q-fin updates on arXiv.org
Thu, 12 Mar 2020 12:01:46 GMT language
In this paper, I introduce a new emissions trading system (ETS) design to
address the problems with existing ETSs and carbon taxes. First, existing ETS
designs inhibit emissions but do not constrain warming to any set level.
Existing ETSs have the indirect objective of reducing emissions instead of
directly reducing warming. Even a global mechanism using an existing ETS cannot
guarantee a particular warming path. Part 1: A Price on Warming addresses this.
My proposed market trades contracts tied to temperature in a double-sided
auction of emissions permits and sequestration contracts. Unlike existing ETSs,
the mechanism has a consistent timescale and metric tied to warming, with
explicit limits on global temperature in every period into the far future.
Every auction finds prices for emissions into the far future. Second, if a
jurisdiction does not require firms to manage their emissions, the firms have
little incentive to do so. Part 2: A Climate Insidium addresses this. My design
incentivizes firms to participate even if their jurisdictions do not join. With
sanctions from member jurisdictions and participating firms, the design has
bottom-up incentives for joining, and the incentives rise over time under
realistic conditions, potentially resulting in a rush to join. Third, existing
designs have high transaction costs for implementation, requiring international
treaties to begin. Part 3: A Faster Path Forward addresses this. I propose a
path without national or international action to begin. A coalition can
implement these rules, creating political force to accelerate participation.
Full implementation still requires national agreements. This design appears to
be closer to "first best", with a lower cost of climate mitigation, than any in
the literature, while increasing the certainty of avoiding catastrophic global
warming. It might also provide a faster pathway to implementation.