We know global warming, caused by the increased concentration of greenhouse gases (GHGs) in the atmosphere, is a serious threat to human health, ecosystems, infrastructure, and agriculture. We also know that we need to significantly accelerate global ambitions to safeguard the planet we live on, while ensuring a just transition so people aren’t left behind.
As an economic externality, carbon emissions are often not priced at all, and when they are, the price per tonne can vary significantly across different regions. This creates an uneven playing field across territories and industries, which means there is less incentive for some countries to reduce emissions.
In June, the International Monetary Fund (IMF) put forward a framework to introduce an International Carbon Price Floor (ICPF) that proposes different price points for emissions for economies at different stages of development to incentivise greater participation.
In a joint report with the World Economic Forum, we have assessed the impacts of international carbon pricing scenarios on economies and industries to help inform the debate and provide insights to governments, businesses and civil society looking for solutions for reducing carbon emissions. We also estimate the revenues raised through carbon pricing, which could be used to help manage the transition.
Our analysis sought to answer three key questions: could the ICPF reduce emissions significantly, could it be done without severe economic damage to livelihoods and businesses, and could it be done without shifting economic activity and emissions from one part of the planet to another. The answer to all three questions is yes. That said, the landscape for introducing carbon pricing is complex and technical analyses are one part of a drive to find solutions to limit global warming.
Key findings
- Emissions
- Cost
- Just transitions
- Challenges
Emissions
An international carbon price floor could reduce emissions by up to 12.3%
When combined with countries’ existing pledges for emission reductions in their nationally determined contributions (NDCs), an ICPF would help limit the rise in temperatures to 2°C above pre-industrial levels. Together with strengthened climate ambition and action, this would help give the world a better chance of reaching 1.5°C.
The analysis found little risk that emissions-producing activities would be moved to locations with a low carbon price if an ICPF were adopted widely.
No single lever alone will be able to solve the climate crisis but the report shows carbon pricing can play an important role.
Cost
An international carbon price could pay for itself
If the revenues raised by the carbon price are returned to households, GDP would decrease by less than 1% across all scenarios tested.
- Over the longer term, much if not all of the GDP loss would be offset by reducing economic losses due to global warming: sea level rise, losses in labour and agricultural productivity, and damage to human health. The costs to society and business of failing to act are far greater.
Just transitions
The revenues generated by an ICPF could be used to support those most disadvantaged
An ICPF could raise up to 3% of GDP in revenues in some countries, which could be redistributed to households and help deliver a just transition.
Only a small portion of the revenues from carbon pricing in the high-income countries would be needed to offset the GDP cost of adopting the ICPF in low-income countries. Such international climate finance is key to a just transition.
Challenges
An international carbon price floor comes with challenges
Carbon pricing is just one tool that will help governments and businesses transition to a net-zero future.
To succeed, the price floor would require international agreement. That would be difficult to gain, though there is precedent for international action. One hundred and thirty-six (136) countries recently signed up to the OECD framework on corporate taxation that sets a minimum tax rate on foreign income, showing such agreement is possible.
Contact us
