Time for a UN agreement on carbon pricing

By José Antonio Ocampo, Professor at Columbia University and former UN Under-Secretary-General for Economic and Social Affairs and Finance to the G20

Climate change has become an existential threat to humanity. The world has failed to adopt the decisions needed to meet the Paris Agreement targets, restated at COP26 in Glasgow last year, to keep the rise in average global temperature to under 1.5oC above pre-industrial levels and well below 2oC. As the most recent report by the Intergovernmental Panel on Climate Change indicates, current national commitments are still insufficient: CO2 emissions need to fall by around 45% by 2030 from 2010 levels and global emissions need to peak before 2025.

The long-term costs of not reaching these targets are clear; so too are the significant benefits of meeting them. Most importantly, protecting water sources and biodiversity and avoiding natural disasters associated with climate change will have strong long-term positive effects. There are also significant equity issues, as climate change is affecting developing countries much more severely due to their geographical location and greater dependence on agriculture. Some islands are likely to disappear due to rising sea levels, and tropical regions will be strongly hit.

There are also net economic benefits attached to climate policies. The UN Environment Programme’s Green Economy Report underscored a decade ago the clear positive effects of investing in clean activities. A more recent study by the International Monetary Fund also shows that the positive impact on the economy associated with green investments can be up to seven times greater than that of investments in traditional activities.

Carbon pricing is crucial for meeting climate change goals. It has two positive effects. First, it generates an incentive for private actors to take production or consumption decisions consistent with global goals. And second, depending on how it is designed, it can also provide revenues for the public sector. These revenues can be used to finance public sector investments that contribute to mitigating or adapting to climate change, either at home or in support of developing countries.

Effective carbon pricing can take different forms. The simplest are taxes on gasoline and diesel, on electricity generated with coal and oil and on goods and services that are energy intensive (metals and some forms of transportation, for example). Explicit carbon taxes, in turn, are an instrument that more than 60 countries have already embraced. However, consumption or production taxes of the former kind may be easier to adopt, especially for developing countries. Large fuel and energy subsidies in several countries must also be scrapped, perhaps by adopting cross subsidies on certain forms of consumption – e.g., taxes on high-income consumers that subsidise low-income households.

A major booster would be the creation of an international market for carbon emissions, expanding the existing European market and integrating it with other markets created by certain US and Canadian states and most recently by China. The great advantage of this mechanism is that it would significantly increase the efficiency of policies to combat climate change. According to recent estimates, it can reduce mitigation costs by approximately 60%. By supporting investments in developing countries, such as reforestation, through “nature-based-solutions”, it can also generate significant international developmental benefits.   

To support a strong global movement in the fight against climate change, a UN Agreement on Carbon Pricing in the context of the UN Framework Convention on Climate Change (UNFCCC) must be adopted. Its most important element should be the commitment by all countries to a minimum carbon price, which is essential to avoid negative competitive effects on those countries and actors that do meet the commitments. It would also avoid negative spillover effects of unilateral measures such as carbon border adjustment mechanisms that might adversely affect international trade.

Such an agreement should adopt clear targets: for example a 30×30 commitment (a minimum USD 30 tax for a ton of CO2 in 2030), followed by 40×40 and 50×50 commitments. It should also establish provisions for special and differential treatment, including the adoption of stronger targets by developed countries and partial use of the money raised to support the financing of climate change mitigation and adaptation in developing countries. The Agreement should develop mechanisms to support the design and implementation of those policies by developing countries, as well as appropriate monitoring mechanisms, for example through the reporting mechanisms under the nationally determined contribution (NDC) framework of the UNFCCC.

The Agreement should be complemented by other actions. Combatting other forms of emissions –notably methane—should be central, and perhaps could be included in the Agreement. Direct regulations such as prohibiting new electricity generation plants based on the use of coal, and banning the sale of cars and transportation that use hydrocarbons should be strengthened. Regulations on the efficiency of electricity networks must also be enhanced.

Last but not least, the Agreement should be adopted by the United Nations, given its universal membership and the fact that global co-operation on environmental sustainability was born half a century ago at the UN Stockholm Conference on the Human Environment. As with the Paris Agreement, it should be adopted in the context of UNFCCC, to enhance the instruments that it coordinates to mitigate and adapt to climate change, and the national commitments on carbon prices included in the NDCs. UNFCC should work closely with other multilateral organisations working on this issue, including UNEP, the OECD, the IMF, the World Bank and the regional Multilateral Development Banks.

As we approach the spring meetings of the Bretton Woods institutions this week, including the meetings of Finance Ministers in parallel and the ECOSOC Financing for Development Forum that will follow, a UN agreement on carbon pricing that enhances the UNFCCC should be at the centre of the agenda.