Over the past months, the introduction of a global carbon price has been presented as a new instrument for mitigating climate change. The idea has been advocated by heads of international organizations, including the new OECD Secretary-General, Mathias Cormann, the director-general of the World Trade Organization, Ngozi Okonjo-Iweala and the managing director of the International Monetary Fund, Kristalina Georgieva. In practice, it is not yet clear how such a global carbon price could be implemented. The most straightforward and ambitious approach would be to introduce a global carbon tax at a uniform tax rate (e.g. 75 USD per ton of CO2 emissions). Such a global carbon tax would bring an important shift in the approach to climate mitigation that has prevailed in international climate change law to date. This blog explains why.

First, a global carbon tax would serve as a solution to one of the key weaknesses of the existing international legal framework for climate mitigation, namely the risk of carbon leakage. Carbon leakage takes place when a country’s climate policy leads to higher levels of greenhouse gas emissions in other countries. It can be caused by the relocation of domestic enterprises to jurisdictions with no (or a lower) carbon price or by an increase in demand for carbon-intensive goods from those jurisdictions. The traditional tool used by countries to mitigate this risk has been to grant preferential treatment to carbon-intensive enterprises. For example, in the EU, enterprises deemed at risk of carbon leakage have been granted free allowances under the EU Emissions Trading System. This has the effect of muting the carbon price signal that they would have otherwise faced. An alternative solution – which has been recently proposed in the EU – is to introduce  carbon border adjustment measures (CBAMs). CBAMs impose a carbon price on importers of a selection of carbon-intensive imported products. This mechanism is intended to make the necessary adjustments so that the carbon price paid by importers is the same as that paid by domestic enterprises. A global carbon tax would render preferential regimes as well as CBAMs unnecessary: if all countries agree on a uniform carbon price, carbon leakage risks would be eliminated. 

Second, the introduction of a global carbon tax would necessarily break with the bottom-up approach of the Paris Agreement. That Agreement requires countries to adopt climate mitigation measures that reflect their “highest possible ambition” in the light of their national circumstances. Under the Agreement, countries are not obliged to introduce an explicit carbon price. Rather, they can choose to mitigate climate change by using other types of mechanisms, such as the introduction of standards or through a ban on carbon-intensive activities (e.g. a ban on coal fire power stations). A global carbon tax would radically shift away from this bottom-up approach by requiring all countries to agree on the introduction of a carbon tax at a uniform rate. Other types of international arrangements on carbon pricing could be envisaged in order to maintain some flexibility for countries to define their own carbon pricing policy. For example, an IMF Staff climate note published in June 2021 supports the introduction of a minimum carbon price that would apply in key large-emitting countries (being those countries where a large amount of carbon-intensive activities take place). The level of this minimum carbon price would be lower in emerging market economies and higher in developed countries. Differences in carbon pricing across countries would thus remain, not fully removing carbon leakage risks caused by differences in carbon prices across countries.  

Third, a global carbon tax would require rethinking the principle of common but differentiated responsibility and respective capabilities(CBDR-RC) that underlies the Paris Agreement. To put it simply, this principle implies that developed countries should take “the lead by undertaking economy-wide absolute emission reduction targets” and provide “financial resources to assist developing country Parties with respect to both climate mitigation and adaptation”. Developing countries are also obliged to adopt climate mitigation policies, but it is accepted that their contribution to climate mitigation can be lower, at least initially. In the context of carbon pricing, this principle could be interpreted as requiring developed countries to introduce a higher carbon price than in developing countries. If this interpretation is correct, the introduction of a global uniform carbon price would be inconsistent with the CBDR-RC principle and, more generally, with the Paris Agreement. The Paris Agreement would accommodate only proposals, such as the IMF proposal discussed above, that provides for a differentiated carbon price floor. I would argue for an alternative approach: the CBDR-RC principle should be reinterpreted to accommodate the introduction of a global carbon tax. This would mean that instead of being directly achieved through differentiated carbon prices across countries, the CBDR-RC principle could be achieved indirectly through the allocation of the revenue of a global carbon tax to developing countries. Allocating the revenue in this way would complement the current commitment of developed countries to provide financial assistance to developing countries. One could argue that this new form of revenue for developing countries would differ from the current financial assistance regime. The revenue generated by a global carbon tax should belong to developing countries. This approach would recognize that, in accepting the introduction of a higher global carbon price, those countries would have gone beyond their obligations under the traditional interpretation of the CBDR-RC principle.

A couple of years ago, a global carbon tax looked like a utopian proposal. Recent developments at the OECD level show that multilateral agreement on important tax issues is no longer out of reach. This suggests that countries might be able to achieve an agreement on a global carbon price in the near term. Steps in this direction could be taken during the next climate summit, COP26, that will take place in Glasgow on 31 October for two weeks. That would be very welcome news. The mitigation of climate change, the most truly global issue that faces us, demands truly global action, and soon.