Sharing the Burden of GHG Reductions

Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/).The G8 countries propose a goal of a 50% reduction in global emissions by 2050, in an effort that needs to take account of other agreements specifying that developing countries are to be provided with incentives to action and protected from the impact of measures taken by others. To help inform international negotiations of measures to achieve these goals we develop a technique for endogenously estimating the allowance allocations and associated financial transfers necessary to achieve predetermined distributional outcomes and apply it in the MIT Emissions Prediction and Policy Analysis (EPPA) model. Possible burden sharing agreements are represented by different allowance allocations (and resulting financial flows) in a global cap-and-trade system. Cases studied include agreements that allocate the burden based on simple allocation rules found in current national proposals and alternatives that specify national equity goals for both developing and developed countries. The analysis shows the ambitious nature of this reduction goal: universal participation will be necessary and the welfare costs can be both substantial and wildly different across regions depending on the allocation method chosen. The choice of allocation rule is shown to affect the magnitude of the task and required emissions price because of income effects. If developing countries are fully compensated for the costs of mitigation then the welfare costs to developed countries, if shared equally, are around 2% in 2020, rising to some 10% in 2050, and the implied financial transfers are large—over $400 billion per year in 2020 and rising to around$3 trillion in 2050. For success in dealing with the climate threat any negotiation of long-term goals and paths to achievement need to be grounded in a full understanding of the substantial amounts at stake.Development of the EPPA model used has been supported by the U.S. Department of Energy, U.S. Environmental Protection Agency and U.S. National Science Foundation, and by a consortium of industry and foundation sponsors of the MIT Joint Program on the Science and Policy of Global Change

A Forward Looking Version of the MIT Emissions Prediction and Policy Analysis (EPPA) Model

Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/).This paper documents a forward looking multi-regional general equilibrium model developed from the latest version of the recursive-dynamic MIT Emissions Prediction and Policy Analysis (EPPA) model. The model represents full inter-temporal optimization (perfect foresight), which makes it possible to better address economic and policy issues such as borrowing and banking of GHG allowances, efficiency implications of environmental tax recycling, endogenous depletion of fossil resources, international capital flows, and optimal emissions abatement paths among others. It was designed with the flexibility to represent different aggregations of countries and regions, different horizon lengths, as well as the ability to accommodate different assumptions about the economy, in terms of economic growth, foreign trade closure, labor leisure choice, taxes on primary factors, vintaging of capital and data calibration. The forward-looking dynamic model provides a complementary tool for policy analyses, to assess the robustness of results from the recursive EPPA model, and to illustrate important differences in results that are driven by the perfect foresight behavior. We present some applications of the model that include the reference case and its comparison with the recursive EPPA version, as well as some greenhouse gas mitigation cases where we explore economic impacts with and without inter-temporal trade of permits.This research was supported by the U.S Department of Energy, U.S. Environmental Protection Agency, U.S. National Science Foundation, U.S. National Aeronautics and Space Administration, U.S. National Oceanographic and Atmospheric Administration; and the Industry and Foundation Sponsors of the MIT Joint Program on the Science and Policy of Global Change: Alstom Power (USA), American Electric Power (USA), A.P. Møller-Maersk (Denmark), Cargill (USA), Chevron Corporation (USA), CONCAWE & EUROPIA (EU), DaimlerChrysler AG (USA), Duke Energy (USA), Electric Power Research Institute (USA), Electricité de France, Enel (Italy), Eni (Italy), Exelon Power (USA), ExxonMobil Corporation (USA), Ford Motor Company (USA), General Motors (USA), Iberdrola Generacion (Spain), J-Power (Japan), Merril Lynch (USA), Murphy Oil Corporation (USA), Norway Ministry of Petroleum and Energy, Oglethorpe Power Corporation (USA), RWE Power (Germany), Schlumberger (USA),Shell Petroleum (Netherlands/UK), Southern Company (USA), StatoilHydro (Norway), Tennessee Valley Authority (USA), Tokyo Electric Power Company (Japan), Total (France), G. Unger Vetlesen Foundation (USA)