A Proposed Global Climate Policy Architecture: Comprehensive Emission Targets from Specific Formulas

1. A Proposed Global Climate Policy Architecture: Comprehensive Emission Targets from Specific Formulas Jeffrey Frankel Harpel Professor, Harvard Kennedy School Academic Seminar Series Resources for the Future,April 23, 2009

2. What successor to the 2008-12 regime?ideally in Copenhagenin December • Features of Kyoto worth building on -- • Politics: Quantitative limits maximize national sovereignty • Economics: Market mechanisms • Thus (2001) “You’re Getting Warmer: The Most Feasible Path for Addressing Global Climate Change Does Run Through Kyoto.” • What is missing: • Participation by US, China, & other developing countries • A mechanism for setting targets far into the future • Any reason to expect compliance. J. Frankel, Harvard

3. Desiderata for the next stage, requirements for the next multilateral treaty • Comprehensive participation • getting US, China, India, et al, to join • Efficiency -- esp. trading • Dynamic consistency – a credible century path • Equity -- re poor countries • Compliance-- No country will join if the plan implies, ex ante, big economic sacrifice overall. • Robustness -- No country will stay in if compliance implies, ex post, huge economic cost in any given period. J. Frankel, Harvard

4. ProposedArchitecture for Quantitative Emissions Targets • Unlike Kyoto, my proposal seeks to bring all countries in & to look far into the future. • But we can’t pretend to see with a fine degree of resolution at a century-long horizon. • How to set a century of quantitative targets? • A decade at a time, in a sequence of negotiations; • but within an overall flexible framework of formulas, • building confidence as it goes along. J. Frankel, Harvard

5. The formulas are designed pragmatically, basedon what emissions paths are possible politically: • unlike other approaches based purely on: • Science (concentration goals), • Ethics (equal emission rights per capita), • or Economics (cost-benefit optimization). • Why the political approach?The usual proposed paths are not dynamically consistent: it is not credible that successor governments will abide by today’s leaders’ commitments. J. Frankel, Harvard

6. “An Elaborated Proposal For Global Climate Policy Architecture: Specific Formulas and Emission Targets for All Countries in All Decades,” March 2009 Suggests a framework of formulas that produce precise numerical targets for CO2 emissions in all regions in all decades. J. Frankel, Harvard

7. The formulas are driven by 6 axioms: • The US will not commit to quantitative targets if China & major developing countries do not commit to quantitative targets at the same time, due to concerns about economic “competitiveness” & carbon leakage. • China & other developing countries will not make sacrifices different in character from those made by richer countries who have gone before them. • In the longer run, no country can be rewarded for having “ramped up” its emissions high above the levels of 1990. • No country will agree to join if it costs more than, say, 1% of GDP throughout the century. • No country will abide by targets that cost it more than, say, 5% of GDP in any one period. • If one major country drops out, others will become discouraged and the system may unravel. J. Frankel, Harvard

8. Building on existing commitments • Between now and 2050, the EU follows the path laid out in the 2008 EC Directive (50% below 1990), • US follows the path in the Lieberman bills (67% below 1990) , • and Japan, Australia & Korea follow statements that their own leaders have recently made. • China, India & others agree immediately to quantitative targets which at first merely copy their BAU paths, thereby precluding leakage. J. Frankel, Harvard

9. When the time comes for developing countries’ cuts, • their emission targets are determined by a formula that incorporates 3 elements,designed so they are only asked to take actions analogous to those already taken by others: • a Progressive Reduction Factor, • a Latecomer Catch-up Factor, and • a Gradual Equalization Factor. J. Frankel, Harvard

10. The targeted reductions from BAU agreed to at Kyoto in 1997 were progressive with respect to income. Cuts ↑ Incomes → J. Frankel, Harvard

11. The three factors in the formulas • Progressive Reduction Factor: • For each 1% difference in income/cap => target is 0.14% greater emissions abatement from BAU (as also agreed at Kyoto). • Latecomer Catch-up Factor: • Gradually close the gap between the latecomer’s starting point & its 1990 emission levels, at the same rate as US. (Goal: avoid rewarding latecomers for ramping up emissions). • Gradual Equalization Factor: • In the long run, rich & poor countries’ targets converge in emissions per capita. (Goal: equity) J. Frankel, Harvard

12. The resultant paths for emissions targets, permit trading, the price of carbon, GDP costs, & environmental effects • estimated by means of the WITCH model of FEEM, Milan, co-authored & applied by Valentina Bosetti. J. Frankel, Harvard

