Can Negotiating a Uniform Carbon Price Help to Internalize the Global Warming Externality?

Abstract

It is difficult to resolve the global warming free-rider externality problem by negotiating n different quantity targets. By contrast, negotiating a single internationally binding minimum carbon price (the proceeds from which are domestically retained) counters self-interest by incentivizing agents to internalize the externality. The model of this article indicates an exact sense in which each agent’s extra cost from a higher emissions price is counterbalanced by that agent’s extra benefit from inducing all other agents to simultaneously lower their emissions in response to the higher price. Some implications are discussed. While the study is centered on a formal model, the tone of the policy discussion resembles more an exploratory think piece.