Global climate policy with differentiated carbon price floors

We use a state-of-the-art global general equilibrium model to quantify the effects of an International Carbon Price Floor (ICPF) proposal for the coordination of global climate policy. With the ICPF proposal, countries would implement a carbon price floor that is differentiated according to their level of development. The price floor could be implemented by an actual carbon price or other policies with equivalent stringency. Implementing such a joint effort would be a big step towards aligning global emissions with the Paris Agreement. The study highlights three main findings. First, the ICPF is progressive in terms of emission reductions and demands considerably more effort from high-income countries (HICs). Unlike proposals based on equity principles, however, it requires neither extremely high emission reductions from HICs nor massive financial transfers. Second, the differentiated carbon prices cost only an additional 0.3 percent of global GDP compared to a global uniform carbon price. Third, the ICPF can be as effective as border carbon adjustment (BCA) mechanisms at preserving competitiveness of HICs despite the differentiation in carbon price floors. This means, there would be no need for BCA with an ICPF. Compared to a BCA, HICs can avoid the administrative burden and low-income countries (LICs) will not face the cost of BCA. As a first step to global climate policy, a sectoral ICPF for the EITE sector could be introduced. It would address competitiveness concerns almost as well as the full ICPF. An International Carbon Price Floor (ICPF), with carbon price floors differentiated by development level, would incur only small economic costs compared to baseline economic growth. The ICPF would allow for international burden sharing, with HICs incurring higher cost than middle - and low-income countries. The ICPF reduces distortions to competitiveness as much as BCA, so that no BCA would be necessary. A 'sectoral ICPF' in energy-intensive and trade-exposed sectors would be effective against leakage and loss in competitiveness and would thus be an attractive alternative to border carbon adjustment.