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It is relatively cheap, it is abundant and its renaissance started before the Fukushima accident. In the future energy mix, gas and renewables will play an important role, but coal will be the most important source. That’s why we need to implement CCS and make it economically affordable if we want to meet our mitigation targets. Prof. Ottmar Edenhofer, in this interview conducted by Mauro Buonocore, talks about the future of energy, the opportunity of a European super-grid and proposes a two-track model for climate negotiations.

Prof. Edenhofer, how have climate negotiations been going since the last COP in Cancùn?  What can we  envision for the future of international negotiations on a post-Kyoto agreement?

It’s very hard to predict what will happen after Cancùn. By and large, I would say that the prospects for a quite comprehensive climate regime in the near future are not very good. And the likelihood that this would happen at the Cop 17 in Durban, South Africa, unfortunately is very low. Nevertheless people become aware of what happened in Fukushima, which has basically nothing to do with the climate change issue, but has a lot to do with the energy issue and will change things substantially in the energy market at the international level. I think that people are going to be a little bit more aware that energy security, human development, economic growth and climate change are all parts of the one integrated issue which deserves much more attention than we gave to these single topics in the last decade. So, I do not assume that the Cop in Durban will be a great success, but I think that in the next three years something will happen at the international scale, which will help us with the broader sustainability issue. The longer we wait, the more expensive mitigation becomes – and the risk increases that climate change reaches tipping points in the earth system like Greenland ice sheet melting.

Should the international community drop the project of a global agreement and should it concentrate its efforts on countries’ individual pledges without a legally binding framework?

I think that a legally binding agreement is important but this should not be the one and only target to camp on. Think about China, for example. China has recently presented the 12th five-year which is extremely ambitious, in some aspects. We don’t necessarily need legally binding agreements. What we need is some kind of international cooperation, which could be very effective as a starting point of negotiations and, with its new 12th five-year plan, China could be one of the driving forces for international cooperation.

After the conferences in Copenhagen and Cancùn the format of the COP was criticized and some experts said it was  not the most  effective way to get concrete results for climate negotiations. Do you agree with this assessment?

That’s probably true. The whole framework of the UNFCCC is good at getting a consensus in the end of a process, but it is not the best format to do real negotiations and therefore I would strongly propose to have a two-track model. On the one hand we could negotiate within the G20 and other international arenas about several issues. In the end if we have achieved any concrete results, the UNFCCC would be a very good framework to get everybody on board and to have the strongest legitimacy on the achieved outcomes.

Could you please make some examples of these other arenas?

G20 would be one of them, for example; or other arenas where you could achieve a bilateral agreement, let’s say between Europe and China, on climate and energy topics. Let me give  you a more concrete example. China intends to implement an emissions-trade scheme and the European Union,  which has great experience on this issue, could advise China on how to implement such a thing. This could be done at a bilateral level. There are so many opportunities for international cooperation and I would avoid the kind of negotiations where people are only focusing on the UNFCCC. I mentioned the G20 as a good arena to achieve outcomes because in the G20 we have already agreed to abandon fossil fuels subsidies. This kind of decision should be simply implemented and this would also be a very good starting point to do something at the international scale. So I think we have to combine different scales of cooperation, we should be aware that in the end we have to achieve an international agreement but there are many ways and many smaller steps that could have a strong impact on all the international negotiations.

Will the Fukushima nuclear crisis have any consequences on energy policy and on nuclear strategies around the world?

First of all, Fukushima has a strong impact on the European policy and I am quite convinced that in the end it will have a strong impact on the global energy policy. I would like to give you a number. Up to now, 14% of the  entire world’s electricity production comes from nuclear power. We have now about 455 light water reactors on the globe. And, given that the electricity consumption will double within the next 20 years, if we  would decide to stabilize the share of nuclear power on the electricity production, we will have to implement around 450 other light water reactors across the globe by the year 2030. I think that – independent of the question whether this is something to aspire to – at the international level we will simply not be able to stabilize the electricity production at 14% from nuclear plants around the world.  I also think that China and India will think about nuclear power again. I’m not saying that they would phase out nuclear power, but the speed and the race to build nuclear power plants might very well be much slower than the project many people anticipated before the Fukushima event. I would say that we could  expect a decline in the share of nuclear power in the global energy mix. From my point of view, in the global scale, the big issue in the future will be coal because it is relatively cheap, it is abundant and many countries will then substitute their nuclear power capacities with coal. Therefore, it is absolutely crucial for an ambitious climate policy, that we have Carbon Capture and Storage technologies available. I know that CCS is not available now at the commercial level and we have only a few pilot plans. People, particularly in Europe, think that CCS is not an important part of the mitigation portfolio. I think it is an almost inevitable part because coal remains the most important issue. Gas will also become important, energy efficiency also has to play a very important role. And the scenarios produced by IEA show that renewables will play an extremely important role and then we have to make sure that renewables really become competitive and cost efficient.

Are the European targets on mitigation achievable with an energy strategy with no nuclear plants?

