Elsevier

Energy Economics

Volume 31, Supplement 2, December 2009, Pages S144-S151
Energy Economics

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

https://doi.org/10.1016/j.eneco.2009.06.011Get rights and content

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. The 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.

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 has 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 agreement. 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 CO2 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. (2009), in 2030 China may have roughly 100 and 300 million people emitting today's US (20 tCO2) and EU (10 tCO2) 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 BRIC, regions behaved as in the baseline. Non-OECD countries' baseline emissions would exceed the carbon budget allowed for stabilizing radiative forcing between 3.5 and 3.7 W/m2 (corresponding to 550 ppm CO2 equivalent), between 2030 and 2040; Baseline emissions of BRICs alone would exceed it between 2035 and 2045.

This highlights the need to engage developing countries – especially BRICs and foremost China – in GHG mitigation before 2030. The negotiating position of some developing countries has indeed been changing, but incentives will likely be necessary to induce them to join a climate coalition (Victor, 2008). Brazil could apply credit for reducing emissions from deforestation (REDD), whose priority as a mitigation option has been undisputed since the conference of parties in Bali in 2007. China might take on environmental commitments partly in return for stronger guarantees of access to export markets abroad, thus linking trade and environmental policies (Tian and Whalley, 2008). Additional instruments such as funding for technology adoption and adaptation might also be used as accession deals.

Within this complicated and uncertain policy framework, developing countries will need to make important investment decisions in the next few decades, especially in long-lasting infrastructures that will shape the way energy will be consumed. This paper aims at analyzing the implications of different developing countries' decisions to participate in international climate agreements, with a special focus on investment decisions in fast-growing emerging markets.

Using the energy–economy–climate model WITCH (Bosetti et al., 2006), we assess the role of immediate versus delayed participation of developing regions in an international climate agreement. We quantify the implications of fragmented participation in terms of macro-economic policy costs and we investigate the role of technology innovation, adoption and diffusion in smoothing the transition of developing regions to a low-carbon intensive path. In particular, we look at optimal investment strategies in emerging economies in terms of energy capital and knowledge when different assumptions are made about the foresight of their own eventual commitment. We investigate the recent and projected investment trends in innovation and low-carbon technologies in China and compare them to the ones prescribed by a foresight strategy. Finally, we investigate the role of an international carbon market as a way to provide economic incentives for participation. We show that the role of policy anticipation should be taken into account in negotiating emission allocations and has important implications for the international financial transfers involved.

This work is meant to extend our knowledge about regional incentives to adopt effective mitigation policies. It extends the standard climate stabilization economic analysis (see IPCC 4ar WGIII) by analyzing departures from the first-best case of immediate participation and by looking at the incentives and strategies of developing regions. A few recent papers (Bosetti et al., 2008, Edmonds et al., 2007, Keppo and Rao, 2007) – along with those appearing in this volume (Clarke et al., forthcoming) – analyze the role of delayed participation of developing countries in international agreements.

Inter-temporal flexibility is known to be important for the economic efficiency of climate policies and has been analyzed extensively after Wigley et al. (1996). Models featuring perfect foresight, such as DICE (Nordhaus, 1992), FUND (Tol, 1999), MERGE (Manne and Richels, 2004), and WITCH make it possible to analyze the effects of anticipating future climate impacts or policies on optimal investments. Such forward-looking behaviour might differ from short-sighted political reality and should be interpreted as normative. Nonetheless, within the context of second-best climate policies, the role of foresight has received little attention. Bosetti et al. (2008) find that developing countries' incentives to increase emissions because of international leakage are more than counterbalanced by the anticipation of an eventual climate policy, even when such a policy is uncertain. This paper extends their analysis by focusing on optimal investment strategies in technology and innovation for fast-growing countries.

The structure of the paper is as follows: Section 2 analyzes the implications of immediate versus delayed participation in an international climate agreement. Section 3 focuses on the investment decisions about technology adoption and innovation, with a special focus on policy anticipation in developing countries. Section 4 discusses the role of an international permit market in providing adequate participation incentives. Section 5 concludes the paper by summarizing our main results.

Section snippets

International climate policies: immediate versus delayed participation

Our analysis starts by looking at international climate policies consistent with the long-term goal of stabilizing atmospheric concentrations. We use the integrated assessment model WITCH2 to investigate the economic and investment implications of climate policy, assuming either immediate or fragmented participation. A model description can be found in the Appendix.

WITCH is a hybrid energy–economy-model designed for the economic

Perfect foresight, innovation and delayed action in fast-growing countries

The detrimental effects of delayed participation, both in terms of policy costs and technology deployment – shown in the previous section – are strictly linked to the dynamics of investments in developing countries and the assumptions concerning policy anticipation. Indeed, a few decades of investments in fast-growing economies without consideration for future climate changes are sufficient to lock in a stock of polluting capital that has long-lasting consequences, and whose early retirement is

The role of an international carbon market

One of the instruments with the potential to increase the participation rate in global climate agreements is an international carbon market. Such a scheme would increase policy efficiency by equalizing marginal abatement costs, and could help developing countries finance energy and carbon efficiency measures. Assuming a perfect market with no transaction costs, the marginal price of carbon would be unrelated to the initial allocation of carbon permits, but regional gains or losses would be

Conclusions

This paper has looked at different participation schemes in a future international climate agreement aimed at long-term climate stabilization. Using a numerical energy–economy–climate model we have shown that delayed participation of fast-growing countries in a global climate treaty increases the cost of climate policy. The magnitude of the penalty with respect to the ideal case of immediate participation can be large, but depends on the stringency of the target and on the possibility to

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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.

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