Download Tradable Permits in Greenhouse Gas Emissions

Regulation Against Global
Warming in an Unequal World
Sylvestre Gaudin Hultberg
The Issue : Global Warming:
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Evidence:
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Earth 1°F warmer than 100 years ago
4 warmest years of 20th century in the 90’s
Temperature anticipated to increase 2-6 °F more
in next 100 years
Small change in climate makes a big difference
Scientists agree on the source of Global
Warming: Greenhouse Gases (GHG) and reduced
carbon sequestration – All human induced
Greenhouse Gases
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Carbon Dioxide
2.20%
Methane
6.50%
Nitrous oxide 9.90%
CFC synthetics
Ozone
Water vapor
CO2
CH4
NO2
HFCs, PFCs,
and SF6
81.40%
Sources of Increased GHG
Concentrations
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Industrial: 77%
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Developing Countries produce less than 1/3 of
industrial CO2, 1/5 excluding China
Land use changes: 25%
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Developing Countries are virtually responsible for
this type of GHG emission
Combined effect of reducing sequestration
Per Capita Emissions:
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Per capita emissions in the US =
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Twice the per capita emissions in Europe
19 times the per capita emissions in Africa
23 times the per capita emissions in India
US emits 25% of total GHGs
But the world is changing…
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Share of LDCs is increasing rapidly
How Much Do We Know?
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Effect of global warming could be
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Do we want to run the risk?
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Catastrophic
Mild or even positive
Do we care about future generations?
How much do we care about today?
How valuable is what we would give up?
Who is “we”?
To reduce the risk we need to:
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Reduce human induced GHG emissions
on a global scale
Protect and/or restore carbon “sinks”
But how?
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Economists like to use markets to restore
price incentives
The Economics of Global
Warming
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Global negative externality:
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When emitting GHG, polluters do not take account
of the cost of their actions on Society – We need
to put a price on the pollution!
Graphical analysis with electricity producers:
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Fossil fuel producers produce too much
Alternative Fuels producers produce too little
In a world of certainty, we can internalize the
costs:
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less “dirty” electricity and more “clean” electricity
Market Based Mechanisms
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A tax per unit of GHG emission:
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Optimal Pigouvian Tax: Tax = MEC
Producers face MSC and produce Qe
Producers abate until MCA=MBA (the tax)
Distribution of tradable permits
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Optimal quantity is set so that Qe is produced
Firms have different costs of abatement
Costs of achieving the target are minimized
Price of the permits = MEC
The worse kind of Externality
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Intertemporal
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Global
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Future generations are affected
The whole world is affected
Uncertain
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Both costs and benefits are highly uncertain
Taxes Versus Permits
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Equivalent in a world of certainty
But costs and benefits of abatement
are highly uncertain
Taxes Vs Permits Under
Uncertainty
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Taxes fix price and
allow firms to adjust
abatement so that
MCA=MBA. The
level of pollution
cannot be controlled
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Risk is imposed on
the environment
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Permits fix the
emission target and
allow price of GHG
emissions to vary.
The price of permits
cannot be controlled
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Risk is imposed on
the regulated firms
Which approach seems preferable if
we think that the environmental risk
is high because of potential
catastrophic consequences?
Which approach seems preferable if
we live in a developing country and
present consequences on costs and
production may be catastrophic ?
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Discount rate issue
Choices Made in Kyoto, 12/97
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Parties of the UNFCCC:
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Annex I countries: Industrialized countries plus Transition
economies
LDCs not in Annex I
Set Emission target for Annex I
countries:
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Chosen rule for distribution: grand-fathering
On average 5.2% less than 1990 emission levels – First
budget period 2008-2012 – 6 GHG included
Carbon sequestration activities offset emissions
Market Mechanisms to Achieve
the Targets
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IET – International Emissions trading
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JI – Joint Implementation mechanism
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Participating Annex I countries only
Participating Annex I countries/firms only
CDM – Clean Development Mechanism
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Annex I countries/firms with projects in LDCs
Permits
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Allowances in ERUs (Emission Reduction
Units)
Credits from JI or CDM projects in CERs
(Certified Emission Reductions)
Different prices for ERUs and CERs
Carbon sequestration activities increase
allowances: CTO (Certified Tradable Offsets)
Equity Considerations
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North North Trade
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The “French” view (Ministry of Equipment)
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Efficiency is attained with tradable permits but
benefits USA with highest emission per head and
per $ GDP
penalizes France who has significantly lower
rates of emission
Transition Economies
Equity Considerations
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North-South Trade
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View that a per-capita allocation of GHG
allowances would be more equitable
Understanding that share of non-industrialized
countries in costs is close to zero – could be a net
gain -> equitable
LDCs cannot participate in selling CERs even if
they contribute (incentive to join)
Poorest countries cannot afford to join – limits to
growth.
Equity Considerations – N/S
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Different stage of development
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Different preferences
Different marginal utility of income
Different personal discount rates
Different experiences with markets
On the rising part of the Environmental Kuznets
curve
Value of ERUs will impact the value of the CERs
Other issues: Transaction costs? Market power?
Equity Considerations S/S
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What countries will first benefit
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Countries with high reduction potential
Countries with pre-existing FDI regulation
Countries with least transaction costs and best
monitoring
Poorest countries score badly…
Corruption?
The future
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Participation of developing countries is essential
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Need to control at least 55% of all emissions
Need a closed market to avoid leakages and free riding
Moving later to per-capita targets could increase
equity both N/N and N/S and encourage LDCs
participation
Enforcement clauses need to be strengthened
Monitoring and accounting needs to be improved
The CEM offers opportunity to lead LDCs onto a
sustainable development path.