After Durban: What is the Politically Sustainable Path of Targets for Greenhouse Gas Emissions?

1. After Durban:What is the Politically Sustainable Pathof Targets for Greenhouse Gas Emissions? Jeffrey Frankel Harpel Professor, Harvard Kennedy School, March 27, 2012

2. The Question • At Durban (Dec. 2012), developing countries essentially agreed at last to join the same GHG emissions control regime as industrialized countries: • A “non-binding agreement to reach an agreement” by 2015 bringing all countries under the same legal regime by 2020, • thus replacing the Berlin Mandate (1995). • But they still refuse to sacrifice their economic development -- as understandable as ever. • The question: how to set emission targets so as to take proper account of country differences, esp. income.

3. Sustainable cooperation:Need to bridge • the gap between rich countries & poor, • the gap between environmental aspirations & economic costs that people are willing to pay, • the gap between what leaders say, &what commitments are enforceable/credible.

4. There are grounds for hope that the Durban climate regime will follow Kyoto, but fix it • Features of the Kyoto Protocol worth building on -- • Politics: Quantitative limits maximize national sovereignty • Economics: Market mechanisms, esp. international permit trading • Thus (2001)“You’re Getting Warmer: The Most Feasible Path for Addressing Global Climate Change Does Run Through Kyoto.” • What was sorely missing from Kyoto: • Participation by US, China, & other developing countries • A mechanism for setting targets further into the future, past 2012 • Any reason to expect compliance.

5. Progress • Most countries (>80) responded to the CopenhagenAccord in 2010 by submitting plans for reducing emissions. • By the time of Cancun, 21 countries had associated themselves with specific quantitative targets • counting the EU27 as one • and including 7 big non-Annex-I countries. • Of course some, like China or US, are vague • about seriousness of commitment. • Also India & China’s 2020 target ≈ BAU (Business as Usual). • But that is not a problem. It is what we have proposed all along.

6. My Proposal: formulas for pragmatic targets, based on what emission paths are sustainable politically: • unlike other approaches based purely on: • Science (concentration goals), • Ethics (equal emission rights per capita), • or Economics (cost-benefit optimization). • Why the political approach? • Countries will not accept burdens they view as unfair. • Above certain thresholds for economic costs, they will drop out.

7. “An Elaborated Proposal For Global Climate Policy Architecture: Specific Formulas and Emission Targets for All Countries in All Decades” (2009) suggested a framework of formulas that produce precise numerical targets for CO2 emissions in all regions for the rest of the century, subject to political constraints: No country suffers loss (PDV) > Y=1% GDP, by signing up ex ante, nor suffers a loss >X=5% GDP, in any one period, by abiding ex post.

8. Maximizing the credibility of agreement,for any given environmental goal Credibility of an agreement, Vs. probability that it will un- ravel because (e.g.) some key players find that complying imposes huge economic costs, relative to dropping out. Frankel (2009) Bosetti & F (UNDP, 2011) • Bosetti & Frankel (REEP) • • Some proposals • 450 ppm | 350 ppm | 500 ppm | Aggressiveness of targeted cut in CO2 concentrations by 2100

9. Proposal Stage 2:When the time comes for developing country cuts, targets are determined by a formula incorporating 3 elements, designed so each is asked only to take actions analogous to those already taken by others: • Stage 1: • Advanced countries commit to the targets that their leaders have already announced for 2020. • Others commit immediately not to exceed BAU. • a Progressive Reduction Factor, • a Latecomer Catch-up Factor, and • a Gradual Equalization Factor.

10. The three factors in the formulas • Progressive Reduction Factor: • For each 1% difference in income/cap => target is γ% greater emissions abatement from BAU. • Latecomer Catch-up Factor: • Gradually close the gap between the latecomer’s starting point & its 1990 emission levels at λ per year. (Goal: avoid rewarding latecomers for ramping up emissions). • Baseline perhaps now moved from 1990 to 2005. • Gradual Equalization Factor: • In the long run, rich & poor countries’ targets converge in emissions per capita at δ per year.(Goal: equity)

11. Where do the parameters come from? • They would be negotiated. • But a good start is to use parameters implicit in targets that have already been agreed. • The degree of progressivity in the PRF can be estimated from observed pattern • in allocations among countries already agreed (γ=.14). • We estimated Latecomer Catch-up parameter from the speed with which US targets close the gap:current vs. 1990 emission levels • in Lieberman-Warner(2008) & Waxman-Markey bills(2009) => λ =.3 per 5-yr. period. • Initially we set speed of Gradual Equalization δ=.1, per 5-yr. budget period(which comes to dominate per capita targets toward the end of the century).

12. The targeted reductions from BAU agreed to at Kyoto in 1997 were progressive with respect to income. Cuts ↑ γ =.14 Incomes → This is how we set the parameter in the Progressive Reductions Factor

13. The resultant paths for emissions targets, permit trading, the price of carbon, GDP costs, & environmental effects are estimated by means of the WITCH model of FEEM, Milan, co-authored & applied by Valentina Bosetti.

