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A sectoral approach balancing global efficiency and equity June 2010

D é partement d ’É conomie. A sectoral approach balancing global efficiency and equity June 2010. Guy Meunier Jean-Pierre Ponssard Ecole Polytechnique. The empirical context. Copenhague showed the limitations of an approach based on uniform carbon price worldwide

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A sectoral approach balancing global efficiency and equity June 2010

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  1. Département d’Économie A sectoral approach balancingglobal efficiency and equity June 2010 Guy Meunier Jean-Pierre Ponssard Ecole Polytechnique

  2. The empiricalcontext • Copenhague showed the limitations of an approach based on uniform carbon price worldwide • Developping countries  intensity targets • Unilateral policies such as EU-ETS deliver little in terms of effectiveness • In principle, leakage • In practice, special treatments for sensitive sectors

  3. Agenda • A conceptual framework to structure a proposal: the Chilchilnisky controversy • Literature on sectoral approaches • The proposal • Next steps

  4. BLS applied touniform versus differentiatedcarbonprices Chichilnisky, G. and G. Heal (1994), Who should abate carbon emissions?: An international viewpoint." Economics Letters, 443-449. Sheeran, K.A. (2006), Who should abate carbon emissions? A note." Environmental and Resource Economics, 35, 89-98. Tirole, J. (2009), Politique climatique : une nouvelle architecture internationale. CAE. Godard, O. (2009), Quelle architecture internationale pour la politique climatique ?  Ecole Polytechnique, Paris.

  5. Preliminaries China MAC and WMUC MAC if WMUC MAC if WMUC 1 2 WMUC EU MAC

  6. Preliminaries

  7. BAU A Unique CO2 price with transfer B’ B Differentiated CO2 prices Sectoral approach C Preliminaries • Figure 4

  8. Literature on sectoralapproaches Center for Clean Air Policy (2010), Global Sectoral Study: Final Report. World Business Council for Sustainable Development (2009), A sectoral approach: Cement Sustainability Initiative. International Energy Agency (2009), How the energy sector can deliver on a climate agreement in Copenhagen. Special delivery excerpt of the World Energy Outlook 2009 for the Bangkok UNFCCC meeting." OECD/IEA, Paris, octobre. Baron, R., B. Buchner, and J. Ellis (2009), Sectoral Approaches and the Carbon Market." IEA/OECD paper for the Annex I Expert Group on the UNFCCC, OECD/IEA, Paris. Hamdi-Cherif, M., C. Guivarch, and P. Quirion (2009), Sectoral targets for developing countries: Combining Common but differentiated responsibilities with Meaningful participation". Working Paper CIRED.

  9. The proposal • For industrialized countries: cap and tradeat all times without free allocations • For emerging countries: intensitycommitmentsto alloweconomicgrowth • Carbon intensive sectorssubject to international trade: firmsabide to the local rulesin the countries theysell • Financial transfersfromindustrialized countries to developing countries in proportion to revenues collected to the permits

  10. The simulation Model • The framework • Tworegions : EU and China • Threesectors: Electricity, Cement and Steel • Static for the horizon 2015-2020 • Three scenarios to becompared to BAU • SectoralApproach • For EU: Cap and tradewithout free allocations, 30% transfer of revenues to China for NAMAs (electricity) • For China: NAMAs (electricity) and integration of Cement and Steel in the EU-ETS for exports, OBA for domestic production • Global Cap (first best) • EU-only • For EU: Cap and tradewith free allocations for Cement and Steel (OBA) • For China: BAU

  11. The model: multi-sectorstaticlineardemand, linear MAC Source: interviews from industry experts

  12. Abatementcosts c (u) = c° + g°(u – u°)2 c° , g°, u° industry and country dependent

  13. Comparison of scenarios • Sectoral approach • Set a carbon price for EU Emissions in elec in EU Emissions in steel and cement for consumption in EU Total emissions in EU  20% • Revenues in EU  transfers in elec in China • Total emissions worldwide • Global cap with identical total emissions

  14. CO2 Impact of the scenarios

  15. Equity issues for consumers

  16. Welfarecomparisons

  17. Financial flows Global Cap

  18. Financial flowsSectoralApproach

  19. Welfarecomparisons

  20. Comparingsectoralapproachwith EU-only and BTA • EU-only • EU-target at 20% • Free allocations (« capacity based » as output based) for sensitive sectors • Border tax adjustment • Leakage • Imports • Revenues for permits

  21. Competitiveness issues

  22. Double dividend

  23. Next Steps • A proposal which takes the constraints seriously • growth in emerging countries • competitiveness in industrialized countries • A proposal which identifies • the limited loss of efficiency relative to a first best option • The substantial gains in terms of equity • The elimination of the competitiveness issue • the double dividend associated with the elimination of the leakage issue • Who should make the next steps for implementation?

  24. A sectoralapproachbalancingglobal efficiency and equity Thankyou

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