How A Global Carbon Price Is Slipping In The Back Door

PARIS—Most everyone here wants a global price on carbon, even those who are knee-deep in carbon. Here's an example uttered this afternoon by Arne Eik of the petroleum company Statoil:
"We are not asking for more costs for our emissions or for emissions from our products, but what we are asking for is certainty, we are asking for incentives to invest, incentives to reduce emissions," he said at the UN Climate Conference. "And I will say to my colleagues here, we will work and call for carbon pricing whether it is inside or outside a UN framework."
Because the word "tax" frightens politicians—and especially anything that resembles a global tax—the world after a Paris agreement is likely to see markets instead—a proliferation of local, regional and national markets that trade in carbon emission allowances.
It could be a mess.
“People say Europe is volatile," said Daniel Agostini of Enel, the Italian power company, referring to the European Union's carbon emissions trading system (ETS), which involves 27 countries.
"But if we had 27 different ETSs, how volatile would that price be? It would be very volatile.”
The United States may soon have just such a menagerie. The Clean Power Plan encourages states to curb carbon emissions with market mechanisms like cap and trade.
They may be volatile, but economic theory suggests these markets should merge, and over time they probably will merge because of benefits of consolidation, including stability and lower cost. The Clean Power Plan encourages states to band together in regional groups.
"To the extent we can harmonize across policies and across regions it reduces the cost of achieving any particular mitigation goal we have," said Tufts economist Gilbert Metcalf.
As state markets trend toward regional or national markets, regional and national markets will trend toward international.
At side events here hosted by the International Emissions Trading Association, economists agreed that larger carbon markets offer participants greater benefits.
"The more buyers and sellers you have in the market, the more opportunities there are to gain from trade," said Brian Murray of Duke University, who modeled carbon markets for U.S. states and compared results if states operate alone or partner with other states.
"The gains from trade are larger the more participants you have," he concluded, and the cost to comply with emissions limits goes down.
If benefits accrue across state lines, they should accrue across borders.
Steve Rose of the Electric Power Research Institute conducted a study similar to Duke's, but modeled what would happen if the U.S. traded carbon allowances with China, and then if the European Union joined them. In each scenario benefits accrued for all parties as the market grew, though some parties benefitted more than others.
"We've also, just out of curiosity, explored a global partnership," Rose said. "Expanding the partnership can be welfare improving in total, but it can have distributional effects so there will be some strategic incentives and strategic thinking required in terms of the composition of those partnerships."
By distributional effects, Rose means that different countries may benefit more or less depending on the mix of buyers and sellers who join any given market.
But to some degree, all benefit.
“Linking markets across the globe gives you stability,” Agostini said. “It also brings economic efficiency, because carbon markets actually bring together information from a wide array of players.”
Such alliances may not be difficult to form.
"As opposed to needing a third party or an international institution," Rose said, "you can imagine countries going forward and negotiating them on their own."
Formal agreements, Murray added, may not even be necessary.
"The linkage doesn't have to be that hard," he said, as long as each jurisdiction: 1. adopts a common unit to trade, such as a ton of carbon, 2. allows units from other jurisdictions to be used in their own market, and 3. participates in a registry that tracks each unit to make sure each it gets counted only once.
Some countries may have more difficulty linking markets because of differences rooted in the UN process, which has allowed each country to develop its own emissions target, its own strategy for meeting the target, and its own timeline.
"If we have two countries who have very different levels of ambition and very different marginal abatement costs, there are going to be limits to the amount of linkage we’ll be able to do," Metcalf said.
Two entities that linked markets successfully across a border—California and Quebec—had a lot in common to begin with, and they put a lot of work into the merger.
“These are two different regions that had similar visions of the level of ambition and price they wanted to achieve," Metcalf said.
Other speakers here have suggested the G7 nations or the G20 as natural partners in multi-national carbon markets.
The United States, however, has no plans to join such a market, said Christo Artusio, director of the State Department's Office of Global Change.
"I'm speaking for a country that has no intention to use them (carbon markets) in an international context," he said. "That said, President Obama continues to have a strong commitment to carbon pricing, carbon markets etc. so we are interested in this for the long game."

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