It is an issue, which has to be analyzed very carefully, but I have the feeling that the European Union  can achieve its mitigation targets if we have a common and a unified European energy policy. If we would have a grid across Europe, we would be able to have integrated energy from the best sites for renewables. We could concentrate, for example, solar power in Spain, wind plants in the North Sea, and so on. With this perspective, I think that we could achieve the ambitious climate protection goals even without nuclear power, but admittedly a   European super-grid requires a lot of investments in the infrastructure.

But renewables are not competitive in the energy market, today. And they are growing on public incentives. Do you think that they will soon become competitive?

It is a stepwise process and it has to be complemented by energy efficiency. Wind is to a certain extent already competitive and also an increasing CO2 price will make coal and gas less competitive. So this is a timing issue and I’m not saying that we can achieve it immediately, but over a reasonable time horizon we can build  this kind of super-grid which  integrates renewables from all over Europe. It’s definitely an option, but it takes time. Even in Germany we  are now debating about by when we should phase out nuclear power. It is my expectation that we will not phase out nuclear power immediately, but we will also do this step by step. And although we have to invest, we have to inform the people and  ask them if they would like to phase out nuclear power by 2020 or a bit later. Anyway, new investments in renewables are inevitable and people have to accept that this is not a free lunch.

Which kind of energy mix are China and India going to compose?

I definitely think China  now has the goal to increase the energy efficiency to an unprecedented scale so China is also thinking about an emissions trade scheme at a national scale, which is very encouraging. The Chinese energy portfolio will count on renewables, but they also have a huge amount of coal and gas. The role of nuclear power will depend on how fast they will be able to build up new nuclear plants. But, again, coal will be a  prominent energy source and so we need CCS and we have to clarify to what extent it is feasible and economically affordable. China is now willing and is committed to do something to reduce their emissions and I find this a very encouraging sign.

Image by {link:http://commons.wikimedia.org/wiki/File:Tehran_Pollution.jpg} Matthias Blume on WikiMedia Commons {/link}

* The views of the authors do not necessarily represent the views of the OECD or of its member countries.

After Copenhagen, concerns over an uneven playing field for producers, caused by regional differences in climate mitigation policies, appear to be heightened. Consequently, the debate over protective measures continues, focusing largely on carbon-based border tax adjustments (BTAs).

In Europe, citing concerns over fair play for industries and jobs, French President Sarkozy has repeated calls for a carbon tax on imports into Europe, to be applied to countries that fail to implement a climate change mitigation policy. Yet the European Commissioner for Trade, Karel De Gucht, opposes this approach, citing apprehension about inciting trade wars (Chaffin et al, 2010). While the European Council concluded in October 2009 that the first-best solution to address carbon leakage is with a broad and deep climate deal, it left the option available to use appropriate measures to address the risk of leakage, and continues to evaluate additional approaches to address competitiveness (EC, 2009 and EC, 2010).

In the United States, similar fears have resulted in provisions for BTAs in the Waxman-Markey bill passed by the House of Representatives in 2009, and the Kerry-Lieberman bill introduced (and subsequently abandoned) in the Senate in 2010. The draft cap and trade policy in both bills included additional allowances for affected industries based on output (Waxman-Markey, 2009; Kerry-Lieberman, 2010). The extent of competitiveness concerns in the Congress was underscored in a letter to President Obama from nine Democrat Senators in December 2009, noting that “any new US climate change laws should establish a national system of border adjustments, in concert with emission allowances or rebates to trade- and energy-intensive sectors of the economy” (Broder, 2009).

In response, key trading partners are voicing their concerns. India along with the G-77 and China have been calling for language in the draft text of the UN climate negotiations that would caution against developed countries resorting to BTAs and other countervailing border measures (Khor, 2009).

Political debates about BTAs confuse several of the underlying issues. To clarify, there are two related issues of concern for countries taking on climate action:

1. that some of their domestic industrial production will lose competitiveness, and
2. that part of their efforts will be undermined by an increase in greenhouse gas (GHG) emissions elsewhere, or “carbon leakage”.

In economic terms, loss of competitiveness stems from relative price differentials in traded goods: companies confronted with a relatively stringent climate policy will have higher production costs than competitors without such constraints. Insofar as this leads to a shift in economic activity towards regions with a less stringent or no climate policy, this will increase emissions in these new locations (leakage). There is, however, a second indirect channel driving leakage: policy dampens world energy demand, which puts downward pressure on global energy prices that in turn increases demand for GHG-emitting fuels in locations where emissions are not constrained.

