Accounting for land use in EU climate policy

By Hannes Böttcher, Senior Researcher, Öko-Institut, previously in IIASA’s Ecosystem Services and Management Program

In or out?  Debit or credit? The role of the land use sector in the EU climate policy still needs to be defined

The EU has a target to reduce greenhouse gas emissions by at least 40% by 2030. This is an economy-wide target and therefore includes the land use sector, which includes land use, land use change and forestry. The EU is currently in the process of deciding how to integrate land use into this target. This is not an easy task, as we show in a new study.

© Souvenirpixels | Dreamstime.com

Land use includes activities, such as logging, that can release greenhouse gases into the atmosphere. But the sector also includes other processes that can remove greenhouse gases from the  atmosphere. Accounting for these processes is a complicated task. © Souvenirpixels | Dreamstime.com

The land use sector has several particularities that make it different from other sectors already included in the target, such as energy, industrial processes, waste, and agriculture. The most specific particularity is that the sector includes activities that cause emissions but also can lead to carbon being removed from that atmosphere, and taken up and stored in vegetation and soil. However, this removal is not permanent. Harvesting trees, and burning wood releases the carbon much more quickly than it was stored. Another particularity is that not all emissions and removals are directly caused by humans. This is especially true for removals from forest management.

In the past, the EU reported that uptake and storing of carbon through land use activities was higher than emissions from this sector. The European land use sector thus acted as a relatively stable net sink of emissions at around -300 to -350 Megatons (Mt) CO2 per year. But this might change in the near future: projections show the net sink declining to only 279 Mt CO2 in 2030.

Adding up carbon credits and debits
The emissions and removals that are actually occurring in the atmosphere are not exactly those that are currently accounted for under the Kyoto Protocol. Rather complicated rules exist that define what can be counted as credits and debits. Depending on how these rules develop, the EU sink may be accounted for to a large degree as a credit, or it could turn into a debit because the sink is getting smaller compared to the past. It is not likely that the entire sink will be turned into credits. Especially for the management of existing forests, which contributes a lot to the net sink, negotiators of the Kyoto Protocol have developed special accounting rules for the time before 2020. Under these rules, carbon credits only count if measured against a baseline.

The rules for the time after 2020 have not yet been agreed, however, as the Kyoto Protocol ends in 2020. In order to assess the impact of including the land use sector in the EU target in our new study, we had to make different assumptions, for example about how much wood we will harvest, the development of emissions and removals, and what the baseline for forest management should be. We then applied the existing Kyoto rules and alternative rules and assessed their impact on the level of ambition required to meet the EU’s target. It quickly became obvious: the assumptions we make and the rules we apply have very large implications for the 2030 Climate and Energy Framework.

One option of including land use discussed by the Commission is to take agriculture emissions out of the currently existing framework of the so-called ESD (an already existing mechanism to distribute mitigation efforts among EU Member States for specific sectors such as transport, buildings, waste and agriculture) and merge it with land use activities in a separate pillar. In our study we estimated the net credits that the land use sector could potentially generate, and found these credits could be as high as the entire emission reduction effort needed in agriculture. This would mean that in agriculture no reductions would be needed if the credits from land use were exchangeable between the sectors.

The impact on thannes-fighe target of 40% emissions reductions can be more than 4 percentage points if land use is included and the rules are not changed. This means that the original 40% target without land use would be reduced to an only 35% target. Other sectors would have to reduce their emissions less because land use seems to do part of the job. The target as a whole would thus become much less ambitious than it currently is. But this does not need to be the case. If accounting rules are changed in a way to account for the fact that the sink is getting smaller and smaller, land use would create debits. Including debits in the target would make it a 41% target instead and increase the overall level of ambition. This would be bad for the atmosphere because effectively emissions would not be reduced as much as needed.

It thus all depends on assumptions and rules. Before the rules are announced, the contribution of the land use sector cannot be quantified. Given this, we argue that the best option would be to keep land use separate from other sectors, give it separate target and design accounting rules that set incentives to increase the sink.

Reference
Böttcher H, Graichen J. 2015. Impacts on the EU 2030 climate target of inlcuding LULUCF in the climate and energy policy framework. Report prepared for Fern and IFOAM. Oeko-Institut.

Note: This article gives the views of the author, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.

Countdown to zero?

