Membership has its Co-benefits
Last week marked the first “informal ministerial consultations” in the run up to the UN climate talks in December. The objective of these informal meetings before The Meeting is to provide the opportunity to find common ground and an organizing framework for what the UN Climate Chief is ominously calling the “last chance for a meaningful agreement”.
Two decades worth of efforts to broker a binding global climate change treaty from the top down have largely failed. But hope springs eternal, and there is belief that a more “bottom up” approach which allows countries to define their own contributions will break the impasse. Each country has been asked to submit a self-determined national “intention” to curb its greenhouse gas emissions. These pledges will provide the foundation for any climate deal reached in Paris.
Every time a country registers a pledge, this UNFCC tree sprouts a new green leaf linked to the plan. As of today, 20 pledges have been submitted.
The prospects for free-riding make this process particularly daunting. As Gernot Wagner and Marty Weitzman note in their recent book:
“Why act, if your actions cost you more than they benefit you personally? Total benefits of your actions may outweigh costs. Yet the benefits get spread across seven billion others, while you incur the full costs. The same logic holds for everybody else. Too few are going to do what is in the common interest. Everyone else free-rides.”
In other words, why would a country voluntarily commit to making significant, costly reductions in domestic greenhouse gas emissions (GHGs)?
Last week, I saw a paper presented by Ian Parry at a summer gathering of environmental economists that suggests this free riding problem might not be quite as dire as it appears. The jumping off point is that reducing the use of GHG producing fuels can generate domestic co-benefits for the countries that undertake them (such as improvements in local air quality or reduced traffic congestion). These authors set out to quantify these environmental co-benefits by country and evaluate the possible implications for GHG emissions. In my mind, the paper’s findings strengthen the pragmatic case for the new “bottom up” approach to global climate change mitigation.
Climate change policy from the bottom up
At the heart of the new approach to climate change negotiations is a new climate change acronym: Intended Nationally Determined Contributions (INDCs). These national pledges describe steps that countries intend to take to reduce their GHG emissions. Countries have tremendous flexibility in drafting these plans. They can pledge to cut emissions by a lot – or a little. Commitments can be binding – or voluntary. The idea is to let countries decide what they are willing and able to contribute to this global effort and take it from there.
The figure below, taken from a special IEA report on climate change, projects the emissions associated with the climate pledges countries have already declared. This INDC trajectory (in blue) is contrasted with a “450 scenario” (in green) that would achieve the widely accepted target of limiting global warming to 2 degrees Celsius, or 450 parts per million of CO2 equivalent in the atmosphere.
The gap between the blue and green line is downright depressing. Although the INDC scenario could improve as more countries sign on, even Al Gore acknowledges that these INDC pledges will fall short of the critical target.
But the glass half full (or at least not empty) view is that these initial pledges are the sign of meaningful global cooperation taking hold. Ultimately, the success of an approach that relies on voluntary contributions will depend on whether countries find the political will to engage in this global effort and pursue significant GHG emissions reductions. Co-benefits could provide a leg up in this regard.
Membership (in the global climate change mitigation club) has its co-benefits
When a country takes steps to reduce GHG emissions benefits beyond climate change mitigation often result. Domestic “co-benefits” of GHG reductions include, for example, reductions in the number of deaths caused by air pollutants that are emitted along with CO2 when fossil fuels are burned, and reductions in congestion, accidents, and other externalities from motor vehicle use.
The paper I saw last week calculates the domestic co-benefits of pricing of carbon dioxide emissions for the top twenty emitting countries that are responsible for about 80 percent of global CO2 emissions. Using country-level estimates of (non-CO2) environmental damages by fossil fuel from this study, together with fuel price data and fuel tax/subsidy information, the researchers derive efficient CO2 prices that reflect domestic (non-internalized) environmental benefits and costs:
The figure summarizes the nationally efficient carbon prices that reflect domestic co-benefits excluding climate benefits. The average (emissions weighted) price is remarkably high: $57/ton CO2. This exceeds the current, mid-range estimates of global climate-change damages per ton CO2.
The graph also shows how prices vary dramatically across countries. Some of this variation reflects differences in the extent to which fuels are subsidized/taxed across countries. The extremely high prices in Saudi Arabia and Iran, for example, are largely due to large subsidies on transportation fuels and natural gas. The analysis assumes that these subsidies remain, and that the carbon tax works to offset the subsidy. The negative tax in Brazil reflects the fact that the existing fuel taxes exceed the author’s calculations of non-carbon external costs per unit of fuel use.
To put these tax estimates in perspective, the authors ask: How would CO2 emissions change if these nationally efficient carbon taxes were implemented? The figure below summarizes emissions reductions estimates for each country (relative to the 2010 emissions that were actually observed).
