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Jean Tirole: Which economic instruments to enforce the COP21 agreement?

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COP21 is just around the corner, and the fear that this international conference will be reduced to a mere list of intentions is growing. The current negotiations based on "Voluntary contributions" (INDC) are a way of making seductive promises and claiming victory when in reality they serve above all to perpetuate the international community's wait-and-see attitude.

Participating countries will do their best to avoid comparability of their commitments with those of other States and to make those commitments non-verifiable and therefore unconstrained. The foreseeable consequences of this waiting game for the level of greenhouse gas emissions are similar to those of a "zero-ambition" agreement.

Setting a global carbon price

We must tackle the climate challenge using economic instruments, and integrate into our thinking the phenomenon of the stowaway who pushes each country to let others take the effort. Policies to reduce CO2 involve a cost borne locally, while the benefits are global and benefit everyone. As a result of the lack of a common regulatory framework, the stowaway phenomenon is aggravated by concerns about carbon leakage and the desire to obtain compensation in future negotiations. It can only be solved by the development of a coherent system of carbon pricing.

In the spirit of the polluter pays principle, agreeing on a uniform international price for carbon, a price that is credible and reflects future environmental damage, seems to us to be the priority. According to the principle of subsidiarity, each country will be free to develop its own national climate policy by creating, for example, a carbon tax or an emissions trading system that would value carbon permits at the market price. (cap-and-trade).

The international agreement would then define a global maximum of emissions and thus a cap on tradable emission rights. In the interests of justice and redistribution, the poorest countries participating in the agreement could be offered free emission permits that they could resell on the international market, while facing the same universal carbon price.

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The WTO and the IMF in police custody

However, it would be utopian to believe that any system could be effective without the application of sanctions imposed on stowaways. Previous attempts in this area, such as the commitments of Kyotohave demonstrated the need to provide for a regulatory body in charge of measuring and controlling the national pollution of the signatories, and to penalise, where appropriate, participants who do not comply with their emission commitments. If the stigmatisation of "bad pupils", known as the naming and shamingis an interesting tactic, but it is still insufficient.

We propose the implementation of two tools that would build on existing and recognized institutions. First, all countries are interested in their exports, and therefore in their competitiveness and the gains from international trade. The WTO should therefore consider non-compliance with an international climate agreement as dumping and should therefore impose punitive taxes on imports from countries that are not part of the international coalition to fight climate change. The nature of the sanctions could not be decided by individual countries, as they would gladly seize this opportunity to introduce protectionist measures. Such a policy would provide an incentive for hesitant countries to join the agreement and would promote the development of a stable global climate coalition.

Second, non-compliance with a climate agreement should engage the responsibility of a country's future governments and thus be considered sovereign debt inflicted by carbon debt. The IMF would be part of this policy. For example, in the case of an emission rights mechanism, a deficit of permits at the end of the year would increase public debt; the conversion rate would be the current market price.

We recognize that the road to a credible and ambitious international agreement remains fraught with difficulties. But we also believe that it is essential to put in place a universal carbon price, which is the only guarantee of the effectiveness and credibility of our mutual climate commitments. We cannot wait any longer.

Jean Tirole...Professor of Economics, chairman, Toulouse School of Economics - Toulouse School of Economics, Nobel Prize in Economics 2014

Christian Gollier...Professor of Economics, Managing Director, Toulouse School of Economics - École d'Économie de Toulouse

This article is published in the framework of the partnership with Louis Bachelier Institute. The complete file of the review "Opinions & Debates" in which Jean Tirole and Christian Gollier took part is available for consultation. hereThe original text of this article was published on The Conversation.

 

 

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