14. ◙ In 2009 version, CO2 concentrations level off at 500 ppm in the latter part of the century. ◙ Constraints are satisfied: -- No country in any one period suffers a loss as large as 5% of GDP by participating. -- Present Discounted Value of loss < 1% GDP. Global peak date ≈ 2035

15. The last published paper(REEP) co-authored with ValentinaBosetti was an attempt to see if we could hit CO2 concentrations = 450 ppm • by assuming more aggressive parameters in the formulas.

16. Latest Bosetti-Frankel study (2011) • updates all the estimates • to reflect recent developments in the economy, environment, & negotiations, • particularly the Copenhagen-Cancun country targets, • and to reflect new technologies, including • Wind, separate from solar • Carbon Capture & Storage (CCS) for gas • Bio-energy (BE) with CCS in most runs . • and again tries to attain more aggressive targets. • “A Politically Feasible Architecture for Global Climate Policy: Specific Formulas and Emission Targets to Build on Copenhagen & Cancun” • with Bosetti • for the UN.

17. 2011 EU27 + 20 other countries

18. 2011 Progressivity in the Cancun numberssetting “hot air” to 0 for 6 FSU countries The implicit progressivity coefficient is almost exactly the same as the one we had been using: .13 ≈ .14 !=> external validation of the political economy of approach Cuts ↑ a a γ =.13 t=3.9 R2=.44 Regression line Emissions targets for 2020 expressed vs. BAU (WITCH model)

19. EUROPE = Old Europe + New Europe US = The United States KOSAU = Korea & S. Africa & Australia (3 coal-users) CAJAZ = Canada, Japan & New Zealand TE = Russia & other Transition Economies MENA = Middle East & North Africa SSA = Sub-Saharan Africa India now treated separately SASIA= the rest of South Asia CHINA = PRC EASIA = Smaller countries of East Asia LAC = Latin America & the Caribbean Our 12 regions:

20. Figure 2: Global emission targetsresulting from the formulas & parametersunder the 500 ppm goal Using Cancun targets, near-term cuts are bigger than in our earlier work.

21. Fig.3: Targets & emissions by OECD countriesunder the 500 ppm goal Predicted actual emissions exceed caps, by permit purchases. }

22. Fig.4: Targets & emissions, developing countries under the 500 ppm goal } Predicted actual emissions fall short of caps, by permit sales.

23. Figure 8: Effect on energy prices, under 500 ppm goal Carbon price climbs steeply in 2nd half of century,but < earlier estimates, presumably due to new technologies.

24. Figure 5: Global economic costs (% of income) 500 ppm goal (without BE-CCS) Global cost < 1% of income Economic losses Contemporaneousvalue Discounted at 5%

25. Economic cost to each country/region (Net Present Value of income losses) USA EU KoSAuCaJaZ TE MENA SSA SAsia China EAsiaLAm India0.8%0.4% 0.9% 0.7% 1.2% 1.2% -0.2% 0.1% 1.2% 0.9% 0.7% 0.5% • Regional Cost measured with respect to baseline (no global climate policy) • Regional Cost measured with respect to case where individual country free rides, but coalition continues. USA EU KoSAu CaJaZ TE MENA SSA SAsia China EAsia LAm India0.7% 0.3% 0.7% 0.9% 1.6% 3.1% -0.2% -0.3% 1.2% 0.5% 0.8% 0.2% Cost is particularly high to oil producers – even if they drop out. But it is almost down to 1% even for them.

26. Figure 7a: Economic losses of each region,relative to dropping out alone(% of income)under 500 ppm goal, 2010-2045 Costs stay under 2% of income during the 1st half of the century.

27. Figure 7b: Economic losses of each region, relative to dropping out alone(% of income)under 500 ppm goal, 2050-2090 For every country in every year, costs stay under 5% of income.

28. Figure 11: Path of concentrations hits the 500 ppm CO2 goal First environmental goal is achieved

29. Figure 12: Rise in Temperatureunder the 500 ppm CO2 goal 3°C vs. 4° C under BAU

30. Summary • Our framework allocates emission targets across countries in such a way that every country feels it is doing its fair share: • corresponding to what others have done before it, • taking due account of differences in income, • and avoiding that any country will bear a cost above threshold. • Specifically, every country expects cost < 5% GDP in every year, • and PDV of costs of participating (almost) < 1% of GDP. • Otherwise, announcements of distant future goals would not be credible, will not have the desired effects. • This framework—in providing for a decade-by-decade sequence of emission targets, each determined on the basis of a few principles and formulas— • is flexible enough to accommodate changes in circumstances during the century, by changes in the formula parameters • as more is learned about climate, economic growth, & technology.