Figure 1 – Carbon leakage with and without BTAs in 2030 Source: OECD ENV-Linkages model (Burniaux et al, 2010) Note: Results shown for scenarios with US, Japan, EU and Annex I respectively acting alone to reach a target of a 50% emission reduction by 2050. Leakage rates are calculated as the ratio of emission changes in non-acting countries over the emission reduction in acting countries or regions. Click to enlarge

The degree of carbon leakage depends on which countries are taking climate action and on differences in the level of stringency of policies. In an illustrative simulation using the OECD ENV-Linkages model, the leakage rate is estimated at almost 12% when the European Union cuts emissions unilaterally by 50% in 2050 from 2005 levels (OECD, 2009). Recent research (Burniaux et al, 2010) shows that similar results would occur if the US or Japan would act alone.  Figure 1 shows these leakage rates for 2030. However, if the effort to achieve a similar level of emission reduction is spread across all Annex I countries simultaneously, carbon leakage becomes negligible, falling to less than 2%. This reflects both the broader country coverage (fewer countries where leakage occurs) and reduced mitigation costs (as efforts are shared). Moreover, not only the magnitude but also the nature of carbon leakage changes with the size and composition of the mitigating coalition: larger coalitions have smaller losses in competitive position but a stronger effect on global fossil fuel prices.

While leakage and competitiveness concerns are inter-related, they can stem from different causes and may require separate policy treatment. Although BTAs could be effective to address leakage stemming from the competitiveness channel for a small group of acting countries, they do not address leakage that occurs through the world fossil fuel markets, nor do they directly address the loss of domestic production. And BTAs come with other costs: they can be damaging to the economy, costly to implement, and could instigate trade wars. The perhaps greater concern of loss of competitiveness for domestic industry should therefore be addressed with more targeted and effective policy levers. This article investigates each of these issues in more detail.

BTAs may reduce carbon leakage from the competitiveness channel

BTAs help to reduce the leakage rate when the coalition of acting countries is small by limiting the competitiveness channel. As the number of acting countries increases, the role and the effectiveness of BTAs decline rapidly, because leakage rates are much lower and tariffs address a smaller share of remaining leakage.

The effectiveness of BTAs in reducing leakage also depends on which channel of leakage is dominant. OECD (2009) analysis shows that if the EU were to act alone, and were to supplement its domestic action with a carbon-based border tax adjustment (calculated on the imported direct and indirect carbon content), then leakage disappears. Burniaux et al (2010) find that BTAs are also effective at limiting leakage when Japan acts alone. But if the USA implements a BTA, or all Annex1 countries together, then a BTA is less effective at reducing leakage; in the case of the USA acting alone, the BTA would reduce the amount of leakage by an estimated 2.5 percentage-points (Ross et al, 2009; Burniaux et al, 2010). This is because in these cases the major channel of leakage is not the loss of competitive position, but rather the second channel through international fossil fuel prices.

Figure 2: Impact of BTAs on production volumes of energy-intensive industries in 2030 Source: OECD ENV-Linkages model (Burniaux et al, 2010) Note: Results shown for scenarios with EU and US respectively acting alone to reach a target of a 50% emission reduction by 2050. Click to enlarge

BTAs fail to protect domestic industry

Although addressing competitiveness concerns is often voiced as a rationale for BTAs, analysis shows that BTAs may not curb the output losses incurred by domestic energy‑intensive industries. While carbon leakage may become very small with a large acting coalition, the impact of carbon pricing on the output of energy‑intensive industries in domestic and international markets may still be large in some countries, reflecting a shift in economic structure away from carbon‑intensive production. As Figure 2 shows, in certain cases (e.g. when the EU acts alone), BTAs can actually worsen the impact on the domestic energy-intensive industry. This is due to several factors, including the impact of BTAs on exchange rates and terms of trade, and the (usually large) share of imports of energy-intensive goods demanded by a number of domestic energy-intensive industries (for instance, car companies import huge amounts of steel products). The impact of BTAs on trading partners depends, in part, on the degree of international linkage and the relative energy-efficiency of trading partner industries.  For example, if the EU implements a BTA, Canada and the USA may actually benefit in comparison to less energy-efficient competitors, such as China, who will be impacted negatively.

Figure 3: Real GDP and welfare impacts in 2030 Source: OECD ENV-Linkages model (Burniaux et al, 2010) Note: Results shown for acting countries, the rest of the world (‘Non-Acting’) and global average for simulation scenarios with US, Japan, EU and Annex I respectively acting alone to reach a target of 50% emission reduction by 2050. Welfare is measured by equivalent variation in household income; it does not incorporate impacts of climate change. GDP and welfare are expressed in percentage change from the baseline. Click to enlarge

BTAs come at a cost

Clearly, BTAs can entail substantial economic losses when looking globally and particularly for non‑participating trading partners. For instance, in a scenario where Annex I countries cut their emissions unilaterally by 50% by 2050, BTAs help reduce world emissions, but the cost to non-acting countries’ GDP in 2030 would increase substantially as shown in Figure 3. The costs to world GDP would also increase as the BTA policy reduces global international trade.

BTAs improve welfare for the implementing country, but negatively impact global welfare. Figure 3 illustrates results from the OECD ENV-Linkages model (Burniaux et al, 2010), showing this negative effect on global consumer welfare, as reduced losses in acting countries cannot compensate fully for the additional losses in other countries. These effects are in line with existing estimates of other recent modelling studies (Mattoo et al, 2009; Dong and Whalley, 2009).

