ENPC Cours n°12

Jean-Charles Hourcade

Les termes de la négociation climat:un exemple d’économie publique

appliquée

Untying the development/environment Gordian Knot

Le problème à résoudre … comment répondre à la motion Byrd – Hagel (1997)

• Kyoto ne contraint que 37% des émissions de GES

• Comment embarquer les USA dans un accord?

• En même temps que la Chine, l’Inde, le Brésil,

• Sans être bloqués par l’Opep (pays du Golfe mais aussi Mexique, Venezuela, Indonésie)

• Sans marginaliser les autres pays du G77

• Tout ceci très vite parce que le temps passe

Lessons from the past: Back to Stockholm

• After Rio two political stances: – EU: forcing the US to act + demonstration effect vis-à-vis DC– US: minimizing abatement costs

• A reciprocal EU/US hypnosis leading to :– treat climate policy as an isolated issue– treat the Third World as a spectator– overlook the political consequences of the cap & trade

option– preserve diplomatic compromises at the cost of self-

defeating rhetorics

• No convincing power of moral attitude if no serious consideration of the Stockholm compromise

Avoiding six rhetoric traps

• The fairness debate (thanks for the fairness but without the burden)

• The “competitiveness” argument

• Tension between significant world carbon prices and their distributional effects

• The debate between Grand accord, expanding coalitions, favella approach

• The Clintons’ mistake: a necessary domestic momentum

• Visions of compliance: international ‘law’, economic mechanisms and the « indulgence quarrel»

Equity: burden sharing in 2030, convergence rule

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-2

-1

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CNZ FSU JAP USA WEU CHI IND ROW

HbHa

LbLa

EITs

1= what Parties should pay with a per capita GDP pro-rata rule (BLS like),>1 if Party pays more,<1 if Party pays less,<0 if Party gains from trading

Region

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Untying the environment-development Gordian Knot

• What obstacles in front of current development patterns?

• Which of them can be removed synergistically with the search for low carbon development pathways?

• Which aspects of climate policies intrinsically cannot but result in an obstacle to development?

• An intellectual pre-condition: from what baseline are we talking about?

Conventional baselines deny sustainability issues

Carbon emissions

Baseline Clean Development

Cost

t

Development Goals

Upside down: from the real baselines to detecting the deadlocks for development

Carbon emissios

Baseline

t

Sustainable DevelopmentReal

Deadlocksand Constraints

≠ No Pain

Venise – July 2005

Obstacles to sustainable development • Capital Constraints and funding of infrastructures

– Capital Scarcity or problem of direction of capital flows

– Changing context for overseas aid and funding• Decreasing amounts in ‘ageing societies’• Sovereign funds • LDCs → still the adaptation and capacity building

• Macro-economic Constraints: oil prices, technology imports, public indebtedness

• Distorted technology choices, unfulfilled basic needs and social dualism (A.K. Sen, I. Sachs)

• Local environment disruption (water, air) land exacerbated in case of climate change

Les vrais enjeux: soit un prix du carbone croissant dans le temps pour assurer un ‘plafonds’ de 450 ppm

-20%

-15%

-10%

-5%

0%

5%

10%

2000 2010 2020 2030 2040 2050

Inde

Chine

CEI

OPEP

USA

UE

Reste OCDE

Reste PED

Financing structural change Price DifférenciationWhat Compensation for OPEC and CEI ?

Variation de PIB en 2050 entre scénarios REF et 450 ppm / F4

• taux de croissance annuel : - 0.45% pour MO et CEI

F4, une croissance mondiale à peine affectée et de vrais perdants?

