Session04-economics-dlimate-change - Tagged.pdf

# Understanding the climate problem The climate problem is a complex and dynamic issue characterized by scientific consensus on human-induced changes, observed physical impacts, the long-lasting effects of accumulated emissions, and its deep interconnection with biodiversity loss, including critical tipping points and significant distributional challenges [5](#page=5). ### 1.1 The scientific consensus on climate change The scientific community has reached a strong consensus regarding climate change, with organizations like the Intergovernmental Panel on Climate Change (IPCC) serving as reliable sources of objective scientific information. The IPCC's assessment reports, such as the Sixth Assessment Report (AR6), highlight that changes in climate are rapid, widespread, and intensifying, and crucially, that human influence is unequivocal. The scientific message also conveys that it is not too late to act, and that every ton of emissions counts [4](#page=4). ### 1.2 Observed impacts of climate change Observed facts include rising global temperatures, increasing sea levels, and shrinking ice cover. The global mean temperature is demonstrably increasing, bringing it very close to the 1.5°C target set in Paris in 2015. This warming is particularly pronounced in regions closer to the poles. For instance, Belgium is warming at almost double the global rate, with an increase of +2.86°C since measurements began in 1833 [5](#page=5) [6](#page=6) [7](#page=7). ### 1.3 Climate change as a dynamic problem: stock vs. flow Climate change is best understood as a stock problem rather than a flow problem. Annual emissions, which represent a flow, accumulate in the atmosphere as a concentration, forming a stock that persists for a long time. The atmospheric concentration of carbon dioxide, for example, remains active for over 100 years, and other greenhouse gases persist even longer. The volume of this atmospheric stock is what drives global temperature change, illustrated by the bathtub analogy: if emissions were to stop today, climate change would continue for decades because of the accumulated stock [8](#page=8). ### 1.4 Interconnectedness of climate and biodiversity crises The climate and biodiversity crises are deeply interconnected problems. Ecosystems play a crucial role as carbon sinks; for instance, approximately 55% of global carbon emissions are absorbed by vegetation through photosynthesis (30%) and by oceans through phytoplankton (25%). Conversely, biodiversity loss exacerbates climate change, and vice versa [5](#page=5) [9](#page=9). > **Tip:** Remember that 1 ton of carbon (C) is equivalent to approximately 3.667 tons of CO2, calculated as $\frac{44}{12}$ [9](#page=9). ### 1.5 Tipping points and system dynamics Climate change involves system dynamics, including feedbacks, non-linearities, and tipping points. A tipping point is a threshold that, once exceeded, leads to significant and often irreversible changes in the state of a system. Returning to the original state after crossing a tipping point is very difficult, potentially leading to a new, locally stable equilibrium, such as one characterized by high temperatures and low ice cover [10](#page=10) [5](#page=5). Major examples of potential tipping points include the Atlantic Meridional Overturning Circulation (AMOC), permafrost thaw (releasing methane), the Amazon rainforest, Arctic sea ice cover, and the ice sheets of Greenland and Antarctica. These are typically long-run phenomena [11](#page=11). ### 1.6 Risk, uncertainty, and the tails of the distribution Climate change presents a scenario of deep uncertainty rather than simply risk. Risk implies that all possible states and their probabilities are known and quantifiable, which is not the case with climate change. Furthermore, insurance models rely on uncorrelated risks, whereas climate change risks are often correlated [12](#page=12). A critical aspect is the shift in both the mean and the variance of climate-related phenomena. The most damaging impacts, such as extreme droughts, floods, and heat waves, occur in the tails of the distribution, not just from the average changes. This emphasizes the importance of considering "fat tails," as discussed in the book *Climate Shock* [12](#page=12). ### 1.7 Distributional issues in climate change Climate change is characterized by significant distributional problems, both between and within generations [14](#page=14) [5](#page=5). #### 1.7.1 Inter-generational distributional impacts There is a strong negative distributional impact across generations because the most severe damages from climate change are projected to materialize beyond 2050. This means that while the costs of taking action fall on the current generation, the most significant benefits of that action will accrue to future generations [14](#page=14) [15](#page=15). #### 1.7.2 Intra-generational distributional impacts Within