1. 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

2. 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

3. 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

4. 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
MAC ) 1 2
Motivation and Structure of Presentation
2 Issues:Alternative Policy Instruments - Cost Efficiency

5. 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

6. 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

7. 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

8. 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

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

10. 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

11. 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

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

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

14. 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

15. 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