Report of the High-Level Commission on Carbon Prices I MAY 29, 2017 Report of the High-Level Commission on Carbon Prices supported by: MINISTÈRE DE LA TRANSITION ÉCOLOGIQUE ET SOLIDAIRE THE COMMISSION: 6OBJECTIVES During the 22nd Conference of the Parties (COP) of the United Nations Framework Convention on Climate Change (UNFCCC) held in Marrakech, Morocco, in 2016, at the invitation of the Co- Chairs of the Carbon Pricing Leadership Coalition (CPLC) High-Level Assembly, Ségolène Royal and Feike Sijbesma, Joseph Stiglitz, Nobel Laureate in Economics, and Lord Nicholas Stern, accepted to chair a new High-Level Commission on Carbon Prices comprising economists, and climate change and energy specialists from all over the world, to help spur successful implementation of the Paris Agreement. The Commission’s objective is to identify indicative corridors of carbon prices that can be used to guide the design of carbon-pricing instruments and other climate policies, regulations, and measures to incentivize bold climate action and stimulate learning and innovation to deliver on the ambition of the Paris Agreement and support the achievement of the Sustainable Development Goals. Commission Chairs: Commission Members: Joseph E. Stiglitz Maosheng Duan Elisabeth Moyer (University Professor, (Director of China Carbon Market (Associate Professor, Department of Columbia University, United States) Center of Tsinghua University, China) the Geophysical Sciences, University of Chicago, United States) Nicholas Stern Ottmar Edenhofer (IG Patel Professor of Economics (Deputy Director and Chief Economist Mari Pangestu and Government and Chair of the at the Potsdam Institute for Climate (Professor of International Economics Grantham Research Institute, London Impact Research, Germany) at the University of Indonesia; former School of Economics and Political Minister of Trade, Indonesia) Science, United Kingdom) Gaël Giraud (Chief Economist of the Agence Priyadarshi R. Shukla Française de Développement, France) (Professor, Indian Institute of Management, Ahmedabad, India) Geoffrey Heal (Donald C. Waite III Professor of Youba Sokona Social Enterprise, Columbia Business (Vice-Chair of the IPCC, Mali) School, United States) Harald Winkler Emilio Lèbre la Rovere (Director, Energy Research Centre, (Executive Coordinator of the Center University of Cape Town, South Africa) for Integrated Studies on Climate Change and the Environment, Federal University of Rio, Brazil) Adele Morris (Senior Fellow and Policy Director for Climate and Energy Economics at the Brookings Institution, United States) Report of the High-Level Commission on Carbon Prices i ACKNOWLEDGEMENTS The Commission was supported by the Carbon Pricing Leadership Coalition (CPLC), a World Bank Group initiative, with a writing team led by Stephane Hallegatte, under the guidance of John Roome, and comprised of Radhika Goyal, Céline Ramstein, and Julie Rozenberg. Support was also provided by Isabel Saldarriaga Arango, Angela Churie Kallhauge, Elisabeth Mealey, and teams from the World Bank’s Climate Change Unit and the Partnership for Market Readiness (PMR). Background papers and valuable contributions for this report were provided, in their personal capacity, by Emilie Alberola (I4CE), Richard Baron (OECD), Mark Budolfson (University of Vermont), Sergey Chestnoy (RUSAL), Ian Cochran (I4CE), Lara Dahan (I4CE), Kurt Van Dender (OECD), Francis Dennig (National University of Singapore-Yale College), Subash Dhar (Technical University of Denmark), Simon Dietz (Grantham Research Institute on Climate Change and the Environment), Etienne Espagne (CEPII), Samuel Fankhauser (Grantham Research Institute on Climate Change and the Environment), Maddalena Ferranna (Princeton University), Dominique Finon (CIRED), Marc Fleurbaey (Princeton University), Dinara Gershinkova (RUSAL), Alain Grandjean (Carbon 4), Pierre Guigon (World Bank), Céline Guivarch (CIRED), Cameron Hepburn (University of Oxford and LSE), Christina Hood (IEA), Jean-Charles Hourcade (CIRED), Noah Kaufman (WRI), Thomas Kerr (IFC), Benoît Leguet (I4CE), Mireille Martini (Institut Louis Bachelier), Ajay Mathur (TERI), Amaro Pereira (COPPE/UFRJ), Antonin Pottier (CERNA), Baptiste Perrissin-Fabert (France Stratégie), Grzegorz Peszko (World Bank), Joeri Rogelj (IIASA), Steven Rose (EPRI), Noah Scovronik (Princeton University), Robert Socolow (Princeton University), Dean Spears (Texas University Austin), Andrew Steer and teams at the World Resources Institute (WRI), Jon Strand (IDB), Michael Toman (World Bank), Adrien Vogt-Schilb (IDB), Henri Waisman (IDRRI) and teams at the Deep Decarbonization Pathways Project, Fabian Wagner (IIASA Vienna), and Byrony Worthington (Environmental Defense Fund Europe). Guidance was provided by multiple reviewers