DISCLAIMER: The IMF Notes Series aims to quickly disseminate succinct IMF analysis on critical economic issues to member countries and the broader policy community. The IMF Staff Climate Notes provide analysis related to the impact of climate change on macroeconomic and financial stability, including on mitigation, adaptation, and transition. The views expressed in IMF Staff Climate Notes are those of the author(s), although they do not necessarily represent the views of the IMF, or its Executive Board, or its management.
RECOMMENDED CITATION: Parry, Ian, Simon Black, and James Roaf. 2021. “Proposal for an International Carbon Price Floor among Large Emitters.” IMF Staff Climate Notes 2021/001, International Monetary Fund, Washington, DC.
ISBN: 978-1-51358-320-4 (Paper)
JEL Classification Numbers: Q48, Q54, Q58, H23
Keywords: Climate change, international carbon price floor, large emitters, Paris Agreement, design issues, mitigation.
Proposal for an International Carbon Price Floor Among Large Emitters
Ian Parry, Simon Black, and James Roaf
Countries are increasingly committing to midcentury ‘net-zero’ emissions targets under the Paris Agreement, but limiting global warming to 1.5 to 2°C requires cutting emissions by a quarter to a half in this decade. Making sufficient progress to stabilizing the climate therefore requires ratcheting up near-term mitigation action but doing so among 195 parties simultaneously is proving challenging. Reinforcing the Paris Agreement with an international carbon price floor (ICPF) could jump-start emissions reductions through substantive policy action, while circumventing emerging pressure for border carbon adjustments. The ICPF has two elements: (1) a small number of key large-emitting countries, and (2) the minimum carbon price each commits to implement. The arrangement can be pragmatically designed to accommodate equity considerations and emissions-equivalent alternatives to carbon pricing. The paper discusses the rationale for an ICPF, considers design issues, compares it with alternative global regimes, and quantifies its impacts.