By Nebojsa Nakicenovic, IIASA Deputy Director General/Deputy Chief Executive Officer (originally published in UNA-UK’s report: Climate 2020: Facing the Future)

Zero net global greenhouse gas emissions must become a reality before the end of the century if humankind is to stave off the worst effects of climate change. How can this be achieved?

This is a big year for embarking on transformational change towards a sustainable future for planet Earth. Three major global events are taking place, on financing and investments in Addis Ababa, sustainable development in New York and climate mitigation in Paris.

Energy futures are a major challenge on the way forward. In September the UN General Assembly in New York will focus on the Sustainable Development Goals (SDGs), which emphasise an enabling environment and economy for human development.

According to Kandeh Yumkella, Special Representative of the UN Secretary-General for Sustainable Energy for All (SE4All), the proposed SDG 7 on energy (‘Ensure access to affordable, reliable, sustainable and modern energy for all’) is “the golden thread that links poverty eradication, equitable economic growth and a healthy environment”.

SE4All calls for universal access to energy services, doubling the rate of energy intensity improvement and doubling the share of renewable energy, all by 2030. These goals are based on the Global Energy Assessment (GEA), coordinated by the International Institute for Applied Systems Analysis (IIASA) and the result of five years’ work by 500 experts worldwide.

The Paris climate meeting in December aims for a major climate agreement. What will it take? Photo Credit: Moyan Brenn via Flickr

The Paris climate meeting in December aims for a major climate agreement. What will it take? Photo Credit: Moyan Brenn via Flickr

The world is also going to have to introduce a workable, implementable scheme to stave off the possibility of runaway climate change, one with the objective of keeping the average global surface temperature increase to within 2°C over the pre-industrial average. It’s doable, but requires a high level of ambition to achieve immediate and vigorous emissions reductions.

The UN Climate Change Conference in Paris in December 2015 is aiming for – and will hopefully get – a climate agreement based on the 2°C limit that will be legally binding on every nation. To come near to achieving this target will require addressing energy systems, which is central to greenhouse gas emissions mitigation – 80 per cent of global energy is derived from fossil fuels. Limiting emissions will involve a major transformation of energy systems toward full decarbonization.

Stabilization scenarios
But we need to move urgently. IIASA research has shown that to meet the 2°C target and avoid dangerous climate change, emissions will need to peak by 2020. By 2050, they will have to be reduced by 30 to 70 per cent compared to today’s levels, and then they will need to go down to zero well before the end of the century.

The reason is that the amount of carbon that can be emitted in the future is limited if we are to restrict climate change to any given level. For example, to meet the 2°C target, humanity has a total carbon budget of some thousand billion tons of carbon dioxide.

This budget needs to be allocated along possible emissions pathways, which explains the need for achieving a peak as soon as possible followed by a decline to zero emissions. Should the emissions peak be late or decline rate too slow, humanity is likely to exceed the cumulative carbon budget. If this occurs, negative emissions would be required: namely, carbon removal from the atmosphere, so that excess emissions are offset rendering stabilization at 2°C possible despite an emissions overshoot.

The question is how could this be done. In stabilization scenarios, the negative emissions are achieved, for instance, by combining combustion of sustainable sources of biomass with carbon capture and storage (CCS). Both technologies are difficult from the current perspective and would require further development and vigorous deployment to reduce the costs and improve their performance.

CCS will presumably be developed anyway to decarbonize fossil fuels in those parts of the world where a transformation toward renewable, and possibly also nuclear, energy is delayed.

So we can decarbonize fossil fuels or switch to a higher percentage of carbon-free energy sources, such as many forms of renewable energy, to reduce and eventually eliminate emissions. What else can we do? GEA findings show that emissions could be reduced by up to half by efficiency improvements in energy, especially in end-use. This means looking at reducing emissions from areas such as transport, buildings, heating and cooling, urbanisation and electric appliances. It means changing mindsets, getting people and policymakers engaged in the emissions-reduction process.

Not all emissions come from sources that are judged to be a sign of development. In many developing countries, cooking over smoky fires burning traditional biomass (or coal) causes small particle pollution that adversely affects the health of women and children. IIASA research is analyzing how to introduce clean modern energy for cooking to millions of people and to cut indoor and outdoor pollution from these sources.

