Will Border Carbon Adjustments Work?

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 potential for greenhouse gas (GHG) restrictions in some nations to drive emission increases in other nations, or leakage, is a contentious issue in climate change negotiations. We evaluate the potential for border carbon adjustments (BCAs) to address leakage concerns using an economy-wide model. For 2025, we find that BCAs reduce leakage by up to two-thirds, but result in only modest reductions in global emissions and significantly reduce welfare. In contrast, BCA-equivalent leakage reductions can be achieved by very small emission charges or efficiency improvements in nations targeted by BCAs, which have negligible welfare effects. We conclude that BCAs are a costly method to reduce leakage but such policies may be effective coercion strategies. We also investigate the impact of BCAs on sectoral output and evaluate the leakage contributions of trade and changes in the price of crude oil.This study received support from the MIT Joint Program on the Science and Policy of Global Change, which is funded by a consortium of government, industry and foundation sponsors

Limited Sectoral Trading between the EU ETS and China

In the negotiations of the United Nations Framework Convention on Climate Change (UNFCCC), new market mechanisms are proposed to involve Non-Annex I countries in the carbon markets developed by Annex I countries, beyond their current involvement through the Clean Development Mechanism (CDM). Sectoral trading is one such mechanism. It would consist of coupling one economic sector of a Non-Annex I country, e.g., the Chinese electricity sector, with the carbon market of some Annex I countries, e.g., the European Union Emission Trading Scheme (EU ETS). Previous research analyzed the potential impacts of such a mechanism and concluded that a limit would likely be set on the amount of carbon permits that could be imported from the non-Annex I country to the Annex I carbon market, should such a mechanism come into effect. This paper analyzes the impact of limited trading in carbon permits between the EU ETS and Chinese electricity sector when the latter is constrained by a 10% emissions reduction target below business as usual by 2030. The limit on the amount of Chinese carbon permits that could be sold into the European carbon market is modeled through the introduction of a trade certificate system. The analysis employs the MIT Emissions Prediction and Policy Analysis (EPPA) model and takes into account the banking–borrowing of allowances and the inclusion of aviation emissions in the EU ETS. We find that if the amount of permits that can be imported from China to Europe is 10% of the total amount of European allowances, the European carbon price decreases by 34%, while it decreases by 74 % when sectoral trading is not limited. As a consequence, limited sectoral trading does not reverse the changes initiated in the European electricity sector as much as unlimited sectoral trading would. We also observe that international leakage and leakage to non-electricity sectors in China are lower under limited sectoral trading, thus achieving more emissions reductions at the aggregate level. Finally, we find that, if China can capture the rents due to the limit on sectoral trading, it is possible to find a limit that makes both regions better off relative to when there is no international trade in carbon permits.The authors wish to thank Henry D. Jacoby for helpful comments and suggestions. The Joint Program on the Science and Policy of Global Change is funded by the U.S. Department of Energy, Office of Science under grants DE-FG02-94ER61937, DE-FG02-93ER61677, DEFG02-08ER64597, and DE-FG02-06ER64320; the U.S. Environmental Protection Agency under grants XA-83344601-0, XA-83240101, XA-83042801-0, PI-83412601-0, RD-83096001, and RD-83427901-0; the U.S. National Science Foundation under grants SES-0825915, EFRI

What to Expect from Sectoral Trading: A U.S.–China Example

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/)In recent United Nations Framework Convention on Climate Change (UNFCCC) negotiations, sectoral mechanisms were proposed as a way to encourage early action and spur investment in low carbon technologies in developing countries, particularly in the electricity sector. Sectoral trading, which is one such proposition, involves including a sector from one or more nations in an international cap-and-trade system. In order to assess potential impacts from such a mechanism, we analyze trade in carbon permits between the Chinese electricity sector and a U.S. economy-wide cap-and-trade program using the MIT Emissions Prediction and Policy Analysis (EPPA) model. We find that this sectoral policy induces significant financial transfers between the two countries. In 2030, the U.S. purchases permits valued at $42 billion from China, which represents more than 46% of its capped emissions. Despite these transfers, there is only a small change in Chinese welfare. In the U.S., the availability of relatively cheap emissions permits significantly reduces the cost of climate policy. In China, sectoral trading increases the price of electricity and reduces the amount of electricity generated, particularly from coal, while opposite effects are observed in the U.S. Despite increases in the price of electricity in China, only small increases in electricity generation from nuclear and renewables are projected in the timeframe of our analysis (2010- 2030). Because the price of coal decree ses, we also find that sectoral trading leads to emissions increases in non-electricity sectors in China, a form of internal carbon leakage.This study received support from the MIT Joint Program on the Science and Policy of Global Change, which is funded by a consortium of government, industry and foundation sponsors

Are Land-use Emissions Scalable with Increasing Corn Ethanol Mandates in the United States?

