prices versus quantities: how do different emission reduction strategies perform in countries at...
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Prices versus Quantities: HOW DO DIFFERENT EMISSION REDUCTION STRATEGIES PERFORM IN
COUNTRIES AT DIFFERENT LEVELS OF DEVELOPMENT
Mark PurdonPhD Candidate Department of Political ScienceUniversity of Toronto, CanadaEmail: [email protected]
Forging Closer Ties: Transatlantic Relations, Climate Change and EnergyFreie Universität Berlin
November 28 – December 5, 2009
Policy or Political Failure?
• Commonplace to hear criticisms of the Kyoto Protocol
• If only we had the right “policy” in place things, we’d be on the right track…– Global carbon tax– Increased international development financing
The more countries involved, the lower the costs
(Carbon Group 2009)
Controlling Costs Will, Politically, Be Important
Sources British Anti-Slavery –Kaufmann & Pape 1999ODA – WB 2008Adaptation – IIED 2009Mitigation – UNFCCC 2007
Costs•Mitigation$200 Billion USD/an
•Adaptation $50 to 109 Billion USD/an
Kyoto’s Approach to Lowering Costs
• “Cap-and-Trade” – Quota-based System– Price of climate change policy to be “revealed” on the
carbon market
• Carbon Market– “Emissions Trading”
• Only between industrialized countries
– “Joint Implementation”• Only between industrialized countries
– “Clean Development Mechanism”• Between industrialized and developing countries
“Offsets”
Location of CDM Projects
(Source: UNFCCC 2009)
Is the CDM a Success?• A 4,763 des projets liés à 2,800 millions de tonnes de
crédits carbone (Oct 2009)
(Source: CDM - UNEP Risoe Centre 2008)
65%
70%
75%
80%
85%
90%
95%
100%
105%
Impact of CDM on Emissions Trends of Kyoto Parties
Kyoto Industrialized Countries (no USA)
Kyoto Industrialized Countries (no USA) with CDMKyoto Annex B (no USA)
Kyoto Annex B (no USA) with CDM
Prices versus Quantities
Two Basic Options to Regulate Carbon
• Regulate QUANTITY of carbon – Cap-and-trade– Uncertainty surrounding the cost of reducing below
cap necessitates emissions trading as an escape mechanism
• Regulate PRICE of carbon – Carbon tax or carbon bounty– Much easier to administer (theoretically)– Uncertainty in effects on emissions
Symmetry of Prices and Quantities
Price = $5
Quantity = 10 tonnes
Climate Change Policy Under “Uncertainty”
Marginal Benefit Curve “Steep"Marginal Benefit Curve “Flat”
If a patient’s health deteriorates only slowly, care should be managed such that each day the patient remains without treatment the hospital should pay a fine.
If the medical condition is serious and prone to deteriorate rapidly, then the hospital only has d days to administer the treatment or the patient dies
MCactual
MCexpected
Qtax Qquantity
Q
P
MB
P*
Q*
Ptax
Pquantity
MCactual
MCexpected
Qtax Qquantity
Q
P
MB
P*
Q*
Ptax
Pquantity
Climate Change Policy Under “Uncertainty”
Marginal Benefit Curve “Steep"Marginal Benefit Curve “Flat”
If a patient’s health deteriorates only slowly, care should be managed such that each day the patient remains without treatment the hospital should pay a fine.
If the medical condition is serious and prone to deteriorate rapidly, then the hospital only has d days to administer the treatment or the patient dies
MCactual
MCexpected
Qtax Qquantity
Q
P
MB
P*
Q*
Ptax
Pquantity
EQ
MCactual
MCexpected
Qtax Qquantity
Q
P
MB
P*
Q*
Ptax
Pquantity
EQ
Climate Change Policy Under “Uncertainty”
Marginal Benefit Curve “Steep"Marginal Benefit Curve “Flat”
If a patient’s health deteriorates only slowly, care should be managed such that each day the patient remains without treatment the hospital should pay a fine.
