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The distribution and magnitude of emissions mitigation costs in climate stabilization under less than perfect international cooperation: SGM results
Energy Economics 31 (2009) S187–S197
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Energy Economics j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / e n e c o
The distribution and magnitude of emissions mitigation costs in climate stabilization under less than perfect international cooperation: SGM results☆ Katherine Calvin a,⁎, Pralit Patel b, Allen Fawcett c, Leon Clarke a, Karen Fisher-Vanden d, Jae Edmonds a, Son H. Kim a, Ron Sands e, Marshall Wise a a
The Pacific Northwest National Laboratory, Joint Global Change Research Institute (JGCRI) at the University of Maryland, College Park, 5825 University Research Court, Suite 3500, College Park, MD 20740, USA Joint Global Change Research Institute (JGCRI) at the University of Maryland, College Park, MD USA c U.S. Environmental Protection Agency's Climate Change Division, USA d Pennsylvania State University, University Park, PA USA e Economic Research Service, U.S. Department of Agriculture, USA b
a r t i c l e
i n f o
Article history: Received 7 April 2009 Received in revised form 18 June 2009 Accepted 18 June 2009 Available online 27 June 2009 Keywords: Climate change Emissions mitigation CGE models Leakage
a b s t r a c t The EMF22 Transition Scenario subgroup explores the implications of delayed accession on limiting climate change to various radiative forcing levels. This paper focuses on the cost of limiting radiative forcing and the role that industrial leakage plays in scenarios of delayed accession. We find that delayed participation shifts the cost burden toward regions that take early action and away from regions that undertake mitigation later. However, the inefficiencies introduced by delay are so great that present discounted costs are higher in the delayed scenario for regions that delay as well as for regions taking early actions. An important element of these inefficiencies is industrial emissions leakage, that is non-participating regions increase their emissions relative to the reference case. In aggregate, industrial leakage rates are less than 10% if all regions of the world begin emissions mitigation by 2050—higher in carbon-intensive sectors and lower in low-carbon-intensity sectors. Additionally, we consider the implication of technology on carbon prices, the feasibility of limiting radiative forcing to low levels, and the incentives to overshoot the radiative forcing limit. © 2009 Elsevier B.V. All rights reserved.
1. Introduction Most of the literature exploring the feasibility and cost of meeting various long-term, global, environmental goals has employed idealized assumptions about the international policy environment1. In general it is assumed that all nations of the world undertake identical climate policies that employ perfect “where” and “when” flexibility. That is, emissions mitigation is undertaken wherever and whenever it is least costly. The purpose of the EMF22 study group is to examine the feasibility and cost of meeting various long-term, global, environmental goals in “less than perfect” regimes. In this study imperfection is introduced when some regions of the world participate in emissions limitation regimes, while others do not. In other words, what
☆ The authors are grateful to the U.S. Environmental Protection Agency for financial support for the research presented here. The authors also thank two anonymous reviewers for their helpful comments. The views expressed here are the authors' alone and should not be attributed to the organizations for which they are employed. ⁎ Corresponding author. E-mail address: [email protected] (K. Calvin). 1 Several important exceptions to this generalization include Richels et al. (2008); Edmonds et al. (2008); and Keppo and Rao (2007); den Elzen and Meinshausen (2005), den Elzen et al. (2005), Berk and den Elzen (2001), and Valverde, L.J., M.D. Webster (1999). 0140-9883/$ – see front matter © 2009 Elsevier B.V. All rights reserved. doi:10.1016/j.eneco.2009.06.014
difference does delay in participation in international programs of emissions mitigation make?2,3 While this study focuses on the combined effects of the Kyoto gases, much of the behavior in SGM (as with all models) is driven by efforts to limit the atmospheric concentration of CO2. As with other models, we find that the limited cumulative emissions associated with stabilization of atmospheric CO2 concentrations implies an essentially “zero sum game” character to international emissions mitigation architectures. Compared with an “ideal” distribution of emissions mitigation over space and time, emissions mitigations that are not undertaken in a given place and time must be undertaken at another place or time. However, as the desired steady-state CO2 concentration declines, shifting emissions over time becomes increasingly less tractable, leaving only shifts from one place to another. In other words, at low steady-state CO2 2 The EMF22 scenarios do not consider other potential imperfections in emissions mitigation regimes. While the EMF22 international scenarios explore imperfections in the timing of emissions mitigation, they implicitly assume that when regions begin emissions mitigation that reductions are undertaken with “idealized” domestic policy regimes. That is, within a given region emissions mitigation is undertaken in whatever sector of the economy it is cheapest to do so. 3 Ultimately, all major economies of the world must participate in emissions mitigation to stabilize the concentration of CO2 in the atmosphere. This follows from the fact that in the long-term cumulative emissions determine steady-state atmospheric CO2 concentrations, at least on millennial time scales. See Kheshgi, Smith and Edmonds (2005).
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Fig. 1. Reference scenario.
concentrations, mitigation not undertaken by one region at any given point in time must be compensated for by correspondingly more mitigation by another region in that same period of time, as shown in the overview paper (Clarke et al., 2009). The delayed accession scenarios outlined in the EMF22 exercise explore the implications of shifting mitigation across regions. From these scenarios, we can assess the increased mitigation burden placed on participating regions when global cooperation is not achieved (Section 5). We can also compare the cost of limiting climate change, globally and by region, between perfect and imperfect cooperation scenarios (Section 6). The delayed accession scenarios in this study are structured such that some regions undertake mitigation efforts immediately, while other
regions do not. This difference in policy creates heterogeneity among prices; consumers and producers in participating regions face higher fossil fuel prices than consumers and producers in non-participating regions. Differences in prices, in combination with the trade linkages in the global economy, create pressures for emissions leakage. The issue of carbon leakage has been an active area of research over the past decade, stimulated by the need for analysis to support both international trade negotiations and to inform negotiations under the Kyoto Protocol (United Nations, 1997).4 A number of studies have looked at the effect of changing energy prices on energy demand in 4 See Sijm et al. (2004) for a comprehensive review of the impacts of climate change policy on spillovers related to carbon leakage and induced technological change.
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non-participating regions (Felder and Rutherford, 1993; Bollen et al., 2000; Paltsev, 2001; Burniaux and Oliveira Martins, 2000). Other studies (e.g., Reinaud, 2008; Burniaux and Oliveira Martins, 2000; Felder and Rutherford, 1993; Kuik and Gerlagh, 2003; Babiker, 2005; Bollen et al., 2000; and Paltsev, 2001) have shown that carbon policies imposed on a subset of countries will lead to a shift in production of carbon-intensive goods to non-participating countries. Bollen et al. (2000) finds the movement of carbon-intensive production to nonparticipating countries will lead to higher incomes in these countries which will result in greater demand for all goods including energy. The EMF22 scenarios extend this line of inquiry to include these effects against a background of long-term limitations to overall climate forcing. We discuss SGM industrial leakage results in Section 8. We begin by describing the SGM model structure and assumptions that constitute the reference scenario. We discuss the assumed international and domestic policy environment and its implications for emissions mitigation. We then take on the issues of emissions mitigation costs, the importance of technology assumptions in shaping those costs, and finally the role of industrial carbon leakage. 2. Model description The model used in this analysis—the Second Generation Model (SGM)—is a dynamic recursive, computable general equilibrium model, where the complex interactions between the four economic agents (i.e., producers, households, government, and the foreign sector) are explicitly modeled over time. The production sector consists of 16 sectors—agriculture, five energy sectors (i.e., coal, natural gas, crude oil, petroleum products and coking coal, and electricity), seven non-energy industrial sectors (i.e., wood and paper products, chemicals, iron and steel, non-ferrous metals, non-metallic minerals, food, other industry), transportation, and two services sectors. In the production sector, technology is assumed to exhibit constant returns to scale and firms are assumed to maximize profits. There are two types of production technologies represented in the model: a nested constant-elasticity-of-substitution (CES) structure, used in all producing sectors except electricity, where adjustment occurs through input substitution, and a nested logit structure used in the electricity sector where adjustment occurs through shifts between Leontief technologies. In the non-electricity sectors, technical change occurs by adjusting the coefficients of the production function over time at an exogenously specified rate. In the electricity sector, eleven generating technologies are explicitly represented—oil-fired, natural gas single cycle, natural gas combined cycle (NGCC), pulverized coal, coal integrated gasification combined cycle (IGCC), nuclear, hydropower, wind, solar, geothermal, and biomass. Carbon capture and storage (CCS) technology can be combined with NGCC and IGCC. To capture the stickiness of capital and technology, the model tracks capital stocks by vintage and technology in the electricity
Fig. 2. CO2 emissions by region in the reference scenario.
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Table 1 Climate change limitation scenarios. Immediate accession (S1)
Delayed accession (S2)
Radiative forcing limit
CO2 equivalent concentration
Overshoot (OS)
Not to exceed (S)
Overshoot (OS)
Not to exceed (S)
2.6 W/m2 3.7 W/m2 4.5 W/m2
450 ppm-eq 550 ppm-eq 650 ppm-eq
S1_2p6_OS ⁎ S1_3p7_OS
S1_2p6_S⁎ S1_3p7_S S1_4p5_S
S2_2p6_OS ⁎ S2_3p7_OS
S2_2p6_S⁎ S2_3p7_S S2_4p5_S
⁎ It was not possible to limit radiative forcing to 2.6 W/m2, in either overshoot or not to exceed scenarios, regardless of the accession regime.