-25.0%

-20.0%

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-10.0%

-5.0%

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World OCDE USA EUR CHN IND CEI MO

Pourquoi le F4 lève un obstacle au développement : l’allègement de la facture énergétique des ménages

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2050 F4

Parts des dépenses énergétiques dans le budget des ménages

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USA EUR CHN IND

2001

2050 REF

2050 F4

Un autre bénéfice du F4: baisse de la dépendance énergétique des pays hors OPEP et Russie

Ratio du solde commercial énergétique sur PIB – scénario REF vs. F4

Pays exportateurs d’énergie: fortes pertes de rentes mais question du syndrôme ‘or des Incas’

Moyen-Orient

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CEI

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REF F4

Profit cumulé des exportateurs d’énergie (*1000 milliards de $), par période

Un paramètre central de la transition: le fardeau énergétique des ménages

fardeau énergétique REF

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USA EUR CEI CHN IND MO

fardeau énergétique F4

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USA EUR CEI CHN IND MO

International trading system: may export revenues imply welfare losses?

$/T C (%) T (G$)

• EU 43 ( 56) - 0.3 - 12.2

• US 43 ( 43) - 0.94 - 33.6

• Japan 43 ( 52) - 0.62 - 4.6

• China 43 (189) - 1.57 - 4.2

• India 43 (391) - 2.16 + 22.2

• Brazil 43 (163) - 0.12 - 1.1

USA – Europe: différences et similitudes

Comparaison des dépenses énergétiques des ménages F4 vs. REF

2020 2050

USA +62.64% -11.88%

EUR +23.18% -25.71%

Comparaison des prix de production industrielle F4 vs. REF

2020 2050

USA +4.76% -3.68%

EUR +5.57% -4.07%

Une simulation pour réfléchir au cas des pays émergeants

Real GDP - India

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2000000

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billio

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S200

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Low Growth + energy frictions High Growth + energy frictions

Real GDP - China

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5000000

10000000

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20000000

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billio

ns o

f dol

lars (

US20

01)

Low Growth High Growth

Low Growth + energy frictions High Growth + energy frictions

Une simulation pour réfléchir au cas des pays émergeants

Real GDP losses - China

-4.0%

-3.0%

-2.0%

-1.0%

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1.0%

2000 2010 2020 2030 2040 2050

% of

real G

DP

Low Growth + energy frictions

High Growth + energy frictions

Real GDP losses - India

-16%

-14%

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-8%

-6%

-4%

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2%

2000 2010 2020 2030 2040 2050

% of

real

GDP

Low Growth + energy frictions

High Growth + energy frictions

How climate policy costs are dependant upon monetary policies

Real GDP losses w.r.t. baseline scenario - China

-2.0%

-1.5%

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2000 2010 2020 2030 2040 2050

% o

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New international economicstrategy

Unchanged internationaleconomic strategy

The beginning of the wisdom: to understand the meaning of the “Kyoto surprise”

“I did not like this proposal, (CDM), but it got a widesupport and I facilitated its approval …. it can becalled ‘extraterritorial implementation’ …. thehypothesis that mitigation costs are lower indeveloping countries is true only if marketdistortions of values are adjusted, becauseotherwise everything is cheaper in developingcountries including labor and natural resources.That disparity has been at the root of everycolonization since the time of the Greeks”.

Raul A. Estrada-Oyuela

… a call for re-ranking priorities

CDM in the KP is not a form of JI … . It is worded as a tool aiming at, in descending order:

- assisting countries in achieving their Sustainable Development objectives

- assisting non Annex B countries in contributing to the UNFCCC objectives

- helping Annex B countries in meeting their Kyoto commitments

An illustration on the Electrical Sector in India

• Impact on land productivity, health and labor productivity of ‘local’ air pollution,

• the electrical sector ‘should’ absorb 25% of investments in the following decade

• State Electrical Boards in deficits

• Important transmission losses

• Power shortages several hours per day

• Problems of rural electrification

Domestic policy packages

• Incentives to Private investments• Readjusment of selling prices• Tax on non renewable energy inputs: 20% in 2035• Compensation for the redistributive effects of higher

energy prices • Subsidies for nuclear or renewables energy• Decrease of distribution losses: from 21-23% to 6%-9%• Increase of energy efficiency of thermal plants (6%)• Increase of the share of Gas by 20 to 42%

106ro

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1995 2000 2005 2010 2015 2020 2025 2030 2035

Baseline scénario

CDM investments

Domestic investments

Assessing the economic leverage

• Basic mechanism: inflow of foreign capital -> reallocation of domestic capital

• Key parameters:– return on capital in the energy sector (-10%; 2%);– marginal productivity of capital (6%; 9%)– share of energy investment replaced by foreign inv.

