A new paper from IMF staff, still under discussion with the IMF Board and membership, proposes the creation of an international carbon price floor arrangement that complements the Paris Agreement.

Launched with the largest emitters (the G20 creates 85 per cent of emissions) the scheme could gradually expand to encompass other countries. The scheme would be anchored on a minimum carbon price. Simultaneous action among large emitters to scale up carbon pricing would deliver collective action against climate change while decisively addressing competitiveness concerns. The focus on a minimum carbon price parallels the current discussion on a minimum for the tax rate in international corporate taxation.

The authors of the paper, Ian Parry, Simon Black and James Roaf, propose that the scheme be pragmatic, equitable, flexible and account for the differentiated responsibilities of countries given, among other factors, historical emissions and development levels. One way to do this is to have, say, two or three different price levels in the agreement that vary according to accepted measures of a country’s development. The arrangement could also accommodate countries where carbon pricing is not currently feasible for domestic political reasons, so long as they achieve equivalent emissions reductions through other policy instruments.

An illustrative example shows that reinforcing Paris Agreement pledges with a three-tier price floor among just six participants (Canada, China, European Union, India, the UK, the US) with prices of $75, $50, and $25 for advanced, high, and low-income emerging markets, respectively and in addition to current policies, could help achieve a 23 per cent reduction in global emissions below baseline by 2030. This is enough to bring emissions in line with keeping global warming below 2°C.

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