How can international frameworks support domestic implementation? Karsten Neuhoff University of Cambridge

Karsten Neuhoff, 2 Outline Criteria from an economist’s perspective Encourage domestic policies and CO 2 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)

Karsten Neuhoff, 3 I. Domestic policy is core for effective climate policy. It can include regulation, taxation, trading, etc. Source:Newbery, D. M. (2003) Sectoral dimensions of sustainable development: energy and transport. Economic Survey of Europe 2(73-93). 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

Karsten Neuhoff, 4 Illustrative Euro/t CO Today Short and not representative history 2.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 2 1 II. Increase market confidence in CO 2 price and emission trajectory facilitates financing and increases private sector responses.

Karsten Neuhoff, 5 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 Mitigation costs vary across sectors and technologies <0 <20 <50 <100 $/t CO Energy supply Transport Buildings (elect.) Buildings (other) Industry (elect.) Industry (other) Agriculture Forestry Waste International rent transfer with uniform CER price of 50

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

Karsten Neuhoff, 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

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