14 th october 2009 climate policy given political constraints stephen stretton research associate...
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14th October 2009
Climate Policy given
Political ConstraintsStephen StrettonResearch AssociateCambridge Centre for Climate Change Mitigation Research (4CMR)Department of Land Economy http://www.4cmr.org
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1: Why?2: Political Constraints
3: Carbon Pricing4: Towards a Solution
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1: Why?
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Part 1: Why?
• Effects of Climate Change• Why? Committed Temperature Rises• Net Costs of Tackling Climate
Change
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Effects of Climate Change
Source: Adapted from Warren, R (2006)
(Present Day) – Some effects already seen
Oceans damaged
Greenland ice melts (raising sea levels eventually by 7m)
Amazon rainforest?Increases in
extreme weather (e.g. hurricanes)Agricultural yields fall
Tropical diseases spread
Hundreds of millions at risk from hunger & drought
CO2 released
from forests and
Soils
Methane released from peat
bogs & oceans?
Desertification of large parts of Earth’s surface
World ecosystems cannot adapt
Positive Feedback: Warming causes further release of greenhouse gases
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Why?
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World Income Under Different Stabilisation Scenarios
-
50
100
150
200
250
300
350
400
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
Date
Gro
ss W
orld
Pro
duct
(U
S$2
000)
Baseline450ppmCO2only (c.550CO2e)500ppmCO2only (c.600CO2e)550ppmCO2only (c.650CO2e)
Net Costs of Mitigation are Small
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Part 1: Conclusions
• Climate change is a massive problem; requiring huge investment
• But it can be solved at low net cost• Very strong action to decarbonise
the economy over two decades is required immediately if we wish to prevent a large risk of massive damage to natural and physical capital
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2: Political Constraints
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Part 2: Political Constraints
• Tragedy of the Commons• Logic of Collective Action• Dual Causation?• Key Actors• Incentive v Wealth Effect• Tragedy of the Commons (2)• An ‘Artificial’ Tragedy?
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‘The Tragedy of the Commons’
• Incentives of individual actors considered separately differ from collectively rational solution
• Where a common resource is involved (e.g. the global atmosphere) this is often referred to as a ‘Tragedy of the Commons’– The cost of each individual’s pollution is shared over the
future– Incentive to ‘Free Ride’
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Logic of Collective Action
• “Tyranny of the Concentrated Interests”– Take a pragmatic approach: concentrated interests can
be harnessed for the interests of the climate
• Concentrated Interests:– Fossil Fuel Owners – Alternative Technologies: Renewables, Nuclear, Carbon
Capture & Storage – Reinsurance companies– Large nation-states (e.g. China)– Trading blocs – Clubs of countries– Institutions
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Dual Causation?
• Economic Structures depend on Government Policy and Government Policy depends on Economic Structures.
Government Policy
Structure of the Economy
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Key Actors
• Individuals/Voters? • Nation States? • Resource Owners?• Industry?
Can climate policy be framed in a way that is positive for these agents?
(Without making things too complicated)
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The Two Effects of Policy
1. Incentive Effect – higher prices encourage behaviour and technological change
2. Endowment (Wealth) Effect – change in value of assets
N.B.: the agents that might suffer the economic loss from strong climate policy (a change in endowment/wealth) are not necessarily the same ones that would be charged the tax or asked to buy permits. The economic incidence of a tax will generally fall on factors of production, namely: labour and owners of land, resources and already-existing capital goods, and differs from the ‘paper incidence’.
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‘The Tragedy of the Commons’ (2)
• I’ll argue here that there are in fact two tragedies:– Firstly, if it is costly for countries to reduce their
greenhouse gas emissions, then there is a ‘natural’ tragedy
– Secondly, there may be an ‘artificial’ tragedy; this is associated with the structure of the institutions we use to solve the problem
• I’ll argue that the ‘artificial’ tragedy is more significant than the ‘natural’ tragedy
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An ‘Artificial Tragedy’?Implications for Policy
• Current international agreements are based on flexibly-determined-quantitative targets.
• Under emissions trading, rights to emit carbon have a value
• In original negotiations, countries may seek to negotiate more value to their countries: i.e. more permits and therefore fewer reductions.
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Part 2: Conclusions
• Global policy suggestions need to take account of the interests and incentives of smaller scale actors (e.g. nation states)
• Structure matters!