sector. Once an investment decision in a particular technology has been made, the capital cannot be transformed for use in any other sector or subsector. In the production of fossil fuel resources, the model employs a resource-reserve framework to capture the depletion of resources and increases in extraction costs. Household demand for each of the 16 commodities is determined by a household demand system based on AIDADS (“An Implicitly Direct Additive Demand System”) (Rimmer and Powell, 1996) that allows for non-homothetic demand and non-linear income-consumption paths. Household income—a portion of which is saved and invested in capital based on the prevailing market interest rate—is derived from labor income, capital income (households are assumed to be the owners of capital), and transfers. The government sector collects taxes and distributes the tax revenue to household income in a lump sum fashion and produces goods and services that are provided to households. The foreign sector is modeled using the standard Armington approach where imports are considered to be imperfect substitutes for domestic commodities. Bilateral trade in all goods and services is explicitly modeled. CO2 emissions in each region are estimated in the model based on the amount and type of fossil fuel consumed by each of the three domestic economic agents. CO2 concentration estimates are generated by linking the SGM emissions results with the Model for the Assessment of Greenhouse-Gas Induced Climate Change (MAGICC), an integrated model of coupled gas-cycle, climate, and ice-melt models. Radiative forcing is calculated within MAGICC based on SGM's endogenously calculated carbon emissions and exogenously specified non-CO2 emissions paths.5 The primary source of data for the construction of model parameters is the social accounts of the Global Trade Analysis Project (GTAP) database, version 6 (Dimaranan, 2006). To build in the energy detail of the model, we incorporate electricity generation data from the International Energy Agency (IEA, 2007a,b) and electricity technology costs from the Energy Information Administration (EIA,1997, EIA, 2008). 3. The reference scenario The SGM reference case is characterized by a peak and decline population scenario (Fig. 1, Panel A) which follow MiniCAM assumptions presented in Clarke et al. (2007). Labor productivity growth rates in developed countries are assumed to range from 1% to 2% per year while labor productivity growth rates in developing regions are assumed in earlier years to be as high as 5% per year (China), declining throughout the century. These assumptions regarding labor productivity growth result in the reference case GNP estimates shown in Fig. 1, Panel B. In the BRICs countries (Brazil, Russia, India, and China), GNP grows at an average annual rate of 3.78% over the 100 year period (2001–2101), while GNP grows by 1.76% and 3.28% annually on average in the Group 1
5 The non-CO2 emissions pathways used in this analysis are from the MiniCAM model (Calvin et al., 2009). We use two separate pathways, one for a reference scenario and one for policy scenarios. The policy scenario pathway reflects reductions in non-CO2 emissions due to the imposition of a carbon price.
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Table 2 Delayed accession (S2). Group
SGM regions
Period of policy phase in
Group 1 Group 2 Group 3
USA, European Union (27), Rest of Annex I Brazil, Russia, India, China Rest of the World
2012 to 2016 2031 to 2050 2051 to 2070
countries and the rest of the world (ROW, Group 3), respectively, over this same period. Global electricity generation grows by a factor of seven between 2001 and 2100 (Fig. 1, Panel C). Coal power generation continues to account for approximately 40% of total electricity while nuclear power's share of electricity grows from 17% in 2001 to nearly 25% of electricity in 2100. Additionally, power generation from wind, solar,
and geothermal grows from less than 1% per year in 2001 to roughly 15% in 2100. Global primary energy consumption triples throughout the century with much of this growth occurring in the developing regions (Fig. 1, Panel D). Primary energy consumption in the United States grows from 84 EJ per year in 2001 to 119 EJ per year in 2100, an increase of only 40%. China's primary energy consumption, however, grows from 42 EJ per year in 2001 to 286 EJ per year in 2100, a six-fold increase. All regions exhibit continued dependence on fossil fuels throughout the century. CO2 emissions, shown in Fig. 2, grow from 23 GtCO2 per year in 2001 to 76 GtCO2 per year in 2100. Like primary energy, most of the growth in CO2 emissions occurs in the developing regions. In 2001, China's share of global emissions is 15% while the ROW share is 18%. By 2100, China's share doubles to 31% while the ROW's share reaches 27%.
Fig. 3. CO2 emissions under a reference scenario and four policy scenarios.
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4. Policy scenarios The EMF 22 International Transition Subgroup was tasked with assessing the implications of limiting radiative forcing through the reduction of emissions of the suite of greenhouse gases included in the Kyoto Protocol in ten different scenarios. These scenarios span five different climate targets—i.e., “not to exceed” radiative forcing limits of 2.6 W/m2, 3.7 W/m2, and 4.5 W/m2, and limits of 2.6 W/m2 and 3.7 W/m2 that can be exceeded but must be achieved at the end of the 100 year period (“overshoot”)—under two different international policy regimes (Table 1). In the first policy regime, “immediate accession” (S1), we assume full global participation beginning in the year 2012; i.e., all regions participate in a global effort to meet the radiative forcing limit. The second policy regime assumes that full accession is delayed. In the delayed accession scenarios (S2), only the Group 1 nations face the radiative forcing limit beginning in 2012. The BRICs regions enter the policy regime in 2031 and the rest of the world enters in 2051. In each of these scenarios, emissions reductions occur due to the imposition of a carbon tax on fossil fuels. For the immediate accession scenarios, the carbon tax rate is chosen to minimize the cost of meeting the target. Cost minimization requires that the carbon tax rate increases at the rate of interest plus the rate of ocean carbon uptake (Edmonds et al., 2008; Clarke et al., 2007; Hotelling, 1931; Peck and Wan, 1996). Having the carbon tax rise at the interest rate ensures that the marginal cost of abatement is constant across time, and thus, exhausts all opportunities for arbitrage across time. Under delayed accession, we assume that the carbon tax imposed in the Group 1 countries rises exponentially.6 In the non-Group 1 nations, we impose a carbon tax in their accession year equal to the carbon tax imposed in the Group 1 nations in 2012. In subsequent years, we assume that the carbon tax in the non-Group 1 nations increases linearly over a twenty year period to meet the Group 1 carbon tax rate. Thus, the BRICs carbon tax is equal to the Group 1 carbon tax from 2051 onward while the ROW carbon tax matches the Group 1 carbon tax in 2071 and beyond. Table 2 summarizes the delayed accession assumptions within the SGM model. In the overshoot scenarios, we adjust the initial tax in Group 1 such that the radiative forcing in 2100 is kept below the specified limit. However, by restricting radiative forcing in 2100, we also constrain radiative forcing to levels below the required limit in all previous periods. That is, the overshoot scenarios never exceed their 2100 target and radiative forcing gradually rises to the policy limit. Therefore, the model results of the 3.7 W/m2 overshoot and 3.7 W/m2 not-toexceed scenarios are identical. This phenomenon occurs for both the immediate and delayed accession cases. As we will see in our discussion of the role of technology assumptions, the shape of the “overshoot” emissions trajectory relative to the “not-to-exceed” emissions trajectory is clearly linked to technology availability. 5. Emissions mitigation Limiting climate forcing requires a reduction in CO2 emissions with the amount of emissions mitigation depending on the climate limit. Fig. 3 shows global and regional CO2 emissions under a
6 This Group 1 path is consistent with cost minimization. Other means of implementing the delayed accession scenarios exist. For example, one could assume that the global emissions pathway in the immediate accession scenario is optimal and restrict global emissions to that path under delayed accession. However, this specification would require dramatic emissions reductions by the Group 1 nations in the early years. Such deep cuts may be unattainable and would change the collection of scenarios that are possible within a model. In the SGM model, this specification would render the 3.7 W/m2 scenario with delay unattainable. This scenario would require Group 1 emissions to be negative to make up for the growth assumed in Groups 2 and 3. Without bioCCS technologies, negative emissions are not possible.
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reference case and the four policy scenarios. From this figure, we see that to limit radiative forcing to 3.7 W/m2 requires an immediate reduction in global emissions. Emissions are reduced by 20% between 2011 and 2016. In the immediate accession regime, this requires action on the part of all countries. Under delayed accession, the burden of emissions reduction initially falls more heavily on Group 1. Group 1 reduces its emissions by 35% in five years, while BRICs (Group 2) and Group 3 continue to increase emissions. However, accession leads to dramatic emissions reductions in participating regions as soon as they enter the mitigating coalition. These new entrants move rapidly to catch up to their trajectory in the immediate accession scenario. Both Groups 2 and 3 exhibit higher CO2 emissions in the delayed accession scenarios than in the reference scenario, Fig. 3. The effect is most pronounced for Group 3, which does not participate in emissions mitigation until 2051, but is also observed for Group 2 prior to its accession. Thus, we observe carbon “leakage” from Group 1 to Groups 2 and 3 until 2031 and from Groups 1 and 2 to Group 3 between 2031 and 2051. We explore the leakage issue in a separate section of this paper. Fig. 3 also shows that after the initial drop in emissions relative to 2005, following accession, further mitigation is gradual in the immediate accession case. As noted above, we see two subsequent steep declines in regional emissions corresponding to the accession of BRICs (2031) and Group 3 (2051) into the regime. With the exception of these two years, emissions mitigation is gradual under delayed accession as well. Additionally, CO2 emissions at the end of the century are still positive and no more than 60% below 2001 levels. This is despite the rather large carbon taxes employed in the SGM model (Fig. 4); the delayed accession 3.7 W/m2 scenario has a carbon tax of over $3000/tCO2 in 2100. The need for such a large tax derives from the technological assumptions in SGM. SGM has a limited number of clean technologies available. For example, the model does not allow transportation to switch to biofuels or electricity. No method exists for reducing cement emissions. Carbon capture and storage is limited to fossil electric technologies and even those technologies are not available until 2026. Beyond the technology options in the electric sector, the primary means of reducing emissions in SGM is through reduced energy consumption (Fig. 5). As a result, the marginal abatement cost curves (Fig. 6) asymptote at some point. Increasing the carbon tax, even by a large amount, has a negligible impact on emissions. Finally, radiative forcing from Kyoto gases was nearly 2.4 W/m2 in 2005; hence, limiting radiative forcing to 2.6 W/m2 is an ambitious task7. Such an endeavor requires a decarbonization of the economy almost immediately. As a result of the demographic, economic and technological assumptions discussed previously, rapidly reducing emissions drastically, as required in the 2.6 W/m2 scenarios, is not possible. Thus, in SGM, the four 2.6 W/m2 scenarios (immediate and delayed accession, not-to-exceed and overshoot) were not possible. These scenarios would require an infinite carbon tax to reduce emissions enough to meet the climate limit. 6. The cost of emissions mitigation Emissions mitigation imposes a cost to society because the use of otherwise productive resources is foregone so as to achieve the environmental benefit. While there are many measures of cost that appear in the literature, we report an “Equivalent Variation” cost measure. The Equivalent Variation measure is the lump-sum payment that our infinitely lived representative consumer would need so that they were just as happy, excluding the environmental benefits from the emissions mitigation, under the emissions mitigation program as
7
See Calvin et al. (2009).