If the medical condition is serious and prone to deteriorate rapidly, then the hospital only has d days to administer the treatment or the patient dies
MCactual
MCexpected
Qtax Qquantity
Q
P
MB
P*
Q*
Ptax
Pquantity
EP
MCactual
MCexpected
Qtax Qquantity
Q
P
MB
P*
Q*
Ptax
Pquantity
EP
Climate Change Policy Under “Uncertainty”
Marginal Benefit Curve “Steep"Marginal Benefit Curve “Flat”
If a patient’s health deteriorates only slowly, care should be managed such that each day the patient remains without treatment the hospital should pay a fine.
If the medical condition is serious and prone to deteriorate rapidly, then the hospital only has d days to administer the treatment or the patient dies
MCactual
MCexpected
Qtax Qquantity
Q
P
MB
P*
Q*
Ptax
Pquantity
EQEP
MCactual
MCexpected
Qtax Qquantity
Q
P
MB
P*
Q*
Ptax
Pquantity
EQEP
Clean Development Mechanism (CDM)
CDM Criticisms
• Transaction Costs– Complicated and bureaucratic project development
system often means only big projects make there way through
• Additionality– A CDM project is additional if GHG emissions are reduced
below those that would have occurred in the absence of the CDM
• Sustainable Development– Is the CDM really making a contribution?– “CO2lonialism”
• Complicated project cycle…
Transaction Costs
CDM Development Phase
CDM Implementation Phase
• Complicated project cycle…
Transaction Costs
CDM Development Phase
CDM Implementation Phase
Host country DNA3rd Party AuditorsCDM Executive Board
Project Developer
Transaction Costs
• Project Developers, Brokers, Regulators
Deadweight Loss
TransactionCosts
TonnesCO2
Year0 Year7
No Project
CDM Project
CarbonOffset
Emissions
CDM Project
Additionality
Baseline
Crediting Period
TonnesCO2
No Project
CDM ProjectGenuine CarbonOffset
CDM Project
Emissions
No Project
Year4
Non-Carbon Project Started
Baseline
BogusCarbonOffset
Bogus credits?
Year0 Year7
Crediting Period
Currently, the CDM operates largely on a project-by-project basis. The demonstration of additionality does not go much further than project boundaries (green lines). Because little information about the environmental performance of non-CDM projects operating in the same sector is presented, regulators do not have sufficient information to assess to what extent the baseline identified by CDM project developers is true.
Programmatic CDM is really an extension of project-based CDM, seeking to reduce transaction costs through economies-of-scale. While there is more baseline information, there are still substantial sectors of the economy which remain outside regulatory purview.
Sectoral CDM would establish a sector-wide performance benchmark, which would then become the baseline for carbon finance.
Sectoral CDM…
« CO2lonialism »
E
Example of FACE reforestation project in Mt Elgon National Park, Uganda
2009 Fieldwork & Preliminary Results
Where in the world….
• Tanzania• Uganda• Moldova
Area: 13,450 ha planted (of 18,000 ha acquired)
Carbon Credits: 6.4 million tCO2e over period 2000-2019
Topography: grassland with the landscape dominated by undulating ridges with steep slopes.
CDM reforestation project in Tanzania
Location: Karatu District, Arusha Region
Project Summary: The project involves improved household stoves and intends to build and install stoves in 22,000 households. On average 45,000 tCO2e annually over 2009-2012.
CDM cookstove project - Tanzania
Improved Cookstove Project
70% Emissions Reduction
Location: Jinja District
Project Summary: •The project involves increasing bagasse co-firing of the sugarworks, sending extra power generated back into the grid and thereby displacing fossil fuel generated electricity
• Extra sugarcane purchased from outgrowers who grow cane on their own land
Sugarcane “bagasse” bioenergy - Uganda
Area: 20,000 ha
Project Summary: • Reforestation of degraded forest land spread out across the country
• Degraded lands identified scientifically and managed in a nation-wide cadastral system
• 594 villages involved
Reforestation Project - Moldova
Additionality:Preliminary Assessment
Project …………………….Additionality………………….
Appears project would have gone ahead, maybe not as big or maybe not as early
TonnesCO2
No Project
Genuine CarbonOffset
Emissions
Y1
Non-Carbon Project Started
BogusCarbonOffset
Y0 Year7
Crediting Period
Appears additional because no other government or private sector activity on stoves
Appears project would have gone ahead, but CDM accelerated implementation
TonnesCO2
Year0 Year7
CarbonOffset
Emissions
What’s the matter with additionality?
