The path that we have taken to reduce the risk of catastrophic changes to our way of life is not working. Between 1960 and 2000 the global economy grew at a 3.7% rate and CO2 emissions grew at 2.4%. Unfortunately, the gap between global GDP growth and carbon emissions growth has fallen from 1.3% in the previous period to 0.7% since 2000. The effect of international treaties since 2000 has been negligible. Unless we take a new approach to reducing carbon emissions we will be leaving ourselves open to a catastrophe that all of us would like to avoid.
The reason why we have not done what is necessary to reduce carbon emissions is easy to understand. The current cost of producing a ton of carbon emissions is around $1. The cost of a ton of carbon needs to rise to $40 in order to insure ourselves against catastrophic risk. We have been unable to bring to cost of carbon to $40 because of the free rider problem. Reducing carbon emissions is a global public good but nations make the decisions about carbon pricing from local perspective. They are willing to let other nations bear the cost of a higher carbon price.
One novel approach to solving the free rider problem is to create a climate club. The members of the club would agree to a $40 per ton price for carbon. They would share in the cost and the benefits from membership in the club. Nations that decided to free ride by not joining the club would be penalized. The penalties would have to be severe enough to encourage free riders to join the club.
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