generations, low-income countries are typically more vulnerable to climate change impacts due to their geographical location and possess fewer means to adapt compared to high-income countries. These adaptation measures include building dikes, establishing emergency and health systems, and developing drought-resistant crops. Medium-income countries often prioritize economic growth, while high-income countries have more to lose from severe climate impacts [13](#page=13) [14](#page=14) [15](#page=15). ### 1.8 The political challenge of climate change Climate change poses a "wicked problem" for politicians due to a disconnection between those who bear the costs of taking action and those who benefit from such actions. This challenge is evident in both inter-generational and intra-generational contexts. While there is a climate problem, strategies exist to cope with it [14](#page=14) [15](#page=15). --- # Strategies for addressing climate change This section outlines the principal approaches to combatting climate change, focusing on geo-engineering, adaptation, and mitigation, alongside an examination of emission drivers and international cooperation complexities [16](#page=16). ### 2.1 Overview of strategies Three main categories of strategies exist to address climate change: geo-engineering, adaptation, and mitigation [17](#page=17). ### 2.2 Geo-engineering Geo-engineering involves active intervention in the climate system. Various technologies fall under this umbrella [17](#page=17) [18](#page=18). #### 2.2.1 Proposed geo-engineering techniques Examples of geo-engineering approaches include: * Placing mirrors in space [17](#page=17). * Injecting aerosols into the atmosphere [17](#page=17). * Fertilizing oceans [17](#page=17). * Removing carbon directly from the atmosphere, such as through Direct Air Capture (DAC) [17](#page=17). #### 2.2.2 Potential benefits and concerns of geo-engineering **Potential benefits:** * Some methods, like aerosols, may be relatively inexpensive compared to emission reduction investments [19](#page=19). * Geo-engineering might provide crucial time if emissions continue to rise significantly [19](#page=19). **Significant concerns:** * **Moral hazard:** It could reduce the incentive to cut greenhouse gas emissions [19](#page=19). * **Free riding:** Disagreements may arise over who bears the cost and responsibility for implementation [19](#page=19). * **Unilateral actions:** Countries acting alone could lead to political instability and fairness issues [19](#page=19). * **Termination shock:** Abruptly stopping an intervention could cause severe climate disruption [19](#page=19). * Past large-scale interventions in ecosystems have a poor track record [19](#page=19). ### 2.3 Adaptation Adaptation focuses on limiting the impact and damage caused by climate change [17](#page=17) [20](#page=20). #### 2.3.1 Adaptation measures Examples of adaptation measures include: * Constructing dikes and flood defenses [17](#page=17) [20](#page=20). * Enhancing water infiltration and storage capabilities [20](#page=20). * Establishing early warning systems and improving emergency services [20](#page=20). * Developing drought-resistant crops [17](#page=17) [20](#page=20). * Improving city planning to mitigate the urban heat island effect [20](#page=20). * Implementing air conditioning or natural ventilation systems [20](#page=20). ### 2.4 Mitigation Mitigation aims to avoid or limit climate change by reducing greenhouse gas (GHG) emissions [17](#page=17) [21](#page=21). #### 2.4.1 Mitigation measures Key mitigation strategies include: * **Improving energy efficiency:** This involves reducing heat losses, insulating buildings, and using energy-efficient appliances [21](#page=21). * **Switching to renewable energy sources:** This entails transitioning from fossil fuels (coal, gas, oil) to renewables like wind, solar, tidal, and geothermal energy [17](#page=17) [21](#page=21). * **Dietary changes:** Shifting towards more plant-based food consumption [21](#page=21). * **Reducing consumption and production:** Lowering overall demand and industrial output [17](#page=17) [21](#page=21). ### 2.5 Greenhouse gases beyond CO2 While carbon dioxide (CO2) is a major concern, other greenhouse gases (GHGs) also contribute to climate change. Emissions are often reported as CO2 equivalent (CO2e), which weights different GHGs by their Global Warming Potential (GWP). Currently, CO2 accounts for approximately 75% of total GHG emissions, with non-CO2 gases making up the remaining 25% [22](#page=22). ### 2.6 Global GHG emissions trends Global GHG emissions, including those from land-use changes, have increased by approximately 45% since 1990. This growth is particularly strong in middle and low-income countries, while high-income countries have seen stable or decreasing emissions. For example, the European Union (EU) has reduced emissions by 38% compared to 1990 levels, and Belgium by 27% [23](#page=23). #### 2.6.1 Shifting emissions landscape The share of emissions from low and middle-income countries has been growing. China now accounts for over 30% of global emissions. Conversely, the EU's share of global emissions decreased from 17% in 1990 to 6.6% in 2023. These figures are based on a production perspective [24](#page=24). ### 2.7 Drivers of emissions: The Kaya identity The Kaya identity provides a framework for understanding the fundamental drivers of GHG emissions. It decomposes emissions into four key factors [25](#page=25): 1. **Population:** The total number of people [25](#page=25). 