including Richard Baron (OECD), Amar Bhattacharya (Brookings Institution), Carter J. Brandon (World Bank), Marianne Fay (World Bank), Zou Ji (Renmin University of China), and Ian Parry (IMF). The contributions to the Commission are available on www.carbonpricingleadership.org. The Commission also thanks the participants of the meetings held at France Stratégie (Paris, France), in January, and at the Brookings Institution (Washington DC, USA), in April 2017, as well as the participants of the symposium for the Commission, hosted by the Agence Française de Développement, the Chair Energy and Prosperity, and the École Normale Supérieure in Paris on May 17, 2017. The Commission benefited from financial support from the government of France and the World Bank Group. The report was edited by Inge Pakulski and the graphic design is by Brad Amburn. Report of the High-Level Commission on Carbon Prices ii CONTENTS The Commission: Objectives i Acknowledgements ii Executive Summary 1 1 Introduction 5 2 Carbon Pricing: Indispensable for Reducing Emissions in an Efficient Way 9 2.1 Carbon-Pricing Options 10 2.2 The Importance of Fossil Fuel Subsidies 12 2.3 Effective Carbon Pricing through an Enabling Environment 13 2.4 Private Sector Gearing Up for Carbon Pricing 14 3 Climate Policy Packages: Key to Achieving the Paris Temperature Objective 15 3.1 Government and Market Failures Other Than GHG Externalities 15 3.2 Country Policy Design: A Reflection of National and Local Circumstances 18 3.3 Dynamic and Adaptive Climate Policy Designs 21 3.4 International Cooperation to Promote Consistency of Actions across Countries 23 4 Evidence on Carbon-Price Trajectories Consistent with Paris Agreement Temperature Objective 25 4.1 Evidence on Carbon Price That Would Be Consistent with the Paris Agreement 25 4.1.1 Technological Roadmaps 25 4.1.2 Analysis of National Mitigation and Development Pathways 30 4.1.3 Global Integrated Assessment Models 32 4.2 Current Level and Breadth of Carbon Pricing Inconsistent with Paris Agreement 35 5 Tapping Carbon-Pricing Revenues 37 5.1 Carbon Pricing as a Source of Government Revenue 37 5.2 Redistributing Carbon-Pricing Revenues to Protect the Poor and Vulnerable 39 5.3 Carbon-Pricing Revenues to Smoothen the Transition toward Decarbonization 40 5.4 Boosting Investment and Economic Growth with Carbon-Pricing Revenues 42 5.5 Carbon-Pricing Revenues to Foster Technological Change and Transition toward Decarbonization 44 6 Complementing Carbon Pricing with Other, Well-Designed Policies 46 6.1 Using Complementary Infrastructure and Planning Approaches to Facilitate Transition 46 6.2 Using Complementary Policies to Tackle Other Market Failures and Distributional Impacts 47 7 Conclusion 50 A Appendix A: The Social Cost of Carbon 52 B Appendix B: The Social Value of Mitigation Action 53 References 54 Report of the High-Level Commission on Carbon Prices iii ACRONYMS CCGT Combined Cycle Gas Turbine CCS Carbon Capture and Storage CDP Carbon Disclosure Project CDM Clean Development Mechanism COP Conference of the Parties CPLC Carbon Pricing Leadership Coalition DDPP Deep Decarbonization Pathways Project EMF Energy Modeling Forum ETS Emissions Trading System EU European Union GHG Greenhouse Gas GtCO2e Giga (metric) tons of Carbon Dioxide equivalent HDI Human Development Index IAM Integrated Assessment Model IEA International Energy Agency IRENA International Renewable Energy Agency IPCC International Panel on Climate Change MDB Multilateral Development Bank MW Megawatt NDC Nationally Determined Contribution PMR Partnership for Market Readiness PPP Purchasing Power Parity R&D Research and Development SDG Sustainable Development Goal SSP Shared Socioeconomic Pathway tCO2 (Metric) tons of Carbon Dioxide tCO2e (Metric) tons of Carbon Dioxide equivalent UNEP United Nations Environment Programme UNFCCC United Nations Framework Convention on Climate Change Report of the High-Level Commission on Carbon Prices iv EXECUTIVE SUMMARY The purpose of this Commission is to explore explicit carbon-pricing options and levels that would induce the change in behaviors— particularly in those driving the investments in infrastructure, technology, and equipment—needed to deliver on the temperature objective of the Paris Agreement, in a way that fosters economic growth and development, as expressed in the Sustainable Development Goals (SDGs). This report does not focus on the estimation and evaluation of the climate change impacts that would be avoided by reducing carbon emissions. While the Commission also covers other policies relevant and important to carbon-pricing design and delivery on the Paris agreement, its primary focus is on pricing. This report has been prepared based on the Commission’s assessment of the available evidence