How can China help reduce climate policy costs?

Carlo Carraro, Valentina Bosetti, Massimo Tavoni

01 October 2008

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In parallel to the growing scientific consensus regarding climate change, the climate challenge has become a public policy priority and now ranks high on the political agendas of many countries. No longer treated as just an environmental issue, climate change control is often discussed by heads of state, who gave it top priority in recent G8 meetings and who commissioned and helped disseminate dedicated reports such as the Stern Review (2006).

Policymakers will face a demanding task in the next few years if they are to reach a post-2012 international climate agreement. Designing an economically efficient agreement will make it easier. The current perception, mostly derived from the findings of the economic working group (WG III) of the IPCC fourth assessment report (2007) - as well as from the Stern Review - is that an effective climate policy1 is achievable at a limited economic penalty for society. The main message from the modelling work used to predict the economic implications of emission mitigation is that an effective climate policy would cost around 1% of Gross World Product (GWP hereafter), a figure rightly considered to be acceptable, given the risks of large damages from future global warming. However, the bill for a climate agreement might significantly outweigh that estimate if some countries postpone their participation.

The growing importance of developing countries

While the climate challenge is a policy priority, progress towards a comprehensive international agreement to curb greenhouse gases has been extremely slow. Many reasons are behind this logjam. Let us mention only two. On the one hand, climate change is a global challenge and therefore unilateral action by a subgroup of countries might bring about little result, especially if non-participating countries have a growing role in the global economy. On the other, there are substantial disparities in population lifestyles across different parts of the world, and the right to develop should not be put in danger.

Table 1 provides some quantitative information on the relevance of these two issues. At the Rio Conference in 1992, when the United Nations Framework Convention on Climate Change was established, China’s emissions were less than half those of the US. Five years later, when the Kyoto Protocol was signed, the ratio was still only 55%. However, the picture changed radically over the last decade. Today, China is the largest emitter in the world, with emissions 10% higher than those of the US. Recent projections into the future show a growing gap between the two countries (Blanford et al., 2008).

Table 1. Chinese-American emissions ratio

  Total emissions Per capita emissions
1992 0.48 0.10
1997 0.55 0.12
2007 1.13 0.26
2030 1.75 0.44

Looking at per capita figures offers a different perspective. An average Chinese citizen emitted 10% of an average US citizen in 1992. Despite its fast economic growth and stable population, China’s per capita emissions today are about one-quarter of the US’s. The difference is projected to persist in coming decades. These statistics, amongst other reasons, suggest that China and possibly other developing countries, even the fast-growing ones, would wait for developed countries to take action before joining an international climate coalition.

Most economic estimates of the cost of climate policy however – including those in IPCC FAR and the Stern Review – assume the full and immediate participation of all major world economies. That is, they compute the cost of climate policy in a “first-best” case, in which all countries participate in a cooperative effort to curb greenhouse gas emissions. What will really happen may be quite different. It is thus crucial to investigate the implications of relaxing the global cooperation assumption and analyse a more realistic situation in which most developing countries do not join an international treaty before 2035.

The costs of delayed participation

What is the cost of climate policy if developing countries do not join an international treaty before 2035? In Bosetti, Carraro and Tavoni (2008), we provide a detailed response to this question. Our analysis is based on results from the WITCH model, a hybrid climate-energy-economy model of the world economy (see Bosetti et al. 2007). Figure 1 summarises the results. If developing countries delay their participation to a global climate agreement by twenty years, the cost to the world economic system would be significant. If the long-term objective is the stabilisation of CO2 concentrations at 450 ppm, GWP losses would be 160% higher (from 1.3% to 3.4%) in 2030 and 77% higher in 2050 (from 3.2% to 5.6%). Only at the very end of the century would the costs be similar.

This significant gap is primarily driven by two factors. First, cheap abatement opportunities are more abundant in developing regions. Second, given the long lifetime of energy infrastructure, allowing developing regions to build capital over the next two decades without accounting for subsequent effective climate policies would result in a prolonged economic penalty.

Figure 1. GWP losses under two different participation scenarios, in 2030, 2050 and 2100

In net present value terms, the penalty arising from developing countries’ delayed action would be on the order of $25 trillion, with a final climate policy cost above 3% of GWP, significantly higher than the 1% that the IPCC uses as a reference, and probably too expensive even for currently committed countries.

Figure 1 confirms that the cost of climate policy is going to be much larger than predicted by the IPCC if developing countries delay their participation in a climate agreement. Therefore, as many regions as possible, particularly fast-growing ones like China, India, Brazil, and Russia, should be given incentives to join a post-2012 global climate policy agreement.

Fostering global cooperation

Here is one possible strategy. If developing regions are allowed to trade emissions reductions below their baseline, rather than below a binding target, through an efficient international carbon market, marginal abatement costs could be equalised and the extra cost of limiting mitigation efforts to a subset of developed countries would wane (Bosetti, Carraro and Tavoni, 2008). Global GWP losses would be very close to those if all countries participated immediately to a climate agreement. According to our model, the global loss in the case of full and immediate participation would be about 2% of GWP, twice the average value estimated by the IPCC.

Similarly, allowing reduced deforestation of tropical ecosystems to be used as carbon credit could help reduce the vast quantity of CO2 emissions going into the atmosphere (as well as providing important co-benefits such as the conservation of biodiversity).

In both cases, wealthy regions would commit to transferring significant amounts to developing regions, but that would still reduce their costs of abating greenhouse gas emissions. Technology or trade agreements might well complement such a scheme.

It is therefore clear than China can do a lot to reduce the cost of climate policy in the US and the EU. If China and the other major developing countries are allowed to enter an international carbon market even without a commitment to reduce their own greenhouse gas emissions below the business-as-usual value, the additional costs of developing countries’ delayed participation would fall. In fact, the total costs of climate policy would almost halve.

References

Blanford, G.J., Richels, R. and T.F Rutherford (2008), “Revised Emissions Growth Projections for China: Why Post-Kyoto Climate Policy Must Look East”, Harvard Working Paper, September 2008.

Bosetti, V., C. Carraro, E. Massetti and M. Tavoni (2007), “Optimal Energy Investment and R&D Strategies to Stabilize Atmospheric Greenhouse Gas Concentrations”, CEPR Discussion Paper 6549.

Bosetti, V., C. Carraro and M. Tavoni (2008) "Delayed Participation of Developing Countries to Climate Agreements: Should Action in the EU and US be Postponed?", CEPR Discussion Paper 6967.

IPCC (2007), IPCC Fourth Assessment Report, Working Group III. Cambridge University Press, Cambridge.

Stern, N. (2006). The Economics of Climate Change: the Stern Review. Cambridge University Press, Cambridge.

Footnotes

1 The many scientific uncertainties make it difficult to translate this statement into an exact threshold. It is often believed that the minimum goal for climate protection is the stabilisation of atmospheric CO2 concentrations at 450ppm (roughly 550ppm all GHGs included). This is the target we considered in the analysis.

 

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Topics:  Environment

Tags:  China, climate change, developing countries

Professor of Environmental Economics and Econometrics, University of Venice and CEPR Research Fellow

Associate Professor at the Department of Economics, Bocconi University

Director, Climate Change Economics unit at Euro-Mediterranean Center for Climate Change

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