Many scientists and policymakers agree that large financial flows from richer to poorer countries will be necessary to reach an agreement on reducing greenhouse-gas emissions enough to keep global warming below 2 °C. But the required amounts of transfer payments and justifications for them remain contested.
We contribute to this debate by developing an argument for transfer payments that derives from the differences between carbon prices that different countries may set in light of two distinct criteria for appropriate levels of emission reductions. If, for reasons of cost efficiency, a globally uniform carbon price was installed, transfer payments would be required to offset these differences. We combine global climate modelling with regional welfare analysis to estimate regional carbon prices under various climate change, emissions and economic scenarios. The estimated ratios between regional carbon prices are surprisingly robust to different modelling assumptions. To the extent that burden-sharing choices in global climate policy are motivated by regional carbon prices, our analysis allows for a quantification of required transfer payments. Assuming a global carbon price of US$35 per t CO2, for example, our estimates would justify transfer payments of the order of US$15–48 billion per year.
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Although global climate negotiations are progressing only very slowly, the European Union and several other countries have declared that they will unilaterally reduce their greenhouse-gas emissions until 2020. Climate scientists argue, however, that even if these unilateral promises are fully implemented, they might add up to no more than an optimistic business-as-usual scenario of total global emissions1. To keep the risk of exceeding global warming by 2 °C below 50%, emissions cuts on a much larger scale will be necessary.
One important obstacle for attempts to reach an effective global climate agreement is that emerging and developing economies expect more rapid economic growth, relative to advanced industrialized countries. To support and sustain their growing economic activity in the short term, they prefer to rely on cheap sources of energy, such as oil and coal. Even though emerging economies, such as China, are becoming increasingly aware of the environmental implications of their fossil-fuel use in general2 and climate change in particular3, they argue that industrialized countries are, historically, responsible for the largest part of the climate change problem up until now. Hence they argue that richer countries should reduce their emissions first and/or compensate emerging and developing economies for participating in mitigation efforts. They also note that burden-sharing in greenhouse-gas mitigation efforts should, in addition to historical responsibility, take into account differences in present economic and technological capacity to abate4. These views and positions have become very firm in the negotiations leading to the Bali action plan, adopted at the 13th Conference of the Parties in Bali5. They have led to an informal agreement on so-called fast-start finance at the 16th Conference of the Parties in Cancún6.
Here, we develop an argument for transfer payments that has, thus far, received only little systematic attention. Various normative criteria give rise to regional carbon prices, and thus to appropriate levels of emissions reductions. We restrict our analysis to two criteria, both of which call for large-scale effective emissions reductions. We label these two criteria liability criterion and utilitarian criterion7. Given that different countries hold different views on what the carbon price should be, agreement on any policy that implicates a globally uniform price for emission rights requires transfer payments to offset these differences. Very few studies have examined the issue of regional carbon prices and none has dealt with how these could relate to transfer payments7.
Our approach to estimating required transfer payments in global climate policy takes into account the trade-offs that countries are likely to make between the costs and benefits of emissions reductions under the liability and utilitarian criterion, respectively. The uncertainty about climate change and future economic growth is accounted for by extensive sensitivity analysis.
The approach presented here is a first step towards enhancing the scientific foundations of a burgeoning political debate about transfer payments that will be required to motivate emerging economies and developing countries to accept constraints on their rights to emit greenhouse gases. The main advantage of our approach is that it is explicit and transparent with respect to the key assumptions that drive estimates of required transfer payments. Both the liability and the utilitarian criterion produce large differences between estimated regional carbon prices and thus support the need for large-scale transfer payments in global climate policy.
Further research could address several issues that are left open by the approach presented here. First, our research does not address how institutional mechanisms for transfer payments could be designed. Setting up and operating such mechanisms over decades raises enormous challenges that extend beyond the scope of the analysis here. In the case of liability, for example, methods and mechanisms for evaluating the responsibility for hypothetical past emissions under regional carbon prices would have to be developed. Countries would also have to agree on how to deal with loss compensation for those parts of climate change that cannot be avoided.
Second, the fact that regional carbon pricing based on the liability criterion implicates that poor low-growth regions should use a relatively high regional carbon price obviously violates the principle of burden-sharing according to capacity. This would be acceptable to these countries only if liability and loss compensation in the future could be strictly enforced because they would then owe less loss compensation to damaged parties at future points in time. Further research could explore to what extent principles of contemporaneous economic capacity could be combined with the reasoning based on liability.
Third, although the utilitarian criterion might be easier to implement in practice because it does not require a strong, enforceable contract over generations, it results in larger transfer payments by industrialized countries for abatement cost. Hence there seems to be an economic and political trade-off between the two principles and their application to transfer payments that deserves more systematic attention.
Fourth, there are several methods to establish abatement-cost curves for deducting abatement levels and cost from carbon prices. Sensitivity analysis considering different assumptions about abatement cost would be useful.
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