Download Social Value of Mitigation Action, an anchor for new forms of carbon

SocialValueofMitigationAction,ananchorfornewformsofcarbonpricing?
Etienne Espagne (CEPII), Jean-Charles Hourcade (Cired), Emilio La Rovere (UFRJ), Baptiste Perrissin-Fabert
(FranceStratégie),,AntoninPottier(EcoledesMines),PriyadarshiShukla(IIMA)
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AftertheParisAgreementafreshlookisneededabouttheroleofcarbonpricesinclimate
policies.Paragraph136oftheDecisionwhichnotestheimportanceofcarbonpricing,only
applies to “non-party entities” and is not binding upon Parties to the Convention. Carbon
prices will thus stay country-specific. This is in contrast with the idea that, in a “first-best”
world,carbonpricesshouldrepresentthesocialcostsofclimatechange(SCC)andbeequated
throughoutcountriesandsectorsmodulocompensatingtransfersforthelosers.
Defacto,theParisAgreementgivesapivotalroletoINDCsforaligningthe+2°Cobjectiveand
thesustainabledevelopmentgoals(SDGs).Carbonpriceswillbeoneofthepossibletoolsof
theirdeploymentbuttheirlevelwillbeconstrainedbythepaceatwhicheachcountrycan
embedthemintoreformsofitsfiscalsystemanditspublicpolicies.Thispacewilllikelynotbe
consistent with the urgency of the climate challenge and leave unsolved how to meet the
Article2oftheAgreementi.e.“makingfinanceflowsconsistentwithapathwaytowardslow
greenhousegasemissionsandclimate-resilientdevelopment».
Theusualresponsetothiscarbonpricegapliesincomplementarynonpricesignals.But,these
toolsentailtheriskofpoliticalarbitrarinessandeconomicinefficienciesleadingtopolitical
distrustofclimatepolicies.Thewayoutistogroundcomplementstocarbonpricesonthe
legitimacyoftheparagraph108oftheDecisionoftheParisAgreementwhich“recognizes
thesocial,economic,andenvironmentalvalueofmitigationactivitiesandtheirco-benefitsto
adaptation,health,andsustainabledevelopment”(hereafterSVMA).
ThenotionofSVMAresultsfromapoliticalprocesstriggeredaftertheCancun’scall(2010)for
“building a low carbon society … that ensures … equitable access to sustainable
development”1. This paradigm shift from climate-centric analysis forces economists to pay
moreattentiontosecond-bestsituationsandtotheco-benefits/costsofclimatemitigation
(Hourcade and Shukla, 2015). It more specifically re-opens the discussion about pricing
policies apt to align climate policies and SDGs: carbon taxes, prices from carbon markets,
internalcarbonpricesofprivateentities,notionalpricesinsectorialpublicpoliciesandprices
otherthancarbonprices(realestates,land,interestrates,currencyexchangerates).
However,thereisnogeneraltheoryofsecond-bestsituations(LipseyandLandcaster,1956)
andtheSVMAisnotawell-establishedconceptineconomicanalysis.Thisiswhythispaper
triesanddefinesitwhileclarifyingitslinkswithwell-establishedconceptslikethesocialcost
ofcarbon,theshadowpricesofcarbon,notionalandmarketcarbonprices.
1. Socialcostsofcarbonversusshadowpricesofcarbon
In economic policy debates confusion is sometimes created by the fact that some wellestablishedconceptsineconomicshaveotherconnotationsinthepolicyarena.Thismightbe
thecasefortheconceptofsocialcostofcarbon(SCC).Inthecommonparlance,itevokesthe
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th
SeetheObama-RoussefdeclarationonJune30 2015andtheLCS-RnetDeclarationJune2015http://lcsrnet.org/lcsrnet_meetings/2015/10/1489
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social and economic damages of emitting one ton of carbon. But this gives no ground for
mitigationpolicies(forexampleforsettingacarbonprice)becausethereareasmanydamages
as climate warming scenarios, hypotheses on the feedbacks on the ecosystems and views
abouttheadaptivecapacitiesofimpactedsocieties.Toavoidconfusion,itwouldbebetterto
makeadistinctionbetweentheSocialCostofClimateChange(SCCC)whichisthediscounting
valueofclimatechangedamagesalongagivenemissionsscenarioandtheSCC.
TheSCC,intheIAMsinceNordhaus(1994),isthetimeseriesofthecost,ateachpointintime,
ofavoidingtheemissionofonemoretonalonganoptimalresponsepathwaywhichultimately
equatestheSCCCandthediscountedvalueoftheSCCs.Thereferencepathwayisoptimalin
‘Ramsey’-likemodels(maximizationofasocialutilityfunctionoveragiventimeperiod)but
notnecessarilyinrecursivemodels(‘Solow’-likeornot).Thisdoesnotmakeadifferencefor
discussingtheSCCsifthereferencepathinrecursivemodelsisassumedtobe‘notmodifiable’
orthe‘bestreachableone’becauseofthetransactioncostsofreformpackages.