2. **GDP per capita (affluence):** The average economic output per person [25](#page=25). 3. **Energy use per unit of GDP (energy intensity):** The amount of energy required to produce one unit of economic output [25](#page=25). 4. **GHG emissions per unit of energy (emission intensity):** The amount of greenhouse gases emitted per unit of energy produced [25](#page=25). This identity helps identify potential policy interventions to reduce emissions [25](#page=25). > **Tip:** The Kaya identity is a crucial tool for analyzing emission trends and formulating effective climate policies. #### 2.7.1 Global Kaya decomposition (1990-2023) Globally, from 1990 to 2023, CO2 emissions from fossil fuels, steel, and cement production continued to grow (+65%). Population (+50%) and GDP per capita (+100%) have been major drivers increasing emissions. Improvements in energy efficiency have helped drive emissions down (-40%), and the carbon intensity of energy production has decreased slowly (-5%), leading to a relative decoupling of emissions from economic growth [27](#page=27). #### 2.7.2 Kaya decomposition for Belgium (1990-2020) In Belgium, between 1990 and 2020, CO2 emissions from fossil fuels, steel, and cement making have decreased (-35%). Population (+19%) and GDP per capita (+50%) have contributed to increasing emissions. However, significant reductions in energy efficiency (-23%) and carbon intensity (-50%) have led to an *absolute* decoupling of emissions from economic activity [28](#page=28). ### 2.8 Consumption versus production perspective Most emission data is presented from a territorial or production perspective, meaning emissions are attributed to where they are produced. However, in open economies, significant amounts of goods and services are imported and exported [29](#page=29). #### 2.8.1 Limitations of the production perspective The production perspective can be a poor measure of a nation's actual responsibility for emissions in open economies, as it doesn't account for the emissions embedded in traded goods [29](#page=29). #### 2.8.2 Challenges of the consumption perspective Calculating emissions from a consumption perspective (carbon footprint) is complex due to: * The need to track trade in raw materials, intermediate goods, and final products [29](#page=29). * Highly interconnected global supply chains [29](#page=29). * The requirement for intricate global Input-Output tables [29](#page=29). Data sources for this perspective include EU Eurostat's FIGARO, OECD, WIOD, and GTAP. These calculations are often based on national and sectoral averages rather than precisely tracking "embodied" emissions in traded goods [29](#page=29). #### 2.8.3 Global and national differences Globally, some regions like the EU, USA, and Japan are net importers of CO2 (their consumption emissions are higher than their production emissions). Conversely, countries like China and Brazil are net exporters of CO2 [30](#page=30). #### 2.8.4 Belgium's consumption-based emissions Belgium is a highly open economy with substantial imports and exports, making it a significant net importer of CO2. The gap between its production-based and consumption-based emissions is considerable [31](#page=31). #### 2.8.5 Household carbon footprint in Flanders In Flanders, the household carbon footprint is approximately 33.07 tons of CO2 per household, which equates to about 13.91 tons of CO2 per capita. The primary drivers of this footprint are housing (heating, cooking), transport, and food consumption. Attributing CO2 emissions to households' consumption patterns reveals detailed breakdowns across these categories [32](#page=32). > **Example:** A household that relies heavily on imported goods for its consumption will have a higher consumption-based carbon footprint than its production-based emissions might suggest, highlighting the importance of considering global supply chains. --- # Economic analysis of climate policy This topic explores the economic rationale and challenges of implementing climate policies by examining cost-benefit analyses of mitigation and adaptation, the complexities of international agreements, the concept of the Social Cost of Carbon, and the ethical considerations of distributional impacts. ### 3.1 Global cost-benefit analysis: building blocks The fundamental building blocks for a global cost-benefit