IMF proposes an ‘international carbon price floor’ – and Canada could be the model

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Researchers at the International Monetary Fund have a proposal they hope will be the key that finally unlocks serious progress toward meeting the world’s Paris Agreement climate commitments. And they’re looking at Canada for their model of how it would work.

It’s called an “international carbon price floor.” In a staff paper published by the IMF last week, the authors propose what amounts to a common minimum carbon tax among a “core group” of the world’s biggest-emitting countries.

“An international carbon price floor offers a realistic prospect of catalyzing the needed global action in the next decade, and its success is in participants’ individual and collective interests,” the report argues.

There are two key advantages to what the IMF paper proposes.

First, it reduces the number of parties who would have to agree to the plan from the unwieldy 196 who signed the Paris Agreement, to some subset of the G20 – who, collectively, account for 85 per cent of global carbon emissions.

Second, it’s remarkably simple. It narrows the entire discussion of achieving Paris commitments down to a single objective: putting a common price on carbon. How each country shapes policy to impose the price target would be its own choice, as long as the objective is attained.

If this sounds familiar to Canadians, that’s because it is, essentially, the strategy that Canada has adopted for its own carbon emissions reductions. At the core is a common national minimum carbon price, increasing over time; provinces have the flexibility to pursue their own carbon-pricing mechanisms in order to meet that target.

“The application of carbon pricing across Canadian provinces gives a good prototype for how a price floor could translate to the international level,” the report says.

Of course, the key difference here is that Canada is a single federation in which the federal government can impose its own carbon pricing mechanism on any province that does not adopt the policy; that’s not an option in a multilateral agreement. Canada couldn’t get 10 provinces onside on its carbon plan; how could we expect an international deal involving twice that many countries to be reached?

For one thing, the researchers say, much of the heavy lifting on emissions reduction could be achieved by a carbon pricing agreement involving a much smaller group of nations – a so-called “minilateral” agreement. If you initially focused the deal on just the four biggest emitters – the United States, China, India and the European Union – you’d cover two-thirds of global emissions.

Toss in Britain and Canada – two more relatively large emitters who already have carbon-pricing policies in place, and therefore would be obvious additions to this core – and, the researchers estimate, a US$50-a-tonne carbon price floor would reduce global emissions by 23 per cent by 2030. This alone would be enough to achieve the Paris Agreement goal of keeping global warming below 2 degrees.

Whether those key nations could achieve a mutual commitment is far from certain; nevertheless, it would certainly be easier to achieve than a consensus among nearly 200 governments. It’s clear at this point that something more concrete needs to be done to propel the world toward the Paris Agreement objectives; what’s been done so far is, measurably, far from adequate.

The IMF paper notes that 59 countries, accounting for more than half of global emissions, have committed to net-zero emissions by the middle of the century. Yet carbon pricing – considered the critical mechanism to achieving those reductions – covers only about 20 per cent of the world’s emissions, and the average price is less than US$3 a tonne. Six years after the Paris Agreement was signed we’ve barely moved the needle.

A mutually agreed-upon carbon price floor among the world’s biggest economies would remove much of the competitiveness concerns that are certainly an impediment for countries nervous about acting unilaterally. The IMF researchers argue that a price floor would eliminate the need for border carbon adjustments – tariffs on goods imported from jurisdictions that a country unilaterally deems have been afforded a carbon-cost advantage. A floor would be a more efficient carbon-reduction mechanism and would avert the kind of trade animosity and protectionism that could leave economic scars.

“This is an efficient, concrete, and easily understood policy instrument. Simultaneous action among large emitters to scale up carbon pricing would deliver collective action against climate change while decisively addressing competitiveness concerns,” the IMF said.

It should be noted that this paper does not constitute the IMF’s formal position at this time. Nevertheless, its publication in advance of the United Nations climate-change conference in November – effectively, the world’s five-year accounting of the progress since Paris, delayed by a year by the COVID-19 pandemic commitments – represents a kick-starting of the global discussion about the potential for a minilateral deal that could meaningfully accelerate emissions reduction in the next five years.

And Canada, with a working model already in place to show the world, is in a position to take a leadership role in that conversation.

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