Crediting Period
TonnesCO2
No Project
Genuine CarbonOffset
Emissions
Year4
Non-Carbon Project Started
BogusCarbonOffset
Bogus credits?
Year0 Year7
Crediting Period
TonnesCO2
Year0 Year7
CarbonOffset
Emissions
What’s the matter with additionality?
Crediting Period
TonnesCO2
Year0 Year7
CarbonOffset
Emissions
What’s the matter with additionality?
Crediting Period
Additional Projects Non-Additional Projects
No large-scale government or private sector policy for improved cookstoves
Government would not have had money to undertake the scale of reforestation without carbon finance
Project undertaken in Tanzania’s forest belt; therefore likely to have gone ahead without carbon finance but maybe not as early nor as large
Carbon finance only a fraction of the total project financing; therefore project would have gone ahead but probably not as soon.
Tanzania – Improved Cookstoves
Moldavia – Reforestation
Tanzania – Reforestation
Uganda – Bioenergy
CDM Administration
• Bureaucratic bottle-necks in Africa “Cork in the bottle” syndrome
• CDM authorities often in small “units” in the technical wing of Ministry of Environment Do not appear to have the authority for nation-
wide changes that could be necessary for CDM Might be other govt agencies (planning) that are
better equipped to address the issues sectoral CDM requires
Price-mechanism Alternatives to the CDM
Price-mechanism• Carbon Tax
– Taxation already difficult in developing countries– Unconscionable high incidence on the poor
• Carbon Bounty– Payment for carbon abatement at a set price– Would be important to set the correct price for the
bounty in different sectors– Could use Carbon Cost Efficiency (CCEff), which measures the
costs in $/tCO2e– CCEff could be used to determine the price at which to set a
carbon bounty in order to achieve a desired emission reduction for a specific project or programme
Carbon Cost Effectiveness
(McKinsey & Co. 2009)
Carbon bounty?
• Tanzania example– Ministry of Natural Resources & Tourism sets the
price of forest products• Government plantations (Sao Hill) are largest player
domestic market and determine price• Price of forest products coming from government
plantations is not determined by the market but a result an act of Parliament – “totally political”
– Recent price increase• 2002: royalty rates set under Forestry Act• 2006: unsuccessful attempt by MNRT to raise prices • 2007: “New Royalty Rates for Forest Products”
Reforestation effort in Mufindi District, Tanzania
Big leap inreforestation
Limits on a price strategy
• Many sources of emissions are non-monetized and not amenable to a price change policy– African Firewood
• Often collected from forest commons which are un-regulated
• Price manipulation and supply shocks– Low fossil fuel prices disincentive to bioenergy in
Moldova• Russian gas subsidized• Gas viewed as “modern” energy source
Conclusion
Ditch the CDM?
• Sometimes prices, sometimes quotas• Price strategies are more appropriate in
developed countries because prices for fossil fuels are relatively stable and predictable
• Need to reform the post-Kyoto agreements in a manner that adds price-based instruments in addition to, not in replacement of, the current quota-based design.
Moral Limits of Climate Change Policy?
Another thought…Climate Realism• Response from industrialized countries to climate
change will be based on a political calculation that weighs the costs of mitigation versus those of domestic adaptation in industrialized countries
• Disquieting hypothesis: it is not necessarily in the interest of the industrialized countries to prevent a level of climate change that is “dangerous” for least developed countries.– UNFCCC ultimate objective: “Stabilization of
greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”
Moral Limits of Climate Change Policy
World Socialism Neoliberalism
Horizon of thought on climate change policy
If not the CDM, then what?
Moral Limits of Climate Change Policy
World Socialism Neoliberalism
Horizon of thought on climate change policy
Climate Realism
Mark PurdonPhD Candidate Department of Political ScienceUniversity of Toronto, CanadaEmail: [email protected]
Thank you!!
This research has been made possible with funding from the International Development Research Council (IDRC) and SSHRC