In response to the Renewable Fuel Standard, the U.S. transportation sector now consumes a substantial amount (13.3 billion gallons in 2010) of ethanol. A key motivation for these mandates is to expand the consumption of biofuels in road transportation to both reduce foreign oil dependency and to reduce greenhouse gas (GHG) emissions from the consumption of fossil fuels in transportation. In this paper, we present the impacts of several biofuels expansion scenarios for the U.S. in which scaled increases in the U.S. corn ethanol mandates are modeled to explore the scalability of GHG impacts. The impacts show both expected and surprising results. As expected, the area of land used to grow biofuel crops increases with the size of the policy in the U.S., and some land-use changes occur abroad due to trade in agricultural commodities. Because the land-use changes happen largely in the U.S., there is an increase in U.S. land-use emissions when natural lands are converted to agricultural use in the policy scenarios. Further, the emissions impacts in the U.S. and the rest of the world in these scenarios, including land-use emissions, scale in direct proportion to the size of the U.S. corn ethanol mandates. On the other hand, the land-use emissions that occur in the rest of the world are disproportionately larger per hectare of change due to conversions of more carbon-rich forests to cultivate crops and feed livestock.We gratefully acknowledge the financial support for this work from the U.S. Department of Energy, Office of Science under DE-FG02-94ER61937, the U.S. Environmental Protection Agency under XA-83600001-1 and XA-835055101-2, and other government, industry, and foundation sponsors of the Joint Program on the Science and Policy of Global Change

The Impact of Climate Policy on U.S. Aviation

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/).We evaluate the impact of an economy-wide cap-and-trade policy on U.S. aviation taking the American Clean Energy and Security Act of 2009 (H.R.2454) as a representative example. We use an economywide model to estimate the impact of H.R. 2454 on fuel prices and economic activity, and a partial equilibrium model of the aviation industry to estimate changes in aviation carbon dioxide (CO2) emissions and operations. Between 2012 and 2050, with reference demand growth benchmarked to ICAO/GIACC (2009) forecasts, we find that aviation emissions increase by 130%. In our climate policy scenarios, emissions increase by between 97% and 122%. A key finding is that, under the core set of assumptions in our analysis, H.R. 2454 reduces average fleet efficiency, as increased air fares reduce demand and slow the introduction of new aircraft. Assumptions relating to the sensitivity of aviation demand to price changes, and the degree to which higher fuel prices stimulate advances in the fuel efficiency of new aircraft play an important role in this result.U.S. Federal Aviation Administration Office of Environment and Energy under FAA Award Number: 06HCHNEHMIT, Amendment Nos. 018 and 028. ErichHBecker Foundation. The Joint Program on the Science and Policy of Global Change is funded by the U.S. Department of Energy and a consortium of government and industrial sponsors

The Partnership for AiR Transportation Noise and Emissions Reduction,

Abstract We evaluate the impact of an economy-wide cap-and

The Future of U.S. Natural Gas Production, Use, and Trade

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/)Two computable general equilibrium models, one global and the other providing U.S. regional detail, are applied to analysis of the future of U.S. natural gas as an input to an MIT study of the topic. The focus is on uncertainties including the scale and cost of gas resources, the costs of competing technologies, the pattern of greenhouse gas mitigation, and the evolution of global natural gas markets. Results show that the outlook for gas over the next several decades is very favorable. In electric generation, given the unproven and relatively high cost of other low-carbon generation alternatives, gas likely is the preferred alternative to coal. A broad GHG pricing policy would increase gas use in generation but reduce use in other sectors, on a balance increasing its role from present levels. The shale gas resource is a major contributor to this optimistic view of the future of gas, but it is far from a panacea over the longer term. Gas can be an effective bridge to a lower emissions future, but investment in the development of still lower CO2 technologies remains an important priority. Also, international gas resources may well prove to be less costly than those in the U.S., except for the lowest-cost domestic shale resources, and the emergence of an integrated global gas market could result in significant U.S. gas imports.American Clean Skies Foundation, with additional support from the Hess Corporation, the Agencia Nacional de Hidrocarburos (Columbia), the Energy Futures Coalition, and the MIT Energy Initiative

Will border carbon adjustments work?

The potential for greenhouse gas (GHG) restrictions in some nations to drive emission increases in other nations, or leakage, is a contentious issue in climate change negotiations. We evaluate the potential for border carbon adjustments (BCAs) to address leakage concerns using an economy-wide model. For 2025, we find that BCAs reduce leakage by up to two-thirds, but result in only modest reductions in global emissions and significantly reduce welfare. In contrast, BCA-equivalent leakage reductions can be achieved by very small emission charges or efficiency improvements in nations targeted by BCAs, which have negligible welfare effects. We conclude that BCAs are a costly method to reduce leakage but such policies may be effective coercion strategies. We also investigate the impact of BCAs on sectoral output and evaluate the leakage contributions of trade and changes in the price of crude oil

Will border carbon adjustments work?

The potential for greenhouse gas (GHG) restrictions in some nations to drive emission increases in other nations, or leakage, is a contentious issue in climate change negotiations. We evaluate the potential for border carbon adjustments (BCAs) to address leakage concerns using an economy-wide model. For 2025, we find that BCAs reduce leakage by up to two-thirds, but result in only modest reductions in global emissions and significantly reduce welfare. In contrast, BCA-equivalent leakage reductions can be achieved by very small emission charges or efficiency improvements in nations targeted by BCAs, which have negligible welfare effects. We conclude that BCAs are a costly method to reduce leakage but such policies may be effective coercion strategies. We also investigate the impact of BCAs on sectoral output and evaluate the leakage contributions of trade and changes in the price of crude oil