Improving air quality in cities with ground-level ozone, or smog (which results from chemical reactions between polluting compounds in the presence of sunlight), has clear synergies for human health, reducing cardiac, pulmonary and other diseases. It can increase human capital, too. One line of IIASA research shows that implementing a stringent climate policy could reduce globally aggregated lives lost due to indoor and regional air pollution by up to four million.

Sectoral interdependencies with respect to emissions are increasing. For example, reducing carbon and particle emissions to keep climate change in check has enormous implications for the food and water supply. Staggering amounts of water are needed to grow food but are also needed for sustaining energy systems. The productivity of land areas depends on climate and soil conditions. California is entering its fourth year of severe drought, raising concerns for agriculture and wildlife. Unsustainable water use in the state is draining aquifers containing ancient water that will take centuries to replenish.

All water systems – not simply those in traditionally arid or developing areas – are vulnerable to the changing climate. Reducing water use immediately reduces demand for electricity, as well as the fuels required to generate electricity. Water is needed to grow crops for biofuels, but fuel transport costs can be reduced by co-locating biofuel cultivation close to the communities that use them – another IIASA research result. Water can also produce plenty of hydroelectricity. Renewable energy technologies can be utilised to provide heat and electricity needs for water desalination. Water and energy use have almost boundless synergies and have to be analysed from an integrated perspective, which is why at IIASA examining the energy-water nexus is such a priority.

Complex problems
Stringent emission-reduction policies can also help to bolster the energy security goals of individual countries and regions. Such policies promote energy efficiency, the diversification of the energy supply mix and the increased utilisation of domestically available renewable energy sources. The result would be energy systems that are more resilient and simultaneously have a higher degree of sovereignty, especially compared to those so reliant on imports of fossil energy commodities, such as North America, Europe, Japan and, increasingly, China.

The international community has also woken up to the significance of climate-relevant emissions from deforestation and land degradation. The UN’s REDD+ initiative (reducing emissions from deforestation and forest degradation) is one of the more promising areas of agreement in global climate negotiations. Felling a tree always releases carbon, stored over its lifetime in its roots, leaves and branches. Large-scale deforestation therefore is a major contributor to carbon emissions. Nitrogen emissions from agriculture, wastewater management and industrial processes are also produced by human activities and need to be mitigated.

 Felling a tree always releases carbon, stored over its lifetime in its roots, leaves and branches. Large-scale deforestation therefore is a major contributor to carbon emissions.  Photo Credit: Curt Carnemark / World Bank

Felling a tree always releases carbon, stored over its lifetime in its roots, leaves and branches. Large-scale deforestation therefore is a major contributor to carbon emissions. Photo Credit: Curt Carnemark / World Bank

These are complex problems and huge investments are needed to solve the energy challenges society faces today. The ostensibly single aim of reducing emissions will, in fact, require a multiple paradigm shift affecting every domain simultaneously. There are many golden threads, and they are very entangled.

To fund the transformation to sustainable energy services for all, including the three billion ‘left behind’ without access and living at or below the poverty line, the Third International Conference on Financing for Development in Addis Ababa in July will need to dig very deep into its collective pockets. To transform the global energy system, the volume of investment will have to almost double over the next three to five decades, from about $1.3 trillion to some $2.5 trillion.

The money is available. Insurance and pension funds control $50 trillion. Governments can help catalyse other kinds of private investment by providing research and development and early deployment, and by helping to de-risk investment. The cost savings of these climate policy synergies are potentially enormous: $100-600 billion annually by 2030 in reduced pollution control and energy security expenditures (0.1-0.7 % of GDP) could be achieved by combining climate mitigation with combating air pollution rather than pursuing the two goals independently.

For emission reductions to be successful, these practical and financial considerations will need to be supported by a new ethical awareness that will temper our relationship with each other and our planet. Sustainability in every aspect of human life means a shift to equity and inclusion.

With the fast-growing population and the need for universal development, the requirement to control emissions is extremely urgent. The golden thread described by Yumkella with respect to the energy sustainable development goal encompasses the notions of both opportunity and fragility, but it binds us all.

Read the full publication: Climate 2020: Facing the future (PDF). 

Interview: Linking climate adaptation and mitigation

In a new study in the journal Climatic Change, IIASA Guest Research Scholar Mia Landauer explores the interrelationships between policies dealing with climate change mitigation and adaptation.

