Economic gains from global cooperation in fulfilling climate pledges

My paper “Economic gains from global cooperation in fulfilling climate pledges” (with Ruth Delzeitab and Christian H.C.A. Henning) is now available online.

Paper Abstract

Mitigation of CO₂ emissions is a global public good that imposes different regional economic costs. We assess the distributional effects of cooperative versus non-cooperative CO₂ markets to fulfil the Nationally Determined Contributions (NDCs), considering different CO₂ permit allocation rules in cooperative markets. We employ a global computable general equilibrium model based on the GTAP-9 database and the add-on GTAP-Power database. Our results show the resulting winners and losers under different policy scenarios with different permit allocation rules. We see that in 2030, we can obtain gains as high as $106 billion from global cooperation in CO₂ markets. A cooperative CO₂ permit market with equal per capita allowances results in considerable monetary transfers from high per capita emission regions to low per capita emission regions. In per capita terms, these transfers are comparable to the Official Development Assistance (ODA) transfers. We also disaggregate the mitigation costs into direct and indirect shares. For the energy-exporting regions, the largest cost component is unambiguously the indirect mitigation costs.

Conclusions

With regard to the initial NDCs, aggregate economic gains from jointly achieving the NDCs are $106bn (i.e. 60% of costs with unilateral action) in 2030. Mobilizing cooperation via Article 6 is important.

When the costs are disaggregated into direct (i.e. domestic mitigation) and indirect (i.e. due to changes in international markets) within the energy-exporters (e.g., Russia, Canada, Middle East and North Africa) the dominant cost share arises from indirect costs.

We also model a scenario using where regional allowances allocated in proportion to the regional population (aka Carbon Egalitarianism) within a global ETS. This approach addresses global equity issues, aligns incentives of all countries & eliminates free-riding problem.

Large financial transfers (~$114bn in 2030) are generated via the carbon markets are leads to welfare improvements in the developing regions. These transfers are comparable to the per capita ODA received by some countries esp. in Sub-Saharan Africa.

The approach based on per capita emission benchmarking has also been suggested by Dr. Raghuram Rajan

If global justice is considered as a global public good, which similar to GHG mitigation, is underprovided, then the principle of carbon egalitarianism could promisingly combine an additional aspect to welfare, giving an important message for policymakers.

Connect with the author