Reducing Uncertainty Through Dual-Intensity Targets

1. Reducing UncertaintyThrough Dual-Intensity Targets 28 October, 2002 COP 8 Side Event Building on the Kyoto Protocol: Options for protecting the climate Yong-Gun Kim and Kevin A. Baumert Korea Environment Institute / WRI

2. Contents • Background • Intensity Targets • Dual Targets • Dual-Intensity Targets • Potential Benefits from Dual-Intensity Targets • Challenges

3. I. Background • Uncertainty is inherent in forecasting future economic situation and therefore future GHG emissions. • Forecast error is inevitable. • Major part of GHG emissions is closely related with economic variable, particularly GDP. • Rigid targets, such as fixed emission targets, generate risk (cost) of unintended ‘hot air’ or severe economic burden. • Hot air, in the case of lower-than-expected economic growth, harms environmental effectiveness • Severe economic constraints, in the case of higher-than-expected economic growth, could result in non-compliance • Necessity to allow emissions to grow, but in a less carbon intensive way for ‘sustainable development.’

4. II. Approach (i): Intensity Targets • Intensity target: ratio of GHG emissions to GDP • GDP: actual GDP during the commitment period • Alpha = GDP coefficient: determines how the allowable emissions level changes in response to GDP changes • Supporting arguments • Compatibility with sustainable development • Reduction of risk from uncertainty (hot air or undesirably severe constraints on economy) • Environmental effectiveness: more aggressive targets, better compliance and wider participation

5. II(2). Analysis and Proposals on Intensity Targets

6. III. Approach (ii): Dual Targets • Take a target band to further reduce risk from uncertainty • Selling Target (more stringent) • Compliance Target (less stringent) • Creates a ‘safe zone’ – a range of future scenarios where country is neither out of compliance not able to sell emission allowances. • Could be simpler than intensity targets • Or, could be combined with intensity targets

7. IV. Dual-Intensity Targets • Two intensity targets • Selling target: • Compliance target: • A country can sell extra emission allowances if its emission is less than ‘selling target.’ • A country faces penalty if its emission is greater than ‘compliance target.’ • Neither incentive nor penalty applies between the two targets. • Emissions trading is allowed

8. IV(2). Graphical Illustration of “Dual” Targets

9. V. Potential Benefits from Dual-Intensity Targets • Flexibility • Includes fixed targets(alpha=0), single intensity targets(I_1=I_2), non-binding or incentive-only targets(I_2=infinity), etc. as special cases. • Sustainable Development • Allows emissions to grow, but in a less carbon intensive way • Lower Cost • Reduce risk and therefore insurance cost • Environmental Effectiveness • Promote stronger targets • Better compliance • Wider participation

10. VI. Challenges • Lack of Environmental Certainty • Overall stringency of reduction target is more important than short-term certainty in the long-term climate change issue • Linkage to Market Mechanisms • Counter measures such as post-verification trading, commitment period reserve, buyer liability and/or financial instruments (forwards, futures, options). • Compatibility is possible: e.g., UK trading Scheme • Not more serious than fixed targets • Potentially lower risk of overselling • GDP issue • Inter-temporal consistency can be guaranteed via PPP, $US or local currency • Infrastructure is better than GHG emission: e.g., IMF