Transfer payments in global climate policy

Many scientists and policymakers agree that large financial flows from richer to poorer countries will be necessary to reach an agreement on reducing greenhouse-gas emissions enough to keep global warming below 2 °C. But the required amounts of transfer payments and justifications for them remain contested. We contribute to this debate by developing an argument for transfer payments that derives from the differences between carbon prices that different countries may set in light of two distinct criteria for appropriate levels of emission reductions. If, for reasons of cost efficiency, a globally uniform carbon price was installed, transfer payments would be required to offset these differences. We combine global climate modelling with regional welfare analysis to estimate regional carbon prices under various climate change, emissions and economic scenarios. The estimated ratios between regional carbon prices are surprisingly robust to different modelling assumptions. To the extent that burden-sharing choices in global climate policy are motivated by regional carbon prices, our analysis allows for a quantification of required transfer payments. Assuming a global carbon price of US$35 per t CO2, for example, our estimates would justify transfer payments of the order of US$15–48 billion per year.