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Part 3: Carbon Pricing
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Part 3: Carbon Pricing
• Definitions• Upstream v Downstream • What does a carbon price do?• Carbon taxes as fiscal instruments• How High?• Taxes and Cap-and-trade• Taxes versus Cap-and-trade• Conclusions
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Definitions
• An energy tax is a monetary amount charged by the government on the extraction, importation or use of fossil fuels.
• A carbon tax is an energy tax levied according to the fossil fuel’s carbon content
• A carbon price is a carbon tax or equivalent price for marketable permits.
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‘Upstream’ or ‘Downstream’?
C
C O
O
C O
O
C O
O
C
C
C C O
O
‘Upstream’ ‘Downstream’
£ € $
Fossil Fuels CO2 Emissions
£ € $
It is administratively simpler to cover all sectors with an ‘upstream’ carbon price
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What does a Carbon Price Do?
1.Reduce Demand
2.Encourage Alternatives
3.Raise Revenue £
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Price Elasticity and Tax Effectiveness
Emissions less sensitive to Price(Price Inelastic)
Emissions more sensitive to Price(Price Elastic)
Effectiveness of Carbon tax as climate policy
Low High
Effectiveness of Carbon tax as a tax
High Low
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Oil Price Fluctuations
Equivalent to $200/tCO2
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How High Does The Carbon Price Need To Be?
• Coal with Carbon Capture and Storage– $85-130/tCO2 for new demonstration plants
– $40-60/tCO2 in 2030 for commercialized plants (Naucler et al. 2008; €1=$1.4)
• Concentrated Solar Power– Carbon price needed: $115/tCO2 (Staley et al., 2009)
• Air Capture – Capture and Storage of Carbon Dioxide from Thin Air
– Carbon price needed: at least $140/tCO2 (Keith et al., 2006)
• $200/tCO2?
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UK Money:Effects of £100/tCO2
• 4p/kWh on gas electricity
• 10p/kWh on coal electricity
• 23p/litre on petrol
• Raise £60bn/yr initially*
• *£1000 citizens income or replace VAT*this will fall as the policy reduces emissions
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Taxes versus Quotas
1.Administrative Burden (Upstream v Downstream?)
2.Volatility – Investment?3.Immediacy?4.Do we know our budget?5.Ability to overachieve?6.Incentives for Countries to
Participate Globally?
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Part 3: Conclusions
• A price of >$200/tCO2 would be effective at reducing emissions in the long run, encouraging alternative sources of energy
• Upstream taxes have important advantages
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Part 4: Towards A Solution
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Part 4: Towards A Solution
• Governing the Commons• Global Solutions• Sub-global Solutions• Conclusions
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“Governing The Commons”Design Principles for Enduring Common-Pool-
Resource Institutions:
1. Clearly defined boundaries of common property resource
2. Congruence between appropriation/provision rules and local conditions
3. Collective choice arrangements – agents can participate in modifying operational rules
4. Monitoring5. Graduated sanctions6. Conflict-resolution mechanisms7. Rights to organize8. “Nested enterprises”
Source: Elinor Ostrom, “Governing the Commons”
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Global Solutions
• Global targets?• Global level institutions: forests
stocks, finance etc.• Measurement, legal structures,
contracts, institutions• Concrete action: “A carbon phase out
plan”
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Sub-global Solutions: “The Climate Club”
• ‘Climate Club’ of committed nations• Constant carbon price of ~$200/tCO2 on
fossil fuels• Issue of contracts guaranteeing this price
for international investors• Price embodied carbon in imports• Adopted by a ‘club’ e.g. EU, US and Japan
with open membership
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Part 4: Conclusions
• International negotiations must provide for credible commitments and global institutions whilst not preventing sub-global action
• Sub-global ‘climate club’ can take concrete action to reduce emissions now
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Discussion
Thank you for your attention!
Contact me:Stephen Strettonsjs53@cam.ac.uk
Links:http://www.4cmr.org
http://www.withouthotair.comhttp://www.zerocarbonnow.org
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Questions from the Audience
• Capital investment requires certainty – if you have different agreements in different parts of the world, will this be certain enough? – Purpose of plan is price certainty, which is what matters for
investors• R&D – technological progress
– Yes, much more expenditure on R&D is needed• Getting there – short term politics, fuel in the ground
– agents won’t cooperate?– Difficult and important questions: maybe we don’t have to
please all the agents all of the time?• CCS doubles cost of steel – is this accounted for in
model?– We do not model CCS in industrial sector, only in the power
sector. Yes, there will be knock-on costs of the price of steel for cost of infrastructure.
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