EconoMonitor

How to Set Greenhouse Gas Emission Targets for all Countries

The effects of a changing global climate show up gradually, decade by decade.   The effects of a changing US political climate have also been showing up gradually, year by year.   A watershed was reached June 25, when the US Congress for the first time approved a bill to limit emissions of Greenhouse Gases (GHGs), by a vote of 219 to 212.    But the Senate hurdle will be tougher.  The attempt to address Climate Change still has a very long way to go. 

 

The problem

 

Climate Change is of course a global externality.   Due to the free-rider problem, no single country, especially the United States, is likely to act on its own.   The best solution is a multilateral treaty in which all countries commit to serious action together.   In December of this year, a Conference of Parties to the UN Framework Convention on Climate Change will meet in Copenhagen, in the hope of negotiating a successor treaty to the Kyoto Protocol.

 

Three critical attributes were missing from the Kyoto Protocol.  These attributes need to be included in any realistic attempt to tackle the reduction of year-2100 GHG concentrations to levels considered less dangerous by scientists:     

i)   Comprehensive participation – that is, acceptance of quantitative limits on emissions – by all major countries, including the US and developing countries.

ii)   A credible framework that can establish a path for emissions reductions extending throughout the century, not just five years ahead.

iii)   Some reason to think that all countries will be willing to join and then comply.  This precludes targets that impose enormous economic costs on any major countries in any decades relative to the alternative of dropping out of the treaty.

 

For ten years — since I worked on Kyoto in the Clinton Administration — I have been thinking about how to design such a framework for assigning quantitative limits across countries.  I now have a complete proposal to offer.   It builds on the foundations of Kyoto, in that it accepts the framework of national targets for emissions and internationally tradable permits.  But it attempts to solve the most serious deficiencies of that agreement: incomplete country participation, the need for long-term targets, and the economic incentive for countries to fail to abide by their commitments.

 

Although there are many ideas to succeed the Kyoto Protocol, the existing proposals are typically based on just one or two out of the following three philosophical approaches:

·        science (e.g., capping global concentrations at 450 ppm) or 

·        equity (e.g., equal emissions per capita across countries) or

·        economics (weighing the economic costs of aggressive short-term cuts against the long-term environmental benefits).   

My emissions reductions plan is a bid to offer a more practical alternative:  in addition to those three considerations, it is based heavily on politics.

 

More specifically, any future climate agreement must in practice comply with six important political constraints.

1)     The US will not commit to quantitative targets if China and other major developing countries do not commit to quantitative targets at the same time, due to concerns about economic competitiveness and carbon leakage.

2)     China and other developing countries will not make sacrifices different in character from those made by richer countries that have gone before them.

3)     In the long run, no country can be rewarded for having “ramped up” its emissions high above the levels of 1990.

4)     No country will agree to participate if the present discounted value of its future expected costs is more than, say, 1% of GDP.

5)     No country will continue to abide by targets that cost it more than, say, 5% of GDP in any one budget period.

6)     If one major country drops out, others will become discouraged and the system may unravel.

 

                   The proposal

 

The proposed plan sets the emissions caps using formulas that assign quantitative emissions limits to countries in every five-year period from now until 2100.   Operationally, four political constraints are particularly important in specifying the formulas.

·        First, “carbon leakage” is precluded, by including all countries from the beginning

·        Yet developing countries are not asked to bear any cost in the early years.

·        Even later, developing countries are not asked to make any sacrifice that is different from the earlier sacrifices of industrialized countries, accounting for differences in incomes.

·        Finally, no country is asked to accept targets that cost it more than 1% of GDP cumulatively, nor more than 5% of GDP in any given budget period.

