CO2 Prices Are Essential for Effective Climate Policy

At the Paris Climate Change Conference in 2015, the international community made the unanimous decision to limit global warming to no more than two degrees Celsius. The enthusiasm from Paris was still very much in evidence at the Marrakech Conference, where a number of states made a concrete commitment to reducing greenhouse gas emissions. At the same time, the US election has created uncertainty over the USA's future role in climate policy. The most recent report from the Federal Ministry for Economic Affairs and Energy's Academic Advisory Board provides a medium-term outlook on how further climate negotiations could lead to effective climate protection.

The Kyoto Protocol has failed in its ambitious attempt to impose a shared quantity commitment with respect to worldwide CO2 emissions. Paris responded to this failure by abandoning any attempt at imposing a common commitment and instead focussing on individual states committing themselves voluntarily. The board finds it extremely unlikely that this kind of policy can effectively curb climate change. The climate issues we face will not be solved without a reciprocal shared commitment from all nations.

The shared goals set in Paris should be converted into a shared commitment on the part of the international community as a whole to an effective reduction in CO2 emissions. We cannot simply rely on uncoordinated voluntary commitments from individual states. Pricing CO2 emissions is essential. The board has come out in favour of striving for a shared commitment to adhering to a minimum price for CO2 emissions as the new goal for international climate policy.

"On an international level, a global price target is more suitable"

A global commitment to the introduction of a minimum price for CO2 emissions would be a new way to end the current deadlock in international climate negotiations. A global price commitment is compatible with a range of national and local policies such as emissions trading schemes and taxation procedures as well as many other national, regional and local preferences and measures, whose effectiveness would only increase with the help of a global commitment. This should make a global CO2 price acceptable to countries that have different climate preferences and different ideas about what the right environmental protection apparatus might be. On an international level, a global price target is probably more suitable than global quantity controls when it comes to reaching a reciprocal shared commitment. This route would provide an opportunity for stable international co-ordination and co-operation.

While a CO2 price is essential, it is not the only measure that might be useful to climate policy. For example, financing research into environmentally-friendly technologies also constitutes an important contribution to environmental protection.

Combining the fundamental principles of co-operation and effective climate policy

Politicians must openly address the problem of public goods if they want to effectively curb climate change. A suitable platform for this could be the G20, of which Germany is currently the chair. If the international community succeeds in translating the ambitious climate goal from Paris into a price target for CO2 emissions and combining this with efficient national climate policy and reciprocal international co-operation, then we are in with a chance of keeping climate change at bay. Combining these fundamental principles of co-operation and effective climate policy has never before been attempted. However, if no measures are taken to counter the co-operation and free rider problems, both national and international climate policy is doomed to failure.

For this reason, the board recommends that the Federal Minister for Economic Affairs advocate for the German government to consider the following principles when drafting climate policy:

1. The goal of international climate policy should be a shared commitment to adhering to (minimum) CO2 prices. The implementation of the price target (whether it be through taxation or emissions markets) can be left to the discretion of individual countries.

2. The basic principle when it comes to stabilising this shared commitment should be reciprocity. All nations must play their part in the shared task of climate protection. To this end, international reward and punishment mechanisms, an essential basis for stable international co-operation, should be developed. The German government's turn as chair of the G20 could be a suitable forum to push forward with ideas like these.

3. In the global context, European climate policy should introduce a universal minimum CO2 price. More specifically, an internationally coordinated minimum price in emissions trading and/or a broadening of emissions trading to include other sectors that have not yet been integrated into emissions trading should be considered.

The report was prepared by a team from the Federal Ministry for Economic Affairs and Energy's Academic Advisory Board under the direction of Professor Axel Ockenfels at the University of Cologne. Also involved in the report were Professor Achim Wambach, President of the Centre for European Economic Research (ZEW), Professor Klaus Schmidt from the University of Munich and Professor Hans Gersbach from the ETH Zurich (chairman of the Academic Advisory Board).

For further information please contact

Prof. Achim Wambach, PhD, Phone +49(0)621/1235-100, E-mail wambach@zew.de