Social Value of Mitigation Action, an anchor for new forms of carbon pricing?

Summary After the Paris Agreement a fresh look is needed about the role of carbon prices in climate policies. Paragraph 136 of the Decision which notes the importance of carbon pricing, only applies to " non-party entities " and is not binding upon Parties to the Convention. Carbon prices will thus stay country-specific. This is in contrast with the idea that, in a " first-best " world, carbon prices should represent the social costs of climate change (SCC) and be equated throughout countries and sectors modulo compensating transfers for the losers. De facto, the Paris Agreement gives a pivotal role to INDCs for aligning the +2°C objective and the sustainable development goals (SDGs). Carbon prices will be one of the possible tools of their deployment but their level will be constrained by the pace at which each country can embed them into reforms of its fiscal system and its public policies. This pace will likely not be consistent with the urgency of the climate challenge and leave unsolved how to meet the Article 2 of the Agreement i.e. " making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development ». The usual response to this carbon price gap lies in complementary non price signals. But, these tools entail the risk of political arbitrariness and economic inefficiencies leading to political distrust of climate policies. The way out is to ground complements to carbon prices on the legitimacy of the paragraph 108 of the Decision of the Paris Agreement which " recognizes the social, economic, and environmental value of mitigation activities and their co-benefits to adaptation, health, and sustainable development " (hereafter SVMA).