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Fig. 4. Group 1 CO2 taxes.
they would have been otherwise.8 This measure will capture any cost associated with mitigation efforts, as well as any change in revenue due to changes in industrial production or energy export revenue. We calculate the equivalent variation for the 3.7 W/m2 scenarios (both immediate and delayed accession) for each of the three regions and display the results in Fig. 7 for the period 2016 (the first policy year) to 2051. From this figure, we see that Group 1 costs are larger under delayed accession in all years due to the significantly higher carbon tax. Group 2, however, benefits from delay prior to their accession. Costs in this group are negative until 2031. Group 3, however, incurs a cost, even prior to its accession. Delay reduces the costs in this group relative to the immediate accession scenario, but a cost is still incurred. This cost can be attributed to reduced energy export revenue. Group 3 is a large supplier of fossil fuels and is negatively impacted by decreased consumption in Group 1. Interestingly, global costs are lower in the delayed accession case relative to the immediate accession case until 2031 when Group 2 undertakes significant emissions mitigation activities in the delayed accession scenario. These lower costs reflect in part the higher global emissions over that same period. However, we note that emissions are higher in the delayed accession scenario until 2051 when Group 3 joins the global mitigation coalition. The earlier cross-over of global costs is a reflection of relatively inefficient mitigation over space and time reflected in the higher carbon prices. While delay in accession shifts the distribution of present discounted costs between the three regions, Fig. 8, Panels A and B, Groups 1 and 2 carry a higher share and Group 3 a lower share. However, as Panel C reveals, total costs are higher in all regions. The greatest increase in cost from delay is in Group 1, with a somewhat lower increase in Group 2, and only a very small increase in Group 3. Nonetheless, all parties have higher present discounted costs under delay. This finding is somewhat ironic; one would expect delayed accession to reduce the burden on Groups 2 and 3. However, the effect of delay is merely to delay mitigation 8 Standard cost metrics include: (1) GDP loss, (2) Consumption loss, (3) Area under the Marginal Abatement Cost (MAC) curve, (4) Compensated Variation, and (5) Equivalent Variation. GDP loss captures the net reduction in consumption, investment, and net export revenue. Thus, we can attribute differences in consumption loss and GDP loss as the effect of exports or investment. The area under the MAC curve measures the deadweight loss to society under a carbon policy. Deadweight loss is the loss in both consumer and producer surplus net of the tax revenue. Compensated variation is the amount of money one would have to compensate a consumer after a price change so their utility remains at its initial level. Equivalent variation is the amount of money a consumer would have to be paid in lieu of a price change to reach the new utility. Whether the compensated variation exceeds equivalent variation or vice versa depends on the direction of the price change and whether the good is a normal or inferior good. In all cases, however, consumer surplus lies between compensated and equivalent variation (Mas-Colell et al., 1995). If the marginal utility of income is independent of price, then the compensated variation, equivalent variation, and consumer surplus are all equal. Additionally, when the marginal utility of income is independent of price, compensated and equivalent variation are equal to the deadweight loss, and thus, equal to the area under the marginal abatement cost curve (Varian, 1984).
Fig. 5. Global primary energy consumption in the 3.7 W/m2 Scenario.
Fig. 6. Marginal abatement cost curve for the immediate accession, 3.7 W/m2 scenario.
(and costs) until later in the century. Additionally, delay increases the burden faced by all regions in the second half of the century.9 This increase in post-accession costs, relative to the immediate accession scenario, offsets any gains prior to accession. The net result is an increase in cost relative to immediate accession in all regions, consistent with the findings in Edmonds et al. (2008). 9 The increase in post-accession burden is due in part to scenario design. We have implemented the delayed accession scenarios in an effort to minimize global costs. An alternate implementation where global emissions under delay are held at their immediate accession levels would increase the costs in Group 1 substantially, but potentially reduce costs in Groups 2 and 3. However, as previously mentioned, such a scenario design would preclude the SGM model from attaining the 3.7 W/m2 target.
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Fig. 7. Policy cost as annual equivalent variation of limiting radiative forcing to 3.7 W/m2 for the world (Panel A), Group 1 (OECD) (Panel B), Group 2 (BRICs) (Panel C), and Group 3 (Rest of the World) (Panel D) in Trillions of 2005 USD.
7. The importance of technology Technology assumptions play a critical role in shaping SGM results. For example, carbon taxes in MiniCAM are less than onefifth of the SGM carbon taxes for the 3.7 W/m2 overshoot scenario and the MiniCAM model (Calvin et al., 2009) found both 2.6 W/m2 immediate accession scenarios feasible, while SGM did not. To help understand the role of technology in explaining differences between the SGM and MiniCAM model results, we developed a sensitivity experiment using MiniCAM in which MiniCAM technology assumptions are brought into alignment with those used in the SGM.
MiniCAM and SGM use the same underlying population scenarios. Global GNP in the SGM reference scenario roughly matches the GNP path in MiniCAM.10 Primary energy in both models grows to approximately 1400 EJ/yr in 2100 in the reference scenario, with a little less than 65% of that energy supplied by fossil fuels. The similarity between the reference scenarios in these two models eases the comparison of policy results; differences in policy scenarios can be attributed to differences in technology and model 10 Global GDP differs by less than 3% from 2050 onwards. The difference prior to 2050 is a little more substantial, but never more than 10%.
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Fig. 8. Present value discounted policy cost as equivalent variation in the 3.7 W/m2 scenarios.
structure rather than differences in socioeconomics or baseline energy consumption. Despite similarities in reference scenarios’ demographics, energy use, and emissions, the MiniCAM model includes numerous advanced technologies, many of which are only utilized under a carbon policy. These technologies include CO2 capture and storage on fossil electric technologies, biomass electricity technologies, hydrogen production,
Fig. 9. Carbon taxes required to limit radiative forcing to 3.7 W/m2 in 2100, assuming immediate accession.
cement, and coal-to-liquids production. Additionally, the MiniCAM model allows for fuel switching into biomass in industry and buildings and into biofuels, electricity, and hydrogen in transportation. Of these technologies, the SGM scenario only allows for CO2 capture and storage on fossil electricity technologies. We removed the technologies from MiniCAM that are unavailable in SGM and calculated the carbon tax path need to limit radiative forcing to 3.7 W/m2 in 2100, assuming immediate accession. The tax paths for SGM, the MiniCAM Base case, and three other variants of MiniCAM are shown in Fig. 9. The three variants iteratively remove technologies from the MiniCAM model. Removing CO2 capture and storage technologies doubles the carbon tax in the scenario. Removing biomass from the No CCS scenario increases the carbon tax by another 50%. Finally, removing all hydrogen and electric transportation options doubles the carbon tax yet again.11 The net effect is a fivefold increase in carbon taxes in MiniCAM due to limits in technology. As a result, the carbon taxes are nearly identical in the two models when the technologies assumptions are comparable.12 Under this low technology variant of MiniCAM, we also found the 2.6 W/m 2 not-to-exceed scenario with immediate accession 11 The scenario that results from the removal of these technologies is the Low Tech version of MiniCAM, discussed both in this paper and in Calvin et al. (2009). 12 We had to remove all carbon capture and storage technologies in the MiniCAM No CCS scenarios. SGM still allows CCS on fossil electric technologies.
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Fig. 10. Radiative forcing for the 3.7 W/m2 overshoot scenarios.
infeasible. Limiting the use of carbon capture and storage, biomass, and advanced transportation technologies creates a perfect storm, where all non-electric sectors are forced to rely on freely venting fossil fuels. The MiniCAM model can limit radiative forcing to 2.6 W/m2 without CCS, or without biomass, or without advanced transportation technologies. It can even limit radiative forcing to 2.6 W/m2 without biomass or CCS. But removing all three technology options prohibits limiting radiative forcing to 2.6 W/m2.13 Fig. 10 depicts the radiative forcing for the SGM model and four variations of the MiniCAM model. By removing technologies from the MiniCAM scenario, we move from a world where ”overshoot” to meet a year 2095 climate forcing limit is optimal to a world where no incentive to “overshoot” exists. Thus, we conclude that overshoot is a technology phenomenon. Without advanced technology options later in the century, we have no means of accelerating emissions reductions and thus cannot return to a radiative forcing level that we have exceeded. 8. Industrial leakage Delayed accession creates the potential for leakage in the energy and industrial sectors. In Fig. 3, panel C and D, we see the net effects of the leakage occurring within the SGM; carbon emissions are larger in the delayed accession scenario than in the reference scenario. We calculate total SGM leakage as the difference between participating regions emissions mitigation and global emissions mitigation. Thus, if participating regions reduce emissions by 6 GtCO2 in 2021 and global emissions mitigation is only 5.7 GtCO2 in that same year, then the global leakage amount is 0.3 GtCO2. Fig. 11 shows the total amount of leakage globally, as a percentage of emissions mitigation. The total amount of leakage in SGM never exceeds 6%. However, the amount of emissions leakage varies by sector — energy intensive sectors exhibit significantly more leakage than non-energy intensive sectors. For example, leakage in the iron and steel sector is as high as 56%, while leakage from services never exceeds 3%. The relatively low level of economy-wide leakage is influenced by both the study design and the Armington elasticities employed within SGM.14 The EMF22 scenarios prescribe delay in Group 2 only until 2031 and delay in Group 3 only until 2051. Note that the “saw tooth” pattern of aggregate leakage in Fig. 11 suggests that leakage increases with the price of carbon in the control regions. If these regions were 13 As a note, it was possible, albeit expensive, to limit radiative forcing to 2.6 W/m2 for the first 50 years in the MiniCAM Low Tech scenario. However, in the second half of the century, the model reached a lower limit on the radiative forcing that could be attained. 14 SGM employs an Armington assumption, where domestic and imported products are differentiated. The choice of Armington elasticity influences the degree of leakage. Using a higher elasticity, or a net trade assumption, would result in more shifts in production and more leakage.
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Fig. 11. Global fossil fuel and industrial emissions leakage in the delayed accession 3.7 W/m2 scenario, as a percentage of total emissions mitigation.
Fig. 12. 2041 Fuel prices in ROW in the reference and delayed accession 3.7 W/m2 scenarios.
delayed until even further into the future, one could expect more leakage. To demonstrate this effect we construct a scenario using the same carbon prices as in our delayed accession 3.7 W/m2 limit scenario, but assume that Group 3 never enters the climate control regime. This results in emissions leakage increasing steadily to 14% at the end of the century (Fig. 11). To illustrate the relative contributions of some of key forces driving leakage, we have examined three factors: (1) changes in the scale of total industrial output in non-participating countries; (2) changes in world energy prices that induce substitutions across inputs to production; and (3) a shift in comparative advantage of carbonintensive production to non-participating countries as a result of
Fig. 13. Iron and steel production in Group 3 in the reference and 3.7 W/m2 scenarios.
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K. Calvin et al. / Energy Economics 31 (2009) S187–S197 Table 3 A decomposition of emissions leakage in ROW in 2041.