 

Under the formulas, rich nations begin immediately to make emissions cuts in line with what their leaders have already committed to.  Developing countries agree to maintain their business-as-usual emissions in the first decades, but over the longer term agree to binding targets that ultimately reduce emissions well below business as usual. This structure precludes energy-intensive industries from moving operations to developing countries (i.e., leakage) and gives industries a more level playing field. However, it still preserves developing countries’ ability to grow their economies; they can even raise revenue by selling emission permits. In later decades, the emissions targets asked of developing countries become stricter, following a numerical formula. However, these emissions cuts are no greater than the cuts made by rich nations earlier in the century, accounting for differences in per-capita income, per-capita emissions, and baseline economic growth.

 

More specifically, the formula incorporates three elements: a Progressive Reductions Factor, a Latecomer Catch-up Factor, and a Gradual Equalization Factor.

·        The Progressive Reductions Factor requires richer countries to make more severe cuts (relative to their business-as-usual emissions) than poor countries.

·        The Latecomer Catch-up Factor requires nations that did not agree to binding targets under Kyoto to make gradual emissions cuts to account for their additional emissions since 1990. This factor prevents latecomers from being rewarded with higher targets, or from being given incentives to ramp up their emissions before signing the agreement.

·        Finally, the Gradual Equalization Factor addresses the fact that rich countries are responsible for most of the carbon dioxide currently in the atmosphere. During each decade of the second half of the century, this factor moves per capita emissions in each country a small step in the direction of the global average of per capita emissions.

 

The formulas, for some convenient parameter values, turn out to imply that global emissions peak around 2035.  This targets result in a world price of carbon dioxide that reaches an estimated $20-$30 per ton in 2020, $100-$160 per ton in 2050, and $700-$800 per ton in 2100, according to economic simulations using the WITCH climate model courtesy of Valentina Bosetti. Most countries sustain economic losses that are under 1% of GDP in the first half of the century, but then rise toward the end of the century. The simulations also show that atmospheric concentrations of CO2 stabilize below 500 ppm in the last quarter of the century, and world temperatures increase by about 3 degrees.  Each of the six political constraints listed above is satisfied.

 

               Conclusion

 

The framework here allocates emission targets across countries in such a way that every country is given reason to feel that it is only doing its fair share, comparable to what  otherws have done before it. Furthermore, the framework – a decade-by-decade sequence of emission targets determined by a few principles and formulas – is flexible enough that it can accommodate major changes in circumstances during the course of the century.  The hope is that only such a combination of continuity and flexibility can make the process dynamically consistent, i.e., credible.

 

Most climate scientists say that 500 ppm is not a sufficiently aggressive goal.  We (my collaborator, Bosetti, and I) have not yet been able to achieve year-2100 concentrations of 450 ppm while obeying the same political-economic constraints.  But we are still working on it.  Stay tuned.

The detailed proposal is “An Elaborated Proposal for Global Climate Policy Architecture:  Specific Formulas and Emission Targets for All Countries in All Decades,”  NBER WP, April 2009.  Forthcoming, 2009, in a volume edited by Joe Aldy & Rob Stavins for  the Harvard Project on International Climate Agreements, Cambridge University Press.  Editors’ summary of the volume is at Post-Kyoto International Climate Policy, Cambridge University Press.   (See also Stavins’ blog, especially, for analysis of the Waxman-Markey bill.)

One Response to “How to Set Greenhouse Gas Emission Targets for all Countries”

Jenell GeurtsJune 10th, 2011 at 3:01 pm

I’d be inclined to clinch the deal with you on this. Which is not something I typically do! I enjoy reading a post that will make people think. Also, thanks for allowing me to speak my mind!

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Emre Deliveli The Kapali Carsi

Emre Deliveli is a freelance consultant, part-time lecturer in economics and columnist. Previously, Emre worked as economist for Citi Istanbul, covering Turkey and the Balkans. He was previously Director of Economic Studies at the Economic Policy Research Foundation of Turkey in Ankara and has has also worked at the World Bank, OECD, McKinsey and the Central Bank of Turkey. Emre holds a B.A., summa cum laude, from Yale University and undertook his PhD studies at Harvard University, in Economics.

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