An interesting result for acting countries is that even if welfare is improved by imposing BTAs, they still have a negative impact on GDP (Figure 3). In the ENV-Linkages model the welfare improvement is the consequence of a positive effect on terms of trade; even though the policy increases import prices, export prices increase relatively more.

BTAs have additional complications

Apart from the disadvantages of BTAs in terms of aggregate mitigation costs and failure to protect domestic industry, they are also likely to be difficult and costly to implement. There are inherent challenges in measuring the emissions embodied in the full production cycle of goods abroad, including foreign emissions from production, combustion and indirect electricity use.

In addition, there are potential political implications of BTAs. Protectionist policies could incite retaliation from trading partners. BTAs could also face legal challenges by members of the World Trade Organisation. On the other hand, the “threat” of using BTAs may incite broader and deeper participation in a carbon market by trading partners. While this may hold to some extent for certain countries, it is uncertain that it will be credible for strong trading partners such as China.

More effective policy levers

Clearly the first-best option to address carbon leakage and loss of competitiveness would be to have global coverage of a climate policy. But given these uncertain times for the carbon market, the threat of BTAs is likely to remain. Yet considering the wide range of countries that have associated with the Copenhagen Accord and/or pledged mitigation targets and actions for 2020, even as a fragmented carbon market develops, leakage is likely to be very limited. BTAs are only effective in addressing leakage through one of the channels, do not directly address the loss of domestic production, and are costly. Thus the real focus should be on exploring more effective policy options to level the playing field than BTAs.

References:

• Broder, John M. (2009), “In Letter to Obama, Senators State Conditions for Supporting Climate Bill”, The New York Times, 3 December, (web).
• Burniaux J.M., J. Chateau, and R. Duval (2010), “Is there a case for carbon-based border tax adjustment? An applied general equilibrium analysis”, OECD Economic Department Working Paper No. 794, July 2010, (web)
• Chaffin, J., N. Tait and T. Barber (2010), “Trade War Fears Raised on Carbon Border Tax”, Financial Times, 12 January.
• Dong, Y. and J. Whalley (2009), “How Large Are the Impacts of Carbon Motivated Border Tax Adjustments”, Working Paper 15613, National Bureau of Economic Research, Cambridge, Massachusetts, (web)
• EC (2009), “Presidency Conclusions of the Brussels European Council (29/30 October 2009)”, 15265/1/09 REV 1, (web).
• EC (2010), “Analysis of options to move beyond 20% greenhouse gas emission reductions and assessing the risk of carbon leakage”, COM(2010) 265 final, Brussels 26.5.2010.
• Khor, M. and H. Jhamtani (2009), “India, G77 Propose Text Against Trade Protection in Copenhagen Draft”, South Bulletin (Issue 40), South Centre, 10 September 2009,  (web).
• Kerry-Lieberman (2010), “American Power Act”, http://kerry.senate.gov/work/issues/issue/?id=7f6b4d4a-da4a-409e-a5e7-15567cc9e95c.
• Mattoo, A., A. Subramanian, D. van der Mensbrugghe, and J. He. (2009), “Reconciling Climate Change and trade Policy”, World Bank, CGD Working Paper No 189, November 2009.
• OECD (2009), Economics of Climate Change Mitigation: Policies and Options for Global Action beyond 2010, (web).
• Ross, M., A. Fawcett, A. and C. Clapp (2009), “U.S. Climate Mitigation Pathways Post-2012: Transition Scenarios in ADAGE.” Energy Economics, (web).
• Waxman-Markey (2009), “The American Clean Energy and Security Act (H.R. 2454)”, (web).

{link:http://commons.wikimedia.org/wiki/File:Charminar.jpg}© Rhaessner at the German language Wikipedia{/link}

Transforming the energy system, improving economy and reducing carbon emissions. These are the milestones of the Indian climate challenge. “We are working to become a more modern country and to build an economy where emissions would be significantly lower”, Prof. Shukla says. The solution requires a large portfolio of energy options and a different perception of the problem: “The conventional perception – Prof. Shukla explains – looks at energy related technologies and innovations from the supply side. Now, we are also looking for solutions that are coming from the demand side”. On the path toward a sustainable development, is the 2° target achievable?
Watch at the video interview with Prof. P.R. Shukla (Indian Institute of Management) at the International Workshop “Reconciling Domestic Energy Needs and Global Climate Policy: Challenges and Opportunities for China and India” in Venice

From Copenhagen to Cancun. Toward a Global Agreement

Let’s bring back the focus in the United Nations Framework Commission on Climate Change and let’s use economic forums to reach the necessary target: the global agreement

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Technologies for a Low Carbon Economy: the Indian Portfolio

Innovations from wind, solar and biomass; after the “123 Agreement” signed with United States, nuclear will be an energy option. All the innovations of the India’s  National Action Plan on Climate Change

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Global Emissions. The 2050 Scenario

We need need a different perception of the problem, but the 2 degree target could be reached.  We are a developing country; we are on the transition to a more modern and to an economy where emissions would be significantly lower

