Economic Implications of Global Convergence on Emission Intensities Govinda R. Timilsina Senior Economist The World Bank, Washington, DC 32 nd USAEE/IAEE North American Conference Anchorage, Alaska July 28-31, 2013

Disclaimer The views expressed in this presentation are those of the speaker’s only, and do not necessarily represent the World Bank and its affiliated organizations

Introduction (1/3) CO2 Emissions in 2010 (Million tons) (2): 43% (5): 58% (20): 81% (30): 88% (10): 68%

Introduction (2/3) Countries in terms of absolute emissions and per Capita emissions in 2010 Vertical Axis – Per capita emissions (ton per capita) Horizontal axis – CO2 emissions (Million Tons)

Introduction (3/3) Per capita CO2 emissions (tons) 14% lower from 1990 level 72% higher from 1990 level Intensity gap (7.4) (11.8 tons) (10.2 tons) (1.6 tons) (2.7 tons) (-20%) Intensity gap (10.3) Although, emission intensity gap is decreasing, industrialized countries, on average, still release 3.7 times as high as CO 2 emissions per capita than developing countries

The Question  Is stabilization of GHG concentrations to avoid climate change possible while converging the emission intensities between industrialized and developing countries? Provided that:  To avoid climate change (or avoiding dangerous consequences in the earth’s atmosphere), the earth mean average surface temperature should not be higher than 2 degree Celsius from the pre-industrialization level  Concentrations of CO 2 emissions should be stabilized below 450 PPM  Global emissions to peak before 2020, followed by substantial overall reductions of around 60% below the 2000 level by 2050

Our Approach  We introduced various levels of carbon tax (US$10 to 250 per ton of CO2) to Annex I countries to reduce their fuel consumption and thereby CO2 emissions and emission intensities.  Non-Annex I countries are exempted from carbon taxation, however they are impacted from Annex I countries carbon tax through international trade.  Since the emission intensities of Annex I countries would decrease in response to the carbon tax while Non-Annex I countries emission intensities would continuously increase, the intensity gap between these two groups of countries drops (i.e., we will be moving towards global convergence of emission intensities).  We used a global CGE model to simulate the effects moving towards global convergence of emission intensities.

Model & Data  Multi-sector, multi-region, global recursive dynamic CGE model  The model is flexible enough to accommodate new regions/countries or sectors and is calibrated with GTAP database  Nested CES and CET functional forms to represent production behavior and land supply, respectively  Representation of bilateral and international trade  Data are coming from the GTAP (Version 7.1)

Per Capita CO 2 Emission (tons) under Different Carbon Tax Rates 6.8 tons US$10/tCO tons (- 9.4%) (- 36.5%) US$50/tCO tons (- 71.6%) US$250/tCO tons (- 51.6%) US$100/tCO tons

Impacts on CO 2 Emissions Annex I Non-Annex I Global

Impacts on CO 2 Emissions in 2030 Limiting temperature rise below 2°C, CO2 concentrations must be below 450ppm Global CO2 emissions should be reduced 60% below 2000 level by 2050 Even at the very high carbon tax rate of $250/tCO2, we find that global CO 2 emissions in 2030 would be only 18% below from that in the baseline

CO 2 Emissions with $250 Carbon Tax Case Compared to 2000 Emission Level Compared to 2000 emissions level, the emission convergence scenario (72% reduction of intensity gap through $250 carbon tax) would, in 2030, - decrease Annex I emissions by 52%, but - increase Non-Annex I emissions by 3 folds, thereby - increase global emissions by 28% Annex I 2000 Global 2000 Non-Annex I countries emissions would exceed global 2000 level by 2030 if there emissions are not limited Even if developed countries CO2 emissions are completely wiped out, meeting 2 degree target would be far out of reach unless Non-Annex I countries emissions are limited

Impacts on GDP in 2030 The relationship between the carbon tax level and corresponding GDP loss is exponential There would be a carbon leakage effect (carbon intensive industries would move to Non-Annex I countries from Annex I countries). Despite the strong international trade linkage between Non-Annex I countries and Annex I countries, the former are not found to be negatively affected by the carbon tax in Annex I countries.

