How to Comply with the Paris Agreement Temperature Goal: Global Carbon Pricing According to Carbon Budgets

Avoiding irreversible climate change as effectively as possible is one of the most pressing challenges of society. Carbon pricing that is uniformly valid on a global and cross-sectoral basis represents a cost-efficient policy tool to meet this challenge. Carbon pricing allows external costs to be allocated or internalized on a polluter-pays principle. It is shown that a global emissions cap-and-trade system is the most suitable market-based instrument for reducing global emissions levels, in line with the temperature goal set by the Paris Agreement. A proposal for its design is presented in this paper. This instrument encourages worldwide measures, with the lowest marginal abatement cost, according to a pre-defined reduction path. Thereby, it ensures compliance with a specified remaining carbon budget to meet a certain temperature limit in a cost-efficient manner. Possible reduction paths are presented in this paper. Weaknesses in the design of existing emissions trading systems (ETS), such as the EU ETS, are identified and avoided in the proposed instrument. The framework solves several problems of today’s climate change policies, like the free rider problem, carbon leakage, rebound effects or the green paradox. The introduction of a global uniform carbon pricing instrument and its concrete design should be the subject of policy, especially at the United Nations climate change conferences, as soon as possible in order to allow for rapid implementation. If a global ETS with a uniform carbon price could be introduced, additional governmental regulations with regard to carbon emissions would become obsolete.