Global Carbon Pricing, The Path to Climate Cooperation | Peter Cramton

All life forms compete for resources and humanity is no exception, as our long history of warfare attests. However, our ancestors also learned that providing controlled, equitable access to ‘public goods’ enabled both people and environment to thrive. We now have the know-how to curb greenhouse gas emissions effectively to meet the Paris goals, with a global treaty.

Rationale for Global Carbon Pricing

Humanity is on a suicidal trajectory

Today it is clear that humanity is addressing its global environmental problems about as effectively as yeast in a bucket of sugary water. (The alcohol yeast produces eventually kills it.) With a similar trajectory, capitalism is working to monetise today’s remaining fossil fuel reserves, valued at around $30 trillion, with no observable amelioration to avoid the catastrophic consequences science says are likely coming down the line.

Self-interested investment is inadequate

Heartfelt beseeching of business communities to invest in low emission projects unfortunately gets an inadequate response, because insufficient self-interest drives them to do so. The total cost of generating emission-free electricity is still too high to reduce emissions substantially, because the renewable energy captured is diffuse and intermittent, and no cost effective electrical storage technology is yet on the horizon.

The price of fuel affects usage

How else can emissions be reduced? The best answer is to increase the price of fossil fuels. This was demonstrated in the 1970s when OPEC tripled and then further doubled the price of oil. Demand for petroleum products plummeted, helped by new fuel efficiency standards that the higher oil price made politically feasible.

A price on carbon need not harm economies, and raises investor self-interest

Putting a price on carbon raises the price of burning fossil fuels so that greener alternatives become relatively cheaper, and therefore in more demand. Returning the revenue generated from carbon levies to households avoids hurting the economy unduly. In addition, studies show that lower income groups – 70% of the population –  benefit overall. The happy consequence is the self-interest of shrewd investors to invest in green alternatives is also raised.

However, free-rider concerns prevent strong carbon pricing

So, given the existential threat we all face, why is strong carbon pricing not being adopted all around the globe? Public goods economists cite the ‘Tragedy of the Commons’ or ‘Free-rider’ problem.  Each nation adopting a strong carbon price knows it will suffer a competitive disadvantage compared to other nations not pricing carbon. Their energy intensive industries – and associated jobs – will move abroad to where carbon is not priced, as happened to the EU in the 1990s as a side-effect of it enacting the EU Emissions Trading Scheme.

Carbon border adjustments would level the playing field, but risk a trade war

A popularly touted solution to this competitiveness problem is to impose special tariffs called ‘Carbon Border Adjustments’ (CBAs), to level the playing field. However, national governments have so far been reluctant to adopt them. Why?  CBAs would be disruptive to trading patterns and relationships. It is already bad enough with Trump’s trade war.

Nations cannot be forced to adopt a strong carbon price

Where does that leave us?  The only way to put a strong price on carbon while avoiding CBAs is for all nations to adopt a similar carbon price in a binding treaty. However, in the absence of a global government, such a treaty cannot be forced on nations, and few, if any want to lose their sovereignty to a global government.

However, a ‘public goods’ agreement could be self-organised by nations

So, stalemate? Not necessarily. The atmosphere is our most shared ‘public good’. Until recently we took it for granted, but now we know our greenhouse gas emissions are adversely affecting the climate, sea-level and hydrological cycles. However, we would not all be here today if our village ancestors had not self-organised to share equitable access to public goods in the form of irrigation rights to rivers, grazing rights to common land and so on.

Equitable public goods agreements have a long history of success

Public goods agreements were most famously studied and taught by the late Professor Elinor Ostrom. She studied hundreds of village agreements to see what worked and where things went wrong. The most basic requirement for success involved controlling access to resources in a way that maximised benefits while preventing damaging over-exploitation. In societies where people specialised, trading of those access rights was catered for. For example, blacksmiths could sell their grazing rights to people wanting to graze more animals.

Cap-and-trade is an economic instrument for limiting emissions

Today’s cap-and-trade carbon pricing schemes grew out of those village schemes. The way they work is by limiting emissions according to national ‘caps’. A limited number of tradeable permits are auctioned to permit emission of the capped CO2 tonnage. (That’s the theory, at least.)

However, the Kyoto Protocol failed because it used cap-and-trade internationally

The failed Kyoto protocol introduced 21 years ago was based on international cap-and-trade. The most fundamental problem was developing countries such as India and China refused to accept any cap on their emissions for fear of limiting their economic growth unduly. In addition, it encouraged corruption and gaming, leading most nations to reject it altogether.

The current Paris Agreement is highly likely to unravel

Having given up all hope of achieving a binding agreement among nations, negotiators at the Paris Conference of the Parties (COP) settled for national statements of good intentions, the Intended Nationally Determined Contributions (INDCs). But this does not augur well for the future. Public goods economists point out that non-binding deals between multiple parties increase in fragility with the number of parties, and a non-binding deal between 200 nations is highly likely to unravel, as indeed Paris already is.

Distinguished economists say a binding treaty based on carbon pricing could work

But was the correct lesson learned from Kyoto? A group of distinguished climate economists, including Nobel prize winning Joseph Stiglitz and Jean Tirole say an emphatic: “No. The correct lesson was that the global framework should have been to negotiate a common price rather than a list of controversial emission quantities.” As such, they published in 2017 their recommendation for how a Common Carbon Price Commitment could much more reliably deliver on the Paris goals.

