This article in the journal AEA Papers and Proceedings reviews the policy context and initial program design of China’s new national emissions trading system. It explains the design of China’s new carbon market, contrasts it with western markets, and highlights possible implications. The article reflects some of the findings in the working paper “China’s New National Carbon Market,” published by the Nicholas Institute for Environmental Policy Solutions.
Implications of Sustainable Development Considerations for Comparability across Nationally Determined Contributions
An important component of the Paris Agreement is the assessment of comparability across nationally determined contributions. Links between mitigation and other societal priorities, including but not limited to the 17 United Nations Sustainable Development Goals, raises the question of how such links might influence comparability assessments. Using a global integrated assessment model, this analysis in the journal Nature Climate Change suggests that accounting for interactions between mitigation and other Sustainable Development Goals would alter comparability assessments. The analysis provides a foundation for assessing how comparability across nationally determined contributions could be better understood in the larger context of sustainability.
On December 19, 2017, China announced the official start of its national emissions trading system (ETS) construction program. When fully implemented, this program could more than double the volume of worldwide carbon dioxide emissions covered by either tax or tradable permit policy. Many of program’s design features reflect those of China’s pilot programs but widely differ from those of emissions trading programs in the United States and Europe. For that reason, the workings of Chinese national carbon market are both intriguing and unfamiliar to those experienced with western markets. This paper explains the design of China’s new carbon market, contrasts it with western markets, and highlights possible implications. It also presents research questions raised by the design.
This contribution to Science's Perspectives underscores the importance of work to update estimates of the cost of carbon dioxide emissions, a cost that pervades government policy making. It explains the efforts of an interagency group charged with improving estimates of the so-called social cost of carbon (SC-CO2)—the dollar value of damage associated with 1 ton of additional emissions—and hence its equivalent, the benefit of avoided damage. It explains that in 2017 a U.S. National Academy of Science panel recommended use of updated damage models that translate climate change into impacts measured against the baseline economic activity and population. An improved damage model architecture for the United States has produced new estimates: 3 degrees Celsius of warming would lead to a loss of ~2 percent of U.S. gross domestic product; 6 degrees Celsius of warming would lead to a ~6 percent loss. But the real value of the new model architecture is enhanced credibility for future benefit estimates built on it and the architecture’s capacity to incorporate new studies and additional economic sectors.
Should the United States consider use of a carbon tax as the primary federal policy to reduce greenhouse gas emissions? A carbon tax establishes a fixed fee per unit of emissions and thereby provides a certain price incentive to cut emissions—but it does not ensure that the nation will achieve a specific emissions goal because the economy’s response to the tax is unknown in advance. Ultimately, there is an underlying tradeoff between certainty about emissions and certainty about prices and costs. Mechanisms that balance emissions and cost uncertainty can be viewed as a way to structure a more careful compromise between cost concerns and environmental interests. Under a carbon tax, mechanisms that can increase mitigation action may allow environmental constituencies to agree to what they may view as an environmentally risky tax with the assurance that further steps will be taken should emissions become too high. This symposium essay in the Harvard Environmental Law Review discusses mechanisms that could increase emissions certainty under a carbon tax.
This introduction to symposium essays in the Harvard Environmental Law Review describes the role of pricing carbon in contemporary climate change policy (with a summary of experience with carbon tax and cap-and-trade policies around the world) and points out similarities of carbon tax policies and cap-and-trade policies based on the academic literature. But it focuses on how a tax and cap-and-trade schemes differ in terms of their economic and emission outcomes in light of the uncertainty characterizing the markets and economies in which these instruments are used. These differences have potentially important economic, environmental, and political economy implications for U.S. climate change policy. Finally, the article highlights the proposals and key findings of each of the symposium essays, including Increasing Emissions Certainty under a Carbon Tax.
To estimate the social cost of carbon dioxide for use in regulatory impact analyses, the federal government should use a new framework that would strengthen the scientific basis, provide greater transparency, and improve characterization of the uncertainties of the estimates, says a new report by the National Academies of Sciences, Engineering, and Medicine. The report also identifies a number of near- and longer-term improvements that should be made for calculating the social cost of carbon.
The Paris Agreement sets forth an innovative and potentially effective policy architecture, a great deal remains to be done to formulate required rules and guidelines and to specify more precise means of implementation. Governments, other stakeholders, and researchers also need to think about constraints on the effectiveness of the agreement—and identify organizations and processes that could complement it and the United Nations Framework Convention on Climate Change process more broadly. In July 2016, the Harvard Project on Climate Agreements hosted a research workshop at the Harvard Kennedy School, the purpose of which was to identify options for elaborating and implementing the Paris Agreement—and to identify policies and institutions that might complement or supplement the Paris-Agreement regime. Participants, which included Nicholas Institute researchers Brian Murray and Billy Pizer, subsequently prepared the briefs that are included in this volume, based largely on their presentations at the workshop, addressing opportunities for—and challenges to—elaborating, implementing, and complementing the Paris Agreement.
To reduce greenhouse gas emissions, some groups have proposed that the United States consider use of a carbon tax. But whether the nation will achieve a specific emissions goal is uncertain because the economy’s response to such a tax is uncertain. Ultimately, there is an underlying tradeoff between certainty about emissions and certainty about prices and costs. To reduce uncertainty about whether a tax will achieve specific emissions goals, additional mitigation measures could be called on if emissions exceed those goals by a given amount. However, such additional measures introduce uncertainty about costs. At the extreme, a commitment to achieve emissions targets at all costs would imply that costs could be quite high. Discussions of policy mechanisms to increase price and cost certainty under several current cap-and-trade programs confronted this same dilemma: how much uncertainty about emissions outcomes is acceptable given reciprocal uncertainty about costs? Viewed through a slightly different lens, mechanisms that balance emissions and cost uncertainty can be viewed as a way to structure a more careful compromise between economic and environmental interests. This policy brief discusses mechanisms that could increase emissions certainty under a carbon tax.
The Paris Agreement culminates a six-year transition toward an international climate policy architecture based on submission of national pledges every five years. An important policy task will be to assess and compare these pledges. This study in the journal Nature Climate Change uses four integrated assessment models to produce metrics of Paris Agreement pledges, and it shows differentiated effort across countries: compared with poorer countries, wealthier countries undertake greater emissions reductions with higher costs. The pledges fall in the lower end of the distributions of the social cost of carbon and the cost-minimizing path to limiting warming to 2 degrees Centigrade, suggesting insufficient global ambition in light of leaders’ climate goals. Countries’ marginal abatement costs vary by two orders of magnitude, illustrating that large efficiency gains are available through joint mitigation efforts, carbon price coordination, or both. Marginal costs rise almost proportionally with income, but full policy costs reveal more complex regional patterns due to terms of trade effects.