Why did you decide to do this study?
Adaptation and mitigation have been traditionally handled as two separate policies to combat climate change. We wanted to explore whether adaptation and mitigation can or should be considered together, because the implementation of the two policies takes place at different scales and the goals of the two climate policies are often considered distant from each other. We approached this question with a systematic literature review, because although such reviews are common in other research fields such as health sciences, there are only a few examples in social and environmental sciences. Ours was the first systematic analysis on how the interrelationships have been studied across different research fields and how these studies have conceptualized the issue.

The United Nation Headquarters complex in New York turns out their lights in observance of “Earth Hour,” in 2015. Credit: John Gillespie via Flickr

Cities are at the forefront of climate policy making and climate impacts. The United Nation Headquarters complex in New York turns out their lights in observance of “Earth Hour,” in 2015. Credit: John Gillespie via Flickr

What were the major findings of your study? What was new or unique?
We found that cities in particular should consider adaptation and mitigation together, because cities are in the forefront of climate policy making and urban actors have to negotiate trade-offs between the two climate policies across multiple scales. We found the highest number of publications on interrelationships between adaptation and mitigation from the field of urban studies.

Our systematic review provides knowledge on how synergies can be identified and conflicts avoided across different urban sectors and scales which is valuable for urban decision makers and planners when they have to consider climate policy making and planning practices.

Why are cities important when researching climate change adaptation and mitigation?
Our systematic review reveals that there is an increasing interest to study the interrelationships especially in cities, which face challenges of global change both in developing and developed countries. Especially under limited resources, integrated adaptation and mitigation strategies can provide a possibility to increase efficiency of cities’ responses to climate change.

A green wall in Paris shows just one example of building innovations to help mitigate climate change. Credit: Mia Landauer 2013

A green wall in Paris shows just one example of building innovations to help mitigate climate change. Credit: Mia Landauer 2013

What are the major conflicts and synergies you identified?
At the organizational scale, the trade-offs and conflicts we found between adaptation and mitigation showed up especially in urban policy and administrative processes, and allocation of resources. In practice, conflicts appear especially when there are competing land uses such as between public and private land. We also identified a number of synergies, which are indications of positive interrelationships. In practice, synergies can be found particularly in the building, infrastructure and energy sectors, with examples ranging from passive building design to urban greening and alternative energy options. In order to enhance synergies, changes in regulations and legislation, policy and planning innovations, raising awareness and cooperation between different actors and sectors should be considered.

How can this information be applied for policy making?
Integration of adaptation and mitigation can reduce vulnerability to climate change and help to implement climate policy and planning in a resource-efficient manner. Our analysis identified many opportunities that can be gained from integration of adaptation and mitigation. Especially in cities we find that it can be beneficial for decision makers and planners to consider adaptation and mitigation policies together, in order to avoid conflicts in planning practices and negotiate difficult trade-offs.

Reference
Landauer M, Juhola S, Soederholm M (2015) Inter-relationships between adaptation and mitigation: a systematic literature review. Climatic Change, Article in press (Published online 8 April 2015) http://dx.doi.org/10.1007/s10584-015-1395-1

Note: This article gives the views of the interviewee, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.

How do you operationalize the water-energy nexus?

By Paul Yillia,  Guest Research Scholar, IIASA Water Program

Sunday March 22 2015, was World Water Day. I woke up on that beautiful spring morning in Vienna to the rising sunshine through a slit in the curtains and the lovely humming of birds returning from their winter hideouts some thousands of kilometers away. It was clear to me: winter has ended and spring is here. But there was another thing on my mind that beautiful Sunday morning: the theme of 2014 World Water Day, the water-energy nexus. How can anyone operationalize this concept?

The Water-Energy Nexus has been a hot topic in the water community this year - but how can this concept be turned to action? Poster courtesy UN Water Program

The Water-Energy Nexus has been a hot topic in the water community this year – but how can this concept be turned to action? Poster courtesy UN Water Program

The nexus refers to the notion that global systems are strongly intertwined and heavily interdependent; that systems thinking and planning is required to address persistent global challenges in an integrated way. It is a beautiful concept, no doubt, but what do we do with it?

