Evaluating of post-2012 carbon policies

Abstract

A dynamic multi-regional computable general equilibrium model has been employed to evaluate the alternative post-2012 targets and policies for CO2 reduction in Annex I and non-Annex I parties to the United Nations Framework Convention on Climate Change. Based on an analysis of conflicting strategies that different countries were pursuing during the recent international negotiations on climate change, this paper presents some ideas for an effective climate policy. The low-end pledges confirmed at the COP 16 negotiations on climate change were evaluated for the alternative policy settings, which include international carbon trading, domestic actions, and linking of the EU ETS with Russian and Ukrainian carbon markets. The study has a special focus on the implications of trading of surplus emission permits, or so-called hot air that occurs when a country’s carbon abatement target is below its projected emissions. Results of computer simulations reveal that by 2020 global carbon emissions will exceed their 1990 levels by 71–96 %, depending on the model scenario. Although multilateral implementation results in the lowest emission levels, it overshoots the levels of CO2 sufficient to stabilise GHG (greenhouse gas) concentrations at 450 ppm in 2100 by 5 Gt. Only international emission trading could motivate Russia and Ukraine to abate emissions. Such trade is profitable for the EU as it halves the carbon price compared with when the EU abates emissions domestically. Countries with non-binding abatement targets could be affected by the terms of trade effects resulting from emission reduction in other countries. Indeed, the possibility to trade emissions internationally provides the climate free-riders with an incentive for emission abatement. However, at the global scale, such policy lowers the cost of carbon abatement without meeting the GHG stabilisation goal. Therefore ambitious abatement targets, along with a large emissions market, are necessary to make climate policy effective.