Transcript Slide 1

Climate Policy
given
Political Constraints
Stephen Stretton
Research Associate
Cambridge Centre for Climate Change Mitigation Research
(4CMR)
Department of Land Economy
http://www.4cmr.org
14th October 2009
1: Why?
2: Political Constraints
3: Carbon Pricing
4: 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
(Present Day) – Some effects already seen
Oceans damaged
Greenland ice melts (raising sea levels eventually by 7m)
Amazon rainforest?
Agricultural yields fall
Increases in
extreme
weather (e.g.
hurricanes)
Tropical diseases spread
Methane
released
from peat
Hundreds of millions at risk from
bogs &
hunger & drought
oceans?
Desertification of large parts of Earth’s surface
World ecosystems cannot adapt
CO2
released
from
forests and
Soils
Positive Feedback: Warming causes further release of greenhouse gases
Source: Adapted from Warren, R (2006)
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Why?
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Net Costs of Mitigation are Small
World Income Under Different Stabilisation Scenarios
400
350
500ppmCO2only (c.600CO2e)
550ppmCO2only (c.650CO2e)
250
200
150
100
50
21
00
20
95
20
90
20
85
20
80
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75
20
70
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65
20
60
20
55
20
50
20
45
20
40
20
35
20
30
20
25
20
20
20
15
20
10
20
05
-
20
00
Gross World Product
(US$2000)
300
Baseline
450ppmCO2only (c.550CO2e)
Date
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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
•
•
•
•
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•
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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.
2.
Incentive Effect – higher prices encourage behaviour
and technological change
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
•
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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
•
•
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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’?
Fossil Fuels
CO2 Emissions
O
C
C
O
C
C
C
C
C
O
O
O
O
C
O
O
£€$
£€$
‘Upstream’
‘Downstream’
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
Emissions more
sensitive to Price sensitive to Price
(Price Inelastic)
(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
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Governing the Commons
Global Solutions
Sub-global Solutions
Conclusions
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“Governing The Commons”
Design Principles for Enduring Common-PoolResource Institutions:
1.
2.
3.
4.
5.
6.
7.
8.
Clearly defined boundaries of common property
resource
Congruence between appropriation/provision rules
and local conditions
Collective choice arrangements – agents can
participate in modifying operational rules
Monitoring
Graduated sanctions
Conflict-resolution mechanisms
Rights to organize
Source: Elinor Ostrom,
“Nested enterprises”
“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 Stretton
[email protected]
Links:
http://www.4cmr.org
http://www.withouthotair.com
http://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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