Asymmetric Climate Change
During an official dinner in Krasnoyarsk, Siberia, the speaker was describing the challenges faced by the management of local forests when he suddenly interrupted his talk and asked: “by the way, what is all this fuss about global warming?” One couldn’t grasp better how asymmetric the perspectives about climate change are necessarily to be.
The issue of climate change is riddled with asymmetries. (1) The pool of carbon dioxide in the biosphere is globally shared and it does not discriminate nor registers responsibilities among those who have dumped and will dump on it – apart from partial and voluntary accounts of carbon footprints. Neither the consequences of past dumping nor the costs of avoiding further carbon dumping keep direct relationship with the economic benefits accrued at the origin of carbon emissions. Therefore, besides carrying inherent features of a “collective action problem”, tackling the issue of man-made climate change implies three types of asymmetries:
(i) Time asymmetry: a large portion of the benefits of policy action toward mitigating future carbon emissions will accrue to future generations, whereas the costs of such an effort will be incurred closer in time;
(ii) Geographical asymmetry at the mitigation effort: given current trends of carbon emissions in the business-as-usual scenario – i.e. with no policy action – in which developing countries are bound to become increasingly larger emitters, a strong mitigation effort will have to take place therein and that will be disproportional to responsibilities for the stock of past emissions, the bulk of which is traceable to developed economies;
(iii) Geographical asymmetry at the adaptation effort: beyond asymmetries at the effort of future mitigation, there is the fact that some developing countries will bear the brunt of climate change negative economic impacts, liable to be minimized only with substantial local adaptation costs.
The global nature of climate change will require concerted action at the global level and thus a strong content of global negotiation and engagement. And those geographical asymmetries have to be reckoned with, as it would be unrealistic to expect any meaningful result of negotiations if commitments are not made that somehow deal with those asymmetries of type (ii). (2)
There currently is a debate regarding the appropriate set of national policies that would yield best cost-effectiveness in dealing internationally with mitigation of carbon emissions (see IMF): carbon taxes versus cap-and-trade schemes; price mechanisms versus mandatory standards etc. In this weekend post, we intend to call attention to the fact that such national choices of instruments at the level of developed economies must also contemplate to what extent they would address those issues of geographical asymmetry, as the outcome of the process of global negotiation will substantially hinge on that.
There are inner difficulties in assessing economic impacts of climate change (Tamirisa). There remains after all a high degree of uncertainty about physical and ecological processes associated to it, despite scientific progress. From an economic standpoint, the evaluation is further complicated not only by the necessity to bring to present value benefits and costs that occur over generations – what turns results inevitably dependent on the adopted rate of inter-temporal discount – but also by somewhat arbitrary behavioral assumptions regarding agents’ adaptive reactions through time.
Notwithstanding the wide variation of estimates of potential damages produced by those studies, they all show results in which developing economies suffer proportionately more the effects of global warming than developed economies, when measured for instance as a proportion of national incomes. That is hardly surprising, given the weight of climate-sensitive sectors (agriculture, fishing, tourism, forestry etc.) in their economies, as well as the fact that their public services lag behind in terms of quantity, quality, and coverage.
According to the International Panel on Climate Change (IPCC), climate change is likely to lead to a higher frequency of heat waves; more intense storms, floods, and droughts; faster spread of diseases; loss of biodiversity; and other disgraces. I, for someone who grew up in Aracaju, a nice town beach at the Brazilian Northeast, include rising sea levels among those most dramatic changes. Indeed, from an economic standpoint, effects of rising sea levels are likely to be particularly dramatic for the population of many developing countries, as revealed by Dasgupta et al, from whom we borrowed the picture below on Latin America and the Caribbean.
Chart 1 – Impact of Sea Level Rise in LAC (21th Century)
Take for instance the geographically asymmetric effects of global warming on agricultural productivity by the 2080s, as examined by William Cline in a recent research. Most developing countries are in warmer parts of the planet and their territory very often covers areas where temperatures are already close to thresholds above which agricultural output tends to suffer loss of productivity. Cline’s study took into consideration temperature changes that are expected to take place over land – “which warms more easily and quickly than water” – and more precisely agricultural land, instead of overall temperature changes as it has been the case of other studies. Even incorporating the hypothetical “carbon fertilization” – the possibility that “carbon emissions can also help agriculture by enhancing photosynthesis in some important crops (such as wheat, rice, and soybeans)” even though not helping “other crops (such as sugar cane and corn)” – Cline’s study reverts some optimistic results that have recently been offered by the literature. Agricultural productive losses are definitely expected to concentrate in developing countries: “whereas the industrial countries experience outcomes ranging from 6% losses without carbon fertilization to 8% gains with it, developing country regions suffer losses of about 25% without carbon fertilization and 10-15% if carbon fertilization is included” (Cline). Chart 2 below illustrates how distances from the equator and different country elevations imply geographically asymmetric impacts of global warming on agriculture.
