Comparing different approaches to tackle the challenges of global carbon pricing

The introduction of carbon pricing faces two main challenges: the need for global cooperation to tackle the collective action problem and the need to share the its burden in a fair way following the principle of common but differentiated responsibility (CBRD). In this paper we explore different ways to build a carbon pricing coalition while minimizing the welfare losses for low-income countries using simulations with a recursive dynamic computable general equilibrium (CGE) model. We first present the need for and efficiency and urgency of global carbon pricing policies. Global carbon pricing is needed to tackle climate change, is more efficient than regional carbon pricing, and is urgent to prevent a patchwork of carbon pricing policies leading to calls for border carbon adjustment (BCA). Because the impact of global carbon pricing on the GDP of most regions is negative, complementary policies are required to tackle the two challenges. We explore four complementary policies: BCA, Nordhaus’s climate club, a global carbon incentive fund, and emission trading with progressive emission reduction targets. We evaluate these proposals based on their projected effects on average income and income inequality among countries, as well as their effectiveness as an incentive to introduce carbon pricing. BCA scores poorly along the three dimensions; Nordhaus’s carbon club performs well as an incentive tool but has a negative impact on average global income and inequality between regions; the global carbon fund has a positive impact on average income and inequality but performs poorly as an incentive tool; and emission trading with progressive reduction targets scores well across all dimensions. We conclude with a discussion of the feasibility of emission trading.