A proposal to scale up global carbon pricing
Between one quarter and one half. That's how much carbon dioxide (CO2) and other greenhouse gases must fall over the next decade to keep alive the goal of restricting global warming to below 2oC. The fastest and most practical way to achieve this is by creating an international carbon price floor arrangement.
This matters to the IMF because climate change presents huge risks to the functioning of the world's economies.
The right climate policies can address these risks and also bring tremendous opportunities for transformative investments, economic growth, and green jobs-so much so that our Board recently approved proposals to include climate change in our regular country economic surveillance and our financial stability assessment program.
At the heart of our policy discussions with member countries is carbon pricingnow widely accepted as the most important policy tool to achieve the drastic cuts to emissions we need.
By making polluting energy sources more expensive than clean sources, carbon pricing provides incentives to improve energy efficiency and to re-direct innovation efforts towards green technologies.
Carbon pricing needs to be supported by a broader package of measures to enhance its effectiveness and acceptability including public investment in clean technology networks (like grid upgrades to accommodate renewables) and measures to assist vulnerable households, workers, and regions. Nonetheless, at the global level, additional measures equivalent to a carbon price of $75 per ton or more are required by 2030.
Ahead of the United Nations' 26th annual climate change conference (COP26) in November-the most important climate conference since Paris 2015-we see promising signs of growing climate ambition. Many countries have stated new climate objectives-60 countries have already pledged to be emissionsneutral by midcentury and some, including the European Union and United States, have offered stronger near-term pledges.
Importantly, carbon pricing schemes are proliferating-more than 60 have been implemented globally, including key initiatives this year in China and Germany.
Yet stronger and more coordinated action in the decade ahead is critical. While some countries are moving ahead aggressively, ambition varies countryby-country such that fourfifths of global emissions remain unpriced and the global average emissions price is only $3 per ton.
As a knock-on effect, some countries and regions with high or rising carbon prices are considering placing charges on the carbon content of imports from places without similar schemes. From a global climate perspective, however, such border carbon adjustments are insufficient instruments as carbon embodied in trade flows is typically less than 10 percent of countries' total emissions.
In part, the slower progress reflects how hard it can be for countries to unilaterally scale up mitigation policies to meet their Paris Agreement commitments-not least because of concerns about how it may affect their competitiveness and worries that others may not match their policy actions. The nearuniversal country participation in the Paris Agreement, so critical for its legitimacy, does not make for easy negotiation.
So how do we get carbon pricing to where it needs to be within ten years? 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 and is launched by the largest emitters. The chart shows, that China, India, the US and the EU will account for nearly twothirds of projected global CO2 emissions in 2030 (if no new mitigation actions are taken). Including the full G20 takes this to 85pc.