InthiscasethelinkbetweentheSCCandcarbonpricesisstraightforward:letusthuspicture,
ingraph1,aneconomyonaproductionfrontier𝐹# (Q,R)(i.e.thesetofmaximumproduction
ofacompositegoodQforagivenamountofemissionsreductionR.PointA,withnoemission
reductions,representsthecaseof‘climateskeptics’forwhichtheSCCiszero.Ifthesocial
welfare function is 𝑈# (Q,R) then point B maximizes social welfare. At this point, marginal
abatementcosts(theslopeof𝐹# (Q,R)isequaltomarginaldamages(theslopeof𝑈# (Q,R).
Both slopes are equal to α which represents the SCC, i.e. the loss of production and
consumptionofQcausedbyoneadditionalemissionreduction.
Difficulties around the value of the SCC have been extensively discussed around the Stern
report(2007).Thisvalueisfunctionofparametersliketheexpectedeconomicgrowthrate,
thepuretimepreference,therateoftechnicalprogressinlowcarbontechniques,theshape
of the damage function in function of the temperature levels and of the vulnerability of
impactedsocieties.Otherparameters,lesspresentinthedebate,alsomatter:theasymmetry
between the utility of a gain and of a loss of income (Ambrosi et al. 2009), the
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intragenerationalponderationofindividualsinthesocialwelfarefunctionandtheformsof
inter-generationalsolidarity(LecocqandHourcade,2012).
Because all these parameters can lead to infinite regresses of scientific and ethical
controversies (Espagne et al., 2015), one alternative option is to adopt a cost efficiency
analysis.Thiscomestocalculatetheshadowpriceofcarbon(ShPC)associatedwithaclimate
objective treated as a political constraint. In graph 1, this is the slope β of 𝐹# (Q,R) at its
crossingpointBwiththeline𝐸&°( (the2°Cobjective).Thisslopecanalsointerpretedasthe
SCCforacountrywithasocialwelfarefunction𝑈& (Q,R).Contrarytoacost-efficiencyanalysis
wheretheimplicitdamagecausedbytheemissionofoneadditionaltoofcarbonapproaches
infinity,βcanbeinterpretedofasthewillingnesstopayfor𝐸&°( andallowsfor“overshoot
scenarios” (Ambrosi et al 2003). Whatever the interpretation of β as a SCC or a SPC,
however,policymakersshouldimplementacarbonpriceequaltothisvalue.
2.SCCina‘2ndbestworld’:ausefulindicator,anincompleteguideforaction
Letusnowassume,ingraph2,thata)theeconomystandsatpointOon𝐹& (Q,R)strictlybelow
thepotentialtechnicalpossiblityfrontier𝐹# (Q,R),b)thisrealproductionfronteeris‘movable’
throughreformpolicieswhichcanleadtheeconomytoA,BorI,andthatCisthepointtobe
reachedtocomplywithitscontributiontotheParisAgreement’sobjectives.
ItispossibletocalculatetheSCCsforA,BorI.ButtheseSCCsareex-postmeasurementof
the welfare losses of decreasing emissions from a baseline resulting from policy packages
adoptedforamixofclimateandnon-climateobjectives(Koketal.,2008).Theydonotprovide
ex-ante guidance about the set of policy signals inciting the economy to locate itself on I
(closertoO)forexample.Moreprecisely,thinkingthatthepolicysignaltobringtheeconomy
fromBtoIisacarbonpriceequaltothedifferenceα − γoftheSCCsassociatedwiththese
twopoints,comestoignoretheexistenceofinterplaysbetweenmitigationanddevelopment
policiesandthatbifurcationstowardscarbonintensivedevelopmentpatternscanmakemore
costlythereturntolowcarbonpathways.
In this framework it is difficult to organize a negotiation process around the gains of
cooperationhelpingtheeconomytoreachthepointC.Thebestinterestofeachcountryis
indeed not to reveal the INDCs leading it from O to I because it would then negotiate
compensationsforthelossofcompositegoodI–Cwheras,startingfromlessambitiousINDCs
leadingittoBitcouldnegotiateforalossB–C.ThehighertheannouncedINDCs,thelesser
compensationsthecountrywillbelegitimatetoask.
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3.TheSVMAasuitableconceptfor2ndbesteconomies
Beyond legitimate caveats against the idea of policies yielding both a climate and a
developmentdividend,itmatterstounderlinethat,withoutthishypothesis,thereisnoroom
fordiscussing‘equitableaccesstolowcarbondevelopment’.Theverynotionofdevelopment
impliesachangeinthepaceanddirectionofthegrowthengine(theupwardmoveofthe
productionfrontierandtheshapeofthismove).Inthiscontext,thenotionof‘co-benefits’
commonly denotes the non-climate related dividends of GHGs mitigation. It encompasses
threedistinctcategories:
- thedirectjointproductsofavoidedGHGsemissions:a)loweradverseconsequences
oflocalairpollutiononhealthandonagriculturalproductivity,b)countries’energysecurity
andlowervulnerabilityoftheirtrade-balancetothevolatilityofoilpricesandc)worldsecurity
throughthedecreaseofenergytensions(IPCCWGIII,2014)andofclimateinducedmigration.
