a copenhagen collar: achieving comparable effort through carbon price agreements warwick j. mckibbin...
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A Copenhagen Collar: Achieving Comparable Effort Through Carbon
Price Agreements
Warwick J. McKibbin
Adele Morris
Peter J. Wilcoxen
Prepared for Wednesday Lowy Lunch, 2 September 2009
Overview
• Update on policy developments• Implications of the GFC for climate
negotiations• The need for a better basis for negotations• Ingredients for an agreement• A price collar• An illustrative price collar for the United
States• Conclusion
Policy debate - global
• Copenhagen in December for country commitments for the 2012-2020 period.
• G-20 has agreed to 80% reduction by 2050 but no base year agreed and no 2020 target
• EU has called the US to cut 25% below 1990 by 2020 (35% below 2005)
• Developing countries have called for the US to cut 40% by 2020
Policy debate – United States
• President Obama proposed cuts of 14% of 2005 by 2020 (83% by 2050)
• US House has passed the Waxman Markey bill which has gone to the Senate – proposes 15% of 2005 by 2020
Policy debate in most countries
• Attempted compromise in a system of national targets and timetables causes
– Not deep enough cuts so environmental lobby object
– Not enough risk management on costs so industry object
Implications of the GFC for Copenhagen
• Anxieties about reducing emissions when unemployment is rising
• Downturn has increased uncertainty about the costs of future sharp emissions reductions– Economic slowdown but hard to get capital to invest in
emission reductions
• Demonstrates how uncertain the future is
The goal of a global climate agreement
• Stabilize carbon concentrations in the atmosphere
• Try to achieve this via “comparable effort” and acknowledging the difference between developed and developing countries
What is comparable effort?
• A similar reduction target from a baseyear is not comparable effort.
• This reflects either a misunderstanding of the real world or a political deception
A common target for emissions is not comparable effort
• Emissions of a country over time depends on:– Endowments (particularly of energy)– Economic structure– Population growth– Productivity growth– Stage of development (consumption pattern)– Technology availability– Etc etc etc
• Kyoto Protocol was a clear example of the problems – New Zealand, Japan, Europe
Comparable effort
• A good measure of effort is the price of carbon in the economy
• Carbon prices and economic costs are highly related
The need for a better basis for policy
• Two parts– A pre commitment to cut global emissions
towards a concentrations goal allocated across countries
– A mechanism for ensuring equal efforts across countries (can be measured as the same carbon price)
Lessons from Kyoto Experience
• A system of rigid targets and timetables is difficult to negotiate because it is a zero sum game
• It is difficult for countries to commit to a rigid target for emissions under uncertainty about costs – harder for rapidly growing economies
• Even the most dedicated countries may be unable to meet their targets due to unforeseen events out of their control
Why Copenhagen will not deliver
• Copenhagen is heading into the same trap at the Kyoto Protocol– Targets and timetables without allowing for
enormous uncertainty about the future
A way forward
• Emissions targets so politicians can feel good pledging x% by year 2020 and 2050
• Combined with a clear compliance mechanism for a country that exceeds an agreed target emission reductions.
How to achieve this?
• The same idea as a global McKibbin Wilcoxen Hybrid
• Negotiate a target reduction path for each country
• Negotiate a price collar for carbon prices
What is a Price Collar?
• Set an initial upper and lower price bound for national carbon prices - the same across all countries
• Increase the upper and lower price band by 4% per year
Compliance
• A country must demonstrate that it has both reached its target and maintained carbon prices above the floor price through the budget period
• A country that exceeds the emissions target must demonstrate that the national price of carbon was at the ceiling price during the period where the target was exceeded
Implementation
• Each country implements it’s carbon policy however it likes– Carbon tax– Emissions trading– Hybrid– Direct regulation– Wishful thinking
What is needed?
• A way to measure the carbon price across all systems that countries might use
• Create a carbon price equivalence like a tariff equivalent measure for WTO compliance.
Developed countries
• Can propose deep cut targets and if it can’t be done then the costs will be limited by riding up the ceiling price
• (same as the McKibbin Wilcoxen Hybrid)
Developing Countries
• Allow initially just to have a price floor without a target
• But if possible - better to allow a generous target with a price collar
What does this mean in practice?
What matters
• A policy that reduces uncertainties of extreme outcomes is more likely to be implemented and to stabilize concentrations than a policy that is precise but can’t be negotiated because no-one is willing to commit because of uncertainty.
• How much is lost by reducing uncertainty on the cost side?
• McKibbin W.J. Morris A. , Wilcoxen P and Y. Cai (2009) “Consequences of Alternative US Cap and Trade Policies: Controlling Both Emissions and Costs”, The Brookings Institution, Washington DC
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lars
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Without Collar With Collar
US Carbon price
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2010 2020 2030 2040 2050Year
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US CO2 Emissions
Cumulative US CO2 Emissions0
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on M
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Conclusion
• It is possible to deal with the politics within a country of – Deep cuts for the environmental lobby– Cost control for industry
Conclusion
• It is possible to deal with the politics of international negotiations of – The fixation with targets and timetables– The need to ensure comparable effort
Conclusion
• The reality of Copenhagen is that the United States will do what it will do domestically.
• The domestic debate in the US is not about legislating the deep cuts being negotiated at Copenhagen.
• The price collar is a way to square the apparent inconsistencies in the domestic versus international debate.
Conclusion
• In Australia a price collar around a deep cut path is a much better way forward than the CPRS for managing climate and political uncertainty
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