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London Parliament, by Claude Monet; picture by {link:http://commons.wikimedia.org/wiki/Commons:10,000_paintings_from_Directmedia}The Yorck Project{/link}

On the eve of the UN’s highly-anticipated Copenhagen meeting, international climate policy negotiations remain in gridlock.  Many OECD countries insist on binding emissions limits for their economic competitors in the developing world, while countries such as China and India are unwilling to accept such responsibility.  They argue that because they are poor, low per-capita emitters and have contributed relatively little to cumulative emissions, they should not be asked to forgo the use of cheap fossil fuels to drive their own industrialization.  Moreover, they point out that since the 1997 agreement in Kyoto, developed countries as a whole have failed to cut emissions and take the first steps indicated by the UN framework.
While the new US and Japanese administrations have renewed hopes that developed economies are now ready to take on serious climate obligations, fears over the economic recovery and the international repercussions of national policies in only a subset of countries might limit their willingness to act.  In the US in particular, politicians are concerned that increases in energy costs at home relative to those abroad would lead to more offshore outsourcing, exacerbating the already high unemployment rate.

Overlaying the political debate is the physical reality that time is running out.  While it may be perfectly reasonable to expect wealthy, industrialized countries to pay a larger share of the global climate protection bill, it has become increasingly clear that, whoever pays for them, reductions in developing countries must begin very soon to keep acceptable climate targets on the table.  Dominated by China, this group will be responsible for nearly all growth in global emissions in coming decades in a “no policy” baseline scenario as demand for cheap coal-based energy expands with economic development.  Even if OECD countries were able to take the extraordinary measure of completely eliminating their emissions by 2050, uncontrolled emissions from the remaining countries by themselves would be sufficient to push atmospheric concentrations beyond any of the global stabilization targets currently proposed.

The essential involment of China

Thus the involvement of countries like China is essential to achieve global carbon reduction goals and to gain the support of OECD countries, but they make a strong case for a free pass.  What can be done?  In a pair of recently published articles (see Climatic Change Letters, Volume 1), we propose one way forward.  The key insight in our analysis is that a commitment now on behalf of China and other key developing countries to accept pre-specified future emission reduction targets could effectively address all three concerns.  Parallel studies based on two widely used integrated assessment models of the global economic, energy, and climate systems show that anticipation of a credible future policy target induces a smooth transition, leading to reductions from baseline emissions well before the policy actually begins (Figure 1).

Figure 1. Energy-related CO2 emissions in China under a no-policy reference case and a future commitment scenario.  Note that agreeing to future commmitments beginning in 2030 leads to reconfiguration of capital stock beginning immediately. The ranges reflect differences between the two models used in the parallel studies. Click the picture to enlarge

The primary driver for this result is the long lifetime of capital in the energy system, in particular of conventional coal-fired electric generation, the main source of emissions in the developing world (now and in an expected “no policy” future).  The most attractive abatement options involve investing instead in low- or zero-carbon generation capacity, including renewables, nuclear, advanced coal with carbon capture and storage (CCS), and improvements in end-use efficiency. This strategy would optimize the replacement of carbon-intensive capital, whose costs are sunk once the capacity is installed.  Equally important, many low-carbon options will require a sustained research and development (R&D) effort to bring them to market.  Thus if a country is eventually to undertake emissions reductions, the sooner its firms and households know about it, the better will be their investments in both capital and technology.

Two studies, one proposal

The parallel studies compared two pathways the world might take to achieving a stabilization goal of limiting the total impact of atmospheric greenhouse gases to the equivalent of a doubling of pre-industrial CO2 (this translates to a roughly 50% chance of keeping global average temperature increase in 2100 below 2.5 degrees C).  In both scenarios, we made what we believe to be realistic assumptions about when developing countries join the effort with legally binding targets, allowing China for example to remain out until 2030.  In one scenario, we assume that non-participating countries undertake no advance planning prior to joining the coalition, while in the other, expectations of future commitments lead to advanced planning.  In this case, we assume that the targets for 2030 and beyond are announced immediately and optimally anticipated.  The results are striking.  In the no advanced planning scenario, developing countries like China are left with stranded assets when their commitment period begins, whereas better investment planning in the “anticipate” scenario dramatically reduces the overall cost of their participation in the global effort, by 20 to 40%.

Meanwhile, because far-sighted investment decisions in developing countries have the collateral benefit of reducing their emissions in the near-term, OECD countries leading the effort today can avoid some of their most costly reductions while keeping the global pathway consistent with the climate stabilization goal.  Both models show that this effect can lead to a cost savings of nearly 50% to the OECD.  Moreover, since the anticipatory actions by China and others save money by shifting some costs forward in time in exchange for avoiding high adjustment costs later, the near-term competitiveness gap could shrink considerably.  Finally, the notion that credible targets are anticipated by rational agents provides much-needed leverage on the thorny issue of verification.
An easy test for the credibility of a Chinese announcement of a future commitment will be whether or not it begins configuring its capital stock accordingly in advance.  Although not a perfect solution, firm future commitments by developing countries can reduce the cost of stabilization for all parties without violating political constraints or compromising reasonable global environmental goals.  Such a winning combination could be a breath of fresh air for the climate stalemate.

