How can international frameworks support domestic implementation?

1. TSEC 2 www.electricitypolicy.org.uk How can international frameworks support domestic implementation? Karsten Neuhoff University of Cambridge www.climate-strategies.org/

2. Outline Criteria from an economist’s perspective • Encourage domestic policies and CO2 price internalisation • To reduce total costs of climate policy • Address extreme CO2 price uncertainty • To facilitate public and private investment • Limit international transfers of rents • To maximise support for international cooperation • CER Put Options (CERPOs)

3. I. Domestic policy is core for effective climate policy. It can include regulation, taxation, trading, etc. Comparison across OECD countries shows: Where taxation doubles energy prices, GDP is twice as high per unit of energy input. -> domestic policy drives energy efficiency – reduces cost of decarbonisation Source:Newbery, D. M. (2003) Sectoral dimensions of sustainable development: energy and transport. Economic Survey of Europe 2(73-93).

4. 2 1 II. Increase market confidence in CO2 price and emission trajectory facilitates financing and increases private sector responses. Illustrative • Short and not representative history • Difficult to quantify likelihood of low future CER prices • Financing difficult for projects that require strong CER price • Possibility of low price is excuse to continue BAU Euro/t CO2 2050 Today 2020

5. Energy supply Transport Buildings (elect.) Buildings (other) Industry (elect.) Industry (other) Agriculture Forestry Waste International rent transfer with uniform CER price of 50 Mitigation costs vary across sectors and technologies $/t CO2 <100 <50 <20 <0 0 2 4 6 8 10 12 14 GT CO2 eq. Emission reduction potential (2030) non OECD/EIT Economic potential for GHG emission reductions in non OECD, non IET countries Base line emissions SRES B2 xxx GT Source IPCC, IPCC Fourth Assessment Report, Working Group III CH11 - TAR (draft), p 21

6. III. Avoid infra-marginal rents for international transfers, to increase support for international cooperation.

7. CER Put Options (CERPOs) Issue for developing countries: • How to advance domestic climate policy? • Policy/sectoral/programmatic CDM have inherent risk of low future CER prices One solution: • Industrialised parties issue put options on CERs • Hedges downside risk for developing countries • Industrialised countries support strong CER price • Developing countries implement domestic policy and gain policy/sectoral/programatic CDM credits • CERPO pays if CER price is low

8. Does CERPO proposal satisfy economist’s criteria? • Development of domestic policy accelerated using policy/sectoral/programmatic CDM • Reduces downside risk for countries/investors, facilitating financing and investment • Infra-marginal rents not reduced Why not link to Chinese tax on CER exports? • Infra-marginal rent finances domestic policies