Carbon Pricing: Effectiveness and Equity

The 2015 Paris Agreement adopted the goal of limiting the rise in global mean temperature to 1.5-2 degrees C above pre-industrial levels. Carbon pricing can play a key role in meeting this objective. A cap-and-permit system, or alternatively a carbon tax indexed to a fixed emission-reduction trajectory, not only can spur cost-effective mitigation and cost-reducing innovation, but also, crucially, can ensure that emissions are held to the target level. The carbon prices needed to meet this constraint are likely to be considerably higher, however, than existing prices and conventional measures of the social cost of carbon. This poses issues of distributional equity and political sustainability that can be addressed by universal dividends funded by carbon revenues.