• A 1.7 to 7 leverage

2nd example: carbon credits revenues to remove local barriers: the LNG Vehicles at Delhi

Obstacles Bus Cars

Capital costs + +/-

Infrastructures, gas distribution + +

• Individual motor vehicles: twice the Indian average, low taxation on diesel, weak public transports (rickshaws)• 72% of local air pollution from transports• Program voted by the Delhi Supreme Court to develop LNG

Extending the CDM concept … taking some risks on the accuracy

• Credits to the Delhi municipality: only possible actor given the diversity of operators

• Conventional determination of the abatement per vehicle (accuracy of measurements vs incentive efficacy)

• Acceptable because of the absence of rebound effects

• CDM revenues allocated to: – Fund a system of annual control of the vehicles– Lower the tax on diesel for down market vehicles– Or finance the distribution network

Lessons for post 2012: timing of constraints

and opportunities Climate policies may be beneficial to emerging economies over the long run even with high carbon prices

But carbon prices will hurt emerging economies over the short run … when they are low!!!

This will not be solved in terms of « compensation » and fairness of the burden sharing

The Marshall Plan metaphor revisited to reorient infrastructure investments

A non intuitive but real link with monetary policies

Du global au sectoriel: vraies et fausses questions de compétitivité internationale

Faut-il vraiment mettre toutes les activités dans un même marché?

• Frictions entre industries différentes par:– L’intensité en carbone– Le degré d’exposition internationale– La place dans la filière de production -> taux de transfert Pc -> Pv / -

> valeur de la firme

• Quel partage de l’effort entre industries et infrastructures?– Faible élasticité – prix (apparente) du secteur transport– L’hypothèse anticipations rationnelles est elle acceptable en la

matière? – Dépendance au sentier et irréversibilités

• Comment gérer les autres gaz (incertitude sur le GWP) et la séquestration biologique (incertitude sur le bilan net)?

Séminaire FONDDRI – Paris – 4 Avril 2006

Cem

ent

Bas

ic ir

on &

ste

el

Refined petroleum

Pulp&Paper*

Lime*

Precious metals*

Fertilisers & NitrogenOther inorganic basic chemicals

Household paperMalt

Coke oven*Industrial gases

Hollow glassAluminium*

Man-made fibres

Rubber tiersFinishing of textiles

Dyes and pigmentsNon-wovens

Direct emissionsIndirect emissions from electricity

UK GDP

Pot

entia

l Max

imum

Gro

ss V

alue

Add

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t S

take

CO2: €20/t CO2

Electricity: €10/MWh

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40%

0.0% 0.2% 0.4% 0.6% 0.8% 1.0%

Price increase:

Demailly, Grubb, Hourcade, Neuhoff and Sato (2007),Cambridge/ CIRED. Convened by Climate Strategies

CO2 cost screen: sectors potentially exposed under unilateral CO2 pricing

Cement sectorIllustrative for UK - but numbers can still change significantly

Most leakage concerns from clinker – easily transportable

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0 500 1000 1500 2000 2500 3000 3500GVA (million Euro)

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ctri

city

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AS

/ C

O2

GV

AS

Cost increase electricity

Cost increase ele+CO2

Cost increase electricity from clinker

Cost increase ele+CO2 from clinker

Clinker

Cement

Concrete products (concrete products for construction; mixed concrete etc)

Steel sector

• Most exposure from BOF (and possible coke oven)• Steel can be transported at semi-finished stage

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0 500 1000 1500 2000 2500 3000 3500Gross value added (million Euro)

