Climate Policy

Costs of Reducing Greenhouse Gas Emissions in Brazil

The Brazilian government has announced volunteer targets to reduce greenhouse gas (GHG) emissions during the 2009 COP meeting in Copenhagen and reassured them in Cancun (2010) and Durban (2011). In this paper we estimate the economic impacts from alternative policies to achieve such targets, including actions to cut emissions from deforestation and agricultural production. We employ a dynamic-recursive general equilibrium model of the world economy. The main results show that deforestation emissions in Brazil can be reduced at very low costs, but the costs of cutting emissions from agricultural and energy use may reach 2.3% loss in GDP by 2020 if sector specific carbon taxes are applied. Those costs may be reduced to 1.5% under a carbon trading scheme. The negative impacts of carbon taxes on agricultural production indirectly reduce deforestation rates. However, directly cutting emissions from deforestation is the most cost-effective option, since it does not negatively affect agricultural production, which still expands on lower yield and underutilized pasture and secondary forest areas.

Economic Development under Climate Change

The papers in this special issue represent some of the most comprehensive analyses of the implications of climate change for developing countries undertaken to date. The papers employ a bottoms-up systems approach whereby the implications of climate change are evaluated using structural models of agriculture and infrastructure systems. The authors of the paper hail from multiple disciplines. This comprehensive, multi-disciplinary, structural approach is designed to allow for more robust insight into the potential implications of climate change. The approach also allows for experimentation with alternative policy options for achieving development objectives in the context of climate change.

Emissions Pricing to Stabilize Global Climate

In this chapter, we discuss projected greenhouse gas (GHG) emissions pricing paths that are potentially consistent with alternative targets for ultimately stabilizing the global climate system at the lowest economic cost and under alternative scenarios for country participation in pricing regimes. The pricing projections come from models that link simplified representations of the global climate system to models of the global economy, with varying degrees of detail on regional energy systems. There is considerable uncertainty surrounding future emissions prices, given that different models make very different assumptions about future emissions growth (in the absence of policy), the cost and availability of emissions-reducing technologies, and so on. Nonetheless, projections from the models still provide policymakers with some broad sense of the appropriate scale of (near-term and more distant) emissions prices that are consistent with alternative climate stabilization scenarios and how much these policies cost.

Summary

Emissions Trading in China: Progress and Prospects

To control rising energy use and CO₂ emissions, China×³s leadership has enacted energy and CO₂ intensity targets as part of the Twelfth Five-Year Plan (the Twelfth FYP, 2011–2015). Both to support achievement of these targets and to lay the foundation for a future national market-based climate policy, at the end of 2011, China×³s government selected seven areas to establish pilot emissions trading systems (ETS). In this paper, we provide a comprehensive overview of current status of China×³s seven ETS pilots. Pilots differ in the extent of sectoral coverage, the size threshold for qualifying installations, and other design features that reflect diverse settings and priorities. By comparing the development of the ETS pilots, we identify issues that have emerged in the design process, and outline important next steps for the development of a national ETS.

Energy caps: Alternative climate policy instruments for China?

Decoupling fossil energy demand from economic growth is crucial for China's sustainable development, especially for addressing severe local air pollution and global climate change. An absolute cap on coal or fossil fuel consumption has been proposed as a means to support the country's energy and climate policy objectives. We evaluate potential energy cap designs that differ in terms of target fuel, point of control, and national versus regional allowance trading using a global numerical general equilibrium model that separately represents 30 provinces in China. First, we simulate a coal cap and find that relative to a cap on all fossil fuels, it is significantly more costly and results in high localized welfare losses. Second, we compare fossil energy cap designs and find that a national cap on downstream fossil energy use with allowance trading across provinces is the most cost effective. Third, we find that a national fossil energy cap with trading is nearly as cost effective as a national CO₂ emissions trading system that penalizes energy use based on carbon content. As a fossil energy cap builds on existing institutions in China, it offers a viable intermediate step toward a full-fledged CO₂ emissions trading system.

