-sustaining climate finance without burdening the tax coffers of any country.
Today there is a strong consensus that imposing a price on CO2 emissions is the most cost-effective way to motivate all players to use less fossil fuels and move to low-carbon or non-carbon economic systems. An increasing number of nations (and regions) are putting a price on carbon within the context of their national reduction commitments, with countries like China and the Republic of Korea also joining the league.
All this is good news in view of the world’s darkening economic and fiscal horizons. We have to overcome the climate challenge at the lowest cost, and the market is the answer.
But the question remains: what kind of carbon market is needed? While national carbon markets are effective for provoking investment and reducing costs, they are all based on arbitrarily pledged national emission reduction commitments which together cannot achieve any climate targets. Then what is the use of launching a carbon market if it does not achieve any real targets? Do we wish to reduce costs only to lose the climate battle? The carbon market must not remain national. It must be extended to be global for its potential to be delivered in its full measure.
Those and other questions are expected to be debated intensively, possibly leading to a new global paradigm for international climate cooperation for the next 50 years and helping to achieve climate targets at the lowest cost, a triumph the world deserves to obtain.
Mutsuyoshi Nishimura is the former chief climate change negotiator for Japan.
For more on a new climate framework and the global carbon market, see Mutsuyoshi Nishimura and Akinobu Yasumoto’s working paper, ‘In search of a new effective international climate framework for post-2020: A proposal for an upstream global carbon market’, available here.
Nishimura asks the following question: “what kind of carbon market is needed?”
The answer is quite simple, yet the world at large seems unable to get it.
If it is true that “there is a strong consensus that imposing a price on CO2 emissions is the most cost-effective way to motivate all players to use less fossil fuels and move to low-carbon or non-carbon economic systems”, as Nishimura states, then isn’t a global price for carbon emissions and an equal per capita distribution of the revenue from pricing revenue simply enough to do the job?
Isn’t what is taught in economics to deal with pollution issues?
Most economists in the developed world including many of its national leaders and politicians should understand this, but few of them advocate this simple, efficient and effective method/policy. Why?
The answer is also simple, but I leave that to the readers.
Hi, Lincoln.
I appreciate your comments. In fact, by going to global carbon market, an assembly of all governments of the world put collective property right on the 2C ensuring carbon budget, sell them by auction to world polluters and get auction revenue and send them to countries in need, most particularly poorer countries. This is the best way to achieve targets like 2C and pull those poorer developing countries out of poverty whilst keeping all economies thriving. Only objection I would have is to distribute auction revenue on an equal per capita basis since such automatic managed economy harms world economy as we have been seeing over the past decades…
M. Nishimura (author)
Mutsuyoshi,
So how do you propose to recycle the revenue back to individuals? I’d think that some sort of revenue recycling will be required as households won’t otherwise be able to either respond to the rising costs of fossil fuels nor invest into non-fossil fuel alternatives… In other words, without a proper recycling component, this would be a massively regressive tax that would severely harm the poorest on the planet.
And what are your going to do against speculation? I assume, under the proposed “budget” approach, all allowances that correspond to this budget (say all emissions allowable between now and 2100) will go up for auction at the outset, not in yearly or “commitment period” trances? If so, I would expect speculative buying up of all the auctions at the outset by financial institutions which would leave the whole market vulnerable to speculation and would also constitute an immense power grab by these institutions.
Alternatively, it might make sense to not put up all allowances that will ever be available for auction at the beginning. This has disadvantages and advantages. The main disadvantage is that you’d have to pre-decide a reduction pathway to determine the amount of allowances to be sold in any given time period, thus, in a way, putting a cap on ambition. On the other hand, the advantage is that this would save the world from blowing its budget in the first couple of decades and then requiring either a carbon crash course or (more likely) the abandonment of the budget. This is likely because we know that future (reduction) costs will be discounted so an allowance price today will compare poorly to real reduction costs in 35 years.
Anyway, for me the most important question when thinking about market based mechanisms must always be: what would be the impact on the poorest in the world. Here, the main crunch issues of the idea would be a clever way for revenue recycling that firmly encourages low carbon investments rather than meeting all the other pressing financial needs that poor households usually have, and the concern that in a global carbon market that relative impact of a unified carbon price would be so massively different that there is a real risk that rich individuals and industries in richer countries would just snatch up the entire budget without leaving enough carbon space for even the basic subsistence emissions of the world’s poor. I believe any proposal has to show that it can ensure that the poor will not become more poor, and ideally help to lift them out of poverty (although a climate change proposal that “just” solves climate change without making other issues worse, but does not solve other problems humanity faces is also appreciated 😉
Christian