Commission on G & D

8/8/2019 Commission on G & D

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Climate Change, Mitigation, and

Developing Country Growth

Michael Spence

WORKI NG PAPER NO.64


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WORKINGPAPERNO.64

ClimateChange,Mitigation,and

DevelopingCountryGrowth

MichaelSpence


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2009TheInternationalBankforReconstructionandDevelopment/TheWorldBanks

OnbehalfoftheCommissiononGrowthandDevelopment

1818HStreetNW

Washington,DC20433

Telephone:2024731000

Internet: www.worldbank.org

www.growthcommission.org

Email: [email protected]

[email protected]

Allrightsreserved

1234512111009

TheCommissiononGrowthandDevelopmentissponsoredbythefollowingorganizations:

AustralianAgency

for

International

Development

(AusAID)

DutchMinistryofForeignAffairs

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U.K.DepartmentofInternationalDevelopment(DFID)

TheWilliamandFloraHewlettFoundation

TheWorldBankGroup

Thefindings,interpretations,andconclusionsexpressedhereindonotnecessarilyreflecttheviewsofthe

sponsoringorganizationsorthegovernmentstheyrepresent.

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Climate Change, Mitigation, and Developing Country Growth iii

AbouttheSeries

The Commission on Growth and Development led by Nobel Laureate Mike

SpencewasestablishedinApril2006asaresponsetotwoinsights.First,poverty

cannotbereduced in isolationfromeconomicgrowthanobservation thathas

beenoverlooked

in

the

thinking

and

strategies

of

many

practitioners.

Second,

thereisgrowingawarenessthatknowledgeabouteconomicgrowthismuchless

definitivethancommonlythought.Consequently,theCommissionsmandateis

totakestockof thestateof theoreticalandempiricalknowledgeoneconomic

growthwithaviewtodrawing implicationsforpolicyfor thecurrentandnext

generationofpolicymakers.

To help explore the state of knowledge, the Commission invited leading

academics and policy makers from developing and industrialized countries to

explore and discuss economic issues it thought relevant for growth and

development, including controversial ideas. Thematic papers assessed

knowledgeand

highlighted

ongoing

debates

in

areas

such

as

monetary

and

fiscal

policies,climatechange,andequityandgrowth.Additionally,25 country case

studieswerecommissionedtoexplorethedynamicsofgrowthandchangeinthe

contextofspecificcountries.

WorkingpapersinthisserieswerepresentedandreviewedatCommission

workshops, whichwereheld in200708 inWashington,D.C.,NewYorkCity,

and New Haven, Connecticut. Each paper benefited from comments by

workshop participants, including academics, policy makers, development

practitioners, representatives of bilateral and multilateral institutions, and

Commissionmembers.

Theworking

papers,

and

all

thematic

papers

and

case

studies

written

as

contributions to the work of the Commission, were made possibleby support

fromtheAustralianAgencyforInternationalDevelopment(AusAID),theDutch

MinistryofForeignAffairs,theSwedishInternationalDevelopmentCooperation

Agency (SIDA), theU.K.Departmentof InternationalDevelopment (DFID), the

WilliamandFloraHewlettFoundation,andtheWorldBankGroup.

TheworkingpaperserieswasproducedunderthegeneralguidanceofMike

SpenceandDannyLeipziger,ChairandViceChairoftheCommission,andthe

Commissions Secretariat, which is based in the Poverty Reduction and

Economic Management Network of the World Bank. Papers in this series

representtheindependentviewoftheauthors.


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iv Michael Spence

Acknowledgments

IamverygratefultoMontekAhluwalia,RobertoZagha,KseniyaLvovsky,John

Bewick,AndreaBeltratti,EdwinLim,andtoBernardoBortolottiandtheteamat

FondazioneEniEnricoMatteiforinsightfulcomments.


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Climate Change, Mitigation, and Developing Country Growth v

Abstract

This paper deals with global mitigation strategy. More specifically the main

purposeistoaddressthequestionofwhethergrowthinthedevelopingworldis

consistentwith longrunclimatechangeobjectives.Theanswer Ibelieve isyes.

Thefirst

part

of

this

paper

lays

out

time

paths

for

emissions

for

countries

in

variouscategories.Thesepathsareconsistentwithcountriesgrowthobjectives,

incomes,andcapacitytoabsorbmitigationcosts.Theintentistoshowthatwhile

global emissions are likely to remain flat or even to rise as a result of the

combinedeffectofmitigationundertakenbyadvancedcountriesandgrowthin

thedevelopingworld,eventuallyreasonablysafeglobalpercapitalevelscanbe

reached on a 50year time horizon. The second part of this paper discusses

countries roles in relation to different categories and mechanisms that would

support the achievement of safe emissions paths. These mechanisms create

incentivesanddealwiththeabsorptionofcosts.Inparticular,thepaperargues

thatacarbon

credit

trading

system

in

the

advanced

countries,

combined

with

an

effective crossborder mechanism and a graduation criterion for developing

countriestojointheadvancedgroup,willcreatestrongincentives,achieveafair

patternofcostabsorption,andsupportthedynamicsdescribedinpartone.One

point emerges clearly: the crossborder mechanism (or international offsets) is

essential in dealing with both the efficiency and the cost absorption/equity

challengesofaglobalmitigationstrategy.


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Climate Change, Mitigation, and Developing Country Growth vii

Contents

AbouttheSeries............................................................................................................. iiiAcknowledgments......................................................................................................... ivAbstract............................................................................................................................. vIntroduction

......................................................................................................................

1

Terminology...................................................................................................................... 4TimeHorizons,Stocks,andFlows................................................................................ 5FairnessandPerCapitaEmissions................................................................................ 6HowDoWeGettoSafeLevelsoverTime?................................................................. 8MitigationScenarios...................................................................................................... 11Implementation:Costs,Efficiency,Technology,Uncertainty,andBurden

Sharing...................................................................................................................... 16ASystemBasedonCarbonCredits............................................................................. 17TheAdvancedCountryCCTSwithaCrossBorderMechanism............................ 20Advanced

Country

Targets

and

the

Cross

Border

Mechanism

..............................

23

EnergyIntensiveTradablesandMobileIndustries.................................................. 24AsynchronousMitigationProgressandCompetitiveProblems............................. 25WhereDoesThisLeaveUs?......................................................................................... 27TheEvolvingRoleofDevelopingCountries............................................................. 30Conclusions..................................................................................................................... 30AppendixA:CarbonCreditTradingGloballyandforAdvancedCountries,

andAdvancedCountryTargetswithCrossBorderMitigationandCredit...32AppendixB:OilConsumption,Population,andIncomeLevels............................ 37AppendixC:GlobalEmissionswithaLongerDevelopingCountryLag..............39


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Climate Change, Mitigation, and Developing Country Growth 1

ClimateChange,Mitigation,and

DevelopingCountryGrowth

MichaelSpence1

Introduction

Global warming is arguably the leading challenge to our capacity for global

governance today. After many years of careful work and persuasion by

dedicated scientists and environmentalists, a growing majority of people

worldwidebelievethattherearesignificantrisksofclimatechangethatneedto

beaddressed.Itiswidelyunderstoodthathumanactivityiscontributingonan

acceleratingbasis

to

an

increase

in

the

stock

of

greenhouse

gases

in

the

atmosphere. That growing contribution increases the risk of adverse effects of

climate change. The stocks of CO2 in the atmosphere are increasing,but there

remains considerable uncertainty about the magnitude of the impact on

temperaturesandclimate.Therangeofestimatesremainswide.2

In thepast twoyears,wehaveenteredanewphase.The focus is shifting

from convincing the majority of people that there are significant tail risks in

staying on our present course, to a process of developing and agreeing on a

globalstrategyforreducinggreenhousegasemissions,principallycarbon.Itisa

major challenge in partbecause a combination of scientific, technological, and

economic

inputs

are

required

to

devise

a

long

term

strategy

that

may

succeed

andthataccordswiththevalues,needs,expectations,andgoalsofawidevariety

ofpeopleandcountries.

A crucial part of any global strategy is the role of developing countries,

particularly therapidlygrowingones: theBRICS,3others intheG20,andsome

other large and systemically important countries.The highgrowth developing

countriesnowincludemorethanhalftheworldspopulation.Iftheysucceedin

continuing(postcrisis)theirpatternofsustainedgrowthasseemslikely,thenby

midcentury or shortly thereafter, they willbe approaching advanced country

levels of income with associated patterns of consumption, energy use, and

carbon emissions.What those patternswillbe andhowwe get to them is the

central issuebefore us. If the patterns are like the present ones, the climate

changebattlewillhavebeenlost.

1MichaelSpence is theChairmanofan independentCommissiononGrowthandDevelopment

anda2001NobelLaureateinEconomics.2ReferencetotheIPCCreportandtheHumanDevelopmentReport2007/2008(UNDP).

3TheBRICSareBrazil,Russia,IndiaandChina.