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SCost increase electricity

Cost increase ele+CO2

Cost increase electricityfrom slab

Cost increase ele+CO2from slab

Semi Finished

Hot rolled

iron&

steel

Illustrative for UK - but numbers can still change significantly

Profil du prix du carbone dans les secteurs d’infrastructure

Un modèle simple à deux périodes

maxq, y

t=1

2

1(1+)t-1 (pt yt Ct(·)) +

1(1+)

t=1

2 qt

C1(·) = C1(y1, q1) C2(·) = C1(y2, q2, q1)

0 = C1q1

+ 1

(1+) C2q1

1

(1+) '

t=1

2 qt

0 = C2q2

'

t=1

2 qt

TranSust – October 28th 2004

Quelle structure de base pour un régime international?

Cap&Trade, for lack of anything better• Internationally coordinated carbon tax (Nordhaus, Cooper)

– Distributional effects : the BSL theorem requires differentiated C-taxes or compensations

– No net transfers to developing countries

• Coordination of “P&Ms” : the essence of a nightmare

• R&D investment on carbon-free techniques:– Some misunderstandings about the nature of innovation– OK but where are the incentives?– OK but are you sure to put the money on technologies appropriate to

our specific contexts?

Le système de Kyoto ... et ce qu’il n’est pas

• Kyoto repose sur des engagements quantitatifs des Etats qui peuvent (ou pas) importer des permis et n’instaure pas de marché mondial généralisé

• Les Etats signataires sont libres de gérer comme ils veulent leur contrainte globale … et de diffracter le prix du carbone comme ils l’entendent

•Kyoto n’est pas une Grande Architecture rigide; il permet :

– Une incitation pour que les gouvernements mettent en jeu les mesures (prix de l’énergie, politiques urbaines, transports

– Une diversification des modalités d’application vis-à-vis des secteurs industriels pour lesquels l’impact sur la valeur de la firme pourrait provoquer des risques majeurs de délocalisation et de ‘fuite de carbone’

•Sa faiblesse: pas de système sérieux d’observance;

Amending Kyoto: a workable architecture if no crispation on the entitlement issue• no global binding cap until the Portuguese per capita

income level is reached (principles to be discussed)

• a menu of– non binding national emissions caps

– sectoral binding quotas allowing to a direct access to ICT and allowing to help domestic PAMs

– CDM redesigned as a support to domestic policies

• price-caps and price-floors– Safety valve Hedging against uncertainty

– A compliance tool and a levy for development

• Risk mitigation instruments to secure (early) investments in carbon saving infrastructures

… and if no crispation on the “favella” vs “grand archictecture” debate

• The climate regime can’t pretend to dictate all core decisions contributing to decarbonisation

• Carbon prices will not “do the job” alone

• They will have weak (and possibly perverse) influence on informal activities and will be swamped by high noise from other price signals (interest rates, real estates, land, shadow price of security, insurance costs)

• But they can operate as an attractor aligning bottom-up initiatives with pledges and review and the are a pre-condition for securing their consistency

An architecture which does not avoid confronting four sensitive issues

• Coal and sequestration: serious environmental integrity question + the « loophole » rethoric

• Biological sequestration: when, where, under what condition?

• The reform of ODA and the regulation of international capital flows

• Climate regime, WTO and the compliance system; an intra-european divide?

What Issue linkages and real motives to act for a compromise?

• Developed countries perspectives– Will the North consider climate only damages

likely to affect them directly? – Will they interpret climate damages in the

developing countries as source of instability– Will there be a link with other strategic issues

• Developing countries perspectives– Degree of concern about global warming: – Not to be isolated from an emerging regime– Opportunity to reform the ‘international economic

order

The last good news? Gleneagle G8:

• “ We will act with resolve and urgency to meet our shared and multiple objectives of reducing GHGs emissions, improving the global environment, enhancing energy security and cutting air pollution in conjunction with our vigorous efforts to reduce poverty”

• “We face a moment of opportunity” given the demand for infrastructure investment in DCs; back to the Marshall plan metaphora?

• To respond the discontents of globalisation: universal solidarity triggered by well-informed perceptions of self-interest