I joked in my travels and engagements on nexus issues last year that 2014 in my view was the most nexus year. Much has been achieved in 2014: raising awareness of the linkages between water and energy ; demonstrating  that integrated approaches and solutions to water-energy issues can achieve greater economic and social impacts; identifying policy formulation and capacity development issues through which the international development community, in particular the UN system can contribute; and identifying key stakeholders and actively engaging them in the discussion on the post-2015 development agenda.

But so far, much of the work on the nexus has been on advocacy, to galvanize interests and mobilize support at the global level. As a result, the concept received widespread global attention and acceptance. The real question now is: How can we transform those commitments and interests into operational frameworks for programs and initiatives? I woke up thinking of three areas:

  1. Supporting nexus assessment to understand the interactions between various nexus dimensions as countries review and roll out new policies. The objective will be to inspect the performance of current policies in terms of resource use efficiency and productivity in order to facilitate the technical interventions that will be required.
  2. Strengthening consultations and engagement among relevant sectors for various nexus dimensions. This will help decision makers anticipate, plan, and manage interventions collectively and to re-think policies and strategies to deal effectively with a range of complex interactions that are interlinked and interdependent.
  3. Reinforcing the enabling environment to facilitate the transitions that are required. This will require action to support key institutions, policy transitions and facilitating public/private funding mechanisms and investment frameworks that are required for nexus interventions.

How do we do this? First, we need to understand the interactions for a given unit of management. It could a country, a river basin, a municipality, a region or sub-region. Then we need to get various spheres of interest engaged in constructive dialogue, both in planning and in resource allocation and utilization. And probably even more importantly we need to provide the institutional, financial, and human capacity requirements to turn ideas into actions.

The challenges are huge in some regions but progress can be achieved with significant multiple gains if we get the assessments right, if we can get key sector actors to continuously talk to each other, and if are able to strengthen the enabling environment to facilitate actions. We need to act before the interest we have generated in the last couple of years diminishes.

Water and energy are inextricably linked - the "water-energy nexus." Yillia and other researchers in IIASA's Water program aim to bring a holistic view to the subject. Photo Credit: Kali Gandaki dam, Asian Development Bank

Water and energy are inextricably linked – the “water-energy nexus.” Yillia and other researchers in IIASA’s Water program aim to bring a holistic view to the subject. Photo Credit: Kali Gandaki dam, Asian Development Bank

Note: This article gives the views of the author, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.

Global carbon taxation: a back of the envelope calculation

By Armon Rezai, Vienna University of Economics and Business Administration and IIASA,
and Rick van der Ploeg, University of Oxford, U.K., University Amsterdam and CEPR 

The biggest externality on the planet is the failure of markets to price carbon emissions appropriately (Stern, 2007). This leads to excessive fossil fuel use which induces global warming and all the economic costs that go with it. Governments should cease the moment of plummeting oil prices and set a price of carbon equal to the optimal social cost of carbon (SCC), where the SCC is the present discounted value of all future production losses from the global warming induced by emitting one extra ton of carbon (e.g., Foley et al., 2013; Nordhaus, 2014). Our calculations suggest a price of $15 per ton of emitted CO2 or 13 cents per gallon gasoline. This price can be either implemented with a global tax on carbon emissions or with competitive markets for tradable emission rights and, in the absence of second-best issues, must be the same throughout the globe.

The most prominent integrated assessment model of climate and the economy is DICE (Nordhaus, 2008; 2014). Such models can be used to calculate the optimal level and time path for the price of carbon. Alas, most people including policy makers and economists view these integrated assessment models as a “black box” and consequently the resulting prescriptions for the carbon price are hard to understand and communicate to policymakers.

© Cta88 | Dreamstime.com - Operating Oil And Gas Well Contour, Outlined On Sunset Photo

© Cta88 | Dreamstime.com 

New rule for the global carbon price
This is why we propose a simple rule for the global carbon price, which can be calculated on the back of the envelope and approximates the correct optimal carbon price very accurately. Furthermore, this rule is robust, transparent, and easy to understand and implement. The rule depends on geophysical factors, such as dissipation rates of atmospheric carbon into oceanic sinks, and economic parameters, such as the long-run growth rate of productivity and the societal rates of time impatience and intergenerational inequality aversion. Our rule is based on the following premises.