Chart 2 – Asymmetric Impact of Global Warming on Agriculture
Source: William Cline
One can right away pinpoint a series of costly adaptive actions that developing countries must implement in order to minimize damages stemming from climate change. For example:
1.Specific R&D efforts – seeds more resistant to droughts and climate variations in general, solutions against fast diffusion of tropical diseases etc. – that do not tend to be the focus of technological activities in temperate developed economies.
2.Adaptation of infrastructure and/or movements away of people and resources from coastal zones vulnerable to increased flooding, hurricanes, and others.
3.Additional layers of fiscal self-insurance beyond and above levels associated with conventional fiscal management, as emergency responses will require cash availability and reserves of human and resource capacity; etc.
So much for the burden imposed on developing countries for adaptation to climate change, the man-made component of which has been mostly originated elsewhere. But there is further asymmetry on the side of mitigation. Now that reducing emissions has come to be realized as a must, it is just the moment when developing economies’ share is coming to the forefront. The bulk of current greenhouse gases in the biosphere – mainly carbon dioxide released with the burning of fossil fuels and deforestation – can be attributed to developed economies. Nonetheless, developing economies – especially China and India, for their sheer sizes and the features of their energy matrixes – are at the cusp of taking that leadership. And given the projections of world energy use made by the International Energy Agency (IEA) for the next decades – see Chart 3 and World Energy Outlook 2007 – there is no alternative but to strive for some structural break with previous patterns of relation between energy use and greenhouse gas emissions, as the business-as-usual scenario would imply a dumping of carbon heavier than ever. It has become simply unfeasible to extend the old style over the future, no matter how asymmetric this break may be.
Chart 3 – World Energy Demand
Chart 4 allows us to infer how the energy demand for transportation tends to skyrocket as vehicle density in China, India and most other developing countries follows the same path as in developed economies. The issue is particularly worth calling attention because there are no feasible large-scale alternatives to oil derivatives in the near future, except for partial substitution by bio-fuels. On the power side, coal is set to grow as a source (Chart 3) but at least some potential alternatives or mitigation technologies are already available or within sight (CCS – Carbon Capture and Storage, nuclear power, more environment-friendly hydro plants, wind and solar power) and there is hope for scenarios other than the one depicted in Chart 3.
Indeed, according to IEA, energy-saving and emission-reduction policies may alter that scenario to the point of even pushing back the increase in global emissions as a possible outcome (Chart 5). As a result, instead of rising 6o C over pre-industrial levels, the average global temperature would go up only half of that.
However, the problem is that substituting those alternative technologies for currently available ones is not without costs, at least while the former do not fully fledge. Despite the fame of energy efficiency as a “low-hanging fruit”, it is not a “manna fallen from heaven”. Transaction costs and market failures – non-alignment of incentives, imperfect information, etc. – make investments in energy efficiency not necessarily an obvious first option as a private choice. Most likely, the alignment between social and private returns in the case of energy efficiency will require not only policies of “getting energy prices right” and regulatory minimum standards, but also some dose of transition costs and public outlays. The same applies even stronger in the case of non-carbon-emitting power-generation technologies utilized by IEA in the scenario depicted in Chart 5 above – not to speak of non-carbon-related challenges (life-threatening waste and security concerns in the case of nuclear power, learning curve still to be crossed in the case of CCS etc.).
In short: on top of costly asymmetric efforts that many developing countries will have to take in order to adapt to climate change, mitigation of future carbon emissions will also demand an asymmetric effort on the side of developing countries as a whole. As this mitigation effort will not be a “piece of cake” or a simple collection of “low-hanging fruits” waiting to be caught, it will require a global exercise of persuasion to engage, one in which responsibilities for past emissions will also have to be one way or another accounted for.
The Choice of Mitigation Policy Instruments Matters
I dare to say there is a reasonable convergence of views among economists on some of the features that energy policies would desirably assume worldwide. For example, national policies should shun from leaning against the current long-standing wind of fundamentals-driven increasing energy prices. The response to this long wave by private agents will be relevant not only for conventional economic efficiency reasons, but also for climate-change mitigation matters. In the case of developing countries, the ideal would be to build or boost existing efficient-and-effective “social protection networks” that do not involve “getting prices wrong” in order to protect the poor from energy price shocks.
