Paris Carbonomics

In December of this year 196 nations will meet in Paris to close a global deal to address climate change. With less than three months, and 5 official negotiating days left before the Paris UN conference, diplomats are working out the key remaining disagreements.

The major concerns revolve around money: how much responsibility rich nations will take for climate change compared to the developing countries that need to power their growing economies and populations; and how will developed nations fulfill their agreement of $100 billion per year of climate finance to begin in 2020.

It's no surprise that cold hard cash is at the center of these disputes. At its core, climate change is an economic problem. Cheap and subsidized coal, oil, and gas fueled the industrial revolution and high quality of life in the West. We didn't realize until the 1960's and 1970's that there was also a huge expense we failed to foresee -- pollution and climate change.

Here's an analogy to consider: The 2008 financial crisis was created by insatiable banks and mortgage brokers who offered loans with "easy" terms to under-qualified customers that didn't reflect the true risks involved and created a housing market bubble. When the bubble finally popped, homeowners who couldn't afford increased mortgage interest rates and small investors took the brunt of the loss.

Fossil fuels are being sold at a price that doesn't reflect the true cost of their impact on the environment. Businesses, governments and even consumers are creating a "carbon bubble" that when it pops may have both severe financial repercussions and, if not addressed soon enough, will trigger uncontrollable climate damage. And like the housing bubble, those who will pay the most severe costs are the poor, elderly and children.

Unfortunately, the 83 page draft climate agreement under negotiation does nothing to prioritize putting a price on carbon pollutants. To avoid severe climate change it's essential that the final Paris agreement makes carbon pricing a central element of the solution. It will take an economic response to address what is essentially an economic problem. Doing so will put the brunt of liability on those industries that are most responsible for the climate crises and have the greatest means of limiting damage. Rather than trying to regulate emissions reduction, a carbon price will incentivize polluters to change their ways or be forced to pay for it. A carbon price will also motivate clean technologies and new low-carbon economic growth. Currently about 40 countries and over 20 cities, states and provinces use carbon pricing mechanisms or have plans to implement them.

There are basically two types of carbon pricing: emissions trade systems (ETS) and carbon taxes or fees:

  • An ETS -- also known as a cap-and-trade system -- limits the amount of greenhouse gas emissions and lowers the cap over time. Carbon polluting industries receive emissions permits that can be sold by lower emitters to larger emitters, creating a market price for greenhouse gas emissions. Lowering the cap reduces overall emissions and pushes the market to increase the price of carbon, which discourages the use of fossil fuels.
  • A carbon tax or fee directly sets a price on carbon at the source (mine, well or port of entry) with a set, and rising, rate. It can be revenue neutral with consumers reimbursed for higher energy costs. Nations can also impose border adjustments for goods imported from non-participating countries in order to maintain the competitiveness of domestic industries.
  • The climate agreements under consideration only mentions emission trading, and do so in a peripheral manner. Carbon fee should also be included as an alternative means of pricing carbon. Joe Robertson, Citizens' Climate Lobby's global strategy director, says

    "Carbon pricing is about economic fairness and reliable prosperity. Right now, everything we do in the economy carries hidden costs, because we are not accounting for the true cost of how we get energy. Getting principled language to guide national policies toward more efficient low-carbon development, through effective, efficient, transparent carbon pricing, means more reliable innovation, investment, hiring and climate action, for everyone."

    An impressive group of leaders from across government, the private sector and civil society have formed the Carbon Pricing Leadership Coalition to ensure smart, effective carbon pricing policies are adopted. But much more needs to be done in the next few months to get carbon pricing right.

    A global climate change agreement without a clear economic solution to this looming problem could be too little, too late -- but there's still time to craft an efficient, effective and equitable correction to the most pressing problem of our times.