Scale of output Carbon intensity Industrial composition
Delayed vs. reference: relative index for ROW 2041 CO2 emissionsa
Relative contribution to ROW year 2041 total leakage (%)
1.0024 1.0323 1.0395
3.3% 44.3% 52.4%
a This index isolates the impact of each factor on the leakage or the change in total year 2041 ROW CO2 emissions from the reference to the delayed accession scenario. For example, the impact of the scale of output ceterus parabis was an increase in ROW CO2 emissions of 0.24%, while the impact of the change in industrial composition alone was an increase in emissions of nearly 4%.
Fig. 14. Iron and steel imports into Group 1 from Group 3 in the reference and 3.7 W/m2 scenarios.
increased production costs in participating countries.15 We use a multiplicative arithmetic mean form of the Divisia decomposition method (Ang and Zhang, 2000) to attribute the relative influence of each of these factors on emissions in Group 3 in 2041 for the 3.7 W/m2 with delayed accession scenario. To assess the effect of changes in scale on carbon emissions in Group 3, we look at the change in emissions in 2041 (relative to 2006) assuming the industrial carbon intensity is constant and equal to the 2006 value. Using the Divisia calculation, we find that about 3% of the emissions growth in ROW, relative to the reference scenario, is due to the increased scale of output. Changes in output, however, are a very small part of the story in these scenarios. Changes in energy prices can induce shifts in production inputs, which in turn can affect carbon emissions. To determine the effect of input substitution on carbon emissions, we look at the within industry carbon intensity in both the reference scenario and in the delayed accession scenario. Because of carbon policies in the participating regions, the prices of fossil fuels to nonparticipants (see Fig. 12) are lower than in the reference scenario.16 Thus, we observe less input substitution and less carbon intensity improvements in Group 3 in the delayed accession case than in the reference case. The change in energy prices between the delayed accession and reference scenarios accounts for about 44% of the leakage in 2041. Imposing a carbon tax in a region raises the price of production for energy-intensive goods in that region. When some regions face this price increase (Group 1) and others do not (Group 2, BRICs and Group 3, ROW), as in the delayed accession scenarios, incentives exist for industrial leakage. Group 1 finds it preferable to import products rather than to produce them domestically and pay the carbon tax. As a result, production in BRICs and ROW increases, as do exports from these regions into the Group 1 countries. Fig. 13 shows iron and steel production in the ROW under the reference, immediate accession 3.7 W/m2, and delayed accession 3.7 W/m2 scenarios. In this figure, production is measured as percentage of reference scenario production. The immediate accession scenarios show a decline in iron and steel production from the reference case. The delayed accession scenarios, however, have increased production. Fig. 14 shows iron and steel imports into Group 1 from ROW under the same three scenarios. Consistent with the leakage story, this figure shows an increase in iron
15
Figs. 13 and 14 are an example of this effect. Note that higher end-use energy prices for fossil fuels in mitigating regions as a consequence of the carbon tax leads to reduced energy demands globally, which in turn lowers the world price for fossil fuels. The degree of reduction varies by fossil fuel. Coal supply is more elastic than oil supply and thus, oil prices tend to decline relatively more than coal prices (Fig. 12). 16
and steel exports from ROW under delayed accession. Hence, delayed accession shifts production of energy intensive industries outside of Group 1 and into ROW. This increase in the production and exports of energy-intensive goods in the ROW contributes to their increased carbon emissions. To assess this effect, we look at the shift in the composition of industrial output (i.e., structural change) in the reference and delayed accession scenarios. Structural change has a downward effect on emissions in both cases, due to the expansion of light industry over heavy industry. However, the ratio of light industry to heavy industry is larger in the reference scenario than in the delayed accession scenario. This implies that there is a larger composition of carbon-intensive production in the delay case, suggesting a movement of carbon-intensive production to ROW. The shift in carbon-intensive production to ROW accounts for the remaining 52% of the leakage in 2041. Table 3 summarizes this decomposition of the leakage effects in 2041 into the three components previously discussed. Finally, we note that changes in income in a policy case, compared to a reference case, can change the demand for industrial products within a region. Interestingly, because of the decreases in the value of energy exports, Group 3 income decreases in the delayed accession scenario, which tends to reduce carbon emissions rather than contributing to leakage. This effect is not captured by our Divisia decomposition. 9. Discussion In our analysis, we find delayed accession increases the cost incurred by mitigating regions in the near term relative to the immediate accession scenario. Delay decreases near-term costs in non-mitigating regions relative to the immediate accession regime. However, delayed accession increases costs everywhere in the second half of the century. The net effect is that total discounted cost is higher in the delayed accession cases than in the immediate accession cases for all regions, including the delayed participants. Thus, while delay shifts some of the cost burden to early participants, we observe an increase in present discounted costs to all parties as a consequence of the temporal and spatial inefficiencies introduced by the delay. Technology has a significant impact on the cost of limiting climate change. By removing advanced technology options from an integrated assessment model, the carbon tax needed to reach a particular radiative forcing limit increases. Additionally, the reduction can be significant; moving from advanced technology to low technology in one scenario required a five-fold increase in carbon taxes. Technology also influences the ability to meet low radiative forcing limits. The limited availability of clean technologies within SGM hinders restricting atmospheric concentrations to 450 ppm CO2-equivalent. SGM found that a single scenario satisfied the requirements of the overshoot and not-to-exceed scenarios. That is, the cost-minimizing path to 3.7 W/m2 in 2100 did not result in radiative forcing that exceeded that limit in any period. Using another integrated assessment model, we conclude that the degree to which “overshoot” reduces the cost of meeting a limit in radiative forcing in 2100 is
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affected by available technology options. The availability of advanced technology options that can rapidly lower emissions allows near-term emissions mitigation to be shifted into the future while still achieving the long-term goal and at lower cost. Without these options, like in SGM, delaying emissions mitigation until later in the century is not cost-effective.17 The spatial and temporal cost inefficiencies induced by delayed accession are exacerbated by industrial emissions leakage from emissions mitigating regions to non-participating regions. In these scenarios, we found that leakage from changes in scale of output in non-participating regions was minimal. We did find in our delayed scenarios that lower energy prices induce less factor substitution than would occur in a reference scenario, resulting in more carbonintensive industries. Finally, regions facing a carbon tax will find it preferable to import energy-intensive goods from non-participating countries, rather than produce those goods domestically, further increasing the emissions of non-participating regions. However, we did not find the magnitude of leakage to be large. References Ang, B.W., Zhang, F.W., 2000. A survey of index decomposition analysis in energy and environmental studies. Energy 25, 1149–1176. Babiker, M.H., 2005. Climate change policy, market structure, and carbon leakage. Journal of International Economics 65, 421–445. Berk, M.M., den Elzen, M.G.J., 2001. Options for differentiation of future commitments in climate policy: how to realize timely participation to meet stringent climate goals? Climate Policy 1 (4), 465–480. Bollen, J., Manders, T., Timmer, H., 2000. Decomposing carbon leakage—an analysis of the Kyoto protocol. Third Annual Conference on Global Economic Analysis, Melbourne, Australia. Burniaux, J-M, Oliveira Martins, J., 2000. Carbon emission leakage: a general equilibrium view. OECD Economics Department Working Paper, 242. Paris. Calvin, Katherine, Edmonds, Jae, Bond-Lamberty, Ben, Clarke, Leon, Kyle, Page, Smith, Steve, Thomson, Allison, Wise, Marshall, 2009. 2.6: Limiting Climate Change to 450 ppm CO2 Equivalent in the 21st Century, Submitted to Energy Economics. Clarke, L., Edmonds, J., Jacoby, H., Pitcher, H., Reilly, J., Richels, R., 2007. CCSP synthesis and assessment product 2.1, part a: scenarios of greenhouse gas emissions and atmospheric concentrations. U.S. Government Printing Office, Washington DC. Clarke, L., Edmonds, J., Krey, V., Richels, R., Rose, S., Tavoni, M., 2009. International Climate Policy Architectures: Overview of the EMF 22 International Scenarios. Energy Economics. Forthcoming. den Elzen, M.G.J., Meinshausen, M., 2005. Meeting the EU 2 °C Climate Target: Global and Regional Emission Implications, RIVM report, 728001031. Netherlands Environmental Assessment Agency, Bilthoven. http://www.rivm.nl/bibliotheek/ rapporten/728001031.pdf. den Elzen, M.G.J., Lucas, P., van Vuuren, D., 2005. Abatement costs of post-Kyoto climate regimes. Energy Policy 33 (16), 2138–2151.
17 It should be noted that it may be physically possible to delay emissions mitigation until later in the century. However, it would require a carbon tax that rises faster than the interest rate and is thus not cost minimizing.
