Experts Discuss Implementation of Carbon Markets and Taxes under the Paris Agreement

Abby L. Harvey
GHG Daily
1/12/2016

Exactly one month after a new global climate deal was agreed upon in Paris, policy experts met Monday morning to discuss the future of carbon markets and taxes. While the majority of economists have long agreed upon market-based approaches to limiting carbon emissions as the most efficient way to meet reduction goals, few expected the climate deal to address it in any significant way. “We, amongst many others, were happily surprised to see the extent in which the Paris Agreement covered carbon markets,” Vikram Widge, head of climate and carbon finance at the World Bank Group, said during a panel discussion hosted by the Center for Global Development.

Article 6 of the Paris Agreement addresses carbon markets, though in somewhat muddled legalese: “Parties shall, where engaging on a voluntary basis in cooperative approaches that involve the use of internationally transferred mitigation outcomes towards nationally determined contributions, promote sustainable development and ensure environmental integrity and transparency, including in governance, and shall apply robust accounting to ensure, inter alia, the avoidance of double counting, consistent with guidance adopted by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement.”

When broken down, Widge explained, Article 6 “acknowledges that markets can, in fact, help countries get onto a low emissions development pathway and hopefully, ultimately, help them ramp up the ambition that we need to get 1.5 to 2 degrees [limit in global temperature rise] that is desired or is set as our ambition.”

Carbon Tax Sends Strongest Market Signal, Expert Says

Vitor Gaspar, director of the fiscal affairs department at the International Monetary Fund, argued that a carbon tax, as opposed to a cap-and-trade system, under which emitters are either allocated a limited number of emissions allowances or purchase them through an auction to offset their carbon emissions, is the simplest and most effective market-based carbon mitigation system.

“Carbon pricing has two key advantages,” Gaspar said. “First, it effectively reduces emissions. Charges will result in higher prices for carbon-intensive fuels, electricity and so on. Higher prices will then promote all mitigation opportunities such as shifting from coal to gas, shifting to renewable energy, driving less and investing in energy efficiency. … [Further] carbon pricing generates substantial revenues. For example, a $30 per ton tax in 2010 would have raised revenues of around 1 percent of GDP or more in many large emitters.”