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
efficiency/equity trade off
}
for alternative policy strategies
1 Policy Guidelines: Efficiency
and Equity
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) 
(USA)
Act then learn
(EU)
Need for quantitative cost-benefit analysis
2 Issues: Buying Global Warming
Insurance
- Total Costs
of Abatement
Motivation
and Structure
of Presentation
Marginal
abatement
costs
(MAC)
Marginal
abatement
costs
(MAC)
mac 2
A
MAC 2
mac 1
C
MAC *
B
MAC 1
Emissionabatement
by 1
Emissionabatement
by 2
Δ E/2
Δ E1*
Δ E2*
ΔE
Efficiency losses (MAC 1  MAC 2)
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
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 and
Sharing
Motivation
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:
Region
Commitments (Percentage of 1990 Base
Year Greenhouse Gas Emissions)
USA / Canada
93.1
European Union (EU15)
92.0
Japan (JPN), Australia (AUS), New Zealand (NZL)
96.8
Economies in Transition (EIT)
98.3
• 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:
TRD
NTR
Annex B
Non Annex B
World
USA/Canada
EU 15
JPN/AUS/NZL
Economies in Transition
India
China
Other Pacific Asia
Middle East/North Africa
Sub-Saharan Africa
Latin America/Caribbean
-2,5
-2
-1,5
-1
-0,5
0
Consumption loss (in % change of BaU)
Source: Böhringer 1999
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:
USA/Canada
6
JPN/AUS/NZL
EU 15
tons of carbon per capita
5
EIT
4
China
3
Other Pacific Asia
Latin America/Caribbean
2
Middle East/North Africa
1
India
Sub-Saharan Africa
0
2000
2010
2020
2030
2040
2050
4 Applied Policy Analysis: Beyond Kyoto - Contraction and Convergence
Source: Böhringer&Welsch 1999
Impacts of Contraction and Convergence on Lifetime Consumption:
TDR
NTR
World
USA/Canada
EU 15
JPN/AUS/NZL
Economies in Transition
India
China
Other Pacific Asia
Middle East/North Africa
Sub-Saharan Africa
Latin America/Caribbean
-15
-10
-5
0
5
10
15
20
Consumption loss (in % change from BaU)
Source: Böhringer&Welsch 1999
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
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