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Dimaranan, BetinaV. (Ed.), 2006. Global Trade, Assistance, and Production: The GTAP 6 Data Base. Center for Global Trade Analysis, Purdue University. Edmonds, J., Clarke, L., Lurz, J., Wise, M., 2008. Stabilizing CO2 concentrations with incomplete international cooperation. Climate Policy 8, 355–376 PNNL-SA-16932. EIA, 1997. Assumptions to the Annual Energy Outlook 2008. InEnergy Information Administration, U.S. Department of Energy, Washington, D.C. Accessed at ftp://ftp. eia.doe.gov/pub/forecasting/aeo97/aeo97asu.pdf. EIA, 2008. Assumptions to the Annual Energy Outlook 2008. Energy Information Administration, U.S. Department of Energy, Washington, D.C. DOE/EIA-0554(2008). Accessed at http://www.eia.doe.gov/oiaf/aeo/assumption/. Felder, S., Rutherford, T.F., 1993. Unilateral CO2 reductions and carbon leakage: the consequences of international trade in oil and basic materials. Journal of Environmental Economics and Management 25, 162–176. Hotelling, H., 1931. The economics of exhaustible resources. Journal of Political Economy 39, 137–175. IEA, 2007a. Energy balances of non-OECD countries, 1971–2005. International Energy Agency, Paris, France. IEA, 2007b. Energy balances of OECD countries, 1960–2005. International Energy Agency, Paris, France. Keppo, I., Rao, S., 2007. International climate regimes: Effects of delayed participation, Technological Forecasting and Social Change, Vol. 74, Issue 7, Greenhouse Gases - Integrated Assessment, pp. 962–979, ISSN 0040-1625. doi:10.1016/j. techfore.2006.05.025. Kheshgi, H., Smith, S.J., Edmonds, J., 2005. Emissions and atmospheric CO2 stabilization: long-term limits and paths, mitigation and adaptation strategies for global change. Climate Change and Environmental Policy 10, 213–220 PNNL-SA-38439. Kuik, O., Gerlagh, R., 2003. Trade liberalization and carbon leakage. The Energy Journal 24 (3), 97–119. Mas-Colell, Andreu, Whinston, Michael, Green, Jerry, 1995. Microeconomic theory. Oxford University Press, Inc., New York. Paltsev, S.V., 2001. The Kyoto protocol: regional and sectoral contributions to the carbon leakage. The Energy Journal 22 (4), 53–79. Peck, S.C., Wan, Y.H., 1996. Analytic solutions of simple greenhouse gas emission models. In: Van Ierland, E.C., Gorka, K. (Eds.), Chapter 6 in Economics of Atmospheric Pollution. Springer Verlag, New York. Reinaud, J., 2008. Climate Policy and Carbon Leakage—Impacts of the European Emissions Trading Scheme on Aluminium. OECD/International Energy Agency. October. Richels, R., Rutherford, T., Blanford, G., Clarke, L., 2008. Managing the transition to climate stabilization. Climate Policy 7 (5), 409–428. Rimmer, M.T., Powell, A.A., 1996. An implicitly, directly additive demand system. Applied Economics 28, 1613–1622. Sijm, J.P.M, Kuik, O.J., Patel, M., Oikonomou, V., Worrell, E., Lako, P., Annevelink, E., Nabuurs, G.J., Elbersen, H.W., 2004. Spillovers of climate policy: an assessment of the incidence of carbon leakage and induced technological change due to CO2 abatement measures. Netherlands Research Programme on Climate Change, Report 500036-002. United Nations, 1997. Kyoto Protocol to the United Nations framework convention on climate change. United Nations, New York. Valverde, L.J., Webster, M.D., 1999. Stabilizing atmospheric CO2 concentrations: technical, political, and economic dimensions. Energy Policy 27 (10), 613–622. Varian, Hal, 1984. Microeconomic analysis. W. W. Norton & Company, Inc., New York.
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Energy Economics j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / e n e c o
The distribution and magnitude of emissions mitigation costs in climate stabilization under less than perfect international cooperation: SGM results☆ Katherine Calvin a,⁎, Pralit Patel b, Allen Fawcett c, Leon Clarke a, Karen Fisher-Vanden d, Jae Edmonds a, Son H. Kim a, Ron Sands e, Marshall Wise a a
The Pacific Northwest National Laboratory, Joint Global Change Research Institute (JGCRI) at the University of Maryland, College Park, 5825 University Research Court, Suite 3500, College Park, MD 20740, USA Joint Global Change Research Institute (JGCRI) at the University of Maryland, College Park, MD USA c U.S. Environmental Protection Agency's Climate Change Division, USA d Pennsylvania State University, University Park, PA USA e Economic Research Service, U.S. Department of Agriculture, USA b
a r t i c l e
i n f o
Article history: Received 7 April 2009 Received in revised form 18 June 2009 Accepted 18 June 2009 Available online 27 June 2009 Keywords: Climate change Emissions mitigation CGE models Leakage
a b s t r a c t The EMF22 Transition Scenario subgroup explores the implications of delayed accession on limiting climate change to various radiative forcing levels. This paper focuses on the cost of limiting radiative forcing and the role that industrial leakage plays in scenarios of delayed accession. We find that delayed participation shifts the cost burden toward regions that take early action and away from regions that undertake mitigation later. However, the inefficiencies introduced by delay are so great that present discounted costs are higher in the delayed scenario for regions that delay as well as for regions taking early actions. An important element of these inefficiencies is industrial emissions leakage, that is non-participating regions increase their emissions relative to the reference case. In aggregate, industrial leakage rates are less than 10% if all regions of the world begin emissions mitigation by 2050—higher in carbon-intensive sectors and lower in low-carbon-intensity sectors. Additionally, we consider the implication of technology on carbon prices, the feasibility of limiting radiative forcing to low levels, and the incentives to overshoot the radiative forcing limit. © 2009 Elsevier B.V. All rights reserved.
1. Introduction Most of the literature exploring the feasibility and cost of meeting various long-term, global, environmental goals has employed idealized assumptions about the international policy environment1. In general it is assumed that all nations of the world undertake identical climate policies that employ perfect “where” and “when” flexibility. That is, emissions mitigation is undertaken wherever and whenever it is least costly. The purpose of the EMF22 study group is to examine the feasibility and cost of meeting various long-term, global, environmental goals in “less than perfect” regimes. In this study imperfection is introduced when some regions of the world participate in emissions limitation regimes, while others do not. In other words, what
☆ The authors are grateful to the U.S. Environmental Protection Agency for financial support for the research presented here. The authors also thank two anonymous reviewers for their helpful comments. The views expressed here are the authors' alone and should not be attributed to the organizations for which they are employed. ⁎ Corresponding author. E-mail address: [email protected] (K. Calvin). 1 Several important exceptions to this generalization include Richels et al. (2008); Edmonds et al. (2008); and Keppo and Rao (2007); den Elzen and Meinshausen (2005), den Elzen et al. (2005), Berk and den Elzen (2001), and Valverde, L.J., M.D. Webster (1999). 0140-9883/$ – see front matter © 2009 Elsevier B.V. All rights reserved. doi:10.1016/j.eneco.2009.06.014
difference does delay in participation in international programs of emissions mitigation make?2,3 While this study focuses on the combined effects of the Kyoto gases, much of the behavior in SGM (as with all models) is driven by efforts to limit the atmospheric concentration of CO2. As with other models, we find that the limited cumulative emissions associated with stabilization of atmospheric CO2 concentrations implies an essentially “zero sum game” character to international emissions mitigation architectures. Compared with an “ideal” distribution of emissions mitigation over space and time, emissions mitigations that are not undertaken in a given place and time must be undertaken at another place or time. However, as the desired steady-state CO2 concentration declines, shifting emissions over time becomes increasingly less tractable, leaving only shifts from one place to another. In other words, at low steady-state CO2 2 The EMF22 scenarios do not consider other potential imperfections in emissions mitigation regimes. While the EMF22 international scenarios explore imperfections in the timing of emissions mitigation, they implicitly assume that when regions begin emissions mitigation that reductions are undertaken with “idealized” domestic policy regimes. That is, within a given region emissions mitigation is undertaken in whatever sector of the economy it is cheapest to do so. 3 Ultimately, all major economies of the world must participate in emissions mitigation to stabilize the concentration of CO2 in the atmosphere. This follows from the fact that in the long-term cumulative emissions determine steady-state atmospheric CO2 concentrations, at least on millennial time scales. See Kheshgi, Smith and Edmonds (2005).
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Fig. 1. Reference scenario.
concentrations, mitigation not undertaken by one region at any given point in time must be compensated for by correspondingly more mitigation by another region in that same period of time, as shown in the overview paper (Clarke et al., 2009). The delayed accession scenarios outlined in the EMF22 exercise explore the implications of shifting mitigation across regions. From these scenarios, we can assess the increased mitigation burden placed on participating regions when global cooperation is not achieved (Section 5). We can also compare the cost of limiting climate change, globally and by region, between perfect and imperfect cooperation scenarios (Section 6). The delayed accession scenarios in this study are structured such that some regions undertake mitigation efforts immediately, while other
regions do not. This difference in policy creates heterogeneity among prices; consumers and producers in participating regions face higher fossil fuel prices than consumers and producers in non-participating regions. Differences in prices, in combination with the trade linkages in the global economy, create pressures for emissions leakage. The issue of carbon leakage has been an active area of research over the past decade, stimulated by the need for analysis to support both international trade negotiations and to inform negotiations under the Kyoto Protocol (United Nations, 1997).4 A number of studies have looked at the effect of changing energy prices on energy demand in 4 See Sijm et al. (2004) for a comprehensive review of the impacts of climate change policy on spillovers related to carbon leakage and induced technological change.
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non-participating regions (Felder and Rutherford, 1993; Bollen et al., 2000; Paltsev, 2001; Burniaux and Oliveira Martins, 2000). Other studies (e.g., Reinaud, 2008; Burniaux and Oliveira Martins, 2000; Felder and Rutherford, 1993; Kuik and Gerlagh, 2003; Babiker, 2005; Bollen et al., 2000; and Paltsev, 2001) have shown that carbon policies imposed on a subset of countries will lead to a shift in production of carbon-intensive goods to non-participating countries. Bollen et al. (2000) finds the movement of carbon-intensive production to nonparticipating countries will lead to higher incomes in these countries which will result in greater demand for all goods including energy. The EMF22 scenarios extend this line of inquiry to include these effects against a background of long-term limitations to overall climate forcing. We discuss SGM industrial leakage results in Section 8. We begin by describing the SGM model structure and assumptions that constitute the reference scenario. We discuss the assumed international and domestic policy environment and its implications for emissions mitigation. We then take on the issues of emissions mitigation costs, the importance of technology assumptions in shaping those costs, and finally the role of industrial carbon leakage. 2. Model description The model used in this analysis—the Second Generation Model (SGM)—is a dynamic recursive, computable general equilibrium model, where the complex interactions between the four economic agents (i.e., producers, households, government, and the foreign sector) are explicitly modeled over time. The production sector consists of 16 sectors—agriculture, five energy sectors (i.e., coal, natural gas, crude oil, petroleum products and coking coal, and electricity), seven non-energy industrial sectors (i.e., wood and paper products, chemicals, iron and steel, non-ferrous metals, non-metallic minerals, food, other industry), transportation, and two services sectors. In the production sector, technology is assumed to exhibit constant returns to scale and firms are assumed to maximize profits. There are two types of production technologies represented in the model: a nested constant-elasticity-of-substitution (CES) structure, used in all producing sectors except electricity, where adjustment occurs through input substitution, and a nested logit structure used in the electricity sector where adjustment occurs through shifts between Leontief technologies. In the non-electricity sectors, technical change occurs by adjusting the coefficients of the production function over time at an exogenously specified rate. In the electricity sector, eleven generating technologies are explicitly represented—oil-fired, natural gas single cycle, natural gas combined cycle (NGCC), pulverized coal, coal integrated gasification combined cycle (IGCC), nuclear, hydropower, wind, solar, geothermal, and biomass. Carbon capture and storage (CCS) technology can be combined with NGCC and IGCC. To capture the stickiness of capital and technology, the model tracks capital stocks by vintage and technology in the electricity
Fig. 2. CO2 emissions by region in the reference scenario.