Authors’ affiliations: G. Blanford and R. Richels: Electric Power Research Institute (EPRI). V. Bosetti: Fondazione Eni Enrico Mattei (FEEM) and Euro-Mediterranean Center for Climate Change (CMCC). C.Carraro: University of Venice, FEEM and CMCC. T. Rutherford: Swiss Federal Institute of Technology (ETH). M. Tavoni: Princeton Environmental Institute, FEEM and CMCC.

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There are mounting fears that the upcoming conference of the parties of the United Nation Framework Convention on Climate Change will fall short of achieving a comprehensive global climate agreement. Many years have been lost since Rio and Kyoto, making every target harder to achieve, and there has been a shift toward more stringent and ambitious climate stabilization objectives, such as the 2 Celsius goal. A combination of less time and tougher goals means that significant mitigation action is now required in both the developed and the developing world. Actual national mitigation actions are at present extremely uncertain, and there is a real risk that current, strong disagreements about relative responsibilities will derail the entire process.

A major factor in the reluctance of countries to make commitments to a low-carbon economy is fear that change will be costly and that others will hold back: the free rider problem. Such fear is often accompanied by limited awareness of the distribution of global emissions today and expected in the future. To provide new insight into where and from whom emissions are generated, we have written a paper¹, together with three coauthors. It moves the focus of attention from national per capita values of CO2 emissions to the emissions of the world’s individuals. Here we summarize some of the findings of paper and also add further analysis.

A Matter of Lifestyles and Energy Intensity

As of today, the discussion over allocating obligations across the countries of the world has mostly involved comparing nations on a per capita basis. We show that this is seriously incomplete. Individual CO2 emissions are very unequally distributed not only across countries but also within countries. This is a consequence of the strong relation that exists today between emissions and income, and of the large disparities in lifestyles and energy intensities across the world.

The key to our analysis is the development of credible, approximate estimates of the individuals emissions in each country that sum to the country’s total emissions. Using income distribution data from the World Bank and the U.N., we have developed a methodology for estimating individual carbon emissions for the year 2003 for 153 countries, covering almost all global emissions. The methodology accounts for the relation between expenditures and emissions² and for the differences in national carbon intensities. From these national distributions we construct a global emission distribution. We also build a corresponding carbon emissions distribution for 2030, using U.S. Energy Information Agency’s International Energy Outlook (2009) “Business as Usual” scenario. We also use this scenario to project national and regional carbon emissions with the assumption that carbon emission inequality is unchanged at the national level. The analysis is restricted to fossil carbon emissions, which are arguably much more closely tied to income than biological emissions (notably, deforestation) or emissions of other greenhouse gases (notably, methane).

Figure 1 – Population (left panel) and emissions (right panel) for three representative emission categories. The darker part of the bars shows figures for 203, and the lighter one the additions from 2003 to 2030 (e.g. the whole bars show the figures for 2030). Click the picture to enlarge

Three Emitters Classes

The emissions of the global middle class are approximately between today’s average for Brazil and the EU. The “low emitters” in the lowest bin represent more than half of the world’s 6.2 Billion people in 2003, but contributed only 11% of carbon emissions³.

At the opposite end, half of 2003 global emissions were created by 11% of the globalpopulation in the upper bin, the “high emitters.” Only the “global middle class” had emissions in proportion to their population, each roughly one-third of the global total.
Figure 1 also shows the three bin distributions for 2030, using regional CO2 emissions projections from the EIA’s International Energy Outlook “Business As Usual” scenario. The EIA projects an increase in global emissions of almost 70% between 2003 and 2030, while population increases by about 30%. Figure 1 shows that the greatest increase in population will happen in the global middle class, but that two-thirds of the incremental emissions will actually come from individuals whose annual emissions exceed 10 tCO2.

Geography of “High Emitters”. Where do they live?

It is natural to wonder where the “high emitters” live and will live. Figure 2 shows their global distribution by binning the world into four regions: the U.S., the rest of the OECD, China, and the rest of the world. The Figure shows that the “high emitters” in the OECD and non-OECD countries contribute approximately equal to global emissions in 2030, whereas in 2003 emissions of the “high emitters” in the OECD were 70% of total “high emitter” emissions. In this view of the world, where China’s rapid economic growth relative to most other countries is an assumption, China’s share grows from 4% to 30%.

Figure 2 – Regional population shares in 2003 and 2030 for the high emitters (>10tCO2), click the picture to enlarge

Taking as our point of departure the increasing dominance of “high emitters” (Figure 1), we propose that the responsibilities of countries or regions be assigned in proportion to the contribution of the emissions of its “high emitters” to the total emissions of “high emitters” (the fractions shown in Figure 2). The lower bound defining a “high emitter” changes with the global target: a tougher target results in a lower cut-off and more individuals in the top category. For example, if the global goal were to cap global emissions at today’s levels in 2030, the individual cap would be at about 10tCO2 (the threshold of the “high emitters”) and roughly one Billion people would exceed that cap. As seen in Figure 2, this group of individuals is roughly equally distributed in the US, other OECD, China and other non OECD countries, each with one quarter of a billion “high emitters.”
The allocation problem takes on important new dimensions when the focus shifts in this way from “high emitting” nations to “high emitting” individuals. In short, , “common but differentiated responsibilities” becomes a statement about individuals, not nations. Our fairness principle is that individuals with the same emissions have the same obligations, wherever they happen to live.