  • First, the carbon cycle dynamics are much more sluggish than the process of growth convergence. This allows us to base our calculations on trend growth rates.
  • Second, a fifth of carbon emission stays permanently in the atmosphere and of the remainder 60 percent is absorbed by the oceans and the earth’s surface within a year and the rest has a half-time of three hundred years. After 3 decades half of carbon has left the atmosphere. Emitting one ton of carbon thus implies that is left in the atmosphere after t years.
  • Third, marginal climate damages are roughly 2.38 percent of world GDP per trillion tons of extra carbon in the atmosphere. These figures come from Golosov et al. (2014) and are based on DICE. It assumes that doubling the stock of atmospheric carbon yields a rise in global mean temperature of 3 degrees Celsius. Hence, the within-period damage of one ton of carbon after t years is
  • Fourth, the SCC is the discounted sum of all future within-period damages. The interest rate to discount these damages r follows from the Keyes-Ramsey rule as the rate of time impatience r plus the coefficient of relative intergenerational inequality aversion (IIA) times the per-capita growth rate in living standards g. Growth in living standards thus leads to wealthier future generations that require a higher interest rate, especially if IIA is large, because current generations are then less prepared to sacrifice current consumption.
  • Fifth, it takes a long time to warm up the earth. We suppose that the average lag between global mean temperature and the stock of atmospheric carbon is 40 years.

We thus get the following back-of-the-envelope rule for the optimal SCC and price of carbon:

Capture

where r = ρ+ (IIA-1)x g. Here the term in the first set of round brackets is the present discounted value of all future within-period damages resulting from emitting one ton of carbon and the term in the second set of round brackets is the attenuation in the SCC due to the lag between the change in temperature and the change in the stock of atmospheric carbon.

Policy insights from the new rule
This rule gives the following policy insights:

  • The global price of carbon is high if welfare of future generations is not discounted much.
  • Higher growth in living standards g boosts the interest rate and thus depresses the optimal global carbon price if IIA > 1. As future generations are better off, current generations are less prepared to make sacrifices to combat global warming. However, with IIA < 1, growth in living standards boosts the price of carbon.
  • Higher IIA implies that current generations are less prepared to temper future climate damages if there is growth in living standards and thus the optimal global price of carbon is lower.
  • The lag between temperature and atmospheric carbon and decay of atmospheric carbon depresses the price of carbon (the term in the second pair of brackets).
  • The optimal price of carbon rises in proportion with world GDP which in 2014 totalled 76 trillion USD.

The rule is easy to extend to allow for marginal damages reacting less than proportionally to world GDP (Rezai and van der Ploeg, 2014). For example, additive instead of multiplicative damages resulting from global warming gives a lower initial price of carbon, especially if economic growth is high, and a completely flat time path for the price of carbon. In general, the lower elasticity of climate damages with respect to GDP, the flatter the time path of the carbon price.

Calculating the optimal price of carbon following the new rule
Our benchmark set of parameters for our rule is to suppose trend growth in living standards of 2 percent per annum and a degree of intergenerational aversion of 2, and to not discount the welfare of future generations at all (g = 2%, IIA = 2, r = 0). This gives an optimal price of carbon of $55 per ton of emitted carbon, $15 per ton of emitted CO2, or 13 cents per gallon gasoline, which subsequently rises in line with world GDP at a rate of 2 percent per annum.

Leaving ethical issues aside, our rule shows that discounting the welfare of future generations at 2 percent per annum (keeping g = 2% and IIA = 2) implies that the optimal global carbon price falls to $20 per ton of emitted carbon, $5.5 per ton of emitted CO2, or 5 cents per gallon gasoline.

If society were to be more concerned with intergenerational inequality aversion and uses a higher IIA of 4 (keeping g = 2%, r = 0), current generations should sacrifice less current consumption to improve climate decades and centuries ahead. This is why our rule then indicates that the initial optimal carbon price falls to $10 per ton of carbon. Taking a lower IIA of one and a discount rate of 1.5% per annum as in Golosov et al. (2014) pushes up the initial price of carbon to $81 per ton emitted carbon.

A more pessimistic forecast of growth in living standards of 1 instead of 2 percent per annum (keeping IIA = 2, r = 0) boosts the initial price of carbon to $132 per ton of carbon, which subsequently grows at the rate of 1 percent per annum. To illustrate how accurate our back-of-the-envelope rule is, we road-test it in a sophisticated integrated assessment model of growth, savings, investment and climate change with endogenous transitions between fossil fuel and renewable energy and forward-looking dynamics associated with scarce fossil fuel (for details see Rezai and van der Ploeg, 2014). The figure below shows that our rule approximates optimal policy very well.