Combining Effects on GDP and CO 2 Emissions (2030) Non-Annex I countries are also expected to reduce their GHG emissions, in that case, emission intensity will diverge instead of converge

Impacts on International Trade in 2030  The carbon tax introduced in Annex I countries would cause international trade to shrink (up to 2% in the case of $250/tCO 2 carbon tax)  Since domestic production would be more expensive in Annex I countries due to carbon tax exports would get impacted the most  Non-Annex I countries would benefit as their exports increase and imports drop

Country Results: CO 2 Emissions Country/RegionsCarbon tax rate (US$/tCO 2 ) Australia and New Zealand-14.9%-36.0%-46.2%-58.7% Canada-9.4%-26.7%-36.6%-50.8% Germany-6.4%-21.1%-30.5%-43.8% Spain-4.2%-15.2%-23.6%-37.5% France-2.9%-10.8%-17.3%-29.4% UK-12.2%-35.0%-46.2%-58.4% Italy-4.2%-15.0%-23.1%-36.6% Japan-8.0%-18.2%-25.4%-37.1% EFTA Countries & Rest of European Union-8.3%-25.6%-35.9%-50.5% Russia-16.7%-42.8%-55.7%-72.2% United States-10.8%-31.6%-43.1%-57.8% Non Annex I Europe & Central Asia0.5%1.9%3.2%4.7% Argentina0.1%0.3%0.6%1.2% Brazil0.4%1.6%2.7%4.9% Rest of Latin America & Caribbean0.3%1.2%2.1%4.1% China0.2%0.8%1.3%2.5% Indonesia0.3%1.2%2.0%3.7% Rest of East Asia & Pacific0.5%1.8%2.9%5.0% Malaysia0.2%0.8%1.3%2.4% Thailand0.3%1.2%2.1%3.7% India0.2%0.8%1.2%1.9% Rest of South Asia0.2%0.8%1.4%2.7% Middle East & North Africa0.0%0.2%0.4%1.0% South Africa0.7%2.2%2.9%3.8% Rest of Sub-Saharan Africa0.2%0.9%1.7%3.4%

Country Results: Emission Intensity CO2 emission per capitaCO2 emission per GDP Carbon tax rate (US$/tCO 2 ) Australia and New Zealand-14.9%-36.0%-46.2%-58.7%-14.8%-35.6%-45.5%-57.6% Canada-9.4%-26.7%-36.6%-50.8%-9.3%-26.2%-35.7%-49.2% Germany-6.4%-21.1%-30.5%-43.8%-6.4%-21.0%-30.2%-43.2% Spain-4.2%-15.2%-23.6%-37.5%-4.2%-15.0%-23.2%-36.7% France-2.9%-10.8%-17.3%-29.4%-2.9%-10.7%-17.1%-29.0% UK-12.2%-35.0%-46.2%-58.4%-12.2%-34.9%-45.9%-58.0% Italy-4.2%-15.0%-23.1%-36.6%-4.1%-14.7%-22.7%-35.6% Japan-8.0%-18.2%-25.4%-37.1%-8.0%-18.1%-25.1%-36.4% EFTA Countries & Rest of European Union-8.3%-25.6%-35.9%-50.5%-8.2%-25.2%-35.3%-49.4% Russia-16.7%-42.8%-55.7%-72.2%-16.2%-40.3%-51.7%-65.9% United States-10.8%-31.6%-43.1%-57.8%-10.7%-31.3%-42.5%-56.9% Non Annex I Europe & Central Asia0.5%1.9%3.2%4.7%0.4%1.8%2.9%4.3% Argentina0.1%0.3%0.6%1.2%0.1%0.4%0.7%1.4% Brazil0.4%1.6%2.7%4.9%0.4%1.6%2.7%5.0% Rest of Latin America & Caribbean0.3%1.2%2.1%4.1%0.3%1.3%2.3%4.6% China0.2%0.8%1.3%2.5%0.2%0.6%1.0%1.9% Indonesia0.3%1.2%2.0%3.7%0.3%1.2%2.0%3.5% Rest of East Asia & Pacific0.5%1.8%2.9%5.0%0.4%1.6%2.6%4.4% Malaysia0.2%0.8%1.3%2.4%0.2%0.9%1.5%2.9% Thailand0.3%1.2%2.1%3.7%0.3%1.0%1.8%3.3% India0.2%0.8%1.2%1.9%0.2%0.5%0.8%1.1% Rest of South Asia0.2%0.8%1.4%2.7%0.2%0.7%1.2%2.3% Middle East & North Africa0.0%0.2%0.4%1.0%0.2%1.1%2.0%4.0% South Africa0.7%2.2%2.9%3.8%0.8%2.2%2.9%3.7% Rest of Sub-Saharan Africa0.2%0.9%1.7%3.4%0.3%1.4%2.6%5.1%

