"An Elaborated Proposal for Global Climate Policy Architecture: Specific Formulas and Emission Targets for All Countries in All Decades"
Discussion Paper 08-08, Harvard Project on Climate Agreements, Belfer Center
Author: Jeffrey Frankel, James W. Harpel Professor of Capital Formation and Growth
Belfer Center Programs or Projects: Harvard Project on Climate Agreements
This paper offers a detailed plan to set quantitative national limits on emissions of greenhouse gases, building on the foundation of the Kyoto Protocol. It attempts to fill in the most serious gaps: the absence of targets extending as far as 2100, the absence of participation by the United States and developing countries, and the absence of reason to think that countries will abide by commitments. The plan elaborates on the idea of a framework of formulas that can assign quantitative limits across countries, one budget period at a time. Unlike other proposals for century-long paths of emission targets that are based purely on science (concentration goals) or economics (cost-benefit optimization), this plan is based partly on politics. Three political constraints are particularly important. (1) Developing countries are not asked to bear any cost in the early years. (2) Thereafter, they are not asked to make any sacrifice that is different in kind or degree than was made by those countries that went before them, with due allowance for differences in incomes. (3) No country will accept an ex ante target that costs it more than 1% of GDP in present value, or more than 5% of GDP in any single budget period, or will abide by it ex post. An announced target path that implies a future violation of these constraints will not be credible, and thus will not provide the necessary signals to firms today. Thus paper tries out specific values for the parameters in the formulas (parameters that govern the extent of progressivity and equity, and the speed with which latecomers must eventually catch up). The resulting target paths for emissions are run through the WITCH model. The outcome is reasonable, in terms of both carbon abatement and economic cost, even though the targets obey the political constraints.
SUMMARY FOR POLICYMAKERS
This proposal builds on the foundations of the Kyoto Protocol, but strengthens it in important ways. It attempts to solve the most serious deficiencies of Kyoto: the absence of long-term targets, the absence of participation by the United States and developing countries, and the lack of motivation for countries to abide by their commitments. Although there are many ideas to succeed Kyoto, virtually all the existing proposals are based either on science (e.g., capping global concentrations at 450 ppm) or on the economics (weighing the economic costs of aggressive short-term cuts against the long-term environmental benefits). This plan for emissions reductions is more practical because it is partly based on politics, in addition to science and economics.
The proposal calls for an international agreement to establish a global cap-and-trade system. The emissions caps are set using formulas that assign quantitative emissions limits to countries in every year until 2100. Three political constraints are particularly important in developing the formulas. First, developing countries are not asked to bear any cost in the early years. Second, even later, developing countries are not asked to make any sacrifice that is different from the earlier sacrifices of industrialized countries, accounting for differences in incomes. Third, countries are not asked to accept targets that cost more than 5% of GDP in any given year.
Under the formulas, rich nations immediately begin to make emissions cuts. Developing countries agree to maintain their business-as-usual emissions in the first decades, but over the longer term agree to binding targets that ultimately reduce emissions below business as usual. This structure precludes energy-intensive industries from moving operations to developing countries (so-called "carbon leakage") and gives industries a more even playing field. However, it still preserves developing countries' ability to grow their economies, and they can raise revenue by selling emission permits. In later decades, once developing countries cross certain income and emissions thresholds, their emissions targets become stricter, following a numerical formula. However, these emissions cuts are no greater than the cuts made by rich nations earlier in the century, accounting for differences in per-capita income, per-capita emissions, and baseline economic growth.
This system of targets results in a world price of carbon dioxide that reaches $30 per ton in 2020, $100 per ton in 2050, and $700 per ton in 2100, according to economic simulations using the WITCH climate model. Most countries sustain economic losses that are under 1% of GDP in the first half of the century, but then rise toward the end of the century. Atmospheric concentrations of CO2 stabilize at 500 ppm in the last quarter of the century, and world temperatures increase by about 3 degrees.
KEY FINDINGS & RECOMMENDATIONS
- Any future climate agreement must comply with six important political constraints. First, the US will not commit to quantitative targets if China and other major developing countries do not commit to quantitative targets at the same time, due to concerns about economic competitiveness and carbon leakage. Second, China and other developing countries will not make sacrifices different in character from those made by richer countries that have gone before them. Third, in the long run, no country can be rewarded for having "ramped up" its emissions high above the levels of 1990. Fourth, no country will agree to participate if, in any year, the present discounted value of its future expected costs is more than 1% of GDP. Fifth, no country will abide by targets that cost it more than 5% of GDP in any year. Sixth, if one major country drops out, others will become discouraged and the system may unravel.
- Future emissions caps should be determined by a formula that incorporates three elements: a Progressivity Factor, a Latecomer Catch-up Factor, and a Gradual Equalization Factor. The Progressivity Factor requires richer countries to make more severe cuts relative to their business-as-usual emissions. The Latecomer Catch-up Factor requires nations that did not agree to binding targets under Kyoto to make gradual emissions cuts to account for their additional emissions since 1990. This factor prevents latecomers from being rewarded with higher targets, or from being given incentives to ramp up their emissions before signing the agreement. Finally, the Gradual Equalization Factor addresses the fact that rich countries are responsible for most of the carbon dioxide currently in the atmosphere. During each decade of the second half of the century, this factor moves per capita emissions in each country a small step in the direction of the global average of per capita emissions.
The framework here allocates emission targets across countries in such a way that every country is given reason to feel that it is only doing its fair share. Furthermore, the framework — a decade-by-decade sequence of emission targets determined by a few principles and formulas — is flexible enough that it can accommodate major changes in circumstances during the course of the century.
- Full Text of "An Elaborated Proposal for Global Climate Policy Architecture: Specific Formulas and Emission Targets for All Countries in All Decades" (1.5 MB PDF)
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