Economic gains from global cooperation in fulfilling climate pledges

Publication in Energy Policy by Sneha Thube ’16 (Economics) et al

Co2, Carbon Dioxide, Carbon, Oxygen, The Atmosphere
Image by Gerd Altmann from Pixabay

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.

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portrait

Sneha Thube ’16 is a researcher at the Kiel Institute for World Economy. She is an alum of the Barcelona GSE Master’s in Economics.

The Macroeconomics of Fighting Climate Change

Macroeconomic Policy and Financial Markets master project by Astrid Esparza Sánchez, Benedikt J. F. Höcherl, and Wei Liam Yap ’21

Photo by Nicholas Doherty on Unsplash

The full title of this project is “The Macroeconomics of Fighting Climate Change: Estimating the Impact of Carbon Taxes, Public and Private R&D Investment in Low-Carbon Technologies on the Scandinavian Economy.”

Editor’s note: This post is part of a series showcasing BSE master projects. The project is a required component of all Master’s programs at the Barcelona School of Economics.

Abstract

The worldwide lockdowns and slowdown of the global economy in the past two years induced a significant overall decrease in CO2 emissions by 8.8% – the largest observed decrease since World War II. In that sense, COVID-19 emphasized the important trade-off between the emissions reductions necessary to fight climate change and economic welfare, which also constitutes a major political stumbling block to introducing policies aimed at halting climate change in normal times.

In order to further our understanding of this trade-off, we evaluate the macroeconomic impact of three policies that are commonly regarded as crucial to meeting national emissions targets:

  • Carbon taxes
  • Public Investment in low-carbon R&D
  • Private Investment in the R&D of low-carbon technologies, proxied by the number of patents for environmentally friendly applications 

In our paper, we develop a novel approach to identifying the long-term impact of these policies using an Structural Vector Autoregression (SVAR) model. We use a Blanchard-Quah long-run identification scheme and a Cholesky short-run identification respectively to  recover a one-standard deviation shock of carbon tax and low-carbon R&D, and investigate their impact on the evolution of GDP, employment and CO2 emissions. In an extension, we include both public and private low-carbon R&D in an SVAR to uncover how public and low-carbon R&D incentivize and complement each other.

Conclusions

We evaluate the effect of carbon taxes, public low-carbon R&D and private low-carbon R&D on GDP, employment and CO2 emissions in Finland, Norway, Denmark and Sweden. We find that carbon taxes do not significantly affect GDP and employment in the long run, but we also do not observe a significant reduction in CO2 emissions. Our results might be shaped by the fact that the first carbon taxes were introduced in 1990 and consequently data is still relatively limited.

Furthermore, our results indicate a significant negative effect of public and private low-carbon R&D on emissions in Denmark and Finland. However, the effect on GDP and employment is ambiguous and depends on the individual country. 

To the best of our knowledge, this is a first empirical indication of the relevance of R&D into low-carbon technologies in reducing CO2 emissions in Northern Europe. 

The implications of our result can fruitfully contribute to the debate about the adequate policy instruments for fighting climate change on at least three dimensions:

  • We find no evidence supporting the political concern that carbon taxes might negatively impact jobs and growth.
  • We provide evidence for the effectiveness of low-carbon R&D – public and private – in reducing CO2 emissions. However, country specific crowding in and crowding out effects of public and private investment in low-carbon technologies should be taken into account when deciding for example on appropriate innovation policies.
  • Our paper underlines the idea that revenues from carbon taxes might potentially be employed for financing low-carbon R&D which in turn could spur long-run, emission free economic growth.

In any case, as for the planet time is of the essence, the Economics profession should focus ever more efforts on understanding the macroeconomics of climate change.

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