analysis of climate action involve modeling emissions, mitigation costs, climate change damages, and adaptation effectiveness [34](#page=34). * **Business-As-Usual (BAU) emissions** ($e_{BAU}$) are a function of population, GDP per capita, energy efficiency, and the carbon intensity of energy, often conceptualized using the Kaya decomposition [34](#page=34). * **Mitigation** involves reducing BAU emissions by investing in strategies like renewables. The cost of mitigation ($C$) is an increasing and convex function of the mitigation effort ($m$), meaning the marginal cost of mitigation ($C'$) is non-negative and increases with more effort [34](#page=34). * $C(m)$, with $C' \ge 0$ and $C'' \ge 0$ [34](#page=34). * **Climate change damage** ($D$) is a function of the remaining global emissions ($e = e_{BAU} - m$), which is also an increasing and convex function. The marginal damage ($D'$) is non-negative and increases with emissions [34](#page=34). * $D(e)$, with $D' \ge 0$ and $D'' \ge 0$ [34](#page=34). * **Adaptation** ($A$) aims to reduce the impact of climate change damages. The effectiveness of adaptation expenditure ($a$) is modeled as an increasing function, with diminishing marginal effectiveness. The remaining damage after adaptation is $(1 - A(a)) D(e)$ [34](#page=34). * $A(a)$, with $A' \ge 0$ and $A'' \le 0$ [34](#page=34). ### 3.2 Optimal adaptation and mitigation The goal of cost-benefit analysis is to find the optimal levels of adaptation and mitigation. #### 3.2.1 Optimal adaptation Optimal adaptation ($a^*$) is achieved when the marginal benefit of adaptation equals its marginal cost. This minimizes the sum of remaining climate change damages (after adaptation) and the expenditure on adaptation itself [35](#page=35). * The condition for optimal adaptation is: Marginal adaptation benefit = Marginal adaptation cost [35](#page=35). * Mathematically, this is represented as: $A'(a^*) D(e) = 1$ [35](#page=35). > **Tip:** The graph illustrating optimal adaptation shows that the optimal level ($a^*$) is where the curves for marginal adaptation benefit and marginal adaptation cost intersect. #### 3.2.2 Optimal mitigation Optimal mitigation ($m^*$) occurs when the marginal mitigation cost equals the marginal remaining climate change damage. This strategy minimizes the sum of mitigation costs and climate change damages [36](#page=36). * The condition for optimal mitigation is: Marginal mitigation cost = Marginal remaining climate change damage [36](#page=36). * Mathematically, this is represented as: $C'(m^*) = [1 - A(a^*)] D'(e_{BAU} - m^*)$ [36](#page=36). > **Tip:** The graph for optimal mitigation depicts the marginal mitigation cost curve and the marginal remaining climate change damage curve. The intersection determines the optimal mitigation effort ($m^*$). ### 3.3 Complications: international climate agreements The simple global cost-benefit model becomes significantly more complex when considering that the world comprises many different countries, each with its own emissions, costs, damages, and adaptation capabilities. * Climate change is a function of global emissions ($e = \sum e_i = \sum (e_{BAU,i} - m_i)$), assuming an unweighted sum for uniformly mixing pollutants [37](#page=37). * This raises the question of whether countries will coordinate their climate policies or engage in free-riding. #### 3.3.1 Absence of climate agreement In the absence of international coordination, each country acts in its own self-interest, minimizing its individual costs. * **Individually rational mitigation:** Occurs when a country's marginal mitigation cost equals its own marginal climate change damage, considering its own adaptation efforts [38](#page=38). * $C'_i(m_i^0) = [1 - A_i(a_i^0)] D'_i(e_{BAU} - m^0) = [1 - A_i(a_i^0)] D'_i(e^0)$ for each country $i$ [38](#page=38). * **Individually rational adaptation:** Occurs when a country's marginal adaptation benefit equals its marginal adaptation cost [38](#page=38). * $A'_i(a_i^0) D_i(e^0) = 1$ for each country $i$ [38](#page=38). #### 3.3.2 Ideal global climate agreement A perfect international agreement would lead to the minimization of global costs, meaning the sum of all individual costs. * **Globally optimal mitigation:** In this scenario, each country's marginal mitigation cost equals the global marginal climate change damage, also known as the Social Cost of Carbon (SCC) [39](#page=39). * $C'_i(m_i^*) = \sum_{j=1}^{n} [1 - A_j(a_j^*)] D'_j(e_{BAU} - m^*) = \sum_{j=1}^{n} [1 - A_j(a_j^*)] D'_j(e^*) = SCC$ for each country $i$ [39](#page=39). * **Globally optimal adaptation:** The rule for optimal adaptation remains the same as in the absence of an agreement, where individual marginal adaptation benefit equals individual marginal adaptation cost [39](#page=39). * $A'_i(a_i^*) D_i(e^*) = 1$ for each country $i$ [39](#page=39). > **Example:** Figure on page 40 illustrates that under global optimal mitigation, individual countries