Across all 20 countries, the authors estimate a 14 percent reduction in 2010 emissions. The majority of emissions reductions come from reduction in coal consumption. In countries where the tax effectively offsets transportation fuel subsidies, reductions in diesel and gasoline play a larger role.
These numerical results are, of course, sensitive to some of the underlying (and sometimes uncertain) assumptions that are documented in the paper. Qualitatively, the take away is that domestic co-benefits from climate change mitigation appear to be significant on average and highly variable across countries.
Boosting local motivation for global cooperation
The mere existence of co-benefits need not imply that countries will implement climate policies to pursue them. There are political constraints, distributional concerns, and other considerations that help explain why most countries have neglected to address domestic externality problems and other distortions in the first place. These constraints will presumably limit a government’s ability to reduce greenhouse gas emissions via a carbon tax or other means
But large co-benefits can make it easier for countries to drum up support for pursuing reductions in domestic GHGs among a wide range of domestic actors, not all of whom are motivated by the spirit of global cooperation or the will to lead. Here at home, President Obama introduced the proposed Clean Power Plan, the centerpiece of his Climate Action Plan, in the asthma ward of a Children’s hospital. Health co-benefits from reductions in local air pollution, including avoided asthma attacks, were estimated to yield approximately 60 percent of the gross benefits under the proposed Clean Power Plan. China offers another example of a country where concerns about air pollution are accelerating action on climate change (and vice versa).
Many economists will cringe at the thought of using climate change policies to address other unpriced externality problems. This is not the ideal, first-best path forward. Climate change policy is an indirect tool for addressing related but different problems of air pollution, traffic congestion, etc. However, until efficient corrective policies are implemented, countries can and should consider these co-benefits in the design and implementation of climate change policy. This will help to mitigate domestic damages associated with the burning of fossil fuels at home while greasing the wheels of the global response to climate change in Paris and beyond.
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Energy Institute Blog 
Reducing the use of GHG producing fuels can generate co-benefits for developing countries and particularly oil producing developing countries. Policy instruments that will reduce GHG and generate co-benefits can be designed at limited cost and effort and can indeed correct for a market failure and act as an alternative “second best” to market set fuel pricing.
To illustrate this in the case of oil producing countries we need to examine both the opportunity cost and the direct subsidies incurred by a certain country as a result of domestic energy consumption. For an oil producing country, the opportunity cost is the difference between the international market price for the fuel and the regulated price in any one country. As is the case with many oil producing countries, the regulated price of fuel whether primary or secondary is significantly below the cost of service. It is the difference between the regulated price and the cost of service that in turn reflects the level of subsidy impacting a government’s budget. On the other hand, the opportunity cost calculated as the difference between the international market price and the regulated price is a reflection of loss in future revenues in turn a function of the appropriate discount rate.
Oil producing countries thus have major incentives to reduce domestic energy consumption. In designing and applying the right policy instruments, they can reduce both the opportunity cost of fuel allocated domestically and reduce the level of fuel subsidies. The policy instruments can for example consist of: 1) carefully set floors for planning parameters to be used in the design of new energy intensive facilities such as power generating stations and 2) efficiency standards targeted at specific industries specifying minimum energy intensity levels. An example of a planning parameter is the setting of a floor fuel price to be used in the project planning and design. This price would impact the design of the facility and would have no bearing on the price the facility ultimately negotiates with the fuel supplier. The floor price would be significantly higher than the regulated price and one that approaches a CO2 price. In a number of modeling exercises we conducted involving actual projects, the appropriate setting of such planning parameters in the case of power generation immediately lead to the adoption of combined cycle technology using natural gas versus simple cycle technology resulting in cutting energy consumption and CO2 emissions by half. Incidentally, assuming also the properly designed power purchase agreement, such an approach also met project developers’ agreement as well.
Without a question, I can attest to the positive role co-benefits can play in incentivizing lower domestic energy consumption in at least the case of oil producing developing countries.
Co-benefits are an important–and still often under-appreciated–aspect of climate change mitigation. One area of potential tension to consider, between climate change mitigation and local air quality, is in biomass combustion: if fossil fuels are replaced with combustion of wood and other biomass products (usually for space heating), local air quality suffers. In some countries, wood combustion is now being promoted as a way to reduce fossil fuel use. However, residential wood combustion results in particulate matter pollution, which negatively affects local air quality, creates ill-health, and generates climate-warming black carbon. State-of-the art wood stoves and pellet stoves create better combustion environments, but still release some particulate pollution and this pollution originates in populated areas.
To clarify, I’m mainly referring here to switching from natural gas or electric space heating to residential combustion of wood or other biomass.