Rogelj et al. Mitigation Paper in Nature

The latest issue of Nature has a paper on climate mitigation by Rogelj et al. The issue also has a "News and Views" item by Steve Hatfield Dodds on the paper. The paper has an interesting message*: Delay in acting on mitigation has the biggest effect on the probability of achieving the 2C target, carbon taxes above $20-40 per tonne have little effect on mitigation, and carbon capture and storage (CCS) is essential. This is a message that environmentalists, business, and fossil fuel producers will like. As Steve points out, one weakness of the paper is that it is all done with the MESSAGE integrated assessment model and that is kind of a black box. In the EMF-22 modelling exercise, MESSAGE had some of the lowest carbon taxes. For a 450 ppm scenario its 2020 carbon tax was only $15. By contrast, FUND had a $260 carbon tax. So MESSAGE is an optimistic model. Other models definitely don't have this carbon tax saturation phenomenon as can be seen from our meta-analysis.

Our PhD student Hyung-Sup Lee's PhD thesis will provide a similar kind of uncertainty analysis purely on the economic side of things using that EMF-22 data.

* Pun kind of intended :)

Doha Outcomes

The main outcomes of the Doha COP meeting that recently concluded were a potentially expanded commitment on financial transfers from developed to developing countries and the renewal of the Kyoto Treaty.

On the Kyoto Treaty I have seen no discussion in the media of the actual commitments participants have agreed to. It turns out that countries have simply used their Copenhagen commitments. So Australia will reduce emissions by 5% from 1990 levels and the EU, 20%. Now these are internationally legally binding commitments. Of course, the total emissions of these countries are only 15% of global emissions. The US never ratified Kyoto and Canada and Japan will not join in the next period. Supposedly, a new treaty is coming in 2015...

There has been much talk in the Australian media and particularly in The Australian about the financing commitment. The latter newspaper derived their numbers from a paper put out by Frank Jotzo but it seems to be used rather out of context. Frank has an op-ed out putting it all into context again.

Article on Climate Mitigation Costs in The Conversation

I have an article today in The Conversation explaining the main findings of our recent paper in AJARE. This time I managed to squeeze the "low hanging fruit" in. There is even a picture of bananas :) Go over to The Conversation to read and discuss it.

Taxes versus Trading versus Revenue Recycling

My colleagues Jack Pezzey and Frank Jotzo have a forthcoming paper in JEEM: "Tax-versus-trading and efficient revenue recycling as issues for greenhouse gas abatement" on the relative performance of emissions taxes versus emissions trading under uncertainty about both abatement costs and BAU emissions as well as different levels of revenue recycling. Uncertainty about future costs of abating emissions is well known to lead to a welfare advantage of emissions taxes over permit trading. They show that uncertainty about BAU emissions is more important and further increases the advantage of taxes. I think this is important because the massive fluctuations in the price of carbon in the EU market for example seems to be largely due to fluctuations in economic activity. They write: "overall our results substantially boost the welfare case for using a carbon tax instead of trading."

However, they argue that whether the raised revenue is efficiently recycled through cuts in existing distorting taxes will be practically of much greater significance than these differences between taxes versus trading. In the presence of existing distorting taxes an emissions tax can have negative impacts on welfare if those taxes are not also reduced - the so called "tax-distortion effect". However, I would have thought that the giving away of free permits or exclusion of activities from control is likely to be greater in extent than exemptions under a carbon tax. This would further increase the advantages of taxes. Or maybe I'm wrong about that?

Energy Policy and Climate Mitigation in China: The Ideas Motivating Change

Based on reading of government documents and the writings of Chinese academics, Olivia Boyd's ANU masters thesis documents the role of three ideas in driving China's current energy and climate policies:

1. The idea of new energy security that stresses domestic, rather than international, sources of energy insecurity.
2. Green development and growing concern over the environmental and resource constraints on economic growth.
3. Low-carbon leadership, which posits a vision of China’s international political and economic influence based on climate leadership and low-carbon markets.

This is roughly what I have argued are China's motivations - for example in my CRWF 8000 lectures on energy and the environment that I gave in October - but I find a lot of resistance to accepting that China is serious about these issues and I based my view largely on conjecture rather than a close reading of the literature. This thesis stands on much more solid foundations.

I saw this paper on academia.edu, which I am finding more and more useful as people are posting interesting papers on it that I otherwise wouldn't see.