13. Bottom line: • Concentrations level off at 500 ppm in the latter part of the century. • No country in any one period suffers a loss as large as 5% of GDP by participating. • Present Discounted Value of loss < 5% GDP. J. Frankel, Harvard

14. EUROPE = Old Europe + New Europe US = The United States KOSAU = Korea + S. Africa + Australia (3 coal-users) CAJAZ = Canada, Japan & New Zealand TE = Russia & other Transition Economies MENA = Middle East + North Africa SSA = Sub-Saharan Africa SASIA= India & the rest of South Asia CHINA = PRC EASIA = Smaller countries of East Asia LACA = Latin America & the Caribbean The 11 regions: J. Frankel, Harvard

15. Two versions • (I) Cut developing country emissions only after thresholds. 1a: • China’s target is not cut below BAU until 2040 • => permit sales > 1 gigaton of Carbon in 2040. • SEAsia does not have to cut below BAU • => permit sales > 1 gigaton in 2080-2100; • and it registers big economic gains toward the century end.[1] • Africa similarly. • I judge such huge international transfers unsustainable politically. • (II) Instead, assign developing countries earlier targets. 1b: • Southeast Asia & Africa get targets below BAU after 2050; • move forward by 10 years the date China takes on cuts (to 2030), • and by 5 years the date MENA is asked to do so (to 2040). • An additional reason was to reduce the slackening in global targets—observable as a carbon price dip —that would otherwise occur around 2035. • Version (II) is presented here. Version (I) in Appendix. • [1] Figs. 2a-6a & Table 3a; or Fig.s 2-8 and Tables 1 & 2 – especially Fig. 7 -- in HPICA DP 08-08. J. Frankel, Harvard

16. Emissions path for rich countriesFig. 2b Predicted actual emissions exceed caps, by permit purchases. J. Frankel, Harvard

17. Emissions path for poor countriesFig. 4b Predicted actual emissions fall below caps, by permit sales. J. Frankel, Harvard

18. Emissions path for the worldFig. 5b Global peak date ≈ 2035 J. Frankel, Harvard

19. Price of Carbon Dioxide Fig. 6b rises slowly over 50 years, then rapidly. J. Frankel, Harvard

20. Concentrations stay below 500 ppm goalFig. 7b J. Frankel, Harvard

21. Temperature rises 3° rather than 4°Fig. 8b Yes, I know. The pay-off is a let-down. J. Frankel, Harvard

22. The next paper (co-authored with Valentina Bosetti)… • (1) See if we can hit concentrations = 450 ppm • Answer, so far: yes, but not within the constraints. • (2) See if the emission target trajectories suggested by others violate our constraints (e.g., 5% of GDP in some periods), and how badly. Of the eventual extensions I hope to do, • the most important will be to introduce uncertainty, especially in the form of stochastic growth processes. • Robustness will require: • Possible decadal updates of BAU & formula parameters; • within-decade indexation of targets to GDP. J. Frankel, Harvard

23. Preliminary results from target cuts severe enough to reach a 450 ppm target by 2100... J. Frankel, Harvard

24. …show GDP losses of 6-7% for most countries in the later decades, to hit 450 ppm. J. Frankel, Harvard

25. Appendix I: Commitments recently made by country leaders European Union • The EU emissions target for 2008–2012 was agreed at Kyoto: 8 % below 1990. • Brussels in 2008: • In the 2nd 2015–2020 period, target = 20 % below 1990. • For the 3rd period (2022–2027), and thereafter up to the 8th period (2048–2052), the EU targets progress in equal increments to a 50 % cut below 1990. Japan • PM Fukuda in 08: Target = 60 % below 2000 by 2050. (Assume equal increments over 2010- 2050.) TheUnited States (Now way above Kyoto targets) • We assume average annual emissions growth rate is cut ½ during 2008–12, • to 0.7 % per year, so that emissions in 2012 are 31.5 % above 1990; • and flat over 2012–2017. • Then we implement the Lieberman–Warner formula • emissions in 2050 reach 67 % below 1990 => 98.5 % below 2012. => Reductions of 2.6 % per year. Australia PM Rudd in 08:plans to cut emissions to 60 % below 2000 by 2050 Korea (Would be the first non-Annex I country to take a target.) • Pres. Myung-bak Lee, March 2008: “tabled a plan to cap emissions at current levels over the first Kyoto period” and “vowed his country would slash emissions in half by 2050,” • Emissions have risen 90 % since 1990. • It is hard to imagine applying the brakes so sharply as to switch from 5 % annual growth to 0. • My interpretation: emissions flatten between 2007 and 2022 China • Reportedly announced plans to start cutting emissions in 2030, presumably vs. BAU (ahead of the 2007 G8 summit, according to Germany’s environment minister -- FT 3/12/07.) J. Frankel, Harvard