undertake greater mitigation efforts ($m_i^*$) compared to the individually rational level ($m_i^0$). This is because they internalize the external benefits of their mitigation on other countries' climate change damages, which are not considered in the absence of an agreement [40](#page=40). ### 3.4 Consequences of no agreement: too little mitigation and too much adaptation The absence of a global climate agreement leads to suboptimal outcomes in both mitigation and adaptation efforts. * **Too little mitigation:** Countries fail to internalize the positive externalities of their mitigation efforts on others, leading to a market failure and insufficient production of this public good. Mitigation is a public good because its benefits are non-excludable [41](#page=41). * **Too much adaptation:** Due to insufficient mitigation, the world experiences more severe climate change, necessitating higher adaptation efforts. Since adaptation is not a public good and countries fully capture its benefits, they tend to over-invest in it from a global perspective, although the poorest countries may face an "adaptation gap" due to budget constraints [42](#page=42). ### 3.5 Equity considerations and welfare weights Climate policy analysis must also account for equity, particularly the differential impacts on low-income versus high-income countries. * Low-income countries often lack the resources for adequate mitigation and adaptation, forcing a trade-off between development and climate action [43](#page=43). * Societal welfare ($W$) can be defined as a weighted sum of the costs and damages across all countries, where welfare weights ($\lambda_i$) reflect societal preferences for different populations [43](#page=43). * $W = \sum_{j=1}^{n} \lambda_j \{[1 - A_j(a_j)] D_j(e) + C_j(m_j) + a_j\}$ [43](#page=43). * These weights are non-negative and sum to one ($\lambda_i \ge 0, \sum_{i=1}^{n} \lambda_i = 1$). Typically, higher weights are assigned to citizens of low-income countries [43](#page=43). #### 3.5.1 Generalized Samuelson rule The introduction of welfare weights modifies the optimal policy prescriptions. * The **generalized Samuelson rule** for optimal global mitigation indicates that a country's marginal mitigation cost should be inversely proportional to its welfare weight [44](#page=44). * $\lambda_i C'_i(m_i^*) = \sum_{j=1}^{n} \lambda_j [1 - A_j(a_j^*)] D'_j(e^*) = SCC$ for all $i$ [44](#page=44). * This implies that low-income countries (with higher $\lambda_i$) should undertake relatively less mitigation effort than high-income countries [44](#page=44). * This optimal allocation is not strictly cost-efficient in the traditional sense because marginal mitigation costs are not equalized across countries [44](#page=44). * The rule for optimal adaptation remains unaffected by welfare weights [44](#page=44). ### 3.6 Estimating the Social Cost of Carbon (SCC) Quantifying the economic impacts requires putting numbers on the costs and benefits, prominently featuring the Social Cost of Carbon. * **Marginal Abatement Cost (MAC) curves** illustrate the cost of reducing emissions. For instance, at a carbon price of 200 dollars per ton of CO2e, approximately 60% of global greenhouse gas emissions could be reduced, with costs falling sharply over time [46](#page=46). * The SCC is a dynamic concept, representing the net present value of all future global marginal damages from emitting one ton of CO2 today. It accounts for time through discount factors [47](#page=47). * $SCC_\tau = \sum_{t=\tau+1}^{\infty} \frac{1}{[1+\rho]^{\tau-t+1}} \sum_{j=1}^{n} \lambda_j [1 - A_j(a_{j,\tau}^*)] D'_j(e_\tau^*)$ [47](#page=47). * SCC estimates vary significantly based on methodology and assumptions, particularly the discount rate. For example, US estimates have ranged from a few dollars to over 50 dollars per ton of CO2. Global estimates, like those from Rennert et al. using a 2% discount rate, suggest an SCC of around 185 dollars per ton of CO2, which would justify significant global mitigation efforts [48](#page=48). > **Tip:** The wide range of SCC estimates highlights the importance of the discount rate in climate policy analysis. A lower discount rate gives more weight to future damages, resulting in a higher SCC. ### 3.7 Global costs of in-action The economic consequences of not implementing climate policies are substantial. * Recent estimates, such as those by Burke et al. project significant GDP impacts, potentially reducing GDP per capita by 23% by 2100 due to nonlinear effects of temperature, especially in low-income countries [49](#page=49). --- # International climate agreements and policy instruments This section reviews the evolution of international climate negotiations and explores various policy instruments for mitigation, focusing on carbon pricing and the EU Emissions Trading System. ### 4.1 History of international climate agreements The journey towards international climate agreements has been marked