They suggest a ‘climate club’ of powerful nations should initiate such a treaty

Their proposal is for a self-organised ‘climate club’ of the main industrial emitters – USA, Europe, China – to negotiate a treaty involving a common carbon price. A negotiation among three parties is more likely to succeed than the current 200. The treaty would be fair and open for all nations to join.

Expected benefits include:

  • Increased confidence by nations to adopt a much higher carbon price than at present
  • Downward pressure on the oil price (the price as it enters the economy)
  • Special incentives for low emissions nations to join (See Green Fund, below)
  • Fewer high emission investments in developing countries than currently planned
  • A light-touch framework for international enforcement


To become politically feasible the proposal needs wide discussion

Politicians could more easily enact such a treaty if people around the world were to become aware of the proposal, and debate the details.

More detailed information is in these ‘skimmable’ chapters from Steven Stoft’s highly acclaimed book Carbonomics:


Game theory ‘magic’ to increase ambition

How can the nations of the world negotiate and agree on a sufficiently ambitious carbon pricing regime? Answer:  Simple game theory. The following is an excerpt from Global Carbon Pricing, a free book with contributions from Joseph Stiglitz, William Nordhaus and other prominent economists:

As an illustration, we take here a group of 10 completely selfish individuals and give them two games to play.  In the first game they (metaphorically) cut each other’s throats. Then, by changing one rule those very same people, their temperaments unchanged, cooperate like angels.

Here’s how. Each player has $10, from which they must simultaneously make a pledge to a common pot. Every dollar placed in the pot (for CO2 abatement) will be doubled (by natural climate benefits) and distributed evenly to all players. So, each dollar placed in the pot will be doubled to $2, and therefore 20 cents will be distributed to each and every player.

In the first game a referee simply makes sure each player pays exactly what they pledged. How does it turn out? The result is the famous ‘tragedy of the commons’, meaning cooperation does not occur. Perhaps a few committed altruists contribute something, correctly noting that if only everyone cooperated, everyone would be better off. But ‘tragically’ the skinflints end up better off than the altruists. If the game is played repeatedly the altruists either learn to contribute nothing or they run out of money.

In the second game the referee determines the lowest pledge from all players, then requires each player to pay exactly that amount – the amount of the lowest pledge. This one rule change alters everyone’s strategy because it makes the game impossible to lose.

Pledging $0 will mean simply keeping your $10, whereas pledging $10 could get you anything between $10 (if the lowest pledge is $0) and $20 (if everybody pledges $10). Now, even though all players continue to play in their narrow self-interest everyone will double their $10 to $20. This is because players realise that if they cannot lose they might as well pledge their full $10. As a result the group’s $100 gets doubled to $200. When that is divided evenly everyone ends up with $20.

The second game protects against free-riding. As a result selfish behaviour has been transformed from ‘contribute nothing’ to ‘contribute everything’ and the outcome is changed from no cooperation to full cooperation. This demonstrates a key point. Even without any increase in political will or ambition from players, we can get better outcomes from better rules.

This principle is the key missing ingredient in the UN COP climate negotiations. By omitting that principle global ambition has been kept low, and is a major reason why climate change is now upon us.

Reciprocal agreements – “I will if you will”

Professor Peter Cramton explains here that this game-changing rule represents a reciprocal agreement, which he characterises as “I will if you will.”  Without reciprocal agreements, he says, meaningful climate action is *not* in the narrow self interest of nations, as is popularly touted:

Global Carbon Pricing, The Path to Climate Cooperation | Peter Cramton


Climate Clubs

Coordinating negotiations among 200+ countries is expensive, time consuming and ultimately, ineffective. Therefore, political scientists such as Professor David Victor of the University of California, San Diego are suggesting that nations form smaller climate clubs for the purpose of negotiations:

Here he presents a detailed proposal for a club of countries to regulate soot and methane emissions near the Arctic:

We can tackle Climate Change with a #PriceOnCarbon


Simpol – a political engine for enacting global policies

Many of us realise we face an abundance of problems no nation can tackle alone, such as climate change, major loss of ocean biomass exacerbated by over-fishing, excessive transnational corporate power, are all examples. We might call these problems global or world-centric owing to their transnational nature. But while it may seem obvious no nation, nor even a small group of nations, can solve them alone, we’re far from fully acknowledging the enormity of what this implies.

Have you ever considered that it’s not that governments don’t want to act decisively, but that they can’t? Their need to keep their national economies attractive to international capital and investors makes it impossible for them to prioritise society or the environment, so things only get worse. But what if you could help release governments from competing for capital so they could cooperate for our future? What if you could be part of a movement that allows us to use our votes in a completely new way to drive governments to cooperate?

Simpol is a unique international citizens campaign to solve global problems! Simpol is short for the Simultaneous Policy – a range of policies to solve global problems at the same time, on the same date, so all nations win. With Simpol, you can contribute to those policies and drive governments to implement them.  Signing up to Simpol is like doubling the power of your vote. As a Simpol supporter, your vote isn’t just a national one – it also sends a powerful signal to politicians that they need to support the Simpol campaign – or risk losing you altogether. The campaign is already underway, supported by these politicians. So please Sign up to Simpol now to double your vote. It may be the one thing that could solve the urgent global problems we all face.


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