All regions of the world do not—and will not—experience the effects of CO2 emissions in the same way. Some will suffer greatly from climate change, while others may even benefit. These heterogeneous effects mean that different countries will have differing incentives to abide by the Paris Agreement, which aims to limit global warming below 2 °C relative to pre-Industrial levels.
A study by University of Chicago economist Esteban Rossi-Hansberg, the Glen A. Lloyd Distinguished Service Professor in Economics, and José-Luis Cruz of Princeton University assesses the local social cost of carbon (LSCC) and how that cost aligns with the carbon reduction pledges countries made under the Paris Agreement. They find that while the distribution of carbon reduction pledges in the Paris Agreement is roughly in line with the LSCC, the pledges have only a very small impact on reducing emissions and limiting warming.
The social cost of carbon has become the standard measure to benchmark the magnitude of the carbon taxes needed to implement optimal carbon policy. It measures the social cost in US dollars of adding a ton of CO2 to the atmosphere. If we were able to measure this social cost accurately, standard Pigouvian logic tells us that the optimal tax should be such that the price of carbon is equal to this social cost. Since carbon emissions are a global externality there is, at least in principle, a world’s social cost of carbon that takes into account all the implications of the additional ton of CO2 throughout the world and over time.
The price of carbon should then be set at this price, everywhere. Of course, this logic is correct only from a global planner’s point of view, where the planner puts equal weights across individuals. Its implementation requires transfers from the regions that are less affected, or positively affected, by CO2 emissions to the countries that are negatively affected. In practice, countries and regions tend to consider the implications of climate change for themselves, not for the whole world. Their incentives to pursue climate policy via carbon taxes, reflect their own evaluation of the social cost of carbon, not necessarily the world’s.—Cruz & Rossi-Hansberg
Under business-as-usual, the world would reach the 2 °C limit in 2043. The Paris pledges delay crossing that threshold by only three years.
CO2 Emissions and Temperature Under the Paris Agreement
This Figure displays the evolution of carbon emissions and global temperature in the business-as-usual scenario and under the coordinated Paris Agreement implementation. It also presents the evolution in the most extreme Intercontinental Panel on Climate Change (IPCC) scenario, RCP 8.5. The Figure shows that, even when the whole world commits to the Paris Agreement, the pledges only have a minuscule effect in reducing carbon emissions and limiting warming. Under the business-as-usual scenario, a global temperature increase of 2°C relative to pre-industrial levels is reached in the year 2043. The Paris Agreement delays the date at which we cross this threshold by only three years. That is, although the agreement might be politically consequential to build toward future agreements, the involved pledges are very far from achieving its stated goal. Cruz & Rossi-Hansberg
To achieve the Agreement’s goal to limit warming below 2 °C over the current century would require setting at least a $200 per ton carbon tax throughout the world, according to the study. The authors consider such a policy so unrealistic that they question the feasibility of the 2 °C target itself.
… carbon taxes of the magnitude needed to achieve the Paris Agreement goals involve very large inter-temporal transfers. Something that has been recognized repeatedly in the literature. Imposing the necessary cost on current generations will be hard, even if we care deeply about future generations. The resulting welfare gains, when we value future generations almost as much as ourselves (including the effect on growth) are small, but negative for most of the developed world. They turn positive when the elasticity of substitution between energy sources is larger. Increasing this elasticity seems essential to make the required carbon policy more palatable.—Cruz & Rossi-Hansberg
Setting such a high tax on carbon is probably unrealistic, especially in developing countries. To make achieving the 2 °C target more palatable to countries, we must develop technologies and install capital that make the substitution between fossil fuels for clean energy sources less costly.—Esteban Rossi-Hansberg