by significant milestones and evolving frameworks. #### 4.1.1 The UN Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol * The **UN Framework Convention on Climate Change (UNFCCC)** was established in 1992 in Rio de Janeiro, providing the fundamental legal and negotiation framework for international climate action [51](#page=51). * A core principle of the UNFCCC is **"common but differentiated responsibilities and respective capabilities"**. This principle acknowledges that while all parties share the responsibility to protect the climate system for present and future generations, developed countries should take the lead in combating climate change due to their historical contributions and greater capabilities [51](#page=51). * Building upon the UNFCCC, the **Kyoto Protocol** was adopted in 1997 at the third Conference of the Parties (CoP 3). It set emission reduction targets for 37 industrialized countries, known as Annex I parties, who committed to reducing their emissions by approximately 5% below 1990 levels during the first commitment period (2008-2012) [51](#page=51). * Developing countries (non-Annex I parties) were not subject to quantitative emission reduction targets under the Kyoto Protocol [51](#page=51). * The protocol introduced **flexibility mechanisms**, including emissions trading between countries, to help achieve emission reduction goals more cost-effectively [51](#page=51). * Despite these efforts, the original objectives of the Kyoto Protocol were significantly diluted. While parties met their targets, the protocol covered less than 50% of global emissions [51](#page=51). #### 4.1.2 Towards the Paris Agreement * The **Bali Roadmap** in 2007 set the stage for post-Kyoto negotiations [52](#page=52). * The **Copenhagen Climate Summit (CoP 15) in 2009** saw high expectations but resulted in no legally binding agreement, leading to confusion. However, it marked the first mention of a 2°C target and included voluntary pledges from various nations, including the EU and China [52](#page=52). * Subsequent conferences, including CoP 16 (Cancun 2010), CoP 17 (Durban 2011), CoP 18 (Doha 2012), CoP 19 (Warsaw 2013), and CoP 20 (Lima 2014), were instrumental in the slow but steady progress towards a new global agreement [52](#page=52). * The culmination of these efforts was the **Paris Agreement in 2015 (CoP 21)** [52](#page=52). * Following the Paris Agreement, the international community has continued to convene at annual Conferences of the Parties, including CoP 22 (Marrakech 2016) through CoP 29 (Baku 2024), to advance climate action [52](#page=52). #### 4.1.3 The Paris Agreement . * The primary objective of the Paris Agreement is to **limit global warming to well below 2°C above pre-industrial levels and to pursue efforts to keep it below 1.5°C**. The 2°C target had been previously agreed upon in Copenhagen and Cancun [53](#page=53). * The reference to 1.5°C is a significant political signal, particularly important for low-lying island states like Tuvalu, highlighting the urgency of ambitious climate action. However, reaching the 1.5°C target is considered a formidable challenge, with projections suggesting it could be breached within a few years [53](#page=53). #### 4.1.4 Intended Nationally Determined Contributions (INDCs) * The Paris Agreement introduced a bottom-up approach through **Intended Nationally Determined Contributions (INDCs)**, or pledges, as a shift from the top-down targets of the Kyoto Protocol [54](#page=54). * These INDCs vary widely in their format and ambition. They can be expressed as: * Reductions compared to a base year or a business-as-usual (BAU) scenario [54](#page=54). * Absolute emission targets [54](#page=54). * Emission intensity targets, such as emissions per unit of GDP, as adopted by countries like China and India [54](#page=54). * They can also be conditional or unconditional [54](#page=54). * Some pledges focus on specific measures and policies [54](#page=54). * An analysis by the IPCC synthesis report indicated that the aggregate effect of these INDCs was **insufficient to meet the 1.5°C and 2°C goals** [54](#page=54). * The voluntary provision of these pledges reflects a "voluntary provision of public good" and, as often seen with public goods, is generally not enough to achieve the desired outcome [54](#page=54). > **Tip:** Understanding the shift from top-down (Kyoto) to bottom-up (Paris Agreement) approaches, and the nature of INDCs, is crucial for analyzing the effectiveness and ambition of international climate efforts. > **Example:** China and India's emission intensity targets (emissions per GDP) represent a different approach to emission reduction compared to absolute targets set by some developed nations. ### 4.2 Policy instruments for mitigation Economists generally favor market-based instruments for achieving emission reductions cost-effectively. #### 4.2.1 Why economists prefer carbon pricing * **Static cost