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2 Michael Spence

By midcentury the fraction of the worlds population with advanced

country income levels(thatis,US$20,000orabovein2009dollars)willgofrom

the present level of 16 percent to about 66 percent. The G20 accounts for 90

percent of global GDP and about two thirds of the worlds population. The

implicationisclear.Thelionsshareoftheeconomicandtechnologicalaspectsof

themitigation

challenge

falls

within

the

purview

of

the

G20

and

afew

other

potentiallyhighgrowthandpopulouscountrieslikeEgypt,Nigeria,andMexico.

Thatdoesnotmean that theothercountriescanbe ignored,because theywill

also grow. In addition, reforestation and afforestation will require the

engagement of a much larger group of countries on terms that are

understandableandfair.TheUnitedNationsFrameworkConventiononClimate

Change (UNFCCC)will continue tobe thecenterof theprocess fordeveloping

international strategies and agreements. But in the next few decades it is the

augmented G20 and its ability or inability to reach agreements on mitigation

strategythatwilllargelydeterminetheresults.

Formulatingaglobal

dynamic

mitigation

strategy

turns

out

to

be

avery

hard problem for several reasons. It has to accommodate the growth of the

developing countries in order tobe acceptable to them and their citizens. It

requiresdealingwithlongtimehorizonsandsequentialdecisionmakingunder

very great uncertainty (about technology, costs, and options) with substantial

learningalongtheway.Tobesuccessfulandbroadlyacceptable,itneedstomeet

the dual criteria of efficiency (accomplishing the mitigation at least cost or

somethingapproximatingleastcost)andfairness.Thiswillrequireseparatingthe

locationofthemitigationactivitiesfromtheabsorptionofcosttosomeextent.

Wecannotpredicttheevolvingglobalpatternofefficientmitigationbecause

we do not yet have the processes that will determine it, like a global carbon

credit trading system (CCTS). However, we do know that as developing

countries grow andbecome richer, they willbe needed as participants in any

efficientglobalmitigationprogram.Withoutmitigationindevelopingcountries,

thecurrentglobalaveragepercapitaemissionsof4.8tonsofCO2peryearwill

growbyafactorofalmosttwoto8.7tonsperpersonin50yearsandthatfigure

assumes developing countries will reach current advancedcountry levels

(exceptingNorthAmerican)ofpercapitaemissions in the range10 to11 tons.

The current Intergovernmental Panel on Climate Change (IPCC) estimate of a

reasonablysafe levelofCO2emissions is2.3 tonsperpersongloballyorroughly

half thecurrentpercapitaaverage.4On thepresentcourse,withoutasignificant

mitigationeffort,

by

mid

century

we

would

be

at

around

four

times

the

safe

level.

TheUnitedStatesandCanadaareatabout20 tonsperpersonat present.

ThedataforvariouscountriesareshowninFigure1.

4Withaglobalpopulationofabout6.4billionpeople,thistranslatestototalCO2emissionsofabout

14.7billiontonsperyear,or14.7gigatons.Apercapitafigureof8.7tonstranslatesintototalglobal

emissionsof55.6gigatons.


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Figure 1. CO2 Emissions per Capita

Source:IPCC and Human Development Report 2007/2008 (UNDP).

Otheradvancedcountriesareintherangeof12to6tonsperperson.France

at 6 tons per person is a reflection of the extensive use of nuclear power for

electricitygeneration.Theglobalaverageandthesafelevelareshownontheleft

in Figure 1. The developing countries are generallybelow 2.3 tons per person

andsubstantiallyso,exceptforChina.

Progresstodateonformulatingaframeworkthatisbroadlyacceptablehas

been limited.Themajordevelopingcountriesuntilrecentlywerebeingpressed

tocommittolongtermcarbonemissionstargetsandtheyhavebeenresistingfor

understandableand

legitimate

reasons.

Trying

to

get

commitments

to

long

term

target emissions from developed and developing countries is unwise and

unlikely to result in an agreement. Given the uncertainty about the costs of

mitigationandtheirevolutionovertime,longtermtargetsposesignificantrisks

to growth for developing countries. If pursued, this approach probably will

producea standoff, followedbygrowingcontroversyandattempts to increase

pressure,whichcouldspilloverintootheraspectsofinternationalrelationslike

trade and capital flows. The negative consequences couldbe far reaching and

longterm.5

There are more constructive ways to approach the problemapproaches

that

over

time

are

more

likely

to

result

in

an

agreed

upon

global

strategy.

Such

andapproacheswouldalso take intoaccountdevelopingcountriesaspirations

our currently limited knowledge of mitigation costs, the pattern of efficient

5Asanexample,theWaxmanMarkeyenergyandclimatechangelegislationthatpassedintheU.S.

House of Representatives has provisions for import tariffsbased on carbon emissions in other

countries.Tobefairitalsohasfavorablefeaturessuchasoffsets,includinginternational(orcross

border)offsetsthataddressbothefficiencyandfairnessorburdensharingissues.

0

5

10

15

20

25

World

SafeLevel

UnitedStates

Canada

Russian

Federation

UnitedKingdom

Germany

NetherlandsItalySpain

FranceChinaEgyptBrazil

VietnamIndia

Nigeria

Bangladesh

Tanzania

Ethiopia

Tonsperyear


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4 Michael Spence

distributionofmitigation effortsacrosscountries,and theevolutionofoptions

andcostsofmitigationovertimeasnewtechnologyisdeveloped.

Terminology

Abriefdiscussionabout terminologyas ithasemerged in theglobalwarming

discussionofthepastyearsmaybeuseful.Thisterminologywillbefamiliarto

many. Responding to potential and actual climate change involves what are

calledmitigationandadaptation.

Mitigationreferstoactionsthatresultinthereductionofnetgreenhouse

gas emissions. They include increasing energy efficiency, reducing energy

consumption (throughpublic transportation, thedesignofcitiesandbuildings,

andsoforth),reducingemissionsfromknownsources,andincreasingtherateat

whichcarbonisremovedfromtheatmosphere;examplesofthelatterwouldbe

reforestation

and

afforestation.

Mitigation

could

also

include

activities

that

increase the reflectivity of the outer atmosphere so that less heatgenerating

radiationenterstheatmosphere.

Adaptationreferstoactionsthatpeople,countries,andsocietiestaketoadjust

toclimatechangethathasoccurred.They includeshiftingcrops, irrigation, levies,

moving away from lowlying coastal areas in the case of sealevel shifts, air

conditioning, and adjustments in medical care in response to change in diseases

causedby climate change. As a first approximation, mitigation is undertaken to

reduce the chances that significant adaptation and its associated costs willbe

required.Mitigationandadaptationarelinkedbecausetheoptionsandcostsfor

adaptation partially determine the payoffs tobuying insurance in the form of

mitigationagainst

significant

climate

shifts.

Thispaper isaboutmitigation.By focusingonmitigation, the intent isnot to

suggestthatadaptationissecondaryinimportance.Indeed,insomescenarioswhere

mitigation failsor is too late,adaptationmaybecome thedominant issue,and its

distributionalaspectsareofgreathumanandmoralimportance.

I use the terms advanced countries and developing countries. These

correspond toAnnex1andnonAnnex1countries inthe languageofmuchof

the climate change negotiation process. Crossborder mitigation efforts are

mitigationactivitiesundertakeninonecountryandfinancedandpaidforbyan

externalentity (suchasagovernment,apublicutility,oranoilcompany) that

hasamitigation

obligation

or

target.

These

efforts

are

referred

to

collectively

in

the Kyoto Protocol as the Clean Development Mechanism or CDM. In

discussionsandlegislationtheyarereferredtoasinternationaloffsets.Domestic

offsetsaresimilarbutapplytotwoentitieswithinthesamecountry.Bothkinds

ofoffsetsoccurautomaticallyinaglobalcarbontradingsystem.

I refer in the secondpartof thepaper tovariousversionsofaCCTS.The

morecommontermiscapandtrade.Ihaveavoidedusingthemorecommon


15/56


termbecause cap suggests that the participants (including countries) accept

caps(whichdeclineovertime)andthentradetoachieveefficientmitigationand

toallow forpreferences toenter thepicture.Fordeveloping countriesa literal

capatanything likecurrentpercapita levelsoraggregate levelswouldensure

that theirgrowth objectives andaspirations couldnotbemet. The term cap

impliessomething

that

developing

countries

are

not

and

should

not

be

willing

to

concede.

TimeHorizons,Stocks,andFlows

Timehorizonsareimportant.Warmingiscausedbythestockofcarbondioxide

and other greenhouse gases in the atmosphere. We do not know how much

warmingwillbecausedbyvariouslevelsofgreenhousegasesintheatmosphere.

The estimated ranges are still wide, even after a quarter century of scientific

effort,

because

of

the

complexity

of

the

relevant

dynamic

systems.

Acting

now

to

reducethenetinflowsofCO2andothergreenhousegasesandhencetherateof

increaseof the stockcanbe thoughtofasbuyingwhat in finance iscalled tail

insurance,thatis,somedegreeofprotectionagainstthemostadverseoutcomes

inthedistributionofpossibleoutcomes.Fromanintertemporaldecisionmaking

pointofview,animportantaspectofthestructureoftheproblemistorecognize

that as stocks rise, we will learn more about the distribution of possible

outcomes.Sensibleglobal strategieswill includeadjustingmitigation efforts in

responsetothenewinformation.

Emissions and natural processes that take down carbon are the flows.

Mitigationattempts to reduce the flowsand thusreduce therateof increaseof

thestock

with

the

ultimate

goal

of

stabilizing

(or

bringing

down)

the

stock

to

whatarebelievedtobesafelevels.Asof2007,theIPCC,theauthoritativebody

thatpools scientific informationandexpertise,has seta safe level targetof2.3

tonsofCO2perpersonperyeartopreventstocksfrombecominghighenoughto

makemajorclimateshiftslikely.IPCCalsohassuggestedatimehorizonof50to

75yearstoachievethislevel.

On our current trajectory, unsafe stocks of CO2 in the atmosphere willbe

reachedonthesametimehorizonof5075years.Advancedcountrieshavebeen

the most significant sources of carbon emissions until relatively recently.

Developing countries are growing at high rates and thereby contributing an

increasingfraction

of

the

total

emissions.

This

pattern

will

continue.

China

and

India,accountingfor40percentoftheworldspopulation,weregrowingat9to

10percentayearbefore thecrisisandare likely to resumehighgrowth in the

postcrisisperiod,meaning that theireconomieswillbedoubling insizeevery

seven to eight years. Other countries are growing at relatively high rates too.

Energyconsumptionandthereforecarbonemissionsrisewithpercapitaincome.

Thus, even though many advanced and developing countries are taking


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6 Michael Spence

aggressive actions to increase energy efficiency and adopt clean energy

technologies, with existing technology, incentives, regulations, and

commitments, total carbon emissions are set to rise rapidly in the coming

decades. Successful mitigation at the global level faces stiff headwinds. In the

long run, success will require major technological advances that arebroadly

adopted.But

in

the

next

15

years,

the

challenge

is

to

jump

start

the

mitigation

andlearningprocess,andtocreateaglobalsystemthattendstowardefficiency

and that creates powerful incentives for technology that increases energy

efficiencyandreducesCO2.

The central problem in formulating a global strategy for mitigation is

whetherthisgrowthcanbemadeconsistentwiththeachievementofsafeglobal

carbon emission levels. It may seem tobe a problem without a solution.Just

waiting for the highgrowth developing countries tobecome much closer in

income to advanced countries, completely exempt from a global emission

reduction program, is not part of a solution.6 But severe restrictions on the

growthof

their

per

capita

carbon

emissions

(which

are

already

very

low

by

advancedcountrystandards) in theshortrunwhilepercapita incomesarestill

relatively lowwill likely imposehighcosts in the formof reducedgrowthand

povertyalleviationinthecomingdecades.Thisisthecentralproblemthatneeds

tobeaddressed.

FairnessandPerCapitaEmissions

Asuccessfulframeworkforamultinationalmitigationstrategyhastodealwith

fairness or equity as well as efficiency. The argument that the advanced

countries,which

are

collectively

responsible

for

most

of

the

current

stock,

should

takeresponsibilityfortheproblemwontworkinitssimpleform,forthereasons

cited early. Advanced countries cannot reach the global goalsby themselves,

unlessthedevelopingcountriesstopgrowing.

Howdoesone thinkabout fairness?Settingasidethedevelopingcountries

forthemoment,itshouldbewidelyacceptedthatadvancedcountries(whoever

theyareataparticular time) should eventuallyhave roughly equalper capita

entitlement to carbon emissions, which means that their overall entitlement

wouldbe proportional to the population. It may take some time to get there,

givenstarklydifferingstartingpoints(seeFigure1),but it ishardtothinkofa

principlethat

treats

advanced

countries

and

citizens

asymmetrically

in

amajor

waythatwouldbeaccepted.Therewillbeadjustmentsforclimateorgeography

but, as a first approximation, equal per capita entitlements seems the right

6Thereisrelativelylittledisagreementaboutthis.Advancedanddevelopingcountriesunderstand

thatkeepingcostsdownbymakingtheglobalpatternofmitigationefficientrequiresmitigationin

bothdevelopingandadvancedcountries.Theissueisthetimepathoftheabsorptionofthecosts.


17/56


baseline.7 One implication of this is that developing countries, as theybecome

advancedover thecomingdecadesasa resultofgrowth,willbesubject to the

sameentitlementsorquotasasotheradvancedcountries.Thatmeansthattheir

longtermgrowthstrategiesand trajectorieswillconverge toadvancedcountry

percapitacarbonemissionslevel.Thelatterareamovingtargetastheadvanced

countriesachieve

reduced

carbon

emissions

over

time.

Asecondimplicationforpurposesofsettingfairstandardsisthatwecannot

fairlytreatcountriesasymmetricallybasedonjustpopulationsize.Itistruethat

ChinaandIndiaarekeyplayersdueinparttotheirhighgrowthandinpartto

the fact that combined they represent almost 40 percent of the worlds

population.Butsizeshouldnotbeahandicap. IfChinaandIndiawerefouror

five countries, each about the size of Indonesia, with high growth but still

relativelypoor,itisunlikelythatalltwelvecountrieswouldbeexperiencingintense

pressuretocommittotargetsorsomeselfgeneratedalternative.Framingsizethis

wayclarifiestheimportanceofthinkingabouttheissuesinpercapitaterms.

Itis

essential

that

asymmetries

based

on

income

and

stages

of

development

are addressedby solutions to the global climate change problem. Developing

countries have different growth paths and levels of CO2 emissions. They will

need to focus on energy efficient and clean technologies even as their growth

raises energy consumption and elevates carbon emissions. It willbe a major

challenge for the developing countries to reach CO2 emissions of 3 tons per

capita in50years.Thechances that India,which isat1.3 tonsperpersonnow,

will end up well below the advanced country figure when it has grown to

7Thechallenge is to findanobjective formula tomake theadjustments.There isa linebetween

legitimatelyhigher

costs

and

choices,

and

there

is

adifference

between

an

objective

adjustment

and

anexcuse.There isa seriousmeasurementhereand thereforean incentiveproblembecause the

results we see are the combined effect of objective differences and choices. The latter would

include thepriceof fuel, theuseofnuclear energy, the layoutof cities, the availabilityofmass

transit,incentivesforenergyefficientbuildings,andmuchmore.Tomaketheproperadjustments,

whatyouideallyneedtoknowishowmuchextracarbonwouldbeemittedbyaEuropeancountry

thathappened tohave theclimate,size,andpopulationdensityofCanada.That is,youneed to

subtractouttheeffectofhighenergy,highcarbonchoices.Quantitativelythisishardtodo.Butit

is important to emphasize that whileCanada is cold and large and not densely populated, the

populationisnotscatteredevenlythroughthecountry.Rather,itislargelyarrayedalongtheU.S.

border and largely in cities like all other advanced countries. While some of the energy

consumptioncomesfromsize,density,andtemperature,muchmorecomesfromrelativelycheap

oilandasetofchoices,publicandprivate,thatcreatesahighconsumptionenergyenvironment.

Theeffectofconflatingthesetwocomponentsoftheobserveddifferencesinenergyconsumption

and emissions depends on the mitigation system. A mitigation system using tradable carbon

creditsjustgivesextra credits to somecountries,whichhas theeffectof transferring costsaway

fromthem.Theglobalpatternofmitigationwillnotbeaffected.Iwillshowlaterinthepaperthat

targetsand international offsetsproducethesameresult.Withtargetsonly,sincethetotalhasto

adduptotheglobaltotal,thereducedrequiredmitigationinonecountryhastobetransferredto

othercountriesintheformofincreasedmitigationrequirements.Inallcasesitisazerosumgame.

Fairnessrequiresthattheadjustmentsbebasedonrealdifferenceswithouttheeffectofdifferential

choices(currentandhistorical)included.


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8 Michael Spence

advancedcountrystatusarenegligible.Anysolutionwillneedtogeneratenew,

moreefficient,andcleanertechnologyandthatwillhave tobe imported to the

developing countries. Finally, some form of burden sharing is likely to be

important.Iargueinthenextsectionsthatthemostplausiblepathtoarelatively

satisfactory global outcome on a 50year time horizon will require all of the

above:an

increase

in

emissions

from

developing

countries,

muted

by

their

own

(alreadywellunderway)planningandpolicyefforts towardenergyefficiency

and lowcarbon energy sources augmented by imported technology, cross

borderincentives,andactivities,burdensharing,andeventuallyaccommodative

allocationsinaCCTS.8

Fairness foradvancedcountriesofapproximatelyequal status is relatively

straightforward. Harder is making precise the meaning and implications of

fairness in the contextofadynamicpath thatachievesglobal carbonemission

goals, a path along which developing countries of necessity will grow and

contributetoaggregatecarbonreductiongoals.

Ratherthan

tackle

this

difficult

issue

directly,

it

may

be

more

helpful

to

lay

out possibly feasible dynamic paths that accomplish the goals and then to

considerissuesofimplementation.

HowDoWeGettoSafeLevelsoverTime?

Inthinkingaboutviabletimepathsthateventuallysolvetheproblemofgetting

tosafeglobaltargets,itisimportanttonotethatthetimehorizonsarelong,and

the uncertainty is great. As discussed above, the group we think of as the

advancedcountrieswillchangedramatically insizeandcomposition.Over the

next50

years,

the

higher

growth

developing

countries

will

be

at

or

approaching

advanced status, and we will learn a lot about the options and costs of

mitigation.Furthermore,essentialnewtechnologieswillalterthoseoptionsand

costsovertime.

A set of common but differentiated responsibilities, established in the

UNFCCCand Kyotoprotocols,affirm that solutionswithany chance ofbeing

acceptablewillinvolveasymmetricrolesforadvancedanddevelopingcountries

invariouscategories.Forthehighergrowthdevelopingcountriesthiswillmean

8Inadvancedcountries,energyefficiencyatthemacrolevelcanbefurtheredbyenergyefficiency

and what is sometimes called reduced energy policies at a more micro level. The incentives

providedbyappropriatepricingandtaxationareextremelyimportantinthisregard.Thesameis

trueofdevelopingcountries,whereahighpriorityfirststepistheremovalofwidespreadenergy

subsidies.Thelatterarenotusefulcomponentsofgrowthanddevelopmentstrategiesforreasons

outline in The Growth Report (Commission on Growth and Development, May 2008). I have

howeverhesitatedtousethetermreducedenergyinrelationtothedevelopingcountriesbecause

interpretedatthemacrolevel,itcouldbemisunderstoodassuggestingthatthereareknownhigh

growth paths that can be accomplished while reducing energy consumption. There are no

examplesofthatandwithexistingtechnologyitisunlikelytobepossible.


19/56


that the roles in the climate change effort will evolve continuously and

eventuallybecomecoincidentwith theotheradvancedcountries,agroup they

willbejoining. More generally, the notion of asymmetric and evolving roles

needstobepartoftheframeofreferencefortheinternationalnegotiations.

Inthissection,mygoalistoprojectingeneraltermshowsignificantlongrun

reductionsin

CO2

emissions

can

occur

in

the

context

of

significant

growth

in

developingcountries.Forthispurpose,Ihavedividedtheadvancedcountriesinto

two groups: (i) the United States, Canada, and Australia, and (ii) the rest. This

divisionreflectsthesignificantlydifferentcurrentpercapitaCO2emissionlevelsin

thetwogroups.

I have also divided the developing countries into a high and a lower

growth group. The lowergrowth group is significant in terms of population

(thoughsmaller than thehighgrowthgroup),but relativelypoorerand low in

theemissionsspectrum,andwithmuchlowergrowthratesandamuchsmaller

shareinglobalGDP.Itwillnotforthemostparthavethedominanteffectinthe

nextseveral

decades.

The

high

growth

group

with

more

than

half

the

worlds

populationisthecenteroftheaction.

Figure 2. Per Capita Emissions, 2009

Population(millions)

2009 per capitaemissions (tons)

United States, Canada, and Australia 330 20

Other advanced 670 11

High-growth developing 3,356 4.2

Lower-growth developing 2,178 1

Source: Population data from United Nations Department of Economic and Social Affairs; emissions per capita

from IPCC and Human Development Report 2007/2008 (UNDP).

The time horizon is 50 years to 2059. I assume that the highgrowth

developingcountrieswillgrowathigh rates,on theorderof6percentayear.

However, the growthofCO2 emissionsabsent mitigation effortswillbe lower

becauseenergyandcarbonintensitybothdeclineasincomesrise(seeAppendix

A forsomedata). Iassumeconservatively that theover the50years, thehigh

growthdevelopingcountrieswillexperienceCO2growthofjustunder2percent

peryear,whichwouldbring them totheadvancedcountry levelof thesecond

group of advanced countries, namely 11 tons per person in 50 years. This

assumes no mitigation. The poorer developing countries experience growth in

CO2emissions

of

2percent

(in

part

because

that

is

where

most

of

the

population

growthwilloccur)butfromalowbase.

Thetargetinthisexerciseistogettoroughlythreetonsapersongloballyin

50years.Thatisnotatthecurrentestimatedsafelevelbutitisgettingclose.The

mainactorsare the twocategoriesofadvancedcountriesand thehighgrowth

developingones.Toreachthethreetontarget,thehighcarbonemitters(thefirst

groupofadvanced countries)need to reduceper capitaCO2 emissionsbyjust


20/56

10 Michael Spence

under 4 percent per year. This may seem a huge challenge, but is more

manageablethanitappears.Muchofitintheearlystagescanbeachievedwith

largeincreasesinenergyefficiency.9Theotheradvancedcountrieswouldneedto

reduceCO2emissionsattherateof2.6percentayear.Onecoulddothisanalysis

with a somewhat longer time horizon. Specific rates would change but the

patternswe

will

see

would

not.

This

analysis

presumes

that

if

the

two

categories

ofadvancedcountriesarenotableorwillingtogettoabout3tonsperpersonon

a50year timehorizon, thedevelopingcountriescannotget thereeither,unless

theirgrowthslowsdramatically.

Theprojectionsbelowarejustarithmeticwithsomeassumptionsaboutthe

rate at which developing countries converge to the advanced country levels,

income,andtechnologies.Iemphasizethatthisisnotmeanttobeanargument

that any category of country should set or agree to 50year targets. Given the

structureof theproblemthat is, sequentialdecisionmaking withuncertainty

about all the relevant parameters (including costs, the efficient pattern of

mitigation,and

technology)it

is

much

wiser

to

put

in

place

incentives

and

regulations that will achieve measurable progress and generate a lot of useful

informationontheway.Ireturntothislaterundertheheadingofimplementation.

Assuming no effective mitigation efforts in either the advanced or

developingcountries,thepatternofglobalpercapitaCO2emissionsisshownin

Figure3.Theglobalaveragerisesto8.71tonsperpersonfromastartingpointof

9 It hasbeen estimated, for example, that if the composition of the European auto fleet were

transferred to theUnitedStates, the reduction inoil consumptionwouldbearound45million

barrelsaday,onabaseof21millionbarrelsaday.

Figure 3. Per Capita Emissions with No Mitigation Effort

Source: Data provided to author by officials at ENI, the Italian energy company.

0

5

10

15

20

25

20092011201320152017201920212023202520272029203120332035203720392041204320452047204920512053205520572059

United States

Other advanced

Growing developing

Other developing

World

Tonspercapita

Year


21/56


4.65,duemainlytothegrowingdevelopingcountries,withacontributionfrom

the lowergrowth group. I have held the advanced countries constant in this

hypotheticalscenario.

Under this scenario, total global emissions will rise as shown in Figure 4.

Thispathwouldconstituteanextraordinarilyhighriskandisveryunlikelytobe

followed

unless

the

process

for

working

out

an

evolving

intertemporal

mitigationprogram failscompletely.Even then, thedrive for increasedenergy

efficiency and lower carbon technologies, well underway in many countries,

advanced and developing, is likely to continue and accelerate. While not the

course we are on, it may serve as an added concrete incentive to move

aggressivelyandquickly.

MitigationScenarios

We

turn

now

to

mitigation

scenarios.

The

pattern

will

look

something

like

that

depicted below in Figure 5. The ingredients are fairly clear. The advanced

countriesdeclineasdescribedearlieratdifferentbutsubstantialrates.Theremay

beperiodsof rapiddeclines inCO2emissions followedby levelingoff,buton

average,thebasicpatternisright.Thesedeclinesareimportantquantitativelyin

themselves,but they are also critical in providing the technology, policy, and

learningbasethatwillinfluencethehighgrowthdevelopingcountrytrajectory.

Their emissions will rise for an extended periodbecause of high growth. The

challengeisnottopreventthatfromhappeningbutovertimetoslowemissions

growth and eventually turn it around as the countries become richer. This

dampeningovertimeofhighgrowthemissionsiscrucialandprobablydoable.

Figure 4. Total Global Emissions (Gigatons)

Source: Authors calculations.

0

10

20

30

40

50

60

Totalglobalemissions(gigatons)

Year


22/56

12 Michael Spence

Figure 5. Per Capita Emissions on Path to Safe Target


Emissionsreductionwilloccurasaresultofanumberofforces.Oneisthe

use of the successor to the Kyoto Clean Development Mechanism that willbe

producedaspart of the current round ofnegotiations.A second isa focus on

increasing energy efficiency in the developing world in anticipation of rising

energy costs. This is clearly in individual countries self interest and is well

underwayinmanycountries.Partoftheenergyefficiencyprogramwillinvolve

the systematic removalofwidespreadenergy subsidies.Theseare increasingly

costlyand

bad

growth

policies

at

the

individual

country

level,

as

discussed

in

TheGrowthReport of the Commission on Growth and Development.10 In some

countries like China, India, and Brazil, aggressive plans to deal with energy

efficiency,localenvironmentalissues,andcarbonemissionsareunderway.11

Athirdandveryimportantprocessisthetransferoftechnologyinthearea

of energy efficiency, clean energy, and carbon capture from advanced to

developing countries. This will require commitment and cooperationbetween

advancedand developing countries. Without it, the processofdampingdown

theenergyconsumptionandrisingcarbonemissionsresultingfromgrowthwill

proveineffective.

10 The implicit expenditures crowd out crucial public sector investment and badly bias the

evolutionof theeconomyand itscapitalstock towardhighenergyconfigurations.Thesubsidies

areintheprocessofbeingdismantled.11

AusefuldescriptioninsomedetailoftheemergingChinaprogramscanbefoundinanarticlein

theMcKinseyQuarterly, May 2009, Chinas Green Opportunity,by MartinJoerss,Jonathan R.

Woetzel,andHaimengZhang.Indiahasimplementedaswitchtocompressednaturalgasinhigh

emissions,threewheeledvehicles inmajorcities.Brazilhasmademajorprogressintransitioning

toanethanolbasedtransportationsystem.Therearemanyotherexamples.

0

5

10

15

20

25

Percapitaemissions(tons)

Year

United States and Canada

Other advanced

Growing developingOther developing

Global average


23/56


The pattern of per capita carbon emissions in Figure 5 requires a little

explanation.Clearlyitdiffersfromthepathshownearlierwithnomitigation,the

more soas timegoeson.Thisprojection is the resultof introducinga function

thatcausesthegrowingdevelopingcountriestoconvergetowardtheadvanced

countriesbutwithalagorpartialconvergenceinthenearterm.

Specifically,

ifD(t)

is

the

per

capital

emissions

in

the

high

growth

developingcountrieswithoutmitigation,andE(t) is theEuropeanemissions,

(bothinyeart)thenitisassumedthatthemitigatedemissionsinthedeveloping

countriesareM(t)asfollows:

,

whereT(t)isbetweenoneandzero,isoneatt=2009anddeclinesto0att=2059.

Recall that D(t) converges to E(0) at the end of the period; that is, without

mitigation, the developing countries hit the current emissions levels for the

second

advanced

country

group

when

they

arrived

at

advanced

country

incomes.Thus,with laggedmitigation,theconvergenceistoE(2059)attheend

of the period, when T(2059)=0. In this equation, the speed of transfer of

technologyiscapturedbyT(t).T(t)isgenerallyconcave,themoresothegreater

the delay in the transfer of advanced country technology to the developed

country.InFigure6,severalexamplesofthedelayedconvergencefunctionT(t)

are shown. The function I have used in the mitigation time paths above

corresponds to theversionof the transferconvergence function representedby

thesolidgrayline.

Figure 6. Transfer Lags for Advanced Country Technology: Various Versions of theFunction T(t)


0

0.2

0.4

0.6

0.8

1

1.2

2009201120132015201720192021202320252027202920312033203520372039204120432045204720492051205320552057

Function

Year


24/56

14 Michael Spence

Figure 7. High-Growth Developing Country Emissions with Various Transfer Lags


If,forexample,oneswitches to thefunctionrepresentedbythesolidblack

line, the delays are longer and this would cause the highgrowth developing

countriesemissionstorisemoreandforlongerthanthosedepictedinFigure5.

Thepercapitaemissionsinthehighgrowthdevelopingworldareshownin

Figure7.Thetopline(dottedgray)representstheemissionswithnomitigation.

Thebottom line (dottedblack) represents the emissions following the rate of

declineofthenonNorthAmericanadvancedcountries.Theremaininglinesare

the

per

capita

emissions

corresponding

to

the

transfer

functions

in

Figure

6

with

thecolorsandpatternsmatching.

Whatunderliesthedepictedtimepathsisratherimportant:itisthelengthof

time and degree of divergence from advanced country standards that

characterizesthegrowthpathofthehighgrowthdevelopingcountries.Howthis

works out in practice will be influenced by international agreements and

incentives(inparticular,issuesrelatedtowhopaysforwhatatvaryingpointson

the journey) but also importantly by domestic policy choices in developing

countries as theyapproach and converge with international advanced country

statusandtargets.

The aggregate CO2 emissions that go with the mitigation paths described

above(using

the

version

of

the

transfer

lag

for

high

growth

developing

countries

representedbythesolidgrayline)areshowninFigure8.

0

2

4

6

8

10

12

20092011201320152017201920212023202520272029203120332035203720392041204320452047204920512053205520572059

Percapitaemissions(

tons)

Year


25/56


Figure 8. CO2 Output in Gigatons with Effective Mitigation


Hereonecanseeclearly theriseandsubsequent fallof totalemissions for

the rapidgrowth developing countries. As a result, global emissions decline

slowlyforabout25ofthe50yearsandthenthedeclineaccelerates.Withlonger

transfer lags, global emissions fall and then rise and then fall again (see

AppendixBforanillustration).

Any broadly acceptable mitigation plan will likely have these general

characteristics,thoughthedetailsandtimingwillvary.Wedonotandprobably

cannotknowhowtheracebetweendevelopingcountrygrowthontheonehand

andmitigationtechnologyanditsadoptionontheotherwillplayout.However,

it seems unlikely that the high growth and elevated energy use in the high

growth developing world willbe overridden in the short run evenby large

reductionsinCO2perunitofenergyused.Anditiscertainthatinthatgroupof

countries,energyconsumptionwillriseintotalandpercapita.

Given thegradual reduction in totalglobalemissions in theearlydecades,

wemight conclude that the assumed initialaggressive efforts in theadvanced

countries,complementedbysignificantdomesticeffortsindevelopingcountries,

areinsufficientorineffectiveinaddressingtheproblem.Thatassumptionwould

beabig

mistake.

Advanced

country

progress,

combined

with

developing

county

commitment to participate in the crossborder programs (and eventually in a

global carbon trading system, discussed below under implementation) and

evidentwillingnesstoadoptenergysavingandcleantechnologieswillformthe

basisforachievingthelongrangetargets.

0

5

10

15

20

25

30

35

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

2051

2053

2055

2057

2059

United States

Other advanced

Growing developing

Other developing

Global total

Gigatons

Year


26/56

16 Michael Spence

Figure 9. Shares of Total CO2 Output


The shares of total CO2 emissions are shown in Figure 9. The shares of

rapidly growing countries are already substantial; they rise for a couple of

decadesand then fallagain.At that point, the restof the developingworld is

becomingmoresignificant,atleastinthemodel,anditsemissionswillhavetobe

addressed. But for most of the next 50 years, the mitigation dynamics willbe

determinedbytheadvancedcountriesandtherapidlygrowingdevelopingones.

Implementation:

Costs,

Efficiency,

Technology,

Uncertainty,andBurdenSharing

Theprecedingsectionsdescribeingeneraltermswhatneedstohappenovertime

inordertoapproachsafe levelsafter50yearswhilethereishighgrowth inthe

developingworld.Theobviousnextquestioniswhatstepsareneededinvarious

countries andat the international level to embark on thispath. Inorder todo

that, we need to focus on the costs of mitigation and their distribution across

countriesandovertime.

From our present vantage point the costs are not known. Essential

componentsof

effective

mitigation

strategies

are

(1)

aprocess

of

discovering

the

costsover time, (2)an incentive structure that leads tomitigationoccurring in

locations (sources of emissions by type of source and geographic locations)

where the cost is minimized, and (3) incentives for households, companies,

entrepreneurs,andgovernmentstodevelopnewbehaviorsandtechnologiesthat

willhavetheeffectofreducingthecostsofmitigationovertime.Atpresentwe

havesomeknowledgeofpartsofthethreecomponentsabove,butnothinglikea

comprehensive picture. In particular, we do not have global system that is

0

10

20

30

40

50

60

70

2009

2012

2015

2018

2021

2024

2027

2030

2033

2036

2039

2042

2045

2048

2051

2054

2057

United States and Canada shareOther advanced share

Growing developing share

Other developing sharePercentage

Year


27/56


capableofsolvingthesethreeproblemsorgeneratinguseful informationlike

the evolution of the marginal cost of mitigation. A significant part of the

mitigationchallengeistocreatethisglobalsystem.

Therestofthepaperbrieflydescribesaglobalcarboncredittradingsystem

(CCTS)anddiscusseswhatitcanandcannotdo.Toanticipate,themainproblem

withafully

global

CCTS

is

the

allocation

of

credits,

in

particular

to

developing

countries. With too few credits they will be forced to absorb the costs of

mitigationorofpurchasingcreditstoaccommodatethegrowth.Eitherwaythere

isarisktogrowth.Iftheallocationofcreditsislarge,thenwhiletheincentivesto

mitigate remain (because it is profitable), there could be large transfers to

developingcountriesthatareessentiallyunrelatedtomitigationandwouldnot

beacceptabletoadvancedcountries.

Iwillthenarguethattherearetwoalternatives,bothofwhichrelyheavily

on crossborder mechanisms that result in quite efficient mitigation globally,

createsignificantincentivesfordevelopingcountriestotakeactionsthatincrease

energyefficiency,

and

reduce

the

trajectory

of

carbon

emissions

consistent

with

maintaininggrowth.Inotherwords,wedontreallyneedthefullglobalCCTS.

In these two alternatives, developing countries do not have formal mitigation

requirements.But theydohave incentivesand commitmentsinother words,

the substance of common commitmentbut differentiated responsibilities. The

incentives I will describe shortly. The commitment required isbasically to the

crossbordermechanism,tothemonitoringsystemthatisrequiredtosupportit,

andtothetransferoftechnology.HereIwilldescribethesealternativesandthen

spellthemoutindetailinanappendixwithaformalmodel.

ASystem

Based

on

Carbon

Credits

AglobalCCTShas, inprincipal,thecapacitytosolveachallengingproblem. If

one stipulates (1) that mitigation in developing countries is needed to achieve

global objectives because of their presumed and likely growth and (2) that

mitigation costs will be absorbed by the countries in which the effort is

undertaken,thenonehasaprobleminwhichmitigationisindirectconflictwith

developing country growth. The solution in principal is to disconnect the

location of mitigation from the cost absorption as happens in the crossborder

mechanisms, though the latter are often sold as increasing the potential

efficiencyof

mitigation.

A

global

CCTS

does

both

things.

The

distributional

issuesareinprinciplehandledbytheinitialallocationofcreditstocountries.

The Elements of a Global Mitigation System Based on Carbon Credits

The first component is a global agreement on a time path for global carbon

emissions, independent of where the mitigation occurs. It might look like the

startofthepathforglobalemissionsinFigure8,butwithperiodicrevisionswith


28/56

18 Michael Spence

asnewinformationaboutcosts,technology,andimpactsongrowthisacquired.

Thepriceofacarboncreditinthissystem isthemarginalcostofreducingCO2

emissions.

Thesecondcomponentisasysteminwhichtheglobaltargetsareachieved

asefficientlyaspossible,meaningintheleasttotalcostmanner.Thatsystemhas

twopieces.

One

is

an

annual

allocation

of

carbon

credits

to

countries

based

on

a

transparentformula,wherethesumofthecarboncreditsaddsuptotheglobal

target foremissions in thatyear.Thesecreditsare tradedand there isaglobal

market price for them. They are time dated and shouldbe thought of as CO2

emissionsrightsforaperiodoftime.Atthehighestlevel,aftertrading,countries

(includingCO2emissionsourceswithincountries)havetoholdcreditsequalto

theaggregateemissionsforthatperiod.

Thesecondpiece isasystemwithineachcountrythat isdesignedtocause

carbon emissions tohit thenationalholdingsof carbon creditsafterpurchases

andsales.Therewillbevariationacrosscountries in thesesubnationalsystems

includinguse

of

carbon

taxes,

quantity

restrictions,

and

other

mechanisms

for

matching output with the national holding of credits. Allowing this kind of

flexibility at the national level is likely to be important for political and

administrativereasons.

Futures and derivative markets will develop to provide risk reduction

opportunities for various entities in the system and to provide future price

signalsthatwillincreasethevisibilityandclarityofthebenefitsofinvestmentin

carbonreducingtechnologies.

Thecombinationof these twopiecescauses thewholeglobal system tobe

efficient. The price of the credits is the marginal cost of mitigation. Carbon

mitigation will occur in places where it has the least cost at the margin.

Furthermore, the incentivesareappropriate,because theglobalpriceofcarbon

and futures prices will incentivize investment in carbonreduction or energy

saving technology by providing appropriate price signals. Countries with

opportunities to reduce net emissionsby reforestation, afforestation, or other

meanswilldoso (assuming theunitcostsarebelow thecarbonprice)because

suchinvestmentswillloweremissionsandeitherincreasethecarboncreditsthat

canbesoldorreducethecarboncreditsthatneedtobepurchased.

Itisimportanttonotethefollowing:

The locationof theemissions reductions isnotknown inadvanceand,

absentacomplete

understanding

of

the

global

cost

function,

cannot

be

known inadvance.Itispartofthepurposeofthesystemtodiscover

thelocation.

The amounts of mitigationby location are not affectedby the initial

country allocation of credits. The location is determined entirely by

efficiency or cost minimization criteria. What the allocation of credits

doesisdeterminewhopaysforhowmuchofthemitigation.


29/56


The allocation of enough credits to developing countries to avoid

reducing their growthby imposing heavy costs will not result in the

absence of mitigation in developing countries. Credits are not targets.

Countrieswithsignificantmitigationopportunitiessuchasreforestation

have an incentive to pursue those opportunities. Relatively lowcost

mitigationproduces

profits

in

the

form

of

extra

sellable

credits

or

creditsthatdonothavetobepurchased.

Per capita carbon emissions across countries will not necessarily

converge.Preferencesplayarolehere.Itisatleastlogicallypossiblethat

driving distances, the construction of cities, physical distances, the

availabilityofpublic transportation,climate,andahostofother factors

interactingwithincomesandwealthcouldproducedifferentchoicesand

different results. In theglobalCCTS, thesediversechoicesarenotand

probablyshouldnotbeprecluded,buttheyareinasensepaidfor.

Thethird

and

final

component

of

a

global

strategy

is

a

formulaor

mechanismthatdynamicallyallocatescarboncreditstocountries.Thesumofthe

creditsacrosscountriesistheglobaltargetforthattimeperiod.Therefore,time

datedglobaltargetsareinputstotheformula.

Howthecreditsareallocateddeterminestheabsorptionofmitigationcosts

across countriesand therefore has embedded in itwhathas come tobe called

burdensharing.Thisthenisthecrucialstepandalsotheheartoftheproblem.

Theargumentof thedeveloping countries is that toallow theirgrowth to

continue, there needs tobe an allocation that does not impose large costs or

reducegrowth.Theproblemisthatwedontknowwhatthoseallocationsshould

be.Inordertocalculatetheallocationthatwouldleaveaparticularcountrywith

net costs of zero, one needs to know the growth path of emissions (net of

mitigation), the costsofmitigation,and thepriceofcarbon.Noneof theseare

knowninadvance,butallthreearerequiredtosettheallocationssoastoleave

themwholeexpost.(DetailsareprovidedinAppendixA.)

It mightbe tempting to allocatebased on population on the theory that

entitlementseventuallyneedtobedoneonapercapitabasis.Thismayworkfor

the advanced countries, after allowing for a transition period for the high

emitters to catch up and some properly calculated adjustments (discussed

earlier).12 But for developing countries this would result in such a large

overallocation relative to current emission levels, and hence would cause

potentially

huge

income

transfers

to

the

poorer

countries

whose

precise

magnitudewouldbediscoveredexpost.Thisisveryunlikelytobeacceptableto

theadvancedcountries.

Ibelieve that the search for a formula for carbon credit allocations in the

contextofa fullyglobalCCTS,one thatkeeps the risks todeveloping country

12Itwouldbeeasiertodealwiththeadvancedcountryallocationsonapercapitabasisifovertime

theirpercapitaemissionshadconvergedtosomethingliketheEuropeanlevels.


30/56

20 Michael Spence

growthlowwithoutthepossibilityoflargetransfers(unrelatedtomitigation),is

unlikelytobesuccessful.Inprincipleitispossible.Inpracticewedonthavethe

informationtoimplementit.

Fortunately,itisnotnecessary.Thesolutionisremarkablysimpleinaway:

leave thedevelopingcountriesoutof theCCTSuntil theirgrowthbrings them

intothe

advanced

country

category.

Instead,

reengage

them

with

adifferent

mechanism, theCDMoracrossbordermechanism,combinedwith technology

transfer.

InthenextsectionIwillarguethatsomethingverysimilartothemitigation

paths described earlier (in the section on time paths) canbe achieved with a

CCTS in the advanced countries combined with an effective crossborder

mechanism.Then, inthefollowingsection,Iwillarguethatwhileanadvanced

country CCTS has a lot of merit in establishing a global price for carbon, the

mitigationpathsthatleadtosafelevelscanbeinitiatedandsustainedforseveral

yearswithouttheCCTS.Thisisaccomplishedwithadvancedcountrytargetsfor

CO2mitigation

in

combination

again

with

an

effective

cross

border

mechanism.

IcallthesetwosystemstheAdvancedCountryCCTSandtheAdvancedCountry

Target System. With a crossborder mechanism,both systems produce strong

incentives tomove toanefficientpatternofmitigationglobally.Both requirea

graduation criterion that determines when developing countries move to

advancedcountry status,atwhichpoint theybecome subject to themitigation

system then in place for advanced countries. The graduation criterion is

important for two reasons. First, it should create incentives for developing

countries to adopt policies that prepare it to cross over to advanced country

status without a significant disruption. Second, it defines precisely the

parametersthatcausethedifferentiatedresponsibilitiestoconvergetothoseof

advanced countries. It is therefore the operational implementation of fairness

andaccommodatinggrowth.

TheAdvancedCountryCCTSwithaCrossBorder

Mechanism

HereIdescribethissystem ingeneraltermsandrefertoAppendixAforafull

layoutof themodeland thederivationof itsproperties.Countriesaredivided

intoadvancedanddeveloping.ThereisafullCCTSfortheadvancedcountries,

withonemodification.Advancedcountriesgetcreditformitigationundertaken

andpaidforindevelopingcountries.Specifically,foreachperiod,eachadvanced

country has to hold credits equal to its own CO2 emissions minus the total

mitigation undertakenby that country in developing countries. To meet this

requirement, the advanced country can reduce its own emissions, engage in

mitigation inadevelopingcountry,orbuycarboncredits.At themargin these

have tobeequallyattractive,whichmeansthatthemarginalcostsofadvanced


31/56


and developing country mitigation have tobe equal and equal to the market

priceofcarbon.Thisistheconditionforgloballyefficientmitigation.

What will actually happen in this structure is that there will be an

entrepreneurial search for lowcost mitigation opportunities in developing

countries. The incentive is clear and powerful. It is to reduce the cost of

mitigationfor

advanced

countries

and

entities

within

them

that

have

either

targets or incentives to do so. Those who find the lowcost inframarginal

mitigationopportunitiesonesthatturnouttohaveunitcostsbelowthepriceof

carbonwill make money. They could be sources with targets but also

intermediarieswhosemainbusinessistobringinformationandexpertisetothe

globalmarketformitigationopportunities.

Turnnowtothedevelopingcountries.Theydonothaveexplicitcreditsor

targets in this systemuntil theygraduate toadvancedcountry status.Theydo

haveatimepathforemissionsoverwhichtheyexercisesomecontrol;callitai(t)

for country i in period t.13 Generally for growing developing countries this

functionwill

be

rising

because

of

growth.

But

the

rate

will

be

affected

by

energy

pricingandefficiencyandmanyotherpolicychoices.14Thispath isbeforeany

crossborder mitigation activity. The net emissions in any time period are the

grossemissions,ai(t),minusaggregateeffectofthetotalcrossbordermitigation

pastandpresent.15

The Graduation Criteria

Acriticaldeterminantofthedynamicperformanceofthesystem iscriteriathat

determinewhenadevelopingcountryshifts toadvancedcountrystatusand is

subjecttotheprevailingregimeforadvancedcountries.Therearechoicestobe

made and they will have important effects on incentives. The goal is to allow

developingcountries

to

grow

rapidly

but

with

as

low

acarbon

footprint

as

possible.Onecoulduseapercapita incomecriterionorgrossornetemissions.

Thesechoicesarebeingdiscussedanddebated.

Percapita incomeby itself isprobablynotagoodcriterion.Itwouldallow

forgrowth,butonlyintersectscarbonatthetimeofgraduation,whichinmany

casesisalongwayoff.Incomepercapitacouldbeusedasasecondarytestwith

emissionsgrossofcrossbordereffectsas theprimary.However, it seemsclear

13 This is the countryspecific analog of D(t) in the earlier section on the dynamics of global

emissions.Itisthenomitigationpath.14

Theconfigurationofcities,themasstransportation system,andthedesignofbuildingswouldbe

amongthem.15

Ifmitigationweresimplya recurringexpense, then thepresentmitigationactivitieswouldbe

sufficient. More realistically however, some crossborder mitigation will involve capital

investment.The impactwillextendout intime.Theaccountingsystemthatunderpinsthecross

border mechanism has to be able to keep track of the intertemporal effects. This accounting

representsasignificantpieceofenablingglobalinfrastructure, onethatisrequiredforallsystems

includingtheCCTS.


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22 Michael Spence

thatifanycountrygottoadvancedcountryemissionlevelswitharelativelylow

levelofpercapitaincome,somethingelsewouldhavegoneverywrong.

Forconcreteness,Iwouldproposethatthetransitionoccurswhengross(of

crossborder mitigation) per capita CO2 emissions hit the average per capita

emissionsofadvancedcountriesatthattime.Iftheglobaleconomyfollowspaths

likethose

depicted

earlier,

then

that

per

capita

figure

will

be

declining.

Isuggest

thisgraduationcriterionbecauseitcreatesapowerfulandconstructiveincentive

fordevelopingcountries topursuepolicies that reduce thegrowth rateofCO2

emissionswithout impairingoverallgrowth.Properlypricingenergywouldbe

an example of a progrowth policy that reduces the growth rate of CO2

emissions. An aggressive program of importing energyefficient and clean

technologies wouldbe an especially important additional activity.16 While we

know that rapidly growing developing countries will increase CO2 emissions,

theycanmakechoicesthataffecttherateofgrowth,andthesystemasproposed

creates an incentive to delay the graduation date with positive effects on

emissions.There isanargumenttobemadeforusingnet(ofcrossborderefforts)per

capitamitigation levelsas thebasis foragraduationcriterion.Theargument is

that doing this would make the developing countries incentivized partners in

promoting crossborder opportunities and inbeing part of the search process.

Arguably it would also maintain the incentive to take actions consistent with

growththatkeepgrossemissionsdown.

To be fair, with either gross or net emissions, adjustments for natural

endowments will have tobe made. Some countries have more hydroelectric

resourcesornaturalgaswhileothersaremoreheavilyendowedwithcoal.These

adjustments are important and are also going to have tobe worked out for

advanced countries. It seems sensible to use the adjustment formula for

advanced countries to make the appropriate adjustments in the graduation

criteriafordevelopingcountries.17

Whathappensaftergraduation?Acountryatthatpointbecomesapartyto

whatever negotiated international agreements are in effect for advanced

countries. It couldbe target rates of reduction of per capita CO2 emissions. It

could be the CCTS for advanced countries with credit allocations based on

population with possible adjustments for size, climate, and a range of

16 Technology development and transfer isby general agreement crucial. Developing country

activity in this area shouldbe supportedby international agencies with an explicit technology

transfermissionaspartoftheirmandate.17

There is an argument that smaller developing countries maybe at a disadvantage in having

feweroptionswithrespecttolowcarbongrowthbecauseissueswithrespecttoscale,fixedcosts,

andthelike.Thismaybetrueanditisimportantfromafairnessstandpoint.Butfromapractical

pointofview,formostthegraduationisalongwayoffandtheCO2outputdoesnthaveamajor

impact. Rather than hold up the process of reaching an agreement, it would seem sensible to

exemptthesmallcountriesfornowanddeferthisissuewithapromisetoreturnto itwithmore

informationlater.


33/56


differentiating factors that may be deemed appropriate as a result of

internationalnegotiations.

Isthereanythingelserequiredofdevelopingcountriestoenablethissystem

towork?Themainadditionalrequirementisparticipationinandsupportforthe

crossbordermechanismandsupport for theglobalmonitoringandaccounting

systemthat

is

needed

to

keep

track

of

mitigation

and

credit

it

to

the

right

source.

There is a final point concerning crossborder mitigation that shouldbe

noted.Thesearchformitigationopportunitiesindevelopingcountrieswillcause

themitigationindevelopingcountriesinaparticulartimeperiodtoexpanduntil

the marginal costs are equal to the advanced country marginal costs and the

carbon price. That will determine the total mitigation in the developing

countries.Itwillnotdeterminewhodoesitorspecificallyhowthosemitigation

effortsare spreadacrossadvancedcountries.Formally, in themodel, theseare

indeterminate. In actuality, they will result from the search for lowcost

mitigation opportunities in developing countries and are part of the

entrepreneurialdynamics

of

the

system.

Tosummarizebriefly, theadvancedcountryCCTSwithaneffectivecross

bordermechanismwilltendtowardagloballyefficientpatternofmitigation.It

doesnotimposeonerouscostsondevelopingcountriesbutdoescreate(orcanbe

constructed to create) strong incentives for reducing carbon in ways that are

consistentwithgrowth.Developingcountriesgraduate late in thegrowthcycle

and thenparticipate in the latterstagesof themitigationeffortasanadvanced

country.Collectively,advancedcountrieshaveanincentivetoreduceemissions

as rapidly as possible as that will cause the developing countries to engage

earlierso that theglobalmitigationeffortwilleventuallyproduce the required

results. Special provisions are needed for highemission tradable goods and

servicesindustries.

AdvancedCountryTargetsandtheCrossBorder

Mechanism

ItturnsoutthattheadvancedcountryCCTScomponentisnotneededtoachieve

global efficiency. The crossborder mechanism by itself will do it. Before

explainingwhy,note that someversionof theCCTS foradvancedcountries is

highly desirablebecause it creates a price for carbon. Futures and derivatives

markets will develop around the carbon market. These prices will provide a

hugeamountofinformationaboutpresentandexpectedfuturemitigationcosts

andcreateincentivesandriskmanagementstructuresandtoolsforinvestmentin

newtechnology.Iwouldnotwanttheanalysisofthissectiontobeinterpretedas

an argument that a wellconstructed CCTS is superfluous. But with a cross

border mechanism and the required accounting and tracking system, one can

movetowardgloballyefficientmitigationefforts.


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24 Michael Spence

Theargumentisreasonablystraightforwardbutabitsurprising(atleastto

me)andislaidoutmoreformallyAppendixA.Theassumptionsarethesameas

intheAdvancedCountryCCTS,exceptthattheCCTSisreplacedbytimedated

targetsthatadvancedcountriesadoptasaresultofaninternationalnegotiation.

There isacrossbordermechanismand thedevelopingcountriesengage in the

sameway

with

the

same

incentives

and

with

agraduation

criterion.

The

only

difference is that foreachadvancedcountry, insteadofneedingcarboncredits

equal to itsemissionsnetof its crossborderactivities, thatcountrymusthave

emissionsnetofitscrossbordermitigationtotalequaltoitstargetforthattime

period.

In this system, advanced countries will mitigate domestically or in

developingcountriesaccordingtowherethemarginalcostsarelower.Thiswill

cause themarginalcosts inadvancedanddevelopingcountries toconverge. If

thatwerenot thecase, then someadvancedcountrycould shift theirdomestic

mitigationactivitytoadevelopingcountryorviceversa,orfromonedeveloping

countryto

another,

and

lower

mitigation

costs.

The

combined

effect

is

to

bring

themarginalcostsofmitigationinadvancedanddevelopingcountriesintoline.

Sincethatistheconditionofefficiencyorcostminimizationinglobalmitigation

efforts,theresultisefficientmitigation.

Thesearchforthecostreducing,crossbordermitigationactivitieswouldbe

morecomplexbecauseoftheabsenceofaglobalcarbonpricesignal.Thatcould

impair the efficiency of the dynamic part of the process and delay the

convergence of marginal costs of mitigation across countries. In addition, the

absorptive capacity of developing countries with respect to crossborder

mitigation investments isnotunlimited. Itwillvaryacrosscountriesand likely

expand over time. One cannot therefore expect instantaneous results,

notwithstanding the formal properties of the system. But as a direction of

movement, it has attractive efficiency properties while accommodating

developingcountrygrowth.

EnergyIntensiveTradablesandMobileIndustries

There isa concernabout themobilityof tradable industries.A global strategy

that allows for developing country growth embodies asymmetries in the roles

andincentivesfordifferentgroupsofcountriesis.Asaresultitrunstheriskof

distortingcertain

kinds

of

incentives.

Of

these

risks,

apotentially

serious

one

is

the migration ofhighenergy, highcarbon industries thatproduce tradables to

developingcountries.Offshoringof these industrieswillproduce localbutnot

global mitigation and could occur with advanced country targets and an

advancedcountrycarboncreditsystem.18

18Theaddedincentivetomovehighenergyindustriestodevelopingcountrieswouldnotexistina

fullglobalCCTSthatincludedthedevelopingcountries.Thereasonisthatmovingproductionto


35/56


It isnotclearhowgreattherisk is.Countervailingforces includetransport

costs, local environmental regulation, and the anticipation of graduation later.

Nevertheless attention to the potential problem is warranted. To eliminate the

distorted incentives, a global agreement to tax the carbon output of these

industries regardlessof their locationwould helpneutralizeadverse incentives.

Thetax

should

be

based

on

carbon

output

and

the

rate

should

be

at

the

global

carbonprice,oranestimateofitbeforetheglobalcarbonpriceisestablishedvia

the trading of carbon credits. In addition to unbiasing the location decisions,

sucha taxwouldalsogetbuilt into theoutputpriceandavoidexcessdemand

basedonunderpricingthenegativeclimatechangeexternality.

Itisworthnotingthatfromthemitigationpointofview,thisisnotacrucial

issue. If these industries are lowcost mitigation opportunities, mitigation will

occur regardless of where they are and conversely under a crossborder

mechanism.19

AsynchronousMitigationProgressandCompetitive

Problems

A significant potential stumbling block in international negotiations on

mitigationcommitments,goals,andtimingconcernsthepotentialconsequences

ofmitigationcostsonrelativeinternationalcompetitivepositions.Thegoalisto

achieveacooperativeoutcomeandavoidsomeofthenegativefeaturesofanon

cooperative Nash equilibrium. The perceived problem is that it is not always

rational for any single player (in this case a country or region) to adopt the

cooperativestrategy

first.

Whether

or

not

this

is

in

fact

the

case

depends

on

the

payoffsandthe incentivestructureofthegame.Anoncooperativeequilibrium

is clearly the right description of the prisoners dilemma structure,but not of

otherstructures.Itiseasytomakeassumptionsabouttheincentivesthatmayor

may not correspond with realty. One must distinguish between plausible

soundingadvocacyandanalysis.

Intheareaofenergyefficiency,therearecleardifferencesacrosscountries,

developing and advanced. These include large differences across developed

countries,which tend tocompetewitheachother in thesameclassesofgoods

andservices.Thereisrelatively littleevidencethatthehighefficiencycountries

havesufferedacompetitivedisadvantageininternationalmarkets,althoughthe

counterfactual isdifficulttocalculate.Highefficiency isachievedwithelevated

taxes and prices, direct regulation, consumer values, or a combination of all

IndiainafullglobalCCTSwouldcauseIndiasmitigationcoststorisetheywouldhavetohold

more carbon credits. With proper incentives transmitted to the industry, those costs wouldbe

imposedontheindustryandbereflectedinthepricing.19

Without the crossborder mechanism this would not be true, and removal of mitigation

incentiveswouldalsobeanissue.


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26 Michael Spence

three.Itcertainlyimposescosts,buttherearecompensatingfactors.Inthecaseof

taxes, the revenues can be used to reduce other taxes so as to create

compensatingincentives(asinthecaseofloweringcorporateprofitstaxes)orto

invest in productivityenhancing public goods. For the developing countries,

following the Commission on Growth and Development, we have argued

forcefullythat

the

net

effect

of

highly

subsidized

energy

on

growth

is

highly

negative.

For the advanced countries, there is a good argument for attempting to

moveforwardinacoordinatedfashionsoastoavoidpotentiallocalcompetitive

disadvantage. As Paul Krugmans work has shown, advanced countries tend

competeandtradeincommonclassesofgoodsandservices.Avoidingthereality

or the appearance of competitive disadvantage by moving forward in a

coordinated way makes sense. Analysts and participants will debate whether

and inwhatareas thereareadvantagesordisadvantages for firstmovers.The

truthislikelytobeacombinationofthetwo.

Thedeveloping

countries

as

we

have

argued

are

adifferent

matter.

First

theyarenotahomogenousgroup in termsof income levels,productivity,and

technology.Withinsubgroupsthatdotendtocompetewitheachotherforglobal

markets in various classes of goods and services, similar arguments to those

above for advanced countries should apply. That is, coordinated forward

movement ispreferable tosinglecountriessteppingout into the leadexcept in

cases where the individual and collective incentives are aligned and it is the

individualcountrysinteresttomove.

But to revert to the main themeof thepaper, successful globalmitigation

that accommodates developing country growth will have to have embedded

asymmetries during the long transitions to advanced country status. Energy

efficiency convergence will come first but with a lag because of the highly

subsidized starting point in many developing countries. Carbon abatement

technology will be developed in advanced countries and transferred to

developing economies. Clean technologies will experience cost declines driven

by the learningcurveastheaccumulatedvolumes increase.Thesedeclineswill

helpacceleratethetransfers.

These asymmetries already exist in the form of differing levels of

productivity, incomes, human capital, infrastructure, and capability. The

preexisting differences are large, with the result that the global economy has

segmentsandelementsofspecialization.Toalargeextent,developingcountries

competein

the

global

economy

in

an

evolving

but

different

set

of

global

market

segments from advanced countries. The asymmetries required to sustain an

inclusiveglobalprogramtobringcarbonemissionsdownareprobablynotlarge

relative to the existing differences and should not on the merits present

insurmountableobstaclesorderailtheprocess.

There are, however, risks to the process of formulating an international

framework for moving forward. The competitive disadvantage arguments will


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be used and possibly misused to argue for verybroad symmetries in targets,

commitments, and performance measures. In an extreme form, this approach

couldsubstantiallydiminishthelikelihoodofanagreedondirectionsupported

byadvancedanddevelopingcountries.

WhereDoesThisLeaveUs?

Thecentralfactinassessingthedimensionsoftheclimatechangechallengeisthe

growth of a significant portion of the developing world. On a 50year time

horizon,thenumberofpeoplelivinginadvancedcountrieswillquadruplefrom

16 toabout64percentof theworldspopulation.Theapproach Ihave tried to

take is to ask whether there is a path that does not truncate that growthbut

allowstheachievementofglobaltargetsonatimehorizonof50yearsoralittle

more. As suggestedby the analysis, Ibelieve that there maybe several such

paths,

the

features

of

which

are

captured

in

the

earlier

graphs.

Developing

countrieswillgrowintermsofincomeandtheiremissionswillgrowpercapital

and in total, while advanced country emissions will decline. Developing

countrieswilltakestepsconsistentwiththatgrowthtomoderatetheincreasein

energy consumptionand carbon emissions,andgraduate toadvanced country

status in the latter years. At roughly that point their total and per capita

emissions will turn over anddecline.20Global emissions will remain relatively

flatforanextendedperiodbecauseofthecombinedeffectofadvancedcountry

mitigation and developing country growth. That is still major progress, even

thoughitmightnotlooklikeit,asitlaysthebasisforrapidreductionslateron.

The opportunities for carbon mitigation in the first 25 years are easier to

discernthan

those

in

the

latter

years.

An

honest

assessment

Ithink

would

be

that

from the present vantage point, we simply do not know for the latter years

whether technology willbe sufficient to meet the final targets without major

changesinglobalgrowth,andotherthingsthataffectthequalityoflife.Thatisa

bridge tobecrossedwhenweget thereorat leastgetcloser. In themeantime,

thereismuchconstructiveactivitytoundertakethatpromisestoreducecarbon

emissionsandhencetheassociatedrisks.

Turning to the question of how we get there, I have tried to suggest that

there are mechanisms that have useful

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