Now that the ink on the Paris Agreement has dried and the champagne bottles have gone to be recycled it’s time to think about how the commitments of Paris will be achieved. The post-Paris press was almost giddy in its enthusiasm about the success of the Paris Agreement. Crafting an agreement on addressing climate change that 195 countries finally did sign took 21 years and is indeed an extraordinary accomplishment. However, despite the euphoria, the commitments themselves are voluntary and only go about half way to keeping global warming below 2 degrees Celsius. And fulfilling the commitments will be challenging.
Enormous investments in clean energy, infrastructure, industry, agriculture and transport will be needed. Among the most exciting announcements in Paris, a group of 20 “Mission Innovation” countries pledged to double funds for clean energy research to a total of $20 billion over five years, and 25 private investors and the University of California launched the Breakthrough Energy Coalition, which is expected to raise several billion dollars to fund start-ups in a range of sectors.
But one of the most important areas of action needed to achieve the Paris targets was not greeted by big announcements and glitzy launch events. Beyond investment, the unheralded weapon to reach the Paris targets will be policy action. Economic tools, at the domestic and international level, will be essential in the years ahead to meet and exceed pledges made in Paris and keep global warming at or below 2 degrees C. Thoughtful policy design can help developing and developed countries meet mitigation pledges, amass financing for mitigation and adaptation, guide investment in clean infrastructure, and pool climate-related risks. While they are not new, it is timely to shine a spotlight on these tools.
To explore the potential of policy options to spur climate action, CGD organized a panel discussion that brought together experts from the IMF, the World Bank, think tanks and California’s Air Resources Board. The discussion focused on carbon taxes, carbon markets (cap-and-trade programs), the elimination of global energy subsidies and support for reduced deforestation as a carbon sink, or “negative emission.”
Among the highlights:
Vitor Gaspar, director of the Fiscal Affairs Department of the International Monetary Fund highlighted messages from a new IMF report, After Paris: Fiscal, Macroeconomic and Financial Implications of Global Climate Change. The report reiterates the case for carbon taxes, or equivalent systems, to bolster mitigation actions. It highlights the need for targeted fiscal measures to counter potential underinvestment in the private sector for adaptation. And it pushes for increased disclosure of carbon footprints, risk assessments of assets values (e.g., fossil fuel reserves), and risk diversification through financial markets.
Catrina Rorke, director of energy policy and senior fellow at the R Street Institute noted that the US would not be able to meet its climate targets with existing policies. Consistent with the R Street Institute’s mission “to promote free markets and limited, effective government” Catrina suggested that the government should not pick winners, should avoid subsidizing “the wrong things” like rebuilding in flood and hurricane zones, and should clarify market signals through a carbon tax. She emphasized that energy is critical to development and that developing countries need energy to increase wealth. “We don’t want to preference climate action (emissions reductions) over the creation of wealth and income in developing countries. They should not be encouraged to reduce carbon emissions at the price of development.”
Vikram Widge, the head of climate and carbon finance for the World Bank Climate Change Group, noted that carbon taxes will be important but need to be supplemented with other interventions. “We need a toolkit, not just a tax.” He suggested that, with the language in the Paris Agreement that supports “internationally transferred mitigation outcomes,” Carbon Markets 2.0 will look much different than the CDM (Clean Development Mechanism). A framework will be needed to compare, measure, validate, and trade carbon assets that will not be limited to offsets and credits. A new initiative, the Transformative Carbon Asset Facility, will help developing countries to create new classes of carbon assets associated with reduced greenhouse gas emission reductions, including those achieved through policy actions like removing fossil fuel subsidies.
Mary Nichols, chair of the California Air Resources Board, explained that when California set out to reduce emissions, it was agnostic between a carbon tax and cap-and-trade. They went with cap-and-trade because they didn’t need legislative approval, as they would have with a tax, to set up an administrative mechanism. Now that it’s up and running she has become a big fan of cap-and-trade: it’s self-executing and not difficult to enforce. It has also begun to generate significant revenues which are used to achieve the targets of the program. California’s cap-and-trade program is already linked to Quebec’s and they are discussing linkages with other jurisdictions, including US regions setting up carbon trading programs in response to the Clean Power Program.
I encouraged the expansion of cap-and-trade programs because they can support performance-based payments to preserve tropical forests, a large source of greenhouse gas emissions and an inexpensive way to curb emissions. The Paris Agreement supports both results-based approaches and reducing deforestation. At the moment the only program that allows firms to reduce emissions by buying emission reductions from tropical forest countries is California. We hope that the expansion and linkage of cap-and-trade programs will mean more funding to reduce deforestation.
Economic policies will be vital to reaching, and doubling, the Paris targets. We look forward to new carbon taxes, cap-and-trade programs, elimination of fossil fuel subsidies and other important policy initiatives in rich countries and developing countries to achieve the Paris goals.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.