Capture-graph

The table below also confirms that our rule also predicts the optimal timing of energy transitions and the optimal amount of fossil fuel to be left unexploited in the earth very accurately. Business as usual leads to unacceptable degrees of global warming (4 degrees Celsius), since much more carbon is burnt (1640 Giga tons of carbon) than in the first best (955 GtC) or under our simple rule (960 GtC). Our rule also accurately predicts by how much the transition to the carbon-free era is brought forward (by about 18 years). No wonder our rule yields almost the same welfare gain as the first best while business as usual leads to significant welfare losses (3% of world GDP).

Transition times and carbon budget

Fossil fuel Only Renewable Only Carbon used maximum temperature Welfare loss
IIA=2 First best 2010-2060 2061 – 955 GtC 3.1 °C 0%
Business as usual 2010-2078 2079 – 1640 GtC 4.0 °C – 3%
Simple rule 2010-2061 2062 – 960 GtC 3.1 °C – 0.001%

 Recent findings in the IPCC’s fifth assessment report support our findings. While it is not possible to translate their estimates of the social cost of carbon into our model in a straight-forward manner, scenarios with similar levels of global warming yield similar time profiles for the price of carbon.

Our rule for the global price of carbon is easy to extend for growth damages of global warming (Dell et al., 2012). This pushes up the carbon tax and brings forward the carbon-free era to 2044, curbs the total carbon budget (to 452 GtC) and the maximum temperature (to 2.3 degrees Celsius). Allowing for prudence in face of growth uncertainty also induces a marginally more ambitious climate policy, but rather less so. On the other hand, additive damages leads to a laxer climate policy with a much bigger carbon budget (1600 GtC) and abandoning fossil fuel much later (2077).

In sum, our back-of-the-envelope rule for the optimal global price of carbon and gives an accurate prediction of the optimal carbon tax. It highlights the importance of economic primitives, such as the trend growth rate of GDP, for climate policy. We hope that as the rule is easy to understand and communicate, it might also be easier to implement.

References
Dell, Melissa, Jones, B. and B. Olken (2012). Temperature shocks and economic growth: Evidence from the last half century, American Economic Journal: Macroeconomics 4, 66-95.
Foley, Duncan, Rezai, A. and L. Taylor (2013). The social cost of carbon emissions. Economics Letters 121, 90-97.
Golosov, M., J. Hassler, P. Krusell and (2014). Optimal taxes on fossil fuel in general equilibrium, Econometrica, 82, 1, 41-88.
Nordhaus, William (2008). A Question of Balance: Economic Models of Climate Change, Yale University Press, New Haven, Connecticut.
Nordhaus, William (2014). Estimates of the social cost of carbon: concepts and results from the DICE-2013R model and alternative approaches, Journal of the Association of Environmental and Resource Economists, 1, 273-312.
Rezai, Armon and Frederick van der Ploeg (2014). Intergenerational Inequality Aversion, Growth and the Role of Damages: Occam’s Rule for the Global Carbon Tax, Discussion Paper 10292, CEPR, London.
Stern, Nicholas (2007). The Economics of Climate Change: The Stern Review, Cambridge University Press, Cambridge.

Note: This article gives the views of the authors, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.

Lima: A stronger role for climate risk management

By Reinhard Mechler & Thomas Schinko (IIASA) with Swenja Surminski (LSE)

(updated 17 December 2014)

As participants in the 20th Conference of the Parties to the Climate Convention (COP 20) in Lima strived to prepare the grounds for a comprehensive climate agreement expected for COP 21 in Paris, negotiators faced key questions that revolve around responsibility and burden sharing.

These questions are not new and have played a key role in the policy and academic discourse on climate change since the beginning of the UNFCCC process.

On the mitigation of emissions, the debate has circled around burden sharing: How should emission reductions be distributed among countries and what are the distributional consequences? On climate impacts and adaptation, the debate has centered on the question of who should pay for adaption and impacts in the global South, given that the global North has been responsible for the bulk of historic anthropogenic greenhouse gas emissions and that the global South will be facing the most severe risks from climate change.