Indian Perspective on Climate Change

I've been at the workshop on Equity, Sustainability, and Climate Change organized by the Centre for Science, Technology and Society at the Tata Institute of Social Sciences in Delhi over the last two days. The meeting was attended by both academics, NGOs, and government officials including a speech by the environment minister. It has been interesting to hear different perspectives on the climate change issue than I usually hear from Australians, Europeans, Americans, and Chinese. Though mentioned by some Chinese, there is a much stronger emphasis on historical responsibility for emissions in the context of a "carbon space" or "carbon budget" model. Developed countries have used up much of the available space in the atmosphere to absorb carbon dioxide and the question is how can the developing countries develop with the little remaining available space in the next few decades if we are to stay within a 2C maximum warming. There is still debate about whether there should be another round of Kyoto commitments or whether the "bottom up" or "pledge and review" framework that emerged from Copenhagen can be accepted. It was pointed out that it was the BASIC countries (Brazil, South Africa, India, and China) that got together with the US at Copenhagen to introduce this regime, so they can hardly complain now. And many seem to accept that Kyoto is dead and at least China has to be in any new agreement in order to have the slightest chance of the getting the Americans on board. Mukul Sanwal stated that China looks like announcing a unilateral cap on per capita emissions, perhaps at the Durban meeting and that this will change the whole game. There was a lot of exasperation with the US and amazement that they could almost default on their debt obligations just because they can't agree with each other internally.

There were also several presentations on the costs of climate mitigation, lead off by my paper on alternative cost measures. We found that the alternative approaches came to the same conclusion - that even a $50 a tonne CO2 tax is very low and would prompt switching to renewable energy on a large scale or substantial abatement in the short-term.

I met a lot of new people. Several, such as , Sivan Kartha, were at the IPCC meeting in Korea but I didn't happen to meet them there.

First Thoughts on the Australian Government's Climate Package

For those of you outside Australia, the federal government is announcing its planned climate change package today. They have the numbers in parliament to pass the legislation so we can expect this to actually happen this time. One surprise is the increase in the 2050 emissions reduction target from 60% to 80%. The carbon price will initially be $23 before a switch to carbon trading in 2015. After trading starts there will be a floor price of $15 for the first three years.

Some initial thoughts:

1. The tax free threshold for income tax is being raised to $18,200 from $6,000. That is massive. $2,000 less tax for every taxpayer who earns more than $18,000 a year. This shift to a higher tax free threshold was one of the things proposed by the Henry Review. But in effect the tax cut is much smaller due to a reduction in the low income tax offset and increases in tax rates. See my next post for more details.

2. Petrol won't be included in the scheme. Given the structure of the scheme which regulates emissions from the 500 largest emitting companies it's logical to exclude petrol. In the short-run this likely raises the costs of the scheme by focusing the reductions on a smaller group of emissions sources. In the long-run it probably doesn't matter as long as other countries drive innovation to develop alternative energy cars. Australia won't manufacture or use petrol driven cars if no-one else in the world does. This is similar to the fact that once major players had adopted lead free petrol other countries had to follow.

3. This package includes more complementary measures than Kevin Rudd's CPRS in terms of funding for renewable energy innovation and biodiversity funding and other things which balances the focus on just the 500 biggest emitters instead of the top 1000 under the CPRS.

4. Because of the structure of the Australian economy, a large share of energy use and carbon emissions is accounted for by the largest 500 emitters. This includes the electricity generation sector, airlines, and of course most heavy industry from BHP and Rio Tinto on down.

Where is it Cheapest to Cut Carbon Emissions: Estimating Marginal Costs

This is the second part of a series on my new working paper on where it is cheapest to cut carbon emissions.

In the previous post I assumed that all countries shared the same marginal cost of abatement curve. In reality this is not the case and in order to rank countries by marginal cost of abatement or total costs of meeting a given policy we need to estimate a cost curve for each country. The Treasury Review assessed the costs of meeting 4 different policy scenarios at 2020 and 2050. This gave us 8 data points for each region or country.

The data we used to estimate the curves are GDP data rather than GNP data because changes in GNP include net receipts for the sale of emissions permits. Our data on the cuts in emissions are the actual domestic reductions in emissions in each region. We don't want, therefore, to use a measure of cost that includes the costs of offsets.

Also we subtracted the "terms of trade impact" component from the estimates of GDP losses and gains. Under a global climate policy countries experience GDP impacts that have nothing to do with their domestic mitigation efforts but are the effect of climate policy actions elsewhere. For example, OPEC countries are hard hit under global mitigation efforts because of the reduction in world demand for oil. On the other hand, oil importers such as India gain from the fall in the oil price. Again, because we wanted to limit costs to the costs of domestic mitigation we needed to remove these effects.

Obviously a lot of technological change is expected to take place over the next 50 years. This technological change would be expected to lower the emissions intensity of the economy even in the absence of climate policy. This lowers business as usual emissions compared to what they would be without technological change. We make the assumption, though, that the elasticity of GDP with respect to reducing emissions relative to business as usual does not change. It's a strong assumption, but we think it is the best we can do with the data we have available.

These are the resulting 2005 marginal costs that we come up with:



The left side of the table ranks countries by the marginal cost of abating a ton of carbon (not carbon dioxide) where marginal cost is measured in PPP (Purchasing Power Parity) adjusted dollars. To get figures in terms of carbon dioxide multiply by 12/44.

Japan and Canada actually have GDP gains. This shows that despite the adjustments made these numbers are still not, of course, the effect of a unilateral domestic policy but of a coordinated global mitigation effort. Apparently, investment increases in Japan under climate mitigation increasing its GDP. Abatement is fairly cheap in the US and EU and expensive in most developing and transition economies. There isn't any correlation between emissions intensity and marginal cost. Countries appear to be on different cost curves.

