Climate%20Policy%20given%20Political%20Constraints

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Climate Policy given Political Constraints

• Stephen Stretton
• Research Associate
• Cambridge Centre for Climate Change Mitigation
  Research (4CMR)
• Department of Land Economy
• http//www.4cmr.org

14th October 2009
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1 Why?2 Political Constraints3 Carbon
Pricing4 Towards a Solution
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1 Why?
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Part 1 Why?

• Effects of Climate Change
• Why? Committed Temperature Rises
• Net Costs of Tackling Climate Change

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Effects of Climate Change
(Present Day) Some effects already seen
Oceans damaged
Greenland ice melts (raising sea levels
eventually by 7m)
Increases in extreme weather (e.g. hurricanes)
Amazon rainforest?
Agricultural yields fall
Tropical diseases spread
CO2 released from forests and Soils
Methane released from peat bogs oceans?
World ecosystems cannot adapt
Hundreds of millions at risk from hunger drought
Desertification of large parts of Earths surface
Positive Feedback Warming causes further release
of greenhouse gases
Source Adapted from Warren, R (2006)
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Why?
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Net Costs of Mitigation are Small
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Part 1 Conclusions

• Climate change is a massive problem requiring
  huge investment
• But it can be solved at low net cost
• Very strong action to decarbonise the economy
  over two decades is required immediately if we
  wish to prevent a large risk of massive damage to
  natural and physical capital

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2 Political Constraints
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Part 2 Political Constraints

• Tragedy of the Commons
• Logic of Collective Action
• Dual Causation?
• Key Actors
• Incentive v Wealth Effect
• Tragedy of the Commons (2)
• An Artificial Tragedy?

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The Tragedy of the Commons

• Incentives of individual actors considered
  separately differ from collectively rational
  solution
• Where a common resource is involved (e.g. the
  global atmosphere) this is often referred to as a
  Tragedy of the Commons
• The cost of each individuals pollution is shared
  over the future
• Incentive to Free Ride

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Logic of Collective Action

• Tyranny of the Concentrated Interests
• Take a pragmatic approach concentrated interests
  can be harnessed for the interests of the climate
• Concentrated Interests
• Fossil Fuel Owners
• Alternative Technologies Renewables, Nuclear,
  Carbon Capture Storage
• Reinsurance companies
• Large nation-states (e.g. China)
• Trading blocs
• Clubs of countries
• Institutions

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Dual Causation?

• Economic Structures depend on Government Policy
  and Government Policy depends on Economic
  Structures.

Government Policy
Structure of the Economy
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Key Actors

• Individuals/Voters?
• Nation States?
• Resource Owners?
• Industry?
• Can climate policy be framed in a way that is
  positive for these agents?
• (Without making things too complicated)

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The Two Effects of Policy

• Incentive Effect higher prices encourage
  behaviour and technological change
• Endowment (Wealth) Effect change in value of
  assets
• N.B. the agents that might suffer the economic
  loss from strong climate policy (a change in
  endowment/wealth) are not necessarily the same
  ones that would be charged the tax or asked to
  buy permits. The economic incidence of a tax will
  generally fall on factors of production, namely
  labour and owners of land, resources and
  already-existing capital goods, and differs from
  the paper incidence.

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The Tragedy of the Commons (2)

• Ill argue here that there are in fact two
  tragedies
• Firstly, if it is costly for countries to reduce
  their greenhouse gas emissions, then there is a
  natural tragedy
• Secondly, there may be an artificial tragedy
  this is associated with the structure of the
  institutions we use to solve the problem
• Ill argue that the artificial tragedy is more
  significant than the natural tragedy

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An Artificial Tragedy?Implications for Policy

• Current international agreements are based on
  flexibly-determined-quantitative targets.
• Under emissions trading, rights to emit carbon
  have a value
• In original negotiations, countries may seek to
  negotiate more value to their countries i.e.
  more permits and therefore fewer reductions.

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Part 2 Conclusions

• Global policy suggestions need to take account of
  the interests and incentives of smaller scale
  actors (e.g. nation states)
• Structure matters!

