After Paris

A deal on limiting climate change, described by the French Foreign Minister as ‘the most ambitious and balanced possible‘ will be agreed today in Paris. It revolves around voluntary pledges made by over 180 countries to cut their greenhouse gas emissions. These pledges alone, if redeemed, would leave the world facing a likely temperature rise of 3 degrees C or more.

The agreement contains a more aspirational target to pursue efforts to limit the temperature increase to 1.5C, with almost no detail of how this is to be reached. Marie-José Nadeau, the chair of the World Energy Council, speaks for most economists and business leaders when she says that “We won’t see a significant shift away from fossil fuels in the energy industry until an honest price is imposed on carbon-dioxide emissions”.

What would an honest price be? It would be a price that is equal to the extra damage caused by emitting one more tonne of CO2, or other greenhouse gas. We don’t know exactly how large that is, but we do have studies that show it is likely to be substantial, and increasing with time. It is also administratively easy for a country to impose this price through its tax system, reducing other distortionary taxes by an equivalent amount to stimulate economic growth.

So, as the world absorbs what it has signed up to in Paris, here is what should be agreed next.

Every country will impose from 2016 a comprehensive, fiscally-neutral tax on its greenhouse gas emissions. In annex 1 countries the tax will start at [$100] [$150] [$200] per tonne of CO2 or its equivalent and increase in real terms at [2] [2.5] [3] % per year. In other countries the tax will start at [$10] [$20] [$30] per tonne of CO2 or its equivalent and increase in real terms at [3] [3.5] [4] % per year.

Negotiators love square brackets, so I have left some in the suggested text to reflect our honest uncertainty about exactly what the ‘fair price’ is. My personal opinion is that the middle of each of the square brackets is about the right place to start. If this text were to be agreed, the ambition on display in Paris would be enshrined in actual policy. In fact, if this text had been agreed at Paris, little else would have been required.