A second example of desirable policies is to ring-fence “energy security” concerns from being captured by vested interests and identified with autarky, as the latter tends to harm efficient energy options that require foreign trade. This has been the case of bio-fuels, as I approached here last February – see also here.
A third area of increasing convergence is toward relying on some combination of mandatory regulatory standards and price incentives as the most pragmatic path. Command-and-control types of policies and tax-subsidy mechanisms tend both to be resorted to in the search for effectiveness and efficiency.
On the other hand, there is some dissent in the case of which instrument to privilege with respect to correcting the market failure of unpriced negative externalities associated to carbon emissions. There are those who favor a widespread adoption of carbon taxes, while others prefer emission cap-and-trade schemes, i.e. government restrictions on the quantity of emissions firms can incur but with the permission to sell/purchase emissions rights. And it is in this context that we want to highlight the case for taking into account the geographically asymmetric features of climate change as an important criterion.
Establishing carbon taxes and cap-and-trade schemes have advantages one over the other. The former tends to lead to higher stability of price of emissions, an important parameter for long-term energy-related investment decisions, as well as a flow of public revenues that can make possible tax reductions for cleaner technologies and/or compensating those adversely impacted by mitigation policies. Cap-and-trade, on the other hand, implies less uncertainty regarding emission outcomes. And the latter’s inner disadvantage in terms of price stability can be reduced by “introducing safety valves that allow governments to sell some temporary permits if permit prices exceed some prespecified ‘trigger’ levels, by allowing the depositing and borrowing of permits, or by creating a central-bank-type institution for overseeing permit markets”(IMF, p.27).
Moving to the landscape of global mitigation policies, one should also remind of the sheer complexity to negotiate and implement a uniform carbon tax regime, particularly given different national preferences regarding taxation. It contrasts with the higher flexibility of change and on-going refinement that an equivalent global cap-and-trade system may bring.
Last but not least, there are the asymmetry-related aspects that favor a global cap-and-trade scheme. Taking as a realistic assumption that somehow the asymmetric aspects heretofore approached will have to be taken into account in negotiations if these are to succeed:
(i) Even though a uniform carbon tax might conceivably be compatible with some kind of compensation of asymmetries via international transfer of public revenues, the inevitable politicization akin to such transfers may constitute a non-starter in negotiations. Conversely, decentralized transaction-based transfers of resources through trade of emissions rights are more palatable from developing countries’ political-economy perspectives.
(ii) Uniform carbon taxes would hit the competitiveness of developing countries relatively more than is the case with cap-and-trade regimes, as the treatment of asymmetries in the latter would imply a differentiation in levels of capping emissions vis-à-vis developed economies.
(iii) Cap-and-trade schemes may accommodate country-specific differentiated caps, creating the ground for the use of criteria such as per-capita income, per-capita carbon emissions and the like, which will inevitably be at the core of any post-Kyoto negotiation.
The Role of Multilateral Development Banks (MDBs)
To finalize, I could not resist saying a few words on the role of MDBs. These institutions not only constitute vehicles for international policy dialogue and concert, but are also “hummingbirds”, helping pollinating knowledge and technology across borders. Their special investment-grade liability structures and capacity to bear some risks enables them to support pioneer initiatives that can be scaled-up once proved successful.
In the case of Latin America and the Caribbean, for example, the Inter-American Development Bank launched in 2006 a “Sustainable Energy and Climate Change Initiative (SECCI)”, using a portion of its ordinary capital to create a special fund and partner with multiple donors to build a platform for providing loans, guarantees and grants in the region, pioneering initiatives regarding renewable energy and energy efficiency, access to carbon finance, adaptation to climate change, and development of environment-friendly and food-compatible bio-fuels.
That pollination and sowing effort has already detected a wide range of avenues of opportunities for exploration, provided that a successfully negotiated global framework to deal with climate change is set, stimulating public and private investments. In order for the latter to become concrete, however, the asymmetric nature of climate change issues will have to be fully reckoned with.
(1) I wrote this post from my talking points prepared for a presentation at the G20 Deputy Ministers of Finance and Central Bank Governors Seminar on “Clean Energy and Global Markets”, 14-16 May, HM Treasury, London, England. Usual caveats apply.(2) Before the reader wonders whether asymmetry type (iii) might lead developing countries to accept more easily asymmetry type (ii), let me remind you that, as you will see in charts below and as illustrated by my Russian host, the heterogeneity of climate change impacts hinders a perfect alignment among developing countries.