Graph3usesthesocialwelfarefunction𝑈) (Q,R)insteadof𝑈# (Q,R)whichattachesagreater
valuetomitigationactionsbyincorporatingtheirjointproducts.
- the acceleration of technical change in such a way that a new production frontier
𝐹) (Q,R)isgeneratedbya“Schumpeterian”innovationwave(Stern,2015).Strictosensu,this
isanetco-benefitifthelowcarbonbiaisintechnicalchangeyieldshigherdividendsthanthe
business as usual one, in terms of long term economic growth and inclusive development
(localresourcesefficiency,spatialdistributionofhumansettlements,accesstobasicenergy,
transportandhousinginfrastructures,lessenergyandmaterialintensivedemandpatterns).
- the indirect short and medium term macroeconomic and development benefits of
well conducted low carbon transition: a) benefits of narrowing the gap between the
propensitytosaveandthepropensitytoinvestthroughredirectingfinancialflowstowards
productive investments b) strengthening the industrial fabric of each country through
investinginlowcarbontechnologiesandlocalresourcesc)alleviatingpovertythroughhigher
growth,higheremploymentandhigherfurnitureofbasicneed
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With𝐹) (Q,R)and𝑈) (Q,R)theoptimumisnowsituatedonpointSwhichrepresentalevelof
socialwelfarenotonlyhigherthanObuthigherthantheinitialobjectiveB.Theassociated
SCCisδ.Butagainδrepresentstheoptimalcarbonpricetobeappliedifthetransitiontowards
Ssucceeds.The‘if’remindsthattheParisAgreementisareasonableprophecyofthefuture
andthattheissueishowtomakeitself-fulfilling.HerecomestheSVMA.
TheglobalSVMAisthedistance,insocialwelfareunitsgiven𝑈) (Q,R),betweenSandO.This
distanceisafunctionoftheslopeofOS(growthvariationassociatedwithonetonofavoided
emission)andofthetransformationofthemarginalutilityofQandRbetweenOandS(in
functionofthelevelofincomeandofthejointproductsofdecarbonization).
IfwedividetheglobalSVMAbytheamountofavoidedemissions(𝐸&°( − 𝐸+ )weobtaina
SVMAperton.Thislookslikeapriceofcarbon‘augmented’bytheincorporationofthecobenefitsofmitigation.Thisisimportantbutdoesnotchangethenatureofthecarbonpricing
problem if it comes to say that carbon prices should be higher than when considering the
climateexternalityonly.Thiswouldonlyresultinwideningthe‘carbonpricegap’.
Toovercomethisproblem,itmatterstocomebacktothefactthattheendpointSisunknown
ex ante because of a large set of uncertainties (technical change, growth impact of a new
innovation wave, governmental judgments on development priorities and on the political
acceptabilityofvariouspolicytools).Actually,totriggeracredibleself-fulfillingprophecy,the
SVMApertonofavoidedemissionshouldprovideananchortofundingmechanismshelping
tomaterialize,ex-ante,thesynergiesbetweendevelopmentandclimatepolicies,whilethe
carbonprices(augmentedornot)cometoreward,ex-post,lowcarbondecisionseveryyear.
Understood this way, the SVMA overcomes the baseline issue in the negotiation process.
Indeed, countries will not argue that their baseline will be located in B in the absence of
cooperationtomeet𝐸&°( .Wouldtheydoso,theywouldreceivelesssupportforatonof
avoidedemissionsincetheadditionalvalueofmitigationaction(indicatedbytheslopeofBS)
islowerthaniftheyaccepttotakeOasastartingpoint(slopeofOS>solpeofBS).
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Concludingremarksaboutthe‘gooduse’oftheSVMA
TheremainingquestioniswhetherthenotionofSVMAshouldremainarethoricalreference
leadingtopinpointthecarbonpricegaporcanprovideananchortohelpclimatepoliciesand
developmentpoliciesworkingsynergisticallyandtosetpull-backforcestohelpreorienting
soon infrastructure investments and avoiding bifurcations towards a high carbon intensive
developmentpathway.Complementarytocarbonpricesitsspecificcontributionshouldbe:
- Tosupportinstitutionalcooperativearrangementsapttoreducetransitioncostsand
transactioncostsofclimatepoliciesandmaximizetheircomplementaritywithotherSDGs,
includingthroughpositiveeffectsofreducingincomeinequalitiesandpoverty
- To hedge against the fragmentation of non pricing policies and climate finance
initiativeslaunchedbysucharrangementsandtheirpotentialarbitrarinessandinefficiency
- toreachhighlevelsovertheshorttermandtofacilitatethenarrowingofitsgapwith
implementablecarbonprices.
- to support the emergence and widespread use of financial devices to de-risk low
carbon investments, specifically on infrastructure, and to build a new class of low-carbon
assetstoattractmanycategoriesofsavers(bybackingfinancialproducts)
- to be more easily negotiable that carbon prices because financial devices
incorporating this value will bridge the funding gap which penalizes the deployment of
infrastructuresindevelopingeconomiesandtheirretroffitingindeveloppedcountries.
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