Expectations for a New Climate Agreement

With the objective of stimulating timely and open discussion of the current attempt to formulate a new climate agreement—to be reached at the 21^st meeting of the Conference of Parties (COP-21) in Paris during November of 2015—analysis is conducted of the expected developments in the lead-up negotiations. Based on the assumption that the architecture of the agreement will likely involve voluntary pledges and ex-post review (akin to the Copenhagen Accord), the domestic policies and measures expected to underlie national negotiating positions are described. Applying a global economic model, the effect of these Nationally Determined Contributions (NDCs) on global greenhouse gas emissions is assessed. The analysis shows that an agreement likely achievable at COP-21 will succeed in a useful bending the curve of global emissions. The likely agreement will not, however, produce global emissions within the window of paths to 2050 that are consistent with frequently proposed climate goals, raising questions about follow-up steps in the development of a climate regime.

Fiscal consolidation and climate policy: An overlapping generations perspective

This paper examines the distributional and efficiency impacts of public debt consolidation financed through a carbon tax employing a dynamic general-equilibrium model with overlapping generations of the U.S. economy. The numerical model features government taxes and spending and a multi-sectoral production structure including intermediate production, specific detail on the energy sector both in terms of primary energy carriers and energy-intensive industries, and sector- and fuel-specific carbon inputs. In contrast to revenue-neutral carbon tax swaps, using the carbon revenue for deficit reduction implies a relaxation of future public budgets as debt repayment results in lower future interest obligations.While intergenerational welfare impacts depend importantly on what tax recycling instrument is used, we find that combining public debt consolidation with a carbon policy entails the possibility of sustained welfare gains for future generations. If social discount rates are sufficiently low or if social preferences exhibit a large aversion with respect to intergenerational inequality, combining fiscal consolidation and climate policy may offer the chance for societal gains even without considering potential benefits from averted climate change.

Implications of Climate Science for Policy

Climate change presents the greatest challenge ever faced by our domestic and international institutions, and a great deal of the difficulty lies in the science of the issue. Because human influence on global climate differs in important ways from other environmental threats these peculiarities set the context for discussion of what can be done to reduce greenhouse gas emissions and to adapt to change that cannot be avoided. Following a brief summary of current understanding of how Earth’s climate works, five ways are presented by which the science of climate impinges on attempts to construct a policy response.

Integrated Economic and Climate Projections for Impact Assessment

We designed scenarios for impact assessment that explicitly address policy choices and uncertainty in climate response. Economic projections and the resulting greenhouse gas emissions for the “no climate policy” scenario and two stabilization scenarios: at 4.5 W/m2 and 3.7 W/m2 by 2100 are provided. They can be used for a broader climate impact assessment for the US and other regions, with the goal of making it possible to provide a more consistent picture of climate impacts, and how those impacts depend on uncertainty in climate system response and policy choices. The long-term risks, beyond 2050, of climate change can be strongly influenced by policy choices. In the nearer term, the climate we will observe is hard to influence with policy, and what we actually see will be strongly influenced by natural variability and the earth system response to existing greenhouse gases. In the end, the nature of the system is that a strong effect of policy, especially directed toward long-lived GHGs, will lag by 30 to 40 years its implementation.

Interprovincial Migration and the Stringency of Energy Policy in China

Interprovincial migration flows involve substantial relocation of people and productive activity, with implications for regional energy use and greenhouse gas emissions. In China, these flows are not explicitly considered when setting energy and environmental targets for provinces, and their potential impact on the effectiveness of policy alternatives is ignored. We analyze how migration affects outcomes under energy intensity targets and energy caps. While both policies are part of the nation’s Twelfth Five Year Plan (2011–2015) and imposed at the provincial level, only the intensity targets are binding at present. We estimate a migration model, integrate it into a general equilibrium model that resolves each province in China, and simulate the effect of migration on energy use and economic activity. We find that although both types of policies are affected by uncertain migration flows, energy intensity targets (energy use indexed to economic output) are more robust than absolute caps. They are also more cost-effective, placing less burden on the relatively clean in-migration provinces. Our findings also underscore the value of moving from provincial targets to an integrated national emissions trading system, given that the choice of abatement strategies will adjust endogenously to labor relocation.

MIT Global Change

Climate Policy

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