31. Most relevant references by the author • "Sustainable Cooperation in Global Climate Policy: Specific Formulas and Emission Targets to Build on Copenhagen and Cancun," 2011, with Valentina Bosetti. HPICADiscussion PaperNo.46; FEEMWorking Paper 66.Background study forHuman Development Report 2011, UNDP. • "How to Agree EmissionTargets at Durban,"withBosetti, VoxEU, Nov.28, 2011.  • "Politically Feasible Emission Target Formulas to Attain 460 ppm CO2 Concentrations," with V.Bosetti; Review of Environmental Economics and Policy , Winter 2011-12;  HKS RWP 11-016. From HPICA Disc.Paper 09-30. • "An Elaborated Proposal for Global Climate Policy Architecture: Specific Formulas and Emission Targets for All Countries in All Decades,”  2009, inPost-Kyoto International Climate Policy, edited by Joe Aldy & Rob Stavins, Chapter 2, (Cambridge U. Press).  • “Formulas for Quantitative Emission Targets,” in Architectures for Agreement: Addressing Global Climate Change in the Post Kyoto World, Joe Aldy & Rob Stavins, eds., Cambridge University Press, 2007. • "You're Getting Warmer:  The Most Feasible Path for Addressing Global Climate Change Does Run Through Kyoto," FEEM, Milan, 2001.  In Trade and Environment: Theory and Policy in the Context of EU Enlargement and Transition Economies, J.Maxwell & R.Reuveny, eds. (Edward Elgar , UK), 2005. • "Greenhouse Gas Emissions," Policy Brief no. 52, The Brookings Institution,1999.

32. Appendices • 1) Trying to hit more aggressive targets • 2) Is it economics? • 3) Extensions for future work:Uncertainty

33. 1) Bosetti-Frankel in REEP • See if we can hit concentrations = 450 ppm • Assumes EU target in 2015-2020 is 30 % below 1990 levels, rather than 20 %. • Developing country starting dates moved up. • Parameters in LCF & GEF tightened.

34. Bottom line • The best we can do is attain 460 ppm • Even then, we had to loosen our political/economic constraints: • We had to raise the threshold of costs above which a country drops out, as high as Y =3.4% of income in PDV terms, • and X =12 % in the worst budget period.

35. Target allocations to hit goal of 460 ppmsource: Bosetti & Frankel(Nov. 2009) Figure 2: Actual Emission per capita throughout the century, for 11 regions

36. Figure 3: Assigned targets & actual emissions for industrialized countries, aggregate 460 ppm (Note: Predicted actual emissions exceed caps by permit purchase amounts.)

37. Figure 4: Assigned targets & actual emissions for poor countries, aggregate 460 ppm (Note: Predicted actual emissions fall below caps by permit sales amounts)

38. Figure 5: Assigned targets & actual emissions for all countries, aggregate Goal: 460 ppm concentration of CO2 in year 2100

39. 7 a) 2010- 2045 Figure 7: Income Losses by Region and Period over the Century (460 ppm) 7 b) 2050- 2100

40. Figure 8: Global Income Loss-- by Budget Period,2010-2100, andPDV (discounted to 2005)

41. Figure 9:Losses by Region -- PDV (discounted to 2005 at 5% discount rate), 2010-2100

42. Figure 10: CO2 concentrationsto achieve year-2100 goal of 460 ppm

43. Figure 11: Rise in temperature under proposed targets (460ppm) vs. BAU Even though the 460 ppm target is achieved by mid-century, the pay-off in further temperature moderation, relative to 500 ppm, is not large. There are diminishing returns to CO2 abatement in two senses: The marginal cost of abatement rises in dollar terms, and the marginal cost of temperature moderation rises in terms of CO2.

44. Figure A1. Choosing country targets to minimize threshold for PDV country costs loses the simplicity of a common formula for all, (green triangles)without much gain in reducing PDV of global losses

45. Figure A2. Varying the developing country start dates tightens or loosens the CO2 concentration objective(blue diamonds)

46. Conclusions • Some may conclude that the goals of 380 or 450 ppm in CO2 concentrations are not attainable in practice, • and that our earlier proposal for 500 ppmis the better plan (Frankel, 2009). • We take no position on the best environmental goal. • Rather, we submit that, whatever the goal, our formulas will give targets that are more practical economically and politically than approaches that have been proposed by others.

47. Appendix 2:“Is it economics?” • Define economics as maximization of objectives subject to constraints. • That applies not just to private agents maximizing expected utility subject to budget constraints, • but also to how policy-makers can maximize objectives subject to political constraints. • Not the same as what other climate modelers do: • cost-benefit analysis (Integrated Assessment models), • or minimizing economic costs subject to the constraint of attaining a given environmental goal.

48. Appendix 3: Uncertainty • The next phase of our research allows for uncertainty • in baseline economic growth • In carbon-saving technological progress • In environmental goals that the politics support

49. Two separate motivations to allow for uncertainty • (1) Some readers don’t believe cost estimates • from WITCH or other models • saying they are too high • or too low. • Allowing for true year-2050 parameters that differ from current assumptions • readers can see how much difference it makes. • Lesson: Just get started ! • Decade-by-decade political sustainability constrains numerical target choices far more than discount rate calculations

50. Two separate motivations to allow for uncertainty, continued • (2) The political sustainability constraint that requires loss X < 5% GDP, for every country in every period, becomes harder to satisfy. • Requires using the flexibility that is built in to our target-formulas framework: • Negotiators update parameters periodically, • in line with developments • Express within-decade targets as indexed to GDP • perhaps proportionately (“intensity targets”) • Perhaps allow “escapeclauses” if cost of carbon too high or low