efficiency:** In the short term, the goal is to achieve a given emission reduction target at the lowest possible cost. This is achieved when **marginal abatement costs (MAC)** are equalized across all polluters. A polluter with a lower marginal cost of abatement should undertake more emission reduction than one with a higher marginal cost [57](#page=57). * **Carbon pricing mechanisms**, such as carbon taxes or tradable emission permits, achieve this cost efficiency. Under carbon pricing, each polluter will reduce emissions up to the point where their marginal abatement cost equals the price of carbon. This leads to a situation where the marginal abatement cost of all polluters is equalized to the price of carbon ($p$), ensuring cost-effectiveness [57](#page=57). * For a polluter with cost function $C_1(m)$, the marginal abatement cost is $C_1'(m)$. * For a polluter with cost function $C_2(m)$, the marginal abatement cost is $C_2'(m)$. * With a carbon price $p$, polluter 1 will reduce emissions to $m_1^*$ where $C_1'(m_1^*) = p$. * Similarly, polluter 2 will reduce emissions to $m_2^*$ where $C_2'(m_2^*) = p$. * Therefore, $C_1'(m_1^*) = C_2'(m_2^*) = p$, ensuring equal marginal abatement costs across polluters for a given reduction target. * **Dynamic cost efficiency:** Over time, emission reduction technologies become cheaper due to research and development (R&D) and learning-by-doing. This causes the marginal abatement cost (MAC) curve to shift downwards and to the right [58](#page=58). * A **profit-maximizing firm operating under a carbon price** has an incentive to reduce emissions more as the MAC curve shifts, adapting to the lower costs of mitigation [58](#page=58). * In contrast, a static emission standard, which mandates a specific level of emission reduction, provides no incentive for firms to mitigate more than required over time, even if technologies become cheaper [58](#page=58). > **Tip:** Economists' preference for carbon pricing stems from its ability to achieve emission reductions at the lowest societal cost, both statically and dynamically, by incentivizing polluters to abate where it is cheapest for them. #### 4.2.2 Carbon pricing in combination with other policy instruments * Empirical research confirms that carbon pricing effectively delivers emission reductions, particularly in profit-maximizing industries like electricity production [59](#page=59). * However, for sectors such as buildings and transport, **complementary instruments** like bans and standards are often necessary to achieve desired outcomes [59](#page=59). * A comprehensive approach also involves combining carbon pricing with other policies to address multiple externalities and market failures, as highlighted by research such as Blanchard et al.. This can include [59](#page=59): * **Phasing out environmentally harmful fossil fuel subsidies** [59](#page=59). * **Subsidizing R&D for radical innovation** in low and negative carbon emission technologies [59](#page=59). * **Implementing transfers to compensate for regressive distributional effects** of climate policies, both nationally and internationally [59](#page=59). * **Introducing carbon import taxes** to level the international playing field and prevent carbon leakage [59](#page=59). #### 4.2.3 The EU Emissions Trading System (ETS) * Since 2005, the European Union has implemented a system of **tradable carbon emission permits**, known as the EU Emissions Trading System (ETS) [60](#page=60). * Currently, emitting one ton of carbon dioxide has a price of approximately 75 euros per ton [60](#page=60). * The ETS initially covered 45% of the EU's carbon emissions [60](#page=60). * With the introduction of the ETS-2, scheduled from 2027, its coverage will expand to 75% of EU carbon emissions by including fossil fuel use in road transport and buildings [60](#page=60). * To protect EU industry competitiveness and address carbon leakage, a **Carbon Border Adjustment Mechanism (CBAM)** is being implemented [60](#page=60). > **Example:** The EU ETS is a prime example of a cap-and-trade system, where a cap is set on total emissions, and companies can buy and sell emission permits, creating a market price for carbon. --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | Climate science consensus | The widely agreed-upon understanding among climate scientists regarding the causes, impacts, and future projections of climate change, primarily based on extensive research and assessment reports from bodies like the IPCC. | | IPCC (Intergovernmental Panel on Climate Change) | An international body established by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) to provide policymakers with regular scientific assessments on climate change, its implications and potential future risks, as well as options for adaptation and mitigation. | | Greenhouse gases (GHGs) | Gases in Earth's atmosphere that trap heat. Key GHGs include carbon dioxide ($CO_2$), methane ($CH_4$), nitrous