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D é partement d ’É conomie. A sectoral approach balancing global efficiency and equity June 2010. Guy Meunier Jean-Pierre Ponssard Ecole Polytechnique. The empirical context. Copenhague showed the limitations of an approach based on uniform carbon price worldwide
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Département d’Économie A sectoral approach balancingglobal efficiency and equity June 2010 Guy Meunier Jean-Pierre Ponssard Ecole Polytechnique
The empiricalcontext • Copenhague showed the limitations of an approach based on uniform carbon price worldwide • Developping countries intensity targets • Unilateral policies such as EU-ETS deliver little in terms of effectiveness • In principle, leakage • In practice, special treatments for sensitive sectors
Agenda • A conceptual framework to structure a proposal: the Chilchilnisky controversy • Literature on sectoral approaches • The proposal • Next steps
BLS applied touniform versus differentiatedcarbonprices Chichilnisky, G. and G. Heal (1994), Who should abate carbon emissions?: An international viewpoint." Economics Letters, 443-449. Sheeran, K.A. (2006), Who should abate carbon emissions? A note." Environmental and Resource Economics, 35, 89-98. Tirole, J. (2009), Politique climatique : une nouvelle architecture internationale. CAE. Godard, O. (2009), Quelle architecture internationale pour la politique climatique ? Ecole Polytechnique, Paris.
Preliminaries China MAC and WMUC MAC if WMUC MAC if WMUC 1 2 WMUC EU MAC
BAU A Unique CO2 price with transfer B’ B Differentiated CO2 prices Sectoral approach C Preliminaries • Figure 4
Literature on sectoralapproaches Center for Clean Air Policy (2010), Global Sectoral Study: Final Report. World Business Council for Sustainable Development (2009), A sectoral approach: Cement Sustainability Initiative. International Energy Agency (2009), How the energy sector can deliver on a climate agreement in Copenhagen. Special delivery excerpt of the World Energy Outlook 2009 for the Bangkok UNFCCC meeting." OECD/IEA, Paris, octobre. Baron, R., B. Buchner, and J. Ellis (2009), Sectoral Approaches and the Carbon Market." IEA/OECD paper for the Annex I Expert Group on the UNFCCC, OECD/IEA, Paris. Hamdi-Cherif, M., C. Guivarch, and P. Quirion (2009), Sectoral targets for developing countries: Combining Common but differentiated responsibilities with Meaningful participation". Working Paper CIRED.
The proposal • For industrialized countries: cap and tradeat all times without free allocations • For emerging countries: intensitycommitmentsto alloweconomicgrowth • Carbon intensive sectorssubject to international trade: firmsabide to the local rulesin the countries theysell • Financial transfersfromindustrialized countries to developing countries in proportion to revenues collected to the permits
The simulation Model • The framework • Tworegions : EU and China • Threesectors: Electricity, Cement and Steel • Static for the horizon 2015-2020 • Three scenarios to becompared to BAU • SectoralApproach • For EU: Cap and tradewithout free allocations, 30% transfer of revenues to China for NAMAs (electricity) • For China: NAMAs (electricity) and integration of Cement and Steel in the EU-ETS for exports, OBA for domestic production • Global Cap (first best) • EU-only • For EU: Cap and tradewith free allocations for Cement and Steel (OBA) • For China: BAU
The model: multi-sectorstaticlineardemand, linear MAC Source: interviews from industry experts
Abatementcosts c (u) = c° + g°(u – u°)2 c° , g°, u° industry and country dependent
Comparison of scenarios • Sectoral approach • Set a carbon price for EU Emissions in elec in EU Emissions in steel and cement for consumption in EU Total emissions in EU 20% • Revenues in EU transfers in elec in China • Total emissions worldwide • Global cap with identical total emissions
Comparingsectoralapproachwith EU-only and BTA • EU-only • EU-target at 20% • Free allocations (« capacity based » as output based) for sensitive sectors • Border tax adjustment • Leakage • Imports • Revenues for permits
Next Steps • A proposal which takes the constraints seriously • growth in emerging countries • competitiveness in industrialized countries • A proposal which identifies • the limited loss of efficiency relative to a first best option • The substantial gains in terms of equity • The elimination of the competitiveness issue • the double dividend associated with the elimination of the leakage issue • Who should make the next steps for implementation?
A sectoralapproachbalancingglobal efficiency and equity Thankyou