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Table 1 Climate change limitation scenarios. Immediate accession (S1)
Delayed accession (S2)
Radiative forcing limit
CO2 equivalent concentration
Overshoot (OS)
Not to exceed (S)
Overshoot (OS)
Not to exceed (S)
2.6 W/m2 3.7 W/m2 4.5 W/m2
450 ppm-eq 550 ppm-eq 650 ppm-eq
S1_2p6_OS ⁎ S1_3p7_OS
S1_2p6_S⁎ S1_3p7_S S1_4p5_S
S2_2p6_OS ⁎ S2_3p7_OS
S2_2p6_S⁎ S2_3p7_S S2_4p5_S
⁎ It was not possible to limit radiative forcing to 2.6 W/m2, in either overshoot or not to exceed scenarios, regardless of the accession regime.
sector. Once an investment decision in a particular technology has been made, the capital cannot be transformed for use in any other sector or subsector. In the production of fossil fuel resources, the model employs a resource-reserve framework to capture the depletion of resources and increases in extraction costs. Household demand for each of the 16 commodities is determined by a household demand system based on AIDADS (“An Implicitly Direct Additive Demand System”) (Rimmer and Powell, 1996) that allows for non-homothetic demand and non-linear income-consumption paths. Household income—a portion of which is saved and invested in capital based on the prevailing market interest rate—is derived from labor income, capital income (households are assumed to be the owners of capital), and transfers. The government sector collects taxes and distributes the tax revenue to household income in a lump sum fashion and produces goods and services that are provided to households. The foreign sector is modeled using the standard Armington approach where imports are considered to be imperfect substitutes for domestic commodities. Bilateral trade in all goods and services is explicitly modeled. CO2 emissions in each region are estimated in the model based on the amount and type of fossil fuel consumed by each of the three domestic economic agents. CO2 concentration estimates are generated by linking the SGM emissions results with the Model for the Assessment of Greenhouse-Gas Induced Climate Change (MAGICC), an integrated model of coupled gas-cycle, climate, and ice-melt models. Radiative forcing is calculated within MAGICC based on SGM's endogenously calculated carbon emissions and exogenously specified non-CO2 emissions paths.5 The primary source of data for the construction of model parameters is the social accounts of the Global Trade Analysis Project (GTAP) database, version 6 (Dimaranan, 2006). To build in the energy detail of the model, we incorporate electricity generation data from the International Energy Agency (IEA, 2007a,b) and electricity technology costs from the Energy Information Administration (EIA,1997, EIA, 2008). 3. The reference scenario The SGM reference case is characterized by a peak and decline population scenario (Fig. 1, Panel A) which follow MiniCAM assumptions presented in Clarke et al. (2007). Labor productivity growth rates in developed countries are assumed to range from 1% to 2% per year while labor productivity growth rates in developing regions are assumed in earlier years to be as high as 5% per year (China), declining throughout the century. These assumptions regarding labor productivity growth result in the reference case GNP estimates shown in Fig. 1, Panel B. In the BRICs countries (Brazil, Russia, India, and China), GNP grows at an average annual rate of 3.78% over the 100 year period (2001–2101), while GNP grows by 1.76% and 3.28% annually on average in the Group 1
5 The non-CO2 emissions pathways used in this analysis are from the MiniCAM model (Calvin et al., 2009). We use two separate pathways, one for a reference scenario and one for policy scenarios. The policy scenario pathway reflects reductions in non-CO2 emissions due to the imposition of a carbon price.
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Table 2 Delayed accession (S2). Group
SGM regions
Period of policy phase in
Group 1 Group 2 Group 3
USA, European Union (27), Rest of Annex I Brazil, Russia, India, China Rest of the World
2012 to 2016 2031 to 2050 2051 to 2070
countries and the rest of the world (ROW, Group 3), respectively, over this same period. Global electricity generation grows by a factor of seven between 2001 and 2100 (Fig. 1, Panel C). Coal power generation continues to account for approximately 40% of total electricity while nuclear power's share of electricity grows from 17% in 2001 to nearly 25% of electricity in 2100. Additionally, power generation from wind, solar,
and geothermal grows from less than 1% per year in 2001 to roughly 15% in 2100. Global primary energy consumption triples throughout the century with much of this growth occurring in the developing regions (Fig. 1, Panel D). Primary energy consumption in the United States grows from 84 EJ per year in 2001 to 119 EJ per year in 2100, an increase of only 40%. China's primary energy consumption, however, grows from 42 EJ per year in 2001 to 286 EJ per year in 2100, a six-fold increase. All regions exhibit continued dependence on fossil fuels throughout the century. CO2 emissions, shown in Fig. 2, grow from 23 GtCO2 per year in 2001 to 76 GtCO2 per year in 2100. Like primary energy, most of the growth in CO2 emissions occurs in the developing regions. In 2001, China's share of global emissions is 15% while the ROW share is 18%. By 2100, China's share doubles to 31% while the ROW's share reaches 27%.
Fig. 3. CO2 emissions under a reference scenario and four policy scenarios.
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4. Policy scenarios The EMF 22 International Transition Subgroup was tasked with assessing the implications of limiting radiative forcing through the reduction of emissions of the suite of greenhouse gases included in the Kyoto Protocol in ten different scenarios. These scenarios span five different climate targets—i.e., “not to exceed” radiative forcing limits of 2.6 W/m2, 3.7 W/m2, and 4.5 W/m2, and limits of 2.6 W/m2 and 3.7 W/m2 that can be exceeded but must be achieved at the end of the 100 year period (“overshoot”)—under two different international policy regimes (Table 1). In the first policy regime, “immediate accession” (S1), we assume full global participation beginning in the year 2012; i.e., all regions participate in a global effort to meet the radiative forcing limit. The second policy regime assumes that full accession is delayed. In the delayed accession scenarios (S2), only the Group 1 nations face the radiative forcing limit beginning in 2012. The BRICs regions enter the policy regime in 2031 and the rest of the world enters in 2051. In each of these scenarios, emissions reductions occur due to the imposition of a carbon tax on fossil fuels. For the immediate accession scenarios, the carbon tax rate is chosen to minimize the cost of meeting the target. Cost minimization requires that the carbon tax rate increases at the rate of interest plus the rate of ocean carbon uptake (Edmonds et al., 2008; Clarke et al., 2007; Hotelling, 1931; Peck and Wan, 1996). Having the carbon tax rise at the interest rate ensures that the marginal cost of abatement is constant across time, and thus, exhausts all opportunities for arbitrage across time. Under delayed accession, we assume that the carbon tax imposed in the Group 1 countries rises exponentially.6 In the non-Group 1 nations, we impose a carbon tax in their accession year equal to the carbon tax imposed in the Group 1 nations in 2012. In subsequent years, we assume that the carbon tax in the non-Group 1 nations increases linearly over a twenty year period to meet the Group 1 carbon tax rate. Thus, the BRICs carbon tax is equal to the Group 1 carbon tax from 2051 onward while the ROW carbon tax matches the Group 1 carbon tax in 2071 and beyond. Table 2 summarizes the delayed accession assumptions within the SGM model. In the overshoot scenarios, we adjust the initial tax in Group 1 such that the radiative forcing in 2100 is kept below the specified limit. However, by restricting radiative forcing in 2100, we also constrain radiative forcing to levels below the required limit in all previous periods. That is, the overshoot scenarios never exceed their 2100 target and radiative forcing gradually rises to the policy limit. Therefore, the model results of the 3.7 W/m2 overshoot and 3.7 W/m2 not-toexceed scenarios are identical. This phenomenon occurs for both the immediate and delayed accession cases. As we will see in our discussion of the role of technology assumptions, the shape of the “overshoot” emissions trajectory relative to the “not-to-exceed” emissions trajectory is clearly linked to technology availability. 5. Emissions mitigation Limiting climate forcing requires a reduction in CO2 emissions with the amount of emissions mitigation depending on the climate limit. Fig. 3 shows global and regional CO2 emissions under a
6 This Group 1 path is consistent with cost minimization. Other means of implementing the delayed accession scenarios exist. For example, one could assume that the global emissions pathway in the immediate accession scenario is optimal and restrict global emissions to that path under delayed accession. However, this specification would require dramatic emissions reductions by the Group 1 nations in the early years. Such deep cuts may be unattainable and would change the collection of scenarios that are possible within a model. In the SGM model, this specification would render the 3.7 W/m2 scenario with delay unattainable. This scenario would require Group 1 emissions to be negative to make up for the growth assumed in Groups 2 and 3. Without bioCCS technologies, negative emissions are not possible.
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reference case and the four policy scenarios. From this figure, we see that to limit radiative forcing to 3.7 W/m2 requires an immediate reduction in global emissions. Emissions are reduced by 20% between 2011 and 2016. In the immediate accession regime, this requires action on the part of all countries. Under delayed accession, the burden of emissions reduction initially falls more heavily on Group 1. Group 1 reduces its emissions by 35% in five years, while BRICs (Group 2) and Group 3 continue to increase emissions. However, accession leads to dramatic emissions reductions in participating regions as soon as they enter the mitigating coalition. These new entrants move rapidly to catch up to their trajectory in the immediate accession scenario. Both Groups 2 and 3 exhibit higher CO2 emissions in the delayed accession scenarios than in the reference scenario, Fig. 3. The effect is most pronounced for Group 3, which does not participate in emissions mitigation until 2051, but is also observed for Group 2 prior to its accession. Thus, we observe carbon “leakage” from Group 1 to Groups 2 and 3 until 2031 and from Groups 1 and 2 to Group 3 between 2031 and 2051. We explore the leakage issue in a separate section of this paper. Fig. 3 also shows that after the initial drop in emissions relative to 2005, following accession, further mitigation is gradual in the immediate accession case. As noted above, we see two subsequent steep declines in regional emissions corresponding to the accession of BRICs (2031) and Group 3 (2051) into the regime. With the exception of these two years, emissions mitigation is gradual under delayed accession as well. Additionally, CO2 emissions at the end of the century are still positive and no more than 60% below 2001 levels. This is despite the rather large carbon taxes employed in the SGM model (Fig. 4); the delayed accession 3.7 W/m2 scenario has a carbon tax of over $3000/tCO2 in 2100. The need for such a large tax derives from the technological assumptions in SGM. SGM has a limited number of clean technologies available. For example, the model does not allow transportation to switch to biofuels or electricity. No method exists for reducing cement emissions. Carbon capture and storage is limited to fossil electric technologies and even those technologies are not available until 2026. Beyond the technology options in the electric sector, the primary means of reducing emissions in SGM is through reduced energy consumption (Fig. 5). As a result, the marginal abatement cost curves (Fig. 6) asymptote at some point. Increasing the carbon tax, even by a large amount, has a negligible impact on emissions. Finally, radiative forcing from Kyoto gases was nearly 2.4 W/m2 in 2005; hence, limiting radiative forcing to 2.6 W/m2 is an ambitious task7. Such an endeavor requires a decarbonization of the economy almost immediately. As a result of the demographic, economic and technological assumptions discussed previously, rapidly reducing emissions drastically, as required in the 2.6 W/m2 scenarios, is not possible. Thus, in SGM, the four 2.6 W/m2 scenarios (immediate and delayed accession, not-to-exceed and overshoot) were not possible. These scenarios would require an infinite carbon tax to reduce emissions enough to meet the climate limit. 6. The cost of emissions mitigation Emissions mitigation imposes a cost to society because the use of otherwise productive resources is foregone so as to achieve the environmental benefit. While there are many measures of cost that appear in the literature, we report an “Equivalent Variation” cost measure. The Equivalent Variation measure is the lump-sum payment that our infinitely lived representative consumer would need so that they were just as happy, excluding the environmental benefits from the emissions mitigation, under the emissions mitigation program as
7
See Calvin et al. (2009).
