Climate change mitigation strategies in fast-growing countries: The benefits of early action

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Climate change mitigation strategies in fast-growing countries: The benefits of early action
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    Climate Change Mitigation Strategies in Fast-Growing Countries: The Benefits of Early Action NOTA DI LAVORO 53.2009 By  Valentina Bosetti and Massimo Tavoni Princeton University, Fondazione Eni Enrico Mattei and CMCC  Carlo Carraro University of Venice, Fondazione Eni Enrico Mattei, CEPR, CESifo and CMCC   The opinions expressed in this paper do not necessarily reflect the position of Fondazione Eni Enrico Mattei Corso Magenta, 63, 20123 Milano (I), web site: www.feem.it, e-mail: working.papers@feem.it SUSTAINABLE DEVELOPMENT Series Editor: Carlo Carraro Climate Change Mitigation Strategies in Fast-Growing Countries: The Benefits of Early Action By Valentina Bosetti and Massimo Tavoni, Princeton University, Fondazione Eni Enrico Mattei and CMCC Carlo Carraro, University of Venice, Fondazione Eni Enrico Mattei, CEPR, CESifo and CMCC Summary  This paper builds on the assumption that OECD countries are (or will soon be) taking actions to reduce their greenhouse gas emissions. These actions, however, will not be sufficient to control global warming, unless developing countries also get involved in the cooperative effort to reduce GHG emissions. This paper investigates the best short-term strategies that emerging economies can adopt in reacting to OECD countries’ mitigation effort, given the common long-term goal to prevent excessive warming without hampering economic growth. Results indicate that developing countries would incur substantial economic losses by following a myopic strategy that disregards climate in the short-run, and that their optimal investment behaviour is to anticipate the implementation of a climate policy by roughly 10 years. Investing in innovation ahead of time is also found to be advantageous. The degree of policy anticipation is shown to be important in determining the financial transfers of an international carbon market meant to provide incentives for the participation of developing countries. This is especially relevant for China, whose recent and foreseeable trends of investments in innovation are consistent with the adoption of domestic emission reduction obligations in 2030. Keywords : Energy-economy Modeling, Climate Policy, Developing Countries  JEL Classification: Q54, Q55, Q43 This paper is part of the research work being carried out by the Sustainable Development Programme of the Fondazione Eni Enrico Mattei, and was written as a contribution for the Energy Modeling Forum 22. Financial support from the TOCSIN project is gratefully acknowledged. The usual disclaimer applies.  Address for correspondence: Massimo Tavoni Fondazione Eni Enrico Mattei Corso Magenta 63 20123 Milano Italy E-mail: massimo.tavoni@feem.it   1  Climate Change Mitigation Strategies in Fast-Growing Countries: The Benefits of Early Action Valentina Bosetti * , Carlo Carraro ** , Massimo Tavoni *    Abstract This paper builds on the assumption that OECD countries are (or will soon be) taking actions to reduce their greenhouse gas emissions. These actions, however, will not be sufficient to control global warming, unless developing countries also get involved in the cooperative effort to reduce GHG emissions. This paper investigates the best short-term strategies that emerging economies can adopt in reacting to OECD countries’ mitigation effort, given the common long-term goal to prevent excessive warming without hampering economic growth. Results indicate that developing countries would incur substantial economic losses by following a myopic strategy that disregards climate in the short-run, and that their optimal investment behaviour is to anticipate the implementation of a climate policy by roughly 10 years. Investing in innovation ahead of time is also found to be advantageous. The degree of policy anticipation is shown to be important in determining the financial transfers of an international carbon market meant to provide incentives for the participation of developing countries. This is especially relevant for China, whose recent and foreseeable trends of investments in innovation are consistent with the adoption of domestic emission reduction obligations in 2030. JEL: Q54, Q55, Q43 KEYWORDS: Energy-economy modeling, Climate Policy, Developing Countries Corresponding author: massimo.tavoni@feem.it * Princeton University, Fondazione Eni Enrico Mattei and CMCC ** University of Venice, Fondazione Eni Enrico Mattei, CEPR, CESifo and CMCC First draft: April 2009 This draft: May 2009 This paper is part of the research work being carried out by the Sustainable Development Programme of the Fondazione Eni Enrico Mattei, and was written as a contribution for the Energy Modeling Forum 22. Financial support from the TOCSIN project is gratefully acknowledged. The usual disclaimer applies.   2 1.   Introduction With the upcoming Copenhagen conference in December 2009, international negotiations over a post-Kyoto treaty are entering a crucial phase. Notwithstanding the consequences of the current economic downturn, there are still high expectations about the possibility of reaching a comprehensive global agreement consistent with the objective of mitigating the consequences of global warming. To be environmentally effective, a climate agreement will need to provide the foundations for overcoming the asymmetric interests and the free-riding incentives that have thus far prevented meaningful coordination of global climate change control. The new US administration’s change of position has removed a long-standing obstacle, so that, despite the remaining differences, concerted climate mitigation action from the major developed countries now seems more probable than ever before. This is an important step forward, since many developing countries have made it clear that their commitment rests on wealthier and more polluting nations’ taking action first. The current upturn in public expenditure which counteracts the current financial and economic turmoil also indicates that governments are focusing on a somewhat “green” recovery, since a sizeable slice (roughly 15%) of global fiscal stimulus plans have been allocated to low-carbon measures. The US has devoted 112 billion USD for green stimulus. Interestingly, China has allocated twice as many resources (221 billion USD), though mostly in rail and grid infrastructures (Robins et al. 2009). Although first steps like these are a necessary condition for effective action against climate change, they are not sufficient and further steps are needed. The principle of common but differentiated responsibilities and respective capabilities emphasizes the different roles that Annex 1 (A1) and non Annex 1 (NA1) countries will play in an international climate   3agreement. With no consideration for past responsibilities, average per capita emissions in the developing world are still substantially lower than in OECD countries. However, given the larger and faster growing populations in NA1 regions, the contribution of emerging economies to total emissions is becoming substantial. China, in particular, has doubled its emissions since the signature of the Kyoto protocol in 1997, and is now the largest contributor of energy-related CO 2  emissions. Today, an average Chinese citizen’s emissions are ¼ those of an average US one. However, assuming continued economic growth - even if it is slower than in the past - and given China’s population size, a large number of Chinese citizens may soon reach developed countries’ emission levels. For example, according to Chakravarty et al. (2008), in 2030 China may have roughly 100 and 300 million people emitting today’s US (20 t CO 2 ) and EU (10 t CO 2 ) per capita averages, respectively. The spikes in fossil fuel prices in recent years are a consequence of fast-growing countries’ increasing contribution to global energy demand. Oil price shocks can harm economic growth prospects for emerging economies with low levels of per capita energy consumption, but with large manufacturing, energy-intensive industries (Li 2008). This has led many developing countries to pursue policies aimed at increasing energy efficiency, 1  and has shown that well designed energy policies have the potential to lead to no-regret investment options. Focusing on the climate problem, it is now clear that developing countries, especially fast-growing regions such as those in the so-called BRIC (Brazil, Russia, India and China), will have a major impact on future emission dynamics and will play a major role in climate negotiations. Results from the WITCH model baseline (see Bosetti et al. 2009) show that even if the OECD regions committed to zero emissions, the attainment of effective climate stabilization objectives would soon be impossible if the rest of the world, especially the 1   China, for example, has set ambitious targets to decrease its energy intensity, though it has struggled to comply with the 20% reduction goal for 2010. The current economic recession may make it easier to attain.  
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