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. Motivation and Structure of Presentation Efficiency (positive) Equity (normative) 1 Policy Guidelines: Efficiency and Equity Guidelines for Climate Policy: Insights from Applied Economic Analysis for Decision Making: magnitude of cost distribution of cost for alternative policy strategies efficiency/equity trade off }

3. 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 Motivation and Structure of Presentation 2 Issues: Buying Global Warming Insurance - Total Costs of Abatement

4. Motivation and Structure of Presentation 2 Issues:Alternative Policy Instruments - Cost Efficiency Δ E/2 A C B mac 2 1 Marginal abatement costs (MAC) MAC 2 1 * Marginal abatement costs (MAC) Emissionabatement by 1 Emissionabatement by 2 Δ E 1 * Δ E 2 * Δ E Efficiencylosses (MAC 1  MAC 2 )

5. Motivation and Structure of Presentation 2 Issues:Alternative Policy Instruments - Cost Efficiency 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

6. Motivation and Structure of Presentation 2 Issues:Distribution of Costs - Burden Sharing 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

7. 3 The Role of Quantitative Economic Analysis 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)

8. 4 Applied Policy Analysis: Kyoto No emission constraints for developing countries Annex B countries keep emissions constant after 2010 International emissions trading (TRD) versus no trade (NTR) Quantified Emission Limits under the Kyoto Protocol:

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

10. 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)

11. 4 Applied Policy Analysis: Beyond Kyoto - Contraction and Convergence 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

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

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

14. 4 Applied Policy Analysis: Beyond Kyoto - Contraction and Convergence 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

15. 5 Summary and Conclusions 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