Shaping Greenhouse Gas Abatement Strategies Policy Issues and Quantitative Insights

1. Shaping Greenhouse Gas Abatement Strategies Policy Issues and Quantitative Insights Prepared for presentation at the International Conference on: ”Flexible Mechanisms for an Efficient Climate Policy” July 27-28, 1999 Stuttgart Christoph Böhringer Centre for European Economic Research (ZEW), Mannheim

2. Guidelines for Climate Policy: Efficiency (positive) Equity (normative) Insights from Applied Economic Analysis for Decision Making: magnitude of cost distribution of cost for alternative policy strategies efficiency/equity trade off } 1 Policy Guidelines: Efficiency and Equity Motivation and Structure of Presentation

3. Consensus: • Need for policy measures to control GHG concentrations • Disagreement: • Critical level of concentration and risks of climate change • Scope and the timing of emission reductions (risk aversion / willingness to pay) • Learn then Act (Wait and see) Act then learn • (USA) (EU) • Need for quantitative cost-benefit analysis 2 Issues: Buying Global Warming Insurance - Total Costs of Abatement Motivation and Structure of Presentation

4. Marginal Marginal abatement abatement costs costs (MAC) mac (MAC) 2 A MAC 2 mac 1 C MAC * B MAC 1 Emission abatement Emission abatement by 1 by 2 Δ E/2 Δ E * Δ E * 1 2 Δ E ¹ Efficiency losses (MAC MAC ) 1 2 2 Issues:Alternative Policy Instruments - Cost Efficiency Motivation and Structure of Presentation

5. Efficiency Conditions: • Spatial dimension: equalized MAC across sources (regions) • ==> where-flexibility • Temporal dimension: equalized MAC over time • ==> when-flexibility • Efficient policy instruments: • Emission taxes: price-based (abatement to be determined) • Emission permits: quantity based (emission price to be determined) • Role of revenue recycling: double dividend debate • Need for systematic quantitative cost-effectiveness analysis of alternative policy strategies 2 Issues:Alternative Policy Instruments - Cost Efficiency Motivation and Structure of Presentation

6. Global Warming Global Problem Global Solution: • Need for cooperative approach which includes all major emitters • Cooperation depends on “fair” burden sharing • What does “fair” mean? - Variety of equity criteria • “Equity is so hopelessly subjective that it cannot be analyzed scientifically” (Young, 1994) • Need for quantitative estimates of the economic implications associated with alternative equity rules 2 Issues:Distribution of Costs - Burden Sharing Motivation and Structure of Presentation

7. Appraisal of Quantitative Models for Climate Policy Analysis: • Operationalization of policy experiments • Consistent analysis of complex mechanism (feed-back, spill-overs) • Systematic sensitivity analysis (robustness test) 3 The Role of Quantitative Economic Analysis

8. Quantified Emission Limits under the Kyoto Protocol: • No emission constraints for developing countries • Annex B countries keep emissions constant after 2010 • International emissions trading (TRD) versus no trade (NTR) 4 Applied Policy Analysis: Kyoto

9. Impacts of Kyoto on Lifetime Consumption: 4 Applied Policy Analysis: Kyoto

10. Significant international spill-over effects • Burden shifting from developed to developing countries via terms of trade • - “Income” effect • - “Substitution” effect • - “Fossil fuel market” effect • TRD reduces total adjustment costs - gains from trade are relatively small due to • limited low-cost abatement options • TRD needs not be beneficial for all countries (adverse terms of trade may • dominate gains from permit trade) 4 Applied Policy Analysis: Kyoto

11. Beyond Kyoto: • Physical requirement ==> contraction of global emissions: • - Further more stringent constraints for the developed countries • - Inclusion of developing countries • „Moral“ requirement ==> convergence of per capita rights (egalitarian) • Contraction and Convergence: • 30% reduction in global emissions as compared to 1990 levels • Linear convergence of current per capita emission to equal per capita emission • rights in 2050 4 Applied Policy Analysis: Beyond Kyoto - Contraction and Convergence

12. Per Capita Emission Rights under Contraction and Covergence: 4 Applied Policy Analysis: Beyond Kyoto - Contraction and Convergence

13. Impacts of Contraction and Convergence on Lifetime Consumption: 4 Applied Policy Analysis: Beyond Kyoto - Contraction and Convergence

14. Large efficiency gains from emissions trading (<== range in marginal • abatement costs between 0 and 1500 $US per ton of CO2 in 2050) • Trade in permits is beneficial to all countries • Where-flexibility (permit trading) as a no-regret strategy for all countries • Major developing areas improve economic welfare over BaU levels • Under trade Contraction and Convergence may be politically feasible 4 Applied Policy Analysis: Beyond Kyoto - Contraction and Convergence

15. Key Determinants of Climate Policy: • Magnitude and distribution of adjustment costs • Insights from Applied Economic Analysis: • Flexible instruments provide substantial efficiency gains: • Buy a higher level of insurance for the same amount of money • Get the same level of climate insurance for significantly less money • Flexibility/Cost-efficiency relaxes the problem of burden sharing: • Feasibility of long-term sustainable strategies such as Contraction and Convergence 5 Summary and Conclusions