Climate Change

Estimates of Economic Costs of Climate Change

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Interpreting these estimates

• Most studies assume a doubling of GHG concentrations– akin to what happened over last half of 20th

century

• Most studies find relatively small effects: “a few percentage points of GDP.” (Tol 2009 p33)

Small?

• “it’s roughly equivalent to a year’s growth in the global economy—which suggests that over a century or so, the economic loss from climate change is not all that large.” (Tol 2009 p33)

Note: some global warming might be beneficial (on average)

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Estimates of the Marginal Social Cost of Carbon

• Based on a survey of extant analysis of the costs of climate change, Tol (2009; p46) concludes that “A government that uses the same 3 percent discount rate for climate change as for other decisions should levy a carbon tax of $25 per metric ton of carbon (modal value) to $50/tC (mean value).”

• Current carbon prices: – EU January 2009: $78/tC ; March 2014: 7euro/TC?– RGGI Jan 2014: $4/tC

• BC: $30/tC ...

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History of International Climate Change agreements

Rio 1992

• “The United Nations Framework Convention on Climate Change (UNFCCC or FCCC) is an international environmental treaty produced at the United Nations Conference on Environment and Development (UNCED), informally known as the Earth Summit, held in Rio de Janeiro from 3 to 14 June 1992.” (Wikipedia)

UNFCCC

• doesn’t set emission targets• does require yearly Conference of the Party

(COP) meetings, which yielded Kyoto Protocol (1997) and Copenhagen Accord (2009)

UNFCCC assigns countries to three groups

• Annex I countries (industrialized countries and countries in transition): Australia, Austria, Belarus, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Monaco, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, United States of America

• (40 countries and separately the European Union)

• Annex II countries (developed countries which pay for costs of developing countries)Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States of America

• (23 countries and separately the European Union; Turkey was removed from the annex II list in 2001 at its request to recognize its economy as a transition economy.)

• (Non-Annex I countries – Everyone else)

Kyoto Protocol

Kyoto Protocol• 1997 (entered into force in 2005)

• Covers 6 greenhouse gases.

• Requires variable reductions (relative to 1990 emissions) during 2008-2012 for Annex-I countries:

• E.g. of required reductions:• EU (-8%)• US (-7%) • Canada (-6%)• Japan (-6%) • Russia (0%)

• Some countries allowed to increase their emissions: • Australia (+8%) Iceland (10%)

Digression

• How has Canada actually done at meeting its Kyoto commitment?

• According to Greenpeace, Canada’s emissions at time of Copenhagen meetings were about 34% above its Kyoto target

• TheStar.com reports Canada will exceed its commitment by ~1billion tonnes of CO2 (“by far the worst breach of any nation”)

2011

• Canada officially pulled out of the Kyoto Agreement

• Federal Environment Minister Kent “said staying in Kyoto would force Canada to spend about $14-billion buying carbon credits abroad because the country is so far behind in meeting its targets.” (Globe and Mail Dec 12, 2011 http://www.theglobeandmail.com/news/politics/canada-formally-

abandons-kyoto-protocol-on-climate-change/article2268432/)

Problems with Multilateral Agreements

Free riding

It’s hard to get every country to ratify

Solution

• Treaty doesn’t take effect unless (almost) everyone signs– Kyoto protocol didn’t go into effect until it was

ratified by industrialized countries accounting for at least half the world’s greenhouse gasses

• By 2008, 183 countries had ratified Kyoto, including EU, Russia, Canada, China, India, Japan.

Famously, the United States never ratified Kyoto

• Reasons given:– China and India aren’t required to reduce own emissions

• “The world's second-largest emitter of greenhouse gases is the People’s Republic of China. Yet, China was entirely exempted from the requirements of the Kyoto Protocol. India and Germany are among the top emitters. Yet, India was also exempt from Kyoto ...” (Pres. Bush 2001)

– Cost• Stern Review estimated “one percent of global GDP is required to be

invested in order to mitigate the effects of climate change” (Wikipedia)– Waiting for the successor to Kyoto

• "it doesn't make sense for the United States to sign [the Kyoto Protocol] because [it] is about to end" (Pres. Obama, April 2009)

Successor to Kyoto: Copenhagen 2009

December 2009, UNFCCC COP 15

– Countries unable to arrive at a new protocol– Instead, they “noted” a 3 page accord

Highlights– goal: cap rise in global temperature to <2 degrees

Celsius– Countries remain divided into Annex I and Non-

Annex I countries (as per designations under Kyoto)• Annex I countries must state country-wide reduction

targets; actual reductions to be certified by an international agency

• non-Annex I countries only need to list mitigation strategies; actual mitigation can be certified domestically

• poorest non-Annex I countries don’t have to do anything (all voluntary)

Highlights continued

– market based measures o.k. (but unspecified)– NO mention of competitiveness concerns,

leakage, or the use of border-tax-adjustments– Countries are to state their intentions (target

reductions) by Jan 30, 2010

Digression• What commitments have countries made?