26. Appendix II: More on hitting 450 ppm • Our 1st pass at attaining 450 ppm concentrations entailed: • negative emissions allocated to W. Europe by 2065 ! • Very big purchases of permits from developing countries. Seems unlikely. • And even then does not quite hit 450 ppm. • At a 2nd pass, we tightened parameters & moved up further the dates at which developing countries start cutting below BAU. J. Frankel, Harvard

27. Next step • EU: • in 2015-2020, EU target is 30 % below 1990 levels, rather than 20 %. • Developing countries start cutting below BAU still earlier than before: • MENA starts making cuts in 2020 • LACA starts in 2020 • China starts in 2020 • South Asia in 2030. • East Asia in 2035 J. Frankel, Harvard

28. 450 ppm goal with even earlier starting dates for developing countries,so they peak ≈ 2030 { J. Frankel, Harvard

29. 450 ppm goal with even earlier starting dates for developing countries=> permit purchases by richcountriesare smaller. { J. Frankel, Harvard

30. 450 ppm goal with even earlier starting dates for developing countriesGlobal emissions peak ≈ 2025 J. Frankel, Harvard

31. Environmental EffectivenessConcentrations actually level off at 450 ppm by 2050 ! J. Frankel, Harvard

32. Environmental Effectiveness . Even though the 450 ppm target is achieved by mid-century, the pay-off in further temperature moderation, relative to 500 ppm, is not large. There are diminishing returns to CO2 abatement in two senses: The marginal cost of abatement rises in dollar terms, and the marginal cost of temperature moderation rises in terms of CO2. J. Frankel, Harvard

33. Price of Carbon for 450 ppm case Reaches $100 / ton already by 2010 (=> ≈ 25¢/gal. of gasoline or heating oil); $1,800 / ton by 2100. J. Frankel, Harvard

34. Resulting Per Capita Emissions Thanks to the beyond-2050 convergence rule, emissions/capita again nicely converge. J. Frankel, Harvard

35. But again the 5% of GDP loss constraint is violated during the latter decades,for at least 3 regions J. Frankel, Harvard

36. The PDV of cost, as share of GDP, also exceeds the 1% threshold(discount rate = 5%) • The global cost is 1.8% of GWP. J. Frankel, Harvard

37. Appendix III • Version (a), where developing countries are not asked to cut emissions below BAU until they cross certain thresholds. • MENA 2030 • China 2040 • SEAsia 2100 • Africa never J. Frankel, Harvard

38. Targets for emission per capita, by regionFig. 2, HPICA DP 08-08 J. Frankel, Harvard

39. Emissions path for industrialized countries Fig. 2a Predicted actual emissions exceed caps, by permit purchases. J. Frankel, Harvard

40. Emissions path for poor countriesFig. 3a Predicted actual emissions fall below caps, by permit sales. J. Frankel, Harvard

41. Fig. T1: Permit Trade 2010-2035 (late LDC targets) J. Frankel, Harvard

42. Fig. T2: Permit Trade 2040-2090 (late LDC targets) J. Frankel, Harvard

43. Emissions path for the world, in the aggregateFig. 4a J. Frankel, Harvard

44. Price of Carbon Dioxide Rises Slowly Over 50 Years, then RapidlyFig. 5a J. Frankel, Harvard

45. Loss of Aggregate Gross World Productby budget period, 2015-2100 with later targets for developing countriesFig. 6 J. Frankel, Harvard

46. Concentrations almost hit the 500 ppm goalFig. 7a (Fig. 9, HPICA DP 08-08) J. Frankel, Harvard

47. Temperature rises 3° rather than 4°Fig. 8a (Fig. 10, HPICA DP 08-08 ) J. Frankel, Harvard

48. Harvard Project on International Climate Agreements; directed by J.Aldy & R.Stavins. Thanks to ValentinaBosetti Paper:http://ksghome.harvard.edu/~jfrankel/SpecificTargetsHPICA2009.docAvailable at: http://ksghome.harvard.edu/~jfrankel/currentpubsspeeches.htm#On%20Climate%20Change