The 20th Conference of the Parties to the Climate Convention (COP 20) opened in Lima on December 1st with big fanfare. It is considered the key milestone event on the road to a comprehensive global deal on climate change that many hope will be struck in Paris in a year’s time.   Photo Credit: UN Climate Change

The 20th Conference of the Parties to the Climate Convention (COP 20) opened in Lima on December 1st with big fanfare. It is considered the key milestone event on the road to a comprehensive global deal on climate change that many hope will be struck in Paris in a year’s time. Photo Credit: UN Climate Change

As a partial response, the Green Climate Fund (CGF) was established at COP 16 in Copenhagen to assist developing economies in addressing climate change adaptation and mitigation. The GCF is currently being capitalized by industrialized and emerging economies with the aim of raising 100 billion USD by 2020. At the UN climate talks in Lima the CGF has achieved – thanks to last-minute pledges by several countries – its short term target of mobilizing at least 10 billion USD for the next four years.

Negotiations covering impacts and adaptation have further proceeded, among others, under the umbrella of the Warsaw Loss and Damage Mechanism (WIM), accepted at COP 19 in Warsaw after strong debate as to its meaning and nature- some suggest this mechanism should be part of adaptation, others want it to focus on residual risks that remain after adaptation efforts have been taken.

As a contribution to the WIM discourse, we recently suggested an approach organized around climate risk management, involving the principle of risk layering. We propose that the WIM can build on this principle to distinguish between risk layers to be managed and residual risk layers ‘beyond adaptation,’ thus involving both equity and efficiency aspects: (i) Equity in terms of financially supporting countries particularly vulnerable to climate change in their efforts to manage risks and deal with the burdens ‘beyond adaptation’; (ii) Efficiency in terms of helping to identify best practice for managing risk through well-designed risk prevention, preparedness and financing measures that address high and low frequency climate-related events.

We argue that the risk layering perspective may contribute to taking the WIM discourse over the apparent red negotiation lines if financial support is coupled with well-targeted risk management efforts  – such as coordinated nationally through national platforms for disaster risk reduction,

Notions of risk management have been fundamental for the WIM. In Lima the parties discuss whether to accept a two-year work plan, which was put together with input from policy, science and practice. The work plan would give a strong role to risk management and, among others, would seek advice on “enhanced understanding of how comprehensive risk management can contribute to transformational approaches.”

Inauguration ceremony of COP20 in Lima. Credit: Ministerio de Relaciones Exteriores, Peru

Inauguration ceremony of COP20 in Lima. Credit: Ministerio de Relaciones Exteriores, Peru

Transformational risk management approaches have been promoted by the disaster risk management community over the last few years in seeking a better balance between pre-event risk management and post-event relief and reconstruction (currently 15% of overseas development assistance goes into pre-event efforts vs. 85% into post-event). As a case in point, regional risk pools (mostly covering climate-related risks) have been springing up in the Caribbean, Pacific, and Africa. These efforts are first and foremost focussed on mutually financing risk, but can also be seen as a first step to a comprehensive approach for reducing and financing risks.

For example, the African Risk Capacity (ARC) pool provides quick finance to provide relief after drought events, and has aimed at linking these efforts to improvements in response planning and early warning. Innovatively, the ARC, initially capitalized by donor support and country contributions, currently explores to set up an Extreme Climate Facility for raising funding for any losses that can be related to climate change and may endanger the solvency of the ARC.

The idea is to monitor variability in a composite index of weather indicators over time and understand whether this variability can be attributed to climate change, which would then lead to a pay-out to the fund from this facility. While promising, the link to attribution is a key scientific challenge, and a number of principled and implementation-related questions for this particular facility as well as for the WIM in general remain open. These open questions will need further attention by science, policy, practice and civil society in the coming months in order to help achieve progress on the Loss and Damage Mechanism.

Reference

Reinhard Mechler, Laurens M. Bouwer, Joanne Linnerooth-Bayer, Stefan Hochrainer-Stigler, Jeroen C. J. H. Aerts, Swenja Surminski & Keith Williges. 2014. Managing unnatural disaster risk from climate extremes. Nature Climate Change. March 26, 2014.  http://www.nature.com/nclimate/journal/v4/n4/full/nclimate2137.html

Note: This article gives the views of the authors, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.