In terms of marginal domestic loss of GDP climate policy is expensive in developing countries and cheap in the developed world.

The right hand side of the table uses actual market exchange rates instead. Now it is cheap to abate in China and OPEC as well as in the US and EU.

Where is it Cheapest to Cut Carbon Emissions?

The answer to the question depends on what you mean by "cheap". In other words, how you measure cost.

I have a new working paper coauthored with Ross Lambie that attempts to answer the question using the results of the GTEM modeling exercises carried out as part of the Australian Treasury review of climate change policy.

Development of policy on the cutting of greenhouse gas emissions has in many countries, including Australia and the United States, been characterized by fierce debate among opposing interest groups. Obviously some interest groups will suffer larger losses than other groups in society and are likely to oppose climate policy.

But putting this issue to one side, is it possible that there are many cheap ways to cut emissions in countries such as the United States and Australia as green groups argue, yet the total cost of climate policy are higher in these countries than in other countries that are often perceived as being more environmentally responsible such as Sweden and the Netherlands as often argued by industry lobbies?

The cost of mitigation - in plainer language cutting carbon emissions - is often represented by a cost curve such as this:



On the X axis is the level of emissions and on the Y axis cost. So that we can put both large and small countries in the same diagram emissions are measured in terms of emissions intensity - emissions per dollar of GDP. Cost is measured as marginal cost - the additional cost of reducing emissions by another unit.

The chart shows two hypothetical countries. One, that I call Ameralia, has high emissions, while Swepan has low emissions. Because it gets harder to cut emissions the lower they get - the "law of diminishing returns" - the marginal cost of reducing emissions is higher in low emissions Swepan than in high emissions Ameralia. The environmentally responsible who have already made efforts to reduce pollution and save energy have higher costs.

The chart shows a Kyoto style equal percentage emissions cut in both countries. The green areas are the total costs that are born by each country in meeting the mitigation target. I've designed the curve so that Ameralia's total costs are greater than Swepan's.

So in this example it is true that depending on what you mean by cheaper it could be cheaper to cut emissions in either Ameralia or Swepan.

The difference between total cost in the two countries will be greater for other policy goals. The total cost of converging on a common emissions intensity will be far greater in Ameralia. Similarly, a common carbon price, if it is to affect Swepan at all, will impose huge costs on Ameralia.

Things get more complicated in the real world. I'll discuss some of those complications in future blog posts.

Analysis of Copenhagen Accord

Interesting analysis of the Copenhagen Accord from Carlo Carraro and a coauthor. He argues that if the funding for developing countries is primarily used for mitigation actions then the Accord could achieve the goal of getting the world on the path towards the 2C limit on warming. I'm skeptical though that the money will:

1. Be spent at all - often aid pledges turn out not to be realised...

2. Not get wasted on bureaucracy and corruption...

3. Actually get spent on useful mitigation rather than adaptation...

4. Get spent on efficient things rather than white elephant prestige projects...

But maybe I'm too cynical...

Consumption Based Carbon Tax

An interesting proposal from Geoff Carmody for a consumption based carbon tax. It cleverly plays on protectionist sentiments and impulses by taxing the carbon content of imports and exempting exports. Every country can set its own carbon tax rate or coordinate as much as they like. I imagine this must have been proposed before. It sounds like a good idea but I can see two major pitfalls:

1. Will the WTO agree to taxing the carbon content of imports but not exports? It sounds unlikely to me.

2. Complicated accounting for embodied carbon is needed both to assess the carbon content of imports and of exports. Inputs purchased by exporters will have the carbon tax built into them and presumably this needs to be claimed back some way to symmetrically exempt exports while taxing imports. Or will only direct fuel use by exporters be counted? That can't be the case because in many cases the producer will not be the exporters. An alternative is to provide credits for exports based on an average estimate of embodied carbon - say one rate per dollar or weight for cars, another for coal etc.

What do you think?

What Do the Mitigation Policy Models Assume about Interfuel Substitution? And is it Important?

In my previous blogpost I commented that the elasticity of substitutions between fuels and between energy and capital were likely to be very important in estimates of the costs of emissions reduction policies. I've been trying to find support for, or evidence against, this hypothesis.

Bhattacharya (1996) writes: "It is generally agreed that the elasticity values are the single most important parameters that affect the results. In the economic literature, there is little consensus about different elaticities for energy products." (p159) He notes that some modelers have used sensitivity analysis. It would be nice if he noted which ones :)

Pezzey and Lambie (2001) reviewed a number of Australian CGE models used in climate policy research. Though they differ in the specifics most have low degrees of substitutability between fuels. The GTEM model developed by ABARE and used by Treasury in their advice to government has less substitutability than G-Cubed (Treasury used GTEM, G-Cubed, and MMRF in their research).

Anyway, it looks like I should add sensitivity analysis of climate change policy modeling to my research agenda.