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Fig. 4. Group 1 CO2 taxes.
they would have been otherwise.8 This measure will capture any cost associated with mitigation efforts, as well as any change in revenue due to changes in industrial production or energy export revenue. We calculate the equivalent variation for the 3.7 W/m2 scenarios (both immediate and delayed accession) for each of the three regions and display the results in Fig. 7 for the period 2016 (the first policy year) to 2051. From this figure, we see that Group 1 costs are larger under delayed accession in all years due to the significantly higher carbon tax. Group 2, however, benefits from delay prior to their accession. Costs in this group are negative until 2031. Group 3, however, incurs a cost, even prior to its accession. Delay reduces the costs in this group relative to the immediate accession scenario, but a cost is still incurred. This cost can be attributed to reduced energy export revenue. Group 3 is a large supplier of fossil fuels and is negatively impacted by decreased consumption in Group 1. Interestingly, global costs are lower in the delayed accession case relative to the immediate accession case until 2031 when Group 2 undertakes significant emissions mitigation activities in the delayed accession scenario. These lower costs reflect in part the higher global emissions over that same period. However, we note that emissions are higher in the delayed accession scenario until 2051 when Group 3 joins the global mitigation coalition. The earlier cross-over of global costs is a reflection of relatively inefficient mitigation over space and time reflected in the higher carbon prices. While delay in accession shifts the distribution of present discounted costs between the three regions, Fig. 8, Panels A and B, Groups 1 and 2 carry a higher share and Group 3 a lower share. However, as Panel C reveals, total costs are higher in all regions. The greatest increase in cost from delay is in Group 1, with a somewhat lower increase in Group 2, and only a very small increase in Group 3. Nonetheless, all parties have higher present discounted costs under delay. This finding is somewhat ironic; one would expect delayed accession to reduce the burden on Groups 2 and 3. However, the effect of delay is merely to delay mitigation 8 Standard cost metrics include: (1) GDP loss, (2) Consumption loss, (3) Area under the Marginal Abatement Cost (MAC) curve, (4) Compensated Variation, and (5) Equivalent Variation. GDP loss captures the net reduction in consumption, investment, and net export revenue. Thus, we can attribute differences in consumption loss and GDP loss as the effect of exports or investment. The area under the MAC curve measures the deadweight loss to society under a carbon policy. Deadweight loss is the loss in both consumer and producer surplus net of the tax revenue. Compensated variation is the amount of money one would have to compensate a consumer after a price change so their utility remains at its initial level. Equivalent variation is the amount of money a consumer would have to be paid in lieu of a price change to reach the new utility. Whether the compensated variation exceeds equivalent variation or vice versa depends on the direction of the price change and whether the good is a normal or inferior good. In all cases, however, consumer surplus lies between compensated and equivalent variation (Mas-Colell et al., 1995). If the marginal utility of income is independent of price, then the compensated variation, equivalent variation, and consumer surplus are all equal. Additionally, when the marginal utility of income is independent of price, compensated and equivalent variation are equal to the deadweight loss, and thus, equal to the area under the marginal abatement cost curve (Varian, 1984).
Fig. 5. Global primary energy consumption in the 3.7 W/m2 Scenario.
Fig. 6. Marginal abatement cost curve for the immediate accession, 3.7 W/m2 scenario.
(and costs) until later in the century. Additionally, delay increases the burden faced by all regions in the second half of the century.9 This increase in post-accession costs, relative to the immediate accession scenario, offsets any gains prior to accession. The net result is an increase in cost relative to immediate accession in all regions, consistent with the findings in Edmonds et al. (2008). 9 The increase in post-accession burden is due in part to scenario design. We have implemented the delayed accession scenarios in an effort to minimize global costs. An alternate implementation where global emissions under delay are held at their immediate accession levels would increase the costs in Group 1 substantially, but potentially reduce costs in Groups 2 and 3. However, as previously mentioned, such a scenario design would preclude the SGM model from attaining the 3.7 W/m2 target.
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Fig. 7. Policy cost as annual equivalent variation of limiting radiative forcing to 3.7 W/m2 for the world (Panel A), Group 1 (OECD) (Panel B), Group 2 (BRICs) (Panel C), and Group 3 (Rest of the World) (Panel D) in Trillions of 2005 USD.
7. The importance of technology Technology assumptions play a critical role in shaping SGM results. For example, carbon taxes in MiniCAM are less than onefifth of the SGM carbon taxes for the 3.7 W/m2 overshoot scenario and the MiniCAM model (Calvin et al., 2009) found both 2.6 W/m2 immediate accession scenarios feasible, while SGM did not. To help understand the role of technology in explaining differences between the SGM and MiniCAM model results, we developed a sensitivity experiment using MiniCAM in which MiniCAM technology assumptions are brought into alignment with those used in the SGM.
MiniCAM and SGM use the same underlying population scenarios. Global GNP in the SGM reference scenario roughly matches the GNP path in MiniCAM.10 Primary energy in both models grows to approximately 1400 EJ/yr in 2100 in the reference scenario, with a little less than 65% of that energy supplied by fossil fuels. The similarity between the reference scenarios in these two models eases the comparison of policy results; differences in policy scenarios can be attributed to differences in technology and model 10 Global GDP differs by less than 3% from 2050 onwards. The difference prior to 2050 is a little more substantial, but never more than 10%.
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Fig. 8. Present value discounted policy cost as equivalent variation in the 3.7 W/m2 scenarios.
structure rather than differences in socioeconomics or baseline energy consumption. Despite similarities in reference scenarios’ demographics, energy use, and emissions, the MiniCAM model includes numerous advanced technologies, many of which are only utilized under a carbon policy. These technologies include CO2 capture and storage on fossil electric technologies, biomass electricity technologies, hydrogen production,
Fig. 9. Carbon taxes required to limit radiative forcing to 3.7 W/m2 in 2100, assuming immediate accession.
cement, and coal-to-liquids production. Additionally, the MiniCAM model allows for fuel switching into biomass in industry and buildings and into biofuels, electricity, and hydrogen in transportation. Of these technologies, the SGM scenario only allows for CO2 capture and storage on fossil electricity technologies. We removed the technologies from MiniCAM that are unavailable in SGM and calculated the carbon tax path need to limit radiative forcing to 3.7 W/m2 in 2100, assuming immediate accession. The tax paths for SGM, the MiniCAM Base case, and three other variants of MiniCAM are shown in Fig. 9. The three variants iteratively remove technologies from the MiniCAM model. Removing CO2 capture and storage technologies doubles the carbon tax in the scenario. Removing biomass from the No CCS scenario increases the carbon tax by another 50%. Finally, removing all hydrogen and electric transportation options doubles the carbon tax yet again.11 The net effect is a fivefold increase in carbon taxes in MiniCAM due to limits in technology. As a result, the carbon taxes are nearly identical in the two models when the technologies assumptions are comparable.12 Under this low technology variant of MiniCAM, we also found the 2.6 W/m 2 not-to-exceed scenario with immediate accession 11 The scenario that results from the removal of these technologies is the Low Tech version of MiniCAM, discussed both in this paper and in Calvin et al. (2009). 12 We had to remove all carbon capture and storage technologies in the MiniCAM No CCS scenarios. SGM still allows CCS on fossil electric technologies.
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Fig. 10. Radiative forcing for the 3.7 W/m2 overshoot scenarios.
infeasible. Limiting the use of carbon capture and storage, biomass, and advanced transportation technologies creates a perfect storm, where all non-electric sectors are forced to rely on freely venting fossil fuels. The MiniCAM model can limit radiative forcing to 2.6 W/m2 without CCS, or without biomass, or without advanced transportation technologies. It can even limit radiative forcing to 2.6 W/m2 without biomass or CCS. But removing all three technology options prohibits limiting radiative forcing to 2.6 W/m2.13 Fig. 10 depicts the radiative forcing for the SGM model and four variations of the MiniCAM model. By removing technologies from the MiniCAM scenario, we move from a world where ”overshoot” to meet a year 2095 climate forcing limit is optimal to a world where no incentive to “overshoot” exists. Thus, we conclude that overshoot is a technology phenomenon. Without advanced technology options later in the century, we have no means of accelerating emissions reductions and thus cannot return to a radiative forcing level that we have exceeded. 8. Industrial leakage Delayed accession creates the potential for leakage in the energy and industrial sectors. In Fig. 3, panel C and D, we see the net effects of the leakage occurring within the SGM; carbon emissions are larger in the delayed accession scenario than in the reference scenario. We calculate total SGM leakage as the difference between participating regions emissions mitigation and global emissions mitigation. Thus, if participating regions reduce emissions by 6 GtCO2 in 2021 and global emissions mitigation is only 5.7 GtCO2 in that same year, then the global leakage amount is 0.3 GtCO2. Fig. 11 shows the total amount of leakage globally, as a percentage of emissions mitigation. The total amount of leakage in SGM never exceeds 6%. However, the amount of emissions leakage varies by sector — energy intensive sectors exhibit significantly more leakage than non-energy intensive sectors. For example, leakage in the iron and steel sector is as high as 56%, while leakage from services never exceeds 3%. The relatively low level of economy-wide leakage is influenced by both the study design and the Armington elasticities employed within SGM.14 The EMF22 scenarios prescribe delay in Group 2 only until 2031 and delay in Group 3 only until 2051. Note that the “saw tooth” pattern of aggregate leakage in Fig. 11 suggests that leakage increases with the price of carbon in the control regions. If these regions were 13 As a note, it was possible, albeit expensive, to limit radiative forcing to 2.6 W/m2 for the first 50 years in the MiniCAM Low Tech scenario. However, in the second half of the century, the model reached a lower limit on the radiative forcing that could be attained. 14 SGM employs an Armington assumption, where domestic and imported products are differentiated. The choice of Armington elasticity influences the degree of leakage. Using a higher elasticity, or a net trade assumption, would result in more shifts in production and more leakage.