oxide ($N_2O$), and fluorinated gases. Their increasing concentration due to human activities leads to global warming. | | $CO_2e$ (Carbon Dioxide Equivalent) | A measure used to compare the emissions from various greenhouse gases based on their global warming potential (GWP) relative to carbon dioxide over a specified period, typically 100 years. | | Kaya identity | An equation that relates greenhouse gas emissions to four key drivers: population, GDP per capita, energy intensity of production, and carbon intensity of energy. It's a tool for understanding the fundamental drivers of emissions and potential policy interventions. | | Energy intensity of production | A measure of how efficiently a country or economy uses energy to produce a unit of economic output, often expressed as energy consumed per unit of GDP (e.g., kWh per dollar). | | Carbon intensity of energy | A measure of the amount of greenhouse gas emissions produced per unit of energy consumed, often expressed as kilograms of $CO_2$ per kilowatt-hour (kg $CO_2$/kWh). | | Consumption perspective | An accounting method for greenhouse gas emissions that attributes emissions to the country where goods and services are consumed, rather than where they are produced. This contrasts with the production perspective, which tracks emissions based on location of production. | | Production perspective | An accounting method for greenhouse gas emissions that attributes emissions to the geographical location where they are produced. This is also referred to as territorial emissions. | | Cost-benefit analysis | An economic technique used to assess the viability of a project or policy by comparing its expected benefits against its expected costs. In climate change, it involves evaluating the economic impacts of mitigation and adaptation measures against the damages from climate change. | | Mitigation | Actions taken to reduce or prevent greenhouse gas emissions. This includes strategies like improving energy efficiency, transitioning to renewable energy sources, and reducing consumption. | | Adaptation | Actions taken to help cope with the impacts of climate change that are already happening or are expected to happen. This includes measures like building sea walls, developing drought-resistant crops, and improving early warning systems. | | Geo-engineering | Large-scale, deliberate intervention in the Earth's climate system to counteract climate change. Examples include solar radiation management (e.g., aerosols) and carbon dioxide removal (e.g., direct air capture). | | Social Cost of Carbon (SCC) | An estimate, in monetary terms, of the long-term economic damages resulting from each additional ton of carbon dioxide ($CO_2$) emissions released into the atmosphere. It is used to quantify the external costs of carbon emissions. | | Marginal abatement cost (MAC) | The cost of reducing one additional unit of pollution (e.g., one ton of $CO_2e$). The marginal abatement cost curve shows the cost of abatement at different levels of emission reductions. | | UNFCCC (United Nations Framework Convention on Climate Change) | An international environmental treaty negotiated at the Earth Summit in Rio de Janeiro in 1992, with the objective of stabilizing greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. | | Kyoto Protocol | An international treaty adopted in 1997 that extended the 1992 UNFCCC by committing industrialized countries and economies in transition to limit and reduce greenhouse gas (GHG) emissions in accordance with agreed-upon national targets. | | Paris Agreement | An international treaty adopted in 2015 that aims to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels. It operates on a bottom-up approach where countries submit their own Nationally Determined Contributions (NDCs). | | Intended Nationally Determined Contributions (INDCs) | The commitments submitted by countries prior to the Paris Agreement negotiations, outlining their intended actions to reduce greenhouse gas emissions and adapt to climate change. These form the basis of Nationally Determined Contributions (NDCs). | | Carbon pricing | An economic policy that puts a price on greenhouse gas emissions. This can be done through a carbon tax or a cap-and-trade system (like emissions permits), aiming to incentivize emission reductions by making polluting activities more expensive. | | EU Emissions Trading System (EU ETS) | A cornerstone of the EU's climate policy, the EU ETS is a cap-and-trade system that sets a limit on the total amount of certain greenhouse gases that can be emitted by installations covered by the system. It allows companies to buy and sell emission allowances where needed. | | Carbon Border Adjustment Mechanism (CBAM) | A policy designed to put a carbon price on imports of certain goods into the EU from non-EU countries. It aims to prevent carbon leakage and ensure a level playing field for EU industries, which are subject to the EU ETS. |