From “High Emitting” nations to “High Emitting” Individuals

Our proposal presumes that a process will be established that allows national allocation fractions to be reconsidered periodically as global development proceeds, national circumstances change, and more is learned about global climate change. From this perspective, Copenhagen is the first of many steps in the transition to a low carbon world.
In summary, our paper shows that a focus on individual emissions provides an important tool for dealing with the decarbonization transition. Fresh and even surprising insights into global emissions result when analysis moves beyond per capita data and all of the world’s high emitters everywhere are revealed. Hopefully, from these new insights, new solutions can be built⁴.

1. Chakravarty, S., A. Chikkatur, H. de Conink, S. Pacala, R. Socolow and M. Tavoni (2009) “Sharing Global CO2 Emission Reductions Among One Billion High Emitters”, Proceedings of National Academy of Science, vol. 106 no. 29 11884-11888
2. In what follows we present results for an elasticity between income and emissions equal to 1. The interested reader is referred to the cited paper for an extensive investigation of the role of this parameter, where we show that the main results are robust to different specifications.
3. Our paper includes an
   analysis of global poverty alleviation which we do not reproduce here. Our principal conclusion is that if extra CO2 emissions were allocated to the one-third of the world’s population whose emissions are less than approximately 1 tCO2/person,  the global population that is the subject of the Millennium Development goals, the incremental task for the upper two-thirds of the world’s emitters would be only marginally bigger. We conclude that whenever low-carbon technologies that raise the living standards of the world’s poorest people are more expensive than fossil-fuel alternatives, the latter should be chosen. In short, climate and poverty alleviation can and should be dealt with separately.
4. Sharing Global CO2 Emissions Reductions Among One Billion High Emitters,a reasearch carried out by a group of reserachers at Princeton University, is included in Time magazine’s invention top list of the year. According to Time’s article: “Negotiations over carbon emissions resemble the end of a Quentin Tarantino film when everyone has a gun pointed at everyone else and no one can make a move. (…) A strategy focused on rich individuals instead of rich countries might just get us out of this”.

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Mitigation costs to reach ambitious stabilization targets are estimated below 5% of GDP (IPCC, 2007). Most models used represent a first based world (optimizing agents with perfect foresight, market clearing equilibrium in all markets, and full utilization of production factors). With such assumptions, the optimal policy is a carbon tax, or a cap and trade system to equalize marginal costs. Any deviation from this is supposed to lead to additional costs and to veer from the optimum. By nature, synergies between development and climate policies and no-regret potential are excluded. The world is on the contrary, full of imperfections that could lead to higher mitigation costs however, they can also provide opportunities for implementing synergies between climate and development. In this article, we analyze the potential for implementing these synergies in a case study focusing on the power sector sub-optimalities in India. To do this, we rely on the modeling framework, Imaclim-R, which is well suited to represent a second best world and to embark sub-optimalities, disequilibrium, and inertia in technical systems.

Institutional and Market Failures of the Indian Power Sector

The Indian power sector is characterised by many institutional and market failures. The most critical symptom of these failures is a restrained access to energy services for both households and productive sectors: while electrification covers only 60% of Indian households (the remaining 40% that are not connected to the grid rely mainly on traditional biomass or on diesel generators), capacity shortage in 2007 reached 9.6% of total demand from the grid reinforcing the use of diesel generators by households and industries.

These power cuts and capacity shortage are caused by structural underinvestment in the power sector. The opening of the sector to the private sector in 1991, failed in absorbing the shortage and in compensating for the constraints on public funding. Less than half of the additional power capacity that had been programmed in the 10th Plan has been built. This underinvestment is largely due to the critically low profitability of investments in this sector induced by a very expensive cross subsidy system.

In 2006, the average level of administrated price covered only 77% of the average production cost: tariffs for households and farmers covered respectively 56% and 12% of the generation costs while industries and the commercial sector were partly compensated because they paid respectively 108% and 122% of production costs. Between 1993 and 2000, subsidies to households and to agriculture more than tripled and reached respectively 0.4 and 1.1% of GDP. In 2000, agriculture uses represented 1/3 of electricity sales in volume but less than 5% of total revenues.

These subsidies are justified by positive externalities on development (access to cheap energy for irrigation to promote food production). Nevertheless, they have significant side effects:

• the combination of critically low prices and of frequent but unpredictable power cuts create a strong incentive to a continuous use of electric pumps for irrigation and induces over consumption (estimated at 30% at least of consumption in agriculture), which increases the magnitude of capacity shortage;
• low revenues from electricity sales induce maintenance under financing and increasing inefficiencies in transmission and distribution, which represented at least 30% of the production in 2005.