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Fig. 11. Global fossil fuel and industrial emissions leakage in the delayed accession 3.7 W/m2 scenario, as a percentage of total emissions mitigation.
Fig. 12. 2041 Fuel prices in ROW in the reference and delayed accession 3.7 W/m2 scenarios.
delayed until even further into the future, one could expect more leakage. To demonstrate this effect we construct a scenario using the same carbon prices as in our delayed accession 3.7 W/m2 limit scenario, but assume that Group 3 never enters the climate control regime. This results in emissions leakage increasing steadily to 14% at the end of the century (Fig. 11). To illustrate the relative contributions of some of key forces driving leakage, we have examined three factors: (1) changes in the scale of total industrial output in non-participating countries; (2) changes in world energy prices that induce substitutions across inputs to production; and (3) a shift in comparative advantage of carbonintensive production to non-participating countries as a result of
Fig. 13. Iron and steel production in Group 3 in the reference and 3.7 W/m2 scenarios.
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K. Calvin et al. / Energy Economics 31 (2009) S187–S197 Table 3 A decomposition of emissions leakage in ROW in 2041.
Scale of output Carbon intensity Industrial composition
Delayed vs. reference: relative index for ROW 2041 CO2 emissionsa
Relative contribution to ROW year 2041 total leakage (%)
1.0024 1.0323 1.0395
3.3% 44.3% 52.4%
a This index isolates the impact of each factor on the leakage or the change in total year 2041 ROW CO2 emissions from the reference to the delayed accession scenario. For example, the impact of the scale of output ceterus parabis was an increase in ROW CO2 emissions of 0.24%, while the impact of the change in industrial composition alone was an increase in emissions of nearly 4%.
Fig. 14. Iron and steel imports into Group 1 from Group 3 in the reference and 3.7 W/m2 scenarios.
increased production costs in participating countries.15 We use a multiplicative arithmetic mean form of the Divisia decomposition method (Ang and Zhang, 2000) to attribute the relative influence of each of these factors on emissions in Group 3 in 2041 for the 3.7 W/m2 with delayed accession scenario. To assess the effect of changes in scale on carbon emissions in Group 3, we look at the change in emissions in 2041 (relative to 2006) assuming the industrial carbon intensity is constant and equal to the 2006 value. Using the Divisia calculation, we find that about 3% of the emissions growth in ROW, relative to the reference scenario, is due to the increased scale of output. Changes in output, however, are a very small part of the story in these scenarios. Changes in energy prices can induce shifts in production inputs, which in turn can affect carbon emissions. To determine the effect of input substitution on carbon emissions, we look at the within industry carbon intensity in both the reference scenario and in the delayed accession scenario. Because of carbon policies in the participating regions, the prices of fossil fuels to nonparticipants (see Fig. 12) are lower than in the reference scenario.16 Thus, we observe less input substitution and less carbon intensity improvements in Group 3 in the delayed accession case than in the reference case. The change in energy prices between the delayed accession and reference scenarios accounts for about 44% of the leakage in 2041. Imposing a carbon tax in a region raises the price of production for energy-intensive goods in that region. When some regions face this price increase (Group 1) and others do not (Group 2, BRICs and Group 3, ROW), as in the delayed accession scenarios, incentives exist for industrial leakage. Group 1 finds it preferable to import products rather than to produce them domestically and pay the carbon tax. As a result, production in BRICs and ROW increases, as do exports from these regions into the Group 1 countries. Fig. 13 shows iron and steel production in the ROW under the reference, immediate accession 3.7 W/m2, and delayed accession 3.7 W/m2 scenarios. In this figure, production is measured as percentage of reference scenario production. The immediate accession scenarios show a decline in iron and steel production from the reference case. The delayed accession scenarios, however, have increased production. Fig. 14 shows iron and steel imports into Group 1 from ROW under the same three scenarios. Consistent with the leakage story, this figure shows an increase in iron
15
Figs. 13 and 14 are an example of this effect. Note that higher end-use energy prices for fossil fuels in mitigating regions as a consequence of the carbon tax leads to reduced energy demands globally, which in turn lowers the world price for fossil fuels. The degree of reduction varies by fossil fuel. Coal supply is more elastic than oil supply and thus, oil prices tend to decline relatively more than coal prices (Fig. 12). 16
and steel exports from ROW under delayed accession. Hence, delayed accession shifts production of energy intensive industries outside of Group 1 and into ROW. This increase in the production and exports of energy-intensive goods in the ROW contributes to their increased carbon emissions. To assess this effect, we look at the shift in the composition of industrial output (i.e., structural change) in the reference and delayed accession scenarios. Structural change has a downward effect on emissions in both cases, due to the expansion of light industry over heavy industry. However, the ratio of light industry to heavy industry is larger in the reference scenario than in the delayed accession scenario. This implies that there is a larger composition of carbon-intensive production in the delay case, suggesting a movement of carbon-intensive production to ROW. The shift in carbon-intensive production to ROW accounts for the remaining 52% of the leakage in 2041. Table 3 summarizes this decomposition of the leakage effects in 2041 into the three components previously discussed. Finally, we note that changes in income in a policy case, compared to a reference case, can change the demand for industrial products within a region. Interestingly, because of the decreases in the value of energy exports, Group 3 income decreases in the delayed accession scenario, which tends to reduce carbon emissions rather than contributing to leakage. This effect is not captured by our Divisia decomposition. 9. Discussion In our analysis, we find delayed accession increases the cost incurred by mitigating regions in the near term relative to the immediate accession scenario. Delay decreases near-term costs in non-mitigating regions relative to the immediate accession regime. However, delayed accession increases costs everywhere in the second half of the century. The net effect is that total discounted cost is higher in the delayed accession cases than in the immediate accession cases for all regions, including the delayed participants. Thus, while delay shifts some of the cost burden to early participants, we observe an increase in present discounted costs to all parties as a consequence of the temporal and spatial inefficiencies introduced by the delay. Technology has a significant impact on the cost of limiting climate change. By removing advanced technology options from an integrated assessment model, the carbon tax needed to reach a particular radiative forcing limit increases. Additionally, the reduction can be significant; moving from advanced technology to low technology in one scenario required a five-fold increase in carbon taxes. Technology also influences the ability to meet low radiative forcing limits. The limited availability of clean technologies within SGM hinders restricting atmospheric concentrations to 450 ppm CO2-equivalent. SGM found that a single scenario satisfied the requirements of the overshoot and not-to-exceed scenarios. That is, the cost-minimizing path to 3.7 W/m2 in 2100 did not result in radiative forcing that exceeded that limit in any period. Using another integrated assessment model, we conclude that the degree to which “overshoot” reduces the cost of meeting a limit in radiative forcing in 2100 is
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affected by available technology options. The availability of advanced technology options that can rapidly lower emissions allows near-term emissions mitigation to be shifted into the future while still achieving the long-term goal and at lower cost. Without these options, like in SGM, delaying emissions mitigation until later in the century is not cost-effective.17 The spatial and temporal cost inefficiencies induced by delayed accession are exacerbated by industrial emissions leakage from emissions mitigating regions to non-participating regions. In these scenarios, we found that leakage from changes in scale of output in non-participating regions was minimal. We did find in our delayed scenarios that lower energy prices induce less factor substitution than would occur in a reference scenario, resulting in more carbonintensive industries. Finally, regions facing a carbon tax will find it preferable to import energy-intensive goods from non-participating countries, rather than produce those goods domestically, further increasing the emissions of non-participating regions. However, we did not find the magnitude of leakage to be large. References Ang, B.W., Zhang, F.W., 2000. A survey of index decomposition analysis in energy and environmental studies. Energy 25, 1149–1176. Babiker, M.H., 2005. Climate change policy, market structure, and carbon leakage. Journal of International Economics 65, 421–445. Berk, M.M., den Elzen, M.G.J., 2001. Options for differentiation of future commitments in climate policy: how to realize timely participation to meet stringent climate goals? Climate Policy 1 (4), 465–480. Bollen, J., Manders, T., Timmer, H., 2000. Decomposing carbon leakage—an analysis of the Kyoto protocol. Third Annual Conference on Global Economic Analysis, Melbourne, Australia. Burniaux, J-M, Oliveira Martins, J., 2000. Carbon emission leakage: a general equilibrium view. OECD Economics Department Working Paper, 242. Paris. Calvin, Katherine, Edmonds, Jae, Bond-Lamberty, Ben, Clarke, Leon, Kyle, Page, Smith, Steve, Thomson, Allison, Wise, Marshall, 2009. 2.6: Limiting Climate Change to 450 ppm CO2 Equivalent in the 21st Century, Submitted to Energy Economics. Clarke, L., Edmonds, J., Jacoby, H., Pitcher, H., Reilly, J., Richels, R., 2007. CCSP synthesis and assessment product 2.1, part a: scenarios of greenhouse gas emissions and atmospheric concentrations. U.S. Government Printing Office, Washington DC. Clarke, L., Edmonds, J., Krey, V., Richels, R., Rose, S., Tavoni, M., 2009. International Climate Policy Architectures: Overview of the EMF 22 International Scenarios. Energy Economics. Forthcoming. den Elzen, M.G.J., Meinshausen, M., 2005. Meeting the EU 2 °C Climate Target: Global and Regional Emission Implications, RIVM report, 728001031. Netherlands Environmental Assessment Agency, Bilthoven. http://www.rivm.nl/bibliotheek/ rapporten/728001031.pdf. den Elzen, M.G.J., Lucas, P., van Vuuren, D., 2005. Abatement costs of post-Kyoto climate regimes. Energy Policy 33 (16), 2138–2151.
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