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Part 3 Carbon Pricing
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Part 3 Carbon Pricing

• Definitions
• Upstream v Downstream
• What does a carbon price do?
• Carbon taxes as fiscal instruments
• How High?
• Taxes and Cap-and-trade
• Taxes versus Cap-and-trade
• Conclusions

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Definitions

• An energy tax is a monetary amount charged by the
  government on the extraction, importation or use
  of fossil fuels.
• A carbon tax is an energy tax levied according to
  the fossil fuels carbon content
• A carbon price is a carbon tax or equivalent
  price for marketable permits.

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Upstream or Downstream?
Fossil Fuels
CO2 Emissions


Downstream
Upstream

• It is administratively simpler to cover all
  sectors with an upstream carbon price

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What does a Carbon Price Do?

1. Reduce Demand
2. Encourage Alternatives
3. Raise Revenue

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Price Elasticity and Tax Effectiveness
Emissions less sensitive to Price (Price Inelastic) Emissions more sensitive to Price (Price Elastic)
Effectiveness of Carbon tax as climate policy Low High
Effectiveness of Carbon tax as a tax High Low
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Oil Price Fluctuations
Equivalent to 200/tCO2
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How High Does The Carbon Price Need To Be?

• Coal with Carbon Capture and Storage
• 85-130/tCO2 for new demonstration plants
• 40-60/tCO2 in 2030 for commercialized plants
  (Naucler et al. 2008 11.4)
• Concentrated Solar Power
• Carbon price needed 115/tCO2 (Staley et al.,
  2009)
• Air Capture
• Capture and Storage of Carbon Dioxide from Thin
  Air
• Carbon price needed at least 140/tCO2 (Keith et
  al., 2006)
• 200/tCO2?

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UK MoneyEffects of 100/tCO2

• 4p/kWh on gas electricity
• 10p/kWh on coal electricity
• 23p/litre on petrol
• Raise 60bn/yr initially
• 1000 citizens income or replace VAT
• this will fall as the policy reduces emissions

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Taxes versus Quotas

1. Administrative Burden (Upstream v Downstream?)
2. Volatility Investment?
3. Immediacy?
4. Do we know our budget?
5. Ability to overachieve?
6. Incentives for Countries to Participate Globally?

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Part 3 Conclusions

• A price of gt200/tCO2 would be effective at
  reducing emissions in the long run, encouraging
  alternative sources of energy
• Upstream taxes have important advantages

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Part 4 Towards A Solution
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Part 4 Towards A Solution

• Governing the Commons
• Global Solutions
• Sub-global Solutions
• Conclusions

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Governing The Commons

• Design Principles for Enduring Common-Pool-Resourc
  e Institutions
• Clearly defined boundaries of common property
  resource
• Congruence between appropriation/provision rules
  and local conditions
• Collective choice arrangements agents can
  participate in modifying operational rules
• Monitoring
• Graduated sanctions
• Conflict-resolution mechanisms
• Rights to organize
• Nested enterprises

Source Elinor Ostrom, Governing the Commons
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Global Solutions

• Global targets?
• Global level institutions forests stocks,
  finance etc.
• Measurement, legal structures, contracts,
  institutions
• Concrete action A carbon phase out plan

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Sub-global Solutions The Climate Club

• Climate Club of committed nations
• Constant carbon price of 200/tCO2 on fossil
  fuels
• Issue of contracts guaranteeing this price for
  international investors
• Price embodied carbon in imports
• Adopted by a club e.g. EU, US and Japan with
  open membership

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Part 4 Conclusions

• International negotiations must provide for
  credible commitments and global institutions
  whilst not preventing sub-global action
• Sub-global climate club can take concrete
  action to reduce emissions now

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Discussion Thank you for your attention!

• Contact me
• Stephen Stretton
• sjs53_at_cam.ac.uk
• Links
• http//www.4cmr.org
• http//www.withouthotair.com
• http//www.zerocarbonnow.org

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Questions from the Audience

• Capital investment requires certainty if you
  have different agreements in different parts of
  the world, will this be certain enough?
• Purpose of plan is price certainty, which is what
  matters for investors
• RD technological progress
• Yes, much more expenditure on RD is needed
• Getting there short term politics, fuel in the
  ground agents wont cooperate?
• Difficult and important questions maybe we dont
  have to please all the agents all of the time?
• CCS doubles cost of steel is this accounted for
  in model?
• We do not model CCS in industrial sector, only in
  the power sector. Yes, there will be knock-on
  costs of the price of steel for cost of
  infrastructure.