"Sharing the Burden of GHG Reductions"
Belfer Center Programs or Projects: Harvard Project on Climate Agreements
The G8 countries propose a goal of a 50% reduction in global emissions by 2050, in an effort that needs to take account of other agreements specifying that developing countries are to be provided with incentives to action and protected from the impact of measures taken by others. To help inform international negotiations of measures to achieve these goals we develop a technique for endogenously estimating the allowance allocations and associated financial transfers necessary to achieve predetermined distributional outcomes and apply it in the MIT Emissions Prediction and Policy Analysis (EPPA) model. Possible burden sharing agreements are represented by different allowance allocations (and resulting financial flows) in a global cap-and-trade system. Cases studied include agreements that allocate the burden based on simple allocation rules found in current national proposals and alternatives that specify national equity goals for both developing and developed countries.
The analysis shows the ambitious nature of this reduction goal: universal participation will be necessary and the welfare costs can be both substantial and wildly different across regions depending on the allocation method chosen. The choice of allocation rule is shown to affect the magnitude of the task and required emissions price because of income effects. If developing countries are fully compensated for the costs of mitigation then the welfare costs to developed countries, if shared equally, are around 2% in 2020, rising to some 10% in 2050, and the implied financial transfers are large—over $400 billion per year in 2020 and rising to around $3 trillion in 2050. For success in dealing with the climate threat any negotiation of long-term goals and paths to achievement need to be grounded in a full understanding of the substantial amounts at stake.
SUMMARY FOR POLICYMAKERS
Success in upcoming climate negotiations will require a clear-eyed view of the relationship between emissions targets and equity goals. This paper uses the MIT Emissions Prediction and Policy Analysis (EPPA) model to estimate the welfare and financial implications of various distributional and emissions reduction outcomes. The results indicate that a target of reducing global emissions by 50% by 2050 while meeting equity targets is extremely ambitious, and would require large financial transfers from developed to developing countries.
International climate negotiations have produced a variety of emissions reduction goals. For example, the G8 has proposed reducing global emissions by 50% by 2050. At the same time, there is a general sense that developed countries should take a disproportionate share of the reduction burden, with goals of 70% to 80% reductions by 2050 expressed by a number of them, plus there are calls for positive incentives for mitigation action by developing nations and for protection from the indirect (e.g., terms-of-trade) effects of mitigation elsewhere.
To assess the compatibility of these environmental and equity goals, this paper uses the EPPA model to explore the mitigation effort and financial transfers that would be necessary, using a cap-and-trade system as an example. Burden sharing agreements are represented by initial allowance allocations and subsequent emissions trade. One output of the calculation is the size of the financial transfers that developed countries would have to make to compensate developing countries. Several burden sharing rules are assessed, including allocating the entire burden to developed countries, allocating burden based on specific equity goals for developing and developed countries, and allocating burden based on simple allocation rules implied by current proposals.
KEY FINDINGS & RECOMMENDATIONS
- The proposed target of a 50% global reduction below 2000 emissions level by 2050 is very ambitious. Absent near universal participation, such a goal is not achievable, because economic activity and emissions would shift to nations that do not sign the agreement. Even with all nations taking on commitments, this goal would require a complex web of financial transfers to simultaneously satisfy widely-discussed burden-sharing goals.
- Two interacting equity concerns would have to be dealt with in seeking the global emissions goal. First, incentives and compensation for developing country participation will be required. Second, since mitigation costs and compensation payments by developing countries will be substantial, they also will need to find an acceptable burden-sharing arrangement among themselves.
- Simple emissions reduction rules are incapable of dealing with the highly varying circumstances of different countries. For example, a 30-70 proposal (in which developing and developed nations reduce their emissions by 30% and 70%, respectively, by 2050) initially appears to be a generous offer from the developed countries. However, it turns out that it could result in net purchases of allowances by some developing countries from the developed countries, in effect partially compensating the richer ones for their mitigation and counteracting the intent of the Bali Action Plan. Other simple rules, such as distributing allowances on a per-capita basis or inversely related to GDP per capita, would shift costs toward richer countries but raise other difficulties. For some developing countries they produce large net benefits beyond costs related to mitigation. For others, they are even more costly than the terms of the 30-70 proposal.
- Successful climate negotiations will need to be grounded in a full understanding of the substantial amounts at stake. If developing countries are fully compensated for the costs of mitigation in the period to 2050, then the average welfare cost to developed countries is around 2% of GDP in 2020 (relative to reference level), rising to 10% in 2050. The implied financial transfers are large—over $400 billion per year in 2020 and rising to around $3 trillion in 2050. The United States’ share of these transfers is $200 billion in 2020, and over a trillion dollars in 2050.
- With less than full compensation the welfare burden on developing countries would rise, but the international financial transfers would remain of unprecedented scale. It is an extreme assumption that developing countries will demand complete compensation. If, as is likely, they are willing to bear some costs, then the welfare burden on the developing countries will be reduced. Also, the burden is lowered somewhat if compensation only covers direct mitigation costs and not other losses associated with the policy, as might come through terms-of-trade effects. In the process the required financial transfers are reduced as well, but they remain large.
The G8 countries have called for an aggressive global emissions goal, while previous climate agreements and the Bali Action Plan create an expectation of incentives and compensation for developing country participation. Unfortunately, the magnitude of the implied international financial transfers suggests that this combination of targets may have been chosen without sufficient regard for the difficulty of finding a mutually acceptable way to share the economic burden.
For more information about this publication please contact the Harvard Project on Climate Agreements Coordinator at 617-496-8054.
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