The document discusses designing carbon pricing instruments to support ambitious climate policy. It notes that while carbon pricing is efficient and raises revenue, political constraints have limited its implementation. These constraints include concerns about competitiveness, household energy bills, dependence on fossil fuels, and policy misalignments. The document outlines strategies to overcome these barriers, including international price convergence, targeting exemptions, and realigning incentives. It also discusses levels of international cooperation on carbon pricing, from agreeing on principles to fully linking emissions trading systems. The discussion raises questions about how to help overcome political constraints and facilitate coordination on carbon pricing policies.

1. DESIGNING CARBON PRICING
INSTRUMENTS FOR AMBITIOUS
CLIMATE POLICY
Andrew Prag
OECD Environment Directorate
Carbon Market Platform 2nd Strategic Dialogue
Rome, Italy
28 September 2017

2. • Carbon pricing and climate ambition: a
broader view
• Constraints on carbon pricing and
strategies for overcoming them
– Specific to carbon pricing design
– Broader political constraints
• Levels of international co-operation on
carbon pricing
2
Overview

3. • Carbon pricing as a tool to support transformational
change (beyond marginal abatement)
• Can carbon pricing be implemented in a way that
improves political conditions, therefore allowing for
more of itself ?
– Good policy design (including exemptions / freebies)
– Effectively communicating benefits of pricing
– Removing policy misalignments
– Constructive international collaboration
• Separate discussion to ambition of NDCs, rules on co-
operative approaches, environmental integrity 3
Carbon pricing and climate ambition:
a broader view

4. • Efficient, cost-effective and business-friendly
way to integrate the core externality
• Raises revenue for governments
• Ultimately comprehensive but can be eased
in gradually
• Provides benefits to other local and regional
objectives such as improving air quality
… So if carbon pricing is so great why
have we not got more of it?
4
Benefits of carbon pricing are clear and
well known…

5. 5
Barriers and political constraints to
carbon pricing
Competitiveness
Households
Carbon
Entanglement
Misalignments
Government
Capacity
Concerns for economic growth, jobs
and industrial competitiveness

6. 6
Combining growth and climate policies
makes economic sense

7. 7
Barriers and political constraints to
carbon pricing
Competitiveness
Households
Carbon
Entanglement
Misalignments
Government
Capacity
Concerns for economic growth, jobs
and industrial competitiveness
Concerns about energy bills for
households and consumers
Government and financial system
dependence on fossil fuel revenue
Broader policy misalignments
counteracting carbon prices
Limited government capacity for
inter-ministry implementation

8. 8
Barriers and political constraints to
carbon pricing
Competitiveness
Households
Carbon
Entanglement
Misalignments
Government
Capacity
Barriers specific to carbon
pricing design
Barriers related to broader
policy and governance

9. Design elements of market mechanisms
Trading system
Foundations
Nuts and bolts
Enforcement
Verification
Adapted from Prag
et al (2012)

10. Design elements of market mechanisms
Trading system
Foundations
Nuts and bolts
Crediting mechanism
Foundations
Nuts and bolts
Verification
Adherence to rules
Rules on use of offsets
Enforcement
Verification
Revenue use
Caps & coverage
Allocation / auctions
Monitoring & reporting
Trading periods
Issuance / registries
Banking and borrowing
Accreditation 3rd parties
Verification process
Compliance regime
Adapted from Prag
et al (2012)

11. 11
Strategies for overcoming those barriers
Competitiveness
- International price convergence
- Design foundations for gradual ramp-up
- Transparent and limited free allocation
Households
- Targeted tax exemptions
- Revenue recycling to affected households
- Complementary energy efficiency policies
Carbon
Entanglement
- Diversifying public revenue sources
- Better financial valuation of climate risk
- Market creation through public procurement
Misalignments
- Realigning fiscal incentives
- Fossil fuel subsidies
- Electricity markets, many others
Government
Capacity
- Best practice sharing
- Technical assistance
- International revenue use

12. 12
Levels of international co-operation on
carbon pricing
Agreeing
on
principles
and
direction
Full linking
of
emissions
trading
systems

13. 13
Levels of international co-operation on
carbon pricing
Agreeing
on
principles
and
direction
Agreeing
to remove
mis-
aligned
policies
Indirect
linking via
common
offset
standards
Co-
ordination
“nuts and
bolts”
design
(MRV etc )
Price
convergence
through co-
ordination of
“foundations”
Full linking
of
emissions
trading
systems
Use of revenues for international activities
Technical assistance and capacity building
Eg.
Commitments
to fossil-fuel
subsidy
removal
Bilateral, clubs or
through Article 6
mechanisms?
Principles of
pricing…also
commitment
to rising
prices?
Step-wise discussions:
Parameters for price
corridors?
Phasing out free allocation?
Co-ordinating taxes and
trading?

14.  What role for the Carbon Market Platform in
helping to overcome political constraints?
 Which carbon pricing designs are most
effective in raising ambition in which country
circumstances?
 How can the Carbon Market Platform facilitate
better coordination on carbon pricing
policies?
14
Questions for discussion

15. THANK YOU
http://www.oecd.org/env/cc
Andrew.Prag@iea.org
Simon.Buckle@oecd.org