– Canada: -17% relative to 2005 levels by 2020– US: -17%– Australia: -5%– Japan: -25% (relative to 1990)– EU: -20% (relative to 1990), with willingness to expand

reductions to -30% if others make substantial commitments– China: since China is a non-Annex I country, it doesn’t have to

declare reduction targets, but rather its “mitigation” goals(1) reduce its carbon intensity by 40-45% by 2020 from 2005 levels, (2) increase the share of non-fossil energy in its primary energy

consumption to around 15% by 2020(3) increase forest coverage by 40 million hectares and forest stock

volume by 1.3 billion cubic meters by 2020 from 2005 levels.

Is UNFCCC the only way forward?• Maybe not

– The US Deputy National Security Advisor for International Economic Affairs chairs meetings between 17 countries: Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, South Africa, the United Kingdom, and the United States.

– Called the “Major Economies Forum on Energy and Climate” (MEF)

– Since these 17 countries and regions account for about 90% of global emissions, some think MEF will replace UNFCCC as main forum for climate change negotiations.

A few of the many problems with Copenhagen Accord

• Non-binding• commitments thus far aren’t sufficient to

reach goal (of <2%C rise in global temperature)

• …• world still divided into two groups• no mention of how to address

competitiveness concerns

Cancun 2010

Cancun 2010

• Copenhagen Accord finally adopted.• Establishes Green Climate Fund

– World Bank to serve as interim trustee– goal: “developed countries to mobilize $100

billion annually by 2020 to support mitigation and adaptation in developing countries” (Stavins http://www.robertstavinsblog.org/2010/12/13/successful-outcome-of-climate-negotiations-in-cancun/)

Durban 2011

• Nov 28 – Dec 11 2011– 17th COP of UNFCCC in Durban South Africa

• Goal: establish a new treaty to limit carbon emissions

Outcomes:

1. countries reached a non-binding agreement to produce a legally binding treaty by 2015, to take effect in 2020.

2. Agreed to extend Kyoto by 5 years

• 3. Fine tuned components of the Cancun Agreements– includes

• “work done on the Green Climate Fund to help mobilize public and private funding of climate change mitigation and adaptation in developing countries;”

• “more specifics on technology transfer mechanisms;”• “mechanisms to enhance the transparency of national

commitments under the Cancun Agreements;”• “an international scheme to reduce deforestation, which –

importantly – includes market mechanisms.” (Stavins http://www.robertstavinsblog.org/ Dec 12, 2011)

The important part• language regarding “common but differentiated

responsibilities” and a division of world into Annex I and non-Annex 1 countries has disappeared

• Of course, since Durban Platform doesn’t actually identify specific targets for developing contrires, this is merely an `opening of the window’ (Stavins http://www.robertstavinsblog.org/ Jan 1, 2012) to the idea that all countries have to reduce own emissions

• Hard to get an agreement if some countries feel they are doing all the work and others reaping the benefits

• But even if the ones undertaking all the cuts didn’t care, there’s the leakage problem

Why does it matter that some countries aren’t constrained?

Warsaw 2013

• “the key task of this COP was essentially to pave the way for the negotiations next year at COP-20 in Lima, Peru, as a lead-up to the real target, reaching a new international climate agreement at the 2015 negotiations in Paris to be implemented in 2020” (Stavins’ blog )

Carbon Leakage

Carbon Leakage

• If Annex I countries reduce their own emissions, by how much will non-Annex I countries raise their emissions in response?

Channels through which carbon leakage works

1. emissions in Annex I countries lowers country i’s MD from its own emissions

– assumes MD from global emissions is increasing

Digression – Finding Domestically Optimal Pollution Level

Pollution

$

Now consider global pollutant

MDi

$

eW=ei+e-i

•Suppose Annex I emissions from ROW are originally at e-i0

• Draw country i’s MCA curve using e-i0 as vertical axis

•Country i will emit ei0 units

e-i0

MCAi

e-i0+ei

0

MDi

$

eW=ei+e-i

•Now suppose Annex I emissions from ROW fall to e-i2

•In eW,$ space, country i’s MCA curve shifts left (new vertical axis is at e-12)

•Country i will now emit ei2 units

•ei2>ei

0

•Why? •Because the reduction in ROW emissions effectively shifts down i’s MD curve•i raises emissions as a result

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2a. Change in the price of fuel (fuel market leakage)

• Suppose Annex I countries use a fuel tax to reduce their fuel use

• tax reduces Annex I country demand for imports of fuel (or reduces export supply)

• result: world fuel price falls• non-Annex I countries respond to lower global

fuel prices by increasing own consumption (i.e. simply move SE along own demand curve)

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2b. Product Market Leakage

• Suppose Annex I countries use an emission tax to reduce their territorial emissions

• tax reduces Annex I country supply of carbon-intensive goods (e.g. steel, aluminium)

• Increases import demand• result: world prices for carbon intensive goods

rise• non-Annex I countries respond to higher global

prices by increasing own production (i.e. simply move NE along own supply curve)

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