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On the impracticability of Emission Intensity Targets
Climate Policy 2 (2002) 397–398
Correspondence
On the impracticability of Emission Intensity Targets Georg Mueller-Furstenberger
Lisowski (Climate Policy, 2.2/3) argues that carbon-intensity targets are better suited to take the hurdle of political acceptance than absolute carbon permits. At first glance, intensity targets seem appealing as they foster the de-carbonization of production without ‘imposing constraints on growth.’ They can be differentiated to account for heterogeneity among participating countries, enhancing developing country participation. Taking a closer look at GHG-intensities, however, reveals some serious flaws. Intensities do not control the stock of atmospheric carbon, hence they may fail to prevent drastic climate change. But there are some more subtle problems. First of all, differentiated intensity targets are inefficient even with trade in carbon. To see the argument, suppose two nations, each producing its macro-output according to fi (ei ), i = 1, 2. Regional emissions are denoted by ei , fi is the (concave) macro production function with emissions as sole explicit input. Let xi denote the intensity target, then (ei –xi fi (ei )) are emissions to be bought on an international carbon market in order to cope with the intensity target. With q as carbon price, regional output maximization gives q = fi (ei )/(1 − xi fi (ei )) as first order condition. Since q applies for both regions, f1 (e1 )/(1 − x1 f1 (e1 )) = f2 (e2 )/(1 − x2 f2 (e2 )) holds in equilibrium. But efficient abatement requires that marginal abatement costs, −fi (ei ), are equal in both regions. This is the case only for x1 = x2 . Hence, differentiated intensity targets are inefficient even with international carbon trade. A second problem with intensity targets occurs when dropping the homogenous macro-output assumption of GDP. The denominator in computing intensities, GDP, is a highly aggregated variable involving the price system as aggregation device. In a forthcoming joint-paper with Benito Mueller (Mueller and Mueller-Furstenberger, 2002) we shall show that though all sectoral carbon intensities increase, the aggregated intensity may decline. This is due to changes in relative prices associated with structural change. Intensities are a convincing greening measure only as long as we abstract from the aggregate nature of the GDP. Carbon intensities are appealing at first glance but much more research is necessary to evaluate them as a substitute for internationally tradable carbon rights. Other options are more promising from a theoretical point of view. One of them is discussed in Stephan and Mueller-Furstenberger (2001), where nations negotiate on their shares in future global emissions instead of regional carbon targets. With this option, even banking and borrowing of carbon rights might be compatible with sustainable carbon emission paths. E-mail address: [email protected] (G. Mueller-Furstenberger). 1469-3062/02/$ – see front matter © 2002 Elsevier Science Ltd. All rights reserved. PII: S 1 4 6 9 - 3 0 6 2 ( 0 2 ) 0 0 0 6 9 - 4
398
G. Mueller-Furstenberger / Climate Policy 2 (2002) 397–398
References Mueller, B., Mueller-Furstenberger, G., 2002. On a Fundamental Indeterminacy of Real Monetized Intensity Growth Measures, mimeo. Stephan, G., Mueller-Furstenberger, G., 2001. Does Distribution Matter? When Flexibility and Pareto-Efficiency in Greenhouse Gas Abatement, Discussion Paper 01.02, Bern University.
Correspondence
On the impracticability of Emission Intensity Targets Georg Mueller-Furstenberger
Lisowski (Climate Policy, 2.2/3) argues that carbon-intensity targets are better suited to take the hurdle of political acceptance than absolute carbon permits. At first glance, intensity targets seem appealing as they foster the de-carbonization of production without ‘imposing constraints on growth.’ They can be differentiated to account for heterogeneity among participating countries, enhancing developing country participation. Taking a closer look at GHG-intensities, however, reveals some serious flaws. Intensities do not control the stock of atmospheric carbon, hence they may fail to prevent drastic climate change. But there are some more subtle problems. First of all, differentiated intensity targets are inefficient even with trade in carbon. To see the argument, suppose two nations, each producing its macro-output according to fi (ei ), i = 1, 2. Regional emissions are denoted by ei , fi is the (concave) macro production function with emissions as sole explicit input. Let xi denote the intensity target, then (ei –xi fi (ei )) are emissions to be bought on an international carbon market in order to cope with the intensity target. With q as carbon price, regional output maximization gives q = fi (ei )/(1 − xi fi (ei )) as first order condition. Since q applies for both regions, f1 (e1 )/(1 − x1 f1 (e1 )) = f2 (e2 )/(1 − x2 f2 (e2 )) holds in equilibrium. But efficient abatement requires that marginal abatement costs, −fi (ei ), are equal in both regions. This is the case only for x1 = x2 . Hence, differentiated intensity targets are inefficient even with international carbon trade. A second problem with intensity targets occurs when dropping the homogenous macro-output assumption of GDP. The denominator in computing intensities, GDP, is a highly aggregated variable involving the price system as aggregation device. In a forthcoming joint-paper with Benito Mueller (Mueller and Mueller-Furstenberger, 2002) we shall show that though all sectoral carbon intensities increase, the aggregated intensity may decline. This is due to changes in relative prices associated with structural change. Intensities are a convincing greening measure only as long as we abstract from the aggregate nature of the GDP. Carbon intensities are appealing at first glance but much more research is necessary to evaluate them as a substitute for internationally tradable carbon rights. Other options are more promising from a theoretical point of view. One of them is discussed in Stephan and Mueller-Furstenberger (2001), where nations negotiate on their shares in future global emissions instead of regional carbon targets. With this option, even banking and borrowing of carbon rights might be compatible with sustainable carbon emission paths. E-mail address: [email protected] (G. Mueller-Furstenberger). 1469-3062/02/$ – see front matter © 2002 Elsevier Science Ltd. All rights reserved. PII: S 1 4 6 9 - 3 0 6 2 ( 0 2 ) 0 0 0 6 9 - 4
398
G. Mueller-Furstenberger / Climate Policy 2 (2002) 397–398
References Mueller, B., Mueller-Furstenberger, G., 2002. On a Fundamental Indeterminacy of Real Monetized Intensity Growth Measures, mimeo. Stephan, G., Mueller-Furstenberger, G., 2001. Does Distribution Matter? When Flexibility and Pareto-Efficiency in Greenhouse Gas Abatement, Discussion Paper 01.02, Bern University.