Moreover, power sector inefficiencies constrain economic growth: electricity shortages hamper productivity and competitiveness. This reduces government tax revenues, and therefore capital availability to invest in additional power capacity.

Source: Annual report 2008-2009. Ministry of Power, India Click to enlarge

These sub-optimalities namely, power generation shortage, under-investment, tariffs not reflecting costs and T&D losses¹ are implemented within the Imaclim-R² hybrid recursive modelling framework. Imaclim-R has been developed to account for sub-optimalities and inertia in technical systems. Underinvestment in the power sector is represented by a gap between the estimated need of investments and realised investments in the power sector. The induced power generation shortage is represented by over utilisation of generation capacities, as Imaclim-R allows for endogenous disequilibrium due to inflexible characteristics of equipment vintages available at each period (putty-clay technologies). In case of underinvestment, in the short term, the main available flexibility lies in the rate of utilization of capacities, which may induce shortage of production factors, entail extra generation costs³, and raise the electricity usage cost.
Whether these sub-optimalities will persist or not is a determining factor for defining climate mitigation strategies.

Deadlock of a Carbon Price

Even if the demand decrease in the power sector for a 450ppm CO2 stabilization objective is large enough to absorb the power shortage and to remove over costs of generation due to over-utilization of capacities, persisting energy inefficiency in power production, transmission, and distribution coupled with over-consumption habits for farmers will introduce a substantial delay in the potential pace of decarbonization in the power sector⁴. A carbon pricing policy will then impact for a longer time the usage cost of electricity for households and industry.

As a result, a carbon price only scenario will induce prohibitive macroeconomic costs for India (-20% of the baseline GDP in 2030) even if GDP losses decrease after 2030 because of a faster technical change induced by the carbon price and of less vulnerability of the Indian economy to oil prices rising. The increased usage cost of electricity has a very important eviction effect for households on other goods consumptions. It induces a decreased competitiveness of Indian production due to the higher energy share in industrial production costs compared to other regions.

Financial transfers from a cap and trade system could reduce these losses. Indeed, with a contraction and convergence rule, financial transfers amount to 1.5% of GDP in 2020, and more than 2% of GDP between 2030 and 2040. On the long term, GDP is 15% higher than in the baseline due to the income effect of financial transfers and to the induced technical change. But on the short term, transition costs persist and India still loses 6% of its GDP in 2015 compared to the baseline. Organizing higher financial transfers to alleviate transition costs have little chance to be accepted by industrialized countries.

Looking for Synergies Between Climate Policies and Development

An alternative approach is investigated to enlarge the spectrum of climate policies to domestic policies targeting sub-optimalities in the power sector:

• the progressive reduction of subsidies to electricity consumption for the agricultural sector, accompanied by demand side management (improvement of irrigation pumps, evolution of consumption habits⁵);
• the implementation of a program to reduce electricity T&D losses to 15% over a 20-year period;
• the revenues following the partial removal of electricity consumption subsidies in the agricultural sector are used to finance all of these components. Remaining additional revenues are rebated to households through lump-sum transfers.

These measures are implemented within the same contraction and convergence allocation and result in GDP losses limited to 2% of the reference scenario during the first three years after the implementation of policies. The main reason for this is the decrease in the electricity usage cost induced by the reduction of T&D (transmission & distribution) losses and by demand side management. These measures lead to a reduction of energy budget share for households and less crowding-out of other goods consumption; in industry these measures lead to a substitution from fossil fuels to electricity and a reduced share of the energy budget.

Therefore Indian products lose relatively less competitiveness than in other simulations, and salaries are less squeezed to restore commercial balance: wage levels are 9% higher in 2020 and 2030. A positive income effect stems from higher wage levels. More wages increase due to more overall activity, and transfers to households coming from the remaining revenues generated by subsidies decrease. They are not used to finance the policies. Climate policies focusing on the alleviation of sub-optimalities constitute a win-win solution for climate and development.

Conclusion

From a methodological point of view, modeling frameworks are able to represent second best world characteristics in order to embark specificities of each national economy and to exhibit no regret potential. Possible synergies between climate policies and development policies should be used for mitigation cost assessment.

From a political point of view, the future international climate agreement should support the implementation of specific policies such as no-regret potential and energy efficiency measures to account for the heterogeneity of the real world instead of only dictating the implementation of a cap and trade system.

1. By default, tariffs not reflecting costs and T&D losses are expected to persist until 2050
2. For a detailed description of Imaclim-R and of the implementation of sub-optimalities within Imaclim -R, please refer to Sassi et al. (2007) and to Mathy and Guivarch – under review
3. Mean generation costs increase when capacity is overused due to the existence of static decreasing returns due to higher labour costs and because less efficient units are switched on at the last aggregate level. By default, in our model, the increasing factor is attached to wages.
4. In India, 69% of electricity is produced with coal.
5. If the service is improved, the number of unpredictable power cuts will be lower, and farmers will not have to leave their pumps switched on all day long.