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

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

Motivation and Structure of Presentation 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

Motivation and Structure of Presentation Marginal Marginal abatement abatement costs costs (MAC) mac 2 (MAC) 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 Efficiency losses (MAC ¹ MAC ) 1 2 Motivation and Structure of Presentation 2 Issues:Alternative Policy Instruments - Cost Efficiency

Motivation and Structure of Presentation 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

Motivation and Structure of Presentation 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

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

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

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

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

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

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

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

abatement costs between 0 and 1500 $US per ton of CO2 in 2050) 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

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