Country Results: GDP Country/RegionsCarbon tax rate (US$/tCO 2 ) Australia and New Zealand-0.2%-0.7%-1.2%-2.6% Canada-0.1%-0.7%-1.3%-3.1% Germany0.0%-0.2%-0.4%-1.1% Spain0.0%-0.3%-0.6%-1.4% France0.0%-0.1%-0.2%-0.6% UK0.0%-0.2%-0.4%-1.0% Italy-0.1%-0.3%-0.6%-1.4% Japan0.0%-0.2%-0.5%-1.1% EFTA Countries & Rest of EU-0.1%-0.4%-0.9%-2.1% Russia-0.7%-4.1%-8.2%-18.5% United States-0.1%-0.5%-1.0%-2.1% NAI Europe & Central Asia0.0%0.2%0.3%0.4% Argentina0.0%-0.1% -0.2% Brazil0.0% -0.1% Rest of LAC0.0%-0.1%-0.2%-0.5% China0.0%0.2%0.3%0.6% Indonesia0.0% 0.1%0.2% Rest of East Asia & Pacific0.0%0.2%0.3%0.5% Malaysia0.0%-0.1%-0.2%-0.5% Thailand0.0%0.2%0.3%0.4% India0.1%0.3%0.4%0.8% Rest of South Asia0.0%0.1%0.2%0.4% Middle East & North Africa-0.2%-0.9%-1.6%-2.9% South Africa0.0% Rest of Sub-Saharan Africa-0.1%-0.5%-0.8%-1.6%

Country Results: International Trade ExportsImports Carbon tax rate (US$/tCO 2 ) Australia and New Zealand-0.4%-1.5%-2.6%-5.1%-0.1%-0.5%-0.9%-1.7% Canada-0.2%-1.1%-2.0%-4.1%-0.2%-1.1%-2.0%-4.4% Germany-0.2%-0.7%-1.2%-2.5%-0.1%-0.2%-0.5%-1.1% Spain-0.3%-1.4%-2.4%-4.8%0.0%-0.2%-0.5%-1.3% France-0.1%-0.7%-1.3%-2.6%0.0%-0.1%-0.3%-0.7% UK-0.1%-0.5%-0.9%-2.0%-0.1%-0.3%-0.6%-1.3% Italy-0.2%-1.1%-1.9%-4.0%-0.1%-0.4%-0.7%-1.8% Japan-0.4%-1.5%-2.7%-5.3%0.0%-0.2%-0.4%-1.1% EFTA Countries & Rest of European Union-0.2%-1.0%-1.9%-4.1%-0.1%-0.6%-1.1%-2.6% Russia-1.7%-6.6%-10.4%-17.1%-0.5%-2.1%-3.5%-7.1% United States-0.6%-2.5%-4.3%-8.0%0.0%-0.1%-0.2%-0.6% Non Annex I Europe & Central Asia0.0% -0.5%-0.1%-0.3%-0.5%-1.3% Argentina0.2%0.9%1.6%2.8%-0.2%-0.8%-1.3%-2.5% Brazil0.1%0.3%0.4%0.6%-0.2%-0.7%-1.3%-2.7% Rest of Latin America & Caribbean0.2%1.0%1.6%2.9%-0.2%-1.0%-1.8%-3.3% China0.0%0.1%0.2% 0.0% -0.1%-0.4% Indonesia0.1%0.6%0.9%1.6%0.0%0.1% 0.0% Rest of East Asia & Pacific0.0%0.1%0.2%0.0% 0.1% 0.0% Malaysia0.1%0.2%0.3%0.4%0.0%-0.2%-0.4%-0.9% Thailand0.0%0.1%0.2%0.1% 0.2%-0.1% India0.0% -0.1%-0.4%0.0%0.1% -0.2% Rest of South Asia0.1%0.3%0.4%0.7%0.1%0.2% Middle East & North Africa0.5%2.3%4.0%7.7%-0.7%-3.0%-5.1%-9.2% South Africa0.0%-0.2%-0.4%-0.8%-0.1%-0.3%-0.4%-0.8% Rest of Sub-Saharan Africa0.2%0.9%1.5%2.6%-0.3%-1.1%-2.0%-3.8%

Conclusions  Developing countries’ argument to converge global CO2 emission intensity could be reasonable from the equity perspective  However, their demand could not be realized in practice if global CO2 emissions are to be reduced to stabilize CO2 concentration to meet the ultimate objective of the UNFCCC  Limitations of GHG emissions is necessary in developing countries to avoid climate change; the 2 degree target can not be realized even if developed countries CO2 emissions are completely wiped out as long as developing countries’ CO2 emissions increase at the current trend

THANK YOU Govinda R. Timilsina Sr. Research Economist (Climate Change & Clean Energy) Development Research Group The World Bank 1818 H Street, NW Washington, DC 20433, USA Tel: Fax: