Distributional Considerations in Climate Policy:

Co-Benefits, Carbon Rent and Adaptation

James K. BoyceDepartment of Economics & Political Economy Research Institute

University of Massachusetts, Amherst

Advanced Graduate Workshop on Development & GlobalizationBangalore – 14 January 2015

Lima CoP20 • Mitigation: Intended Nationally Determined

Contributions (INDCs)

• Adaptation: Green Climate Fund

Climate Policy:Three distributional issues

Mitigation policies:• Air quality co-benefits• Carbon rent

Adaptation policies:• Resource allocation

Air Quality Co-Benefits

Air Quality Co-Benefits

‘Co-pollutants’ from fossil fuel combustion include:

• particulates• sulfur dioxide • nitrogen oxides• air toxics (e.g., benzene)

• If CO2 emissions decline, so do harmful co-pollutants

• ‘Co-benefits’ from CO2 reduction are LARGE International research shows the co-benefits may

be comparable to the benefits of CO2 reduction itself

Magnitude of co-benefits varies across and within countries

WHY CO-BENEFITS MATTER

CO-BENEFITS ARE LARGE

“The nationally efficient CO2 price [based on non-CO2 domestic externalities] is typically quite large, for example, $63 per ton—estimated for year 2010 and in US $ for that year—in China, and averages $57.5 per ton among the top twenty emitters. For comparison, a US government study (US IAWG 2013) puts the global damage from CO2 emissions at $35 per ton.”

- Parry et al. (2014) ‘How Much Carbon Pricing is in Countries’ Own Interests? The Critical Role of Co-Benefits,’ IMF Working Paper WP/14/174.

CO-BENEFITS VARY ACROSS COUNTRIES

Source: Parry et al. (2014) ‘How Much Carbon Pricing is in Countries’ Own Interests? The Critical Role of Co-Benefits,’ IMF Working Paper WP/14/174.

CO-BENEFITS VARY WITHIN COUNTRIES

JAMES K. BOYCE & MANUEL PASTOR

CO2 benefits are global:

Marginal Average Benefit of reductions is the same across polluters

Co-benefits are local:

Marginal Average Benefit of reductions varies across polluters

WHY CO-BENEFITS MATTER: Efficiency

WHY CO-BENEFITS MATTER: Efficiency

An example

Power plant near Bakersfield, CaliforniaOil refinery in Torrance, California

PM emissions: 350 tons/yrPopulation within 6-mi radius: 800,000

PM emissions: 50 tons/yrPopulation within 6-mi radius: 600

WHY CO-BENEFITS MATTER: Equity

Difference between the minority share of health risk from industrial air toxics and the minority share of the population by state

Source: Michael Ash et al., 2009, Justice in the Air: Tracking Toxic Pollution from America’s Industries and Companies to our States, Cities, and Neighborhoods (Amherst, MA: University of Massachusetts Political Economy Research Institute and University of Southern California Program for Environmental and Regional Equity, 2009).

1. STRENGTHEN CARBON EMISSION REDUCTION TARGETS

POLICY IMPLICATIONS

Air-quality co-benefits should be counted in setting policy objectives for carbon emissions reduction.

2. CO-POLLUTANT MONITORING

POLICY IMPLICATIONS

Climate-policy implementation should be accompanied by monitoring of co-pollutant emissions. Remedial policies should be introduced if monitoring reveals the widening of disproportional co-pollutant impacts on low-income communities and minorities.

3. DESIGNATE HIGH-PRIORITY ZONES

POLICY IMPLICATIONS

Climate-policy design should include identification of high-priority zones where air-quality co-benefits are especially large. Policy should ensure that emissions reductions in these zones equal or exceed the average reductions achieved by the policy as a whole.

4. DESIGNATE HIGH-PRIORITY SECTORS & FACILITIES

POLICY IMPLICATIONS

Priority for carbon emissions reductions should be assigned to industrial sectors & facilities that pose high co-pollutant burdens and have disproportionate impacts on minorities and low-income communities. Policy should ensure that emissions reductions in high-priority sectors and facilities equal or exceed the average reductions achieved by the policy as a whole.

5. COMMUNITY BENEFIT FUNDS

POLICY IMPLICATIONS

Part of the carbon rent generated by price-based climate-policy instruments that is devoted to public investments should be allocated to community benefit funds to support environmental and public-health improvements in disadvantaged communities.

CO-BENEFIT VARIATION ACROSS COUNTRIES REVISITED

Source: Boyce & Pastor (2012) Cooling the Planet, Clearing the Air: Climate Policy, Carbon Pricing and Co-Benefits. Portland, OR: Economics for Equity and the Environment.

CO-BENEFIT VARIATION ACROSS COUNTRIES REVISITED

Source: Boyce & Pastor (2012) Cooling the Planet, Clearing the Air: Climate Policy, Carbon Pricing and Co-Benefits. Portland, OR: Economics for Equity and the Environment.

Carbon Rent

“Keep the oil in the soil”

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“Keep the oil in the soil”: some basic economics

Carbon rent

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Who pays carbon rent?

Consumers pay• in proportion to their direct and

indirect use of fossil fuels

• in absolute terms, richer households use more than poorer households

• as a share of income, in some countires poorer households pay more -> equivalent to a regressive tax

Carbon Emissions vs Expenditure Levels

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0 5000 10000 15000 20000 25000 30000 35000

expenditure per capita

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Source: Boyce, James K. and Matthew Riddle, Cap and Dividend: How to Curb Global Warming While Protecting the Incomes of American Families, Amherst, MA: Political Economy Research Institute, Working Paper No. 150, November 2007. Available at: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_101-150/WP150.pdf

Carbon Emissions and Household Expenditure: U.S.

Carbon Emissions vs Expenditure Levels: China

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591 840 1,022 1,218 1,451 1,771 2,258 3,097 4,414 8,866

expenditure per capita (yuan)

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Source: Mark Brenner, Matthew Riddle, and James K. Boyce, “A Chinese Sky Trust? Distributional impacts of carbon charges and revenue recycling in China,” Energy Policy 35: 1771-84 (2007).

Carbon Emissions and Household Expenditure: China

Who gets the carbon rent?

“Keep the oil in the soil” ?

Who gets the carbon rent?

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Cap

Pricing carbon via cap or tax

Tax {

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Cap

Pricing carbon via cap or tax

Tax {

Carbon rent

Pricing carbon 1 permit = 1 ton CO2

Instrument Target

Tax Price

Cap Quantity

BIG price increases due to inelastic demand

% change in quantity

% change in price

Example: A 7% reduction in quantity a 23% increase in price

A 7% reduction in quantity is just the beginning.

= – 0.3

Carbon capping:costs versus transfers

Source: Dallas Burtraw et al., “The Incidence of U.S. Climate Policy.” Washington, DC: Resources for the Future, April 2009.

COST TRANSFERN

CAPPING CARBON in the U.S.HOW MUCH RENT?

period tons CO2/yr $/ton $/yr revenue 2015-20 6 billion $15 $90 bn

$540 billion2021-30 4.5 billion $30 $135 bn $1.35

trillion2031-40 3 billion $60 $180 bn

$1.8 trillion 2041-50 1.5 billion $120 $180 bn

$1.8 trillion

Cumulative revenue (2015-2050): $5.49 trillion

Climate policy ≠ open access

Climate policy as property creation

Open access Regulatory

standards (aka “command-

and-control”)

Polluter pays abatement costs

Price-based regulation

Polluter pays abatement costs + pays to pollute

Property right to set access rules

Property rights to set access rules + to receive income

(resource rent)

Congestion problem Pricing solution

Charging for parking does not mean the parking lot is for sale …It means use of the parking lot Is not free.

Why carbon pricing as part of the policy mix?

• Short-run timing: Immediate reductions in carbon emissions

• Long-run incentives: Induce demand-side changes

• Carbon rent: Allocation opportunities

Who owns the atmospheric “parking lot”?Who gets the money?

Consumers pay in proportion to their use of the scarce resource.

Option 1: Fossil fuel corporations?

• Free permits = windfall profits.

Cap-and-giveaway-and-trade

• Profits distributed in proportion to stock ownership.

• Some profits flow to foreign shareholders.

Option 1: Fossil fuel corporations?

• Free permits = windfall profits.

Cap-and-giveaway-and-trade

• Profits distributed in proportion to stock ownership.

• Some profits flow to foreign shareholders.

Option 2: The government?

• Permits auctioned, not given away.

Cap-and-spend

• Revenue retained by government.

• Funds used to increase spending or cut taxes.

“Double dividend” via tax shift?

#1: internalizing externality

#2: cutting ‘distortionary’ taxes (e.g. income and sales taxes) increases incentives to supply labor (and capital), leading to increased output (reducing ‘excess burden’ of taxation

Really?Assumption: full employment of labor & capital

Option 3: The people?

• Permits auctioned.

Cap-and-dividend

• Revenue recycled to the public in equal dividends per person.

• Protects the purchasing power of working families.

“La tierra es de todos com el aire el agua i la luz i el calor de sol.”

- Diego Rivera, La Asamblea Primero de Mayo. Ministry of Public Education, Mexico City.

Adaptation

Adaptation

Two distributional issues

• Costs: Who will pay?

• Benefits: Who & what will be protected?

“The Fund will promote the paradigm shift towards low-emission and climate-resilient development pathways by providing support to developing countries to limit or reduce their greenhouse gas emissions and to adapt to the impacts of climate change, taking into account the needs of those developing countries particularly vulnerable to the adverse effects of climate change…

“The Fund will operate in a transparent and accountable manner guided by efficiency and effectiveness.“

- Source: http://www.gcfund.org/about/the-fund.html

Allocation: within & among countries

Wealth-based approach“The measurement of the costs of health-impairing pollution depends on the forgone earnings from increased morbidity and mortality. From this point of view a given amount of health-impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic of dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that.”

.

Lawrence Summers, “Let them eat pollution,” The Economist, February 8, 1992.

Rights-based approach

“Every person shall have the right to an environment which is not detrimental to his or her health or well-being.”

- Constitution of the Republic of South Africa (1994)

“The people shall have the right to clean air and water, freedom from excessive and unnecessary noise, and the natural, scenic, historic, and esthetic qualities of their environment; and the protection of the people in their right to the conservation, development and utilization of the agricultural, mineral, forest, water, air and other natural resources is hereby declared to be a public purpose.’”

- Constitution of the Commonwealth of Massachusetts (1780)

Recap: Three distributional issues in climate policy

• Air quality co-benefits• Carbon rent• Adaptation costs & benefits

Climate policy is not just about people versus the planet.

It’s not just about the current generation versus future generations.

It’s also about the distribution of rights, income, health and safety within the current generation.

Thank you.