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8. Equity and global distribution

Climate protection is a pure public good; emission reductions anywhere benefit people everywhere. What international arrangements are needed to coordinate reductions worldwide and overcome the free-rider problem? What is the appropriate standard of equity in allocating the costs of global policies to nations and individuals?

 

Equity in Climate Change: An Analytical Review
Mattoo, A. & Subramanian, A.
World Development, 2012, 40, 1083 - 1097
This paper presents an analytical framework to encompass contributions to the literature on equity in climate change, and highlights the consequences - in terms of future emissions allocations- of different approaches to equity. These include: progressive cuts relative to historic levels; equal per capita emissions, historic responsibility, and ability to pay; and preserving future development opportunities. We show that because climate change goals dictate a stringent global carbon budget, each of the approaches to equity necessarily imposes large costs on at least some groups of countries.

Trading off generations: Equity, discounting, and climate change
Schneider, M. T.; Traeger, C. P. & Winkler, R.
European Economic Review, 2012, 56, 1621 - 1644
The prevailing literature discusses intergenerational trade-offs in climate change predominantly in terms of the Ramsey equation relying on the infinitely lived agent model. We discuss these trade-offs in a continuous time OLG framework and relate our results to the infinitely lived agent setting. We identify three shortcomings of the latter: first, underlying normative assumptions about social preferences cannot be deduced unambiguously. Second, the distribution among generations living at the same time cannot be captured. Third, the optimal solution may not be implementable in overlapping generations market economies.

Climate change, humidity, and mortality in the United States
Alan I. Barreca
Journal of Environmental Economics and Management, 2012, 63, 19 - 34
This paper estimates the effects of humidity and temperature on mortality rates in the United States (c. 1973-2002) in order to provide an insight into the potential health impacts of climate change. I find that humidity, like temperature, is an important determinant of mortality. Coupled with Hadley CM3 climate-change predictions, I project that mortality rates are likely to change little on the aggregate for the United States. However, distributional impacts matter: mortality rates are likely to decline in cold and dry areas, but increase in hot and humid areas. Further, accounting for humidity has important implications for evaluating these distributional effects.

Vulnerability, Income Growth and Climate Change
Ward, P. & Shively, G.
World Development, 2012, 40, 916 - 927
Cross-country data on energy consumption, per capita gross domestic product (GDP), and a social vulnerability index are used to measure changes in vulnerability associated with changes in per capita GDP and per capita energy consumption. Energy consumption, through its non-linear effect on per capita income, reduces a country’s overall vulnerability by a greater amount at moderate incomes than at low or high incomes. An implication is that policies aimed at reducing carbon emissions in developing countries are unlikely to significantly affect vulnerability to the risks arising from climate change, especially at very low incomes.

Is fairness blind? --The effect of framing on preferences for effort-sharing rules
Carlsson, F.; Kataria, M.; Lampi, E.; Löfgren, Å. & Sterner, T.
Ecological Economics, 2011, 70, 1529 - 1535
This paper uses a choice experiment to study citizens' preferences for effort-sharing rules for reducing carbon dioxide emissions. For a given global cost and level of emission reduction, we study the willingness to pay for various rules that imply different distributions of the cost between EU, the US, China and Africa. The focus of this paper is on the use of two different treatments, one where the respondents were informed about the country (or country group) names and one where the names were replaced with anonymous labels A-D. This allows us to test whether people's preferences for effort-sharing rules depend on the framing of the problem. We find that the ranking of the rules and the strength of the preferences are not significantly different between the two treatments, and hence we find no evidence of ingroup bias in preferences for effort-sharing rules.

Climate change, humidity, and mortality in the United States
Barreca, A. I.
Journal of Environmental Economics and Management, 2012, 63, 19 - 34
This paper estimates the effects of humidity and temperature on mortality rates in the United States (c. 1973-2002) in order to provide an insight into the potential health impacts of climate change. I find that humidity, like temperature, is an important determinant of mortality. Coupled with Hadley CM3 climate-change predictions, I project that mortality rates are likely to change little on the aggregate for the United States. However, distributional impacts matter: mortality rates are likely to decline in cold and dry areas, but increase in hot and humid areas. Further, accounting for humidity has important implications for evaluating these distributional effects.

The role of technological availability for the distributive impacts of climate change mitigation policy
Michael Lüken, Ottmar Edenhofer, Brigitte Knopf, Marian Leimbach, Gunnar Luderer, Nico Bauer,
Energy Policy (2011) 39(10): Pages 6030-6039
The impacts of the availability of low-carbon technologies on the regional distribution of mitigation costs are analyzed in a global multi-regional integrated assessment model. Three effects on regional consumption losses are distinguished: domestic measures, trade of fossil energy carriers and trade of emission permits. Key results are: (i) GDP losses and a redirection of investments in the energy system towards capital-intensive technologies are major contributions to regional consumption losses. (ii) A devaluation of tradable fossil energy endowments contributes largely to the mitigation costs of fossil fuel exporters. (iii) In case of reduced availability of low-carbon technologies, the permit market volume and associated monetary redistributions increase. The results suggest that the availability of a broad portfolio of low-carbon technologies could facilitate negotiations on the permit allocation scheme in a global cap-and-trade system.

Research cooperation and international standards in a model of coalition stability
Kai Lessmann and Ottmar Edenhofer
Resource and Energy Economics (2011) 33(1): 36-54.
Suggestions on international cooperation in climate policy beyond 2012 include substituting or complementing international environmental agreements (IEA) with technology-oriented agreements (TOA). We look at the impact of TOA on environmental cooperation in a framework of coalition stability. Using a numerical model, we analyze the differences of several TOA and how they interact. We find that participation in and environmental effectiveness of the IEA are raised less effectively when the TOA focuses on research cooperation in mitigation technology rather than cooperation on augmenting productivity in the private good sector. This is due to the former having an effect on all actors via emissions, whereas effects of the latter are exclusive to research partners. For the same reason, we find that restricting research cooperation to the coalition is only credible when it focuses on productivity. Technology standards that reduce the emission intensity of production are unlikely to raise participation by themselves and may suffer from inefficiencies. However, these disadvantages do not apply when standards are implemented as a complementary instrument. Separately negotiated technology standards may hence facilitate participation in an IEA without adding to its complexity.

On international equity weights and national decision making on climate change Equity and global distribution
David Anthoff and Richard S.J. Tol
Journal of Environmental Economics and Management (2010) 60(1): 14-20.
Estimates of the marginal damage costs of carbon dioxide emissions require the aggregation of monetised impacts of climate change over people with different incomes and in different jurisdictions. Implicitly or explicitly, such estimates assume a social welfare function and hence a particular attitude towards equity and justice. We show that previous approaches to equity weighting are inappropriate from a national decision maker’s point of view, because domestic impacts are not valued at domestic values. We propose four alternatives (sovereignty, altruism, good neighbour, and compensation) with different views on concern for and liability towards foreigners. The four alternatives imply radically different estimates of the social cost of carbon and hence the optimal intensity of climate policy.

Revisiting the case for intensity targets: Better incentives and less uncertainty for developing countries  
Robert Marschinski and Ottmar Edenhofer
Energy Policy (2010) 38(9): 5048-5058.
In the debate on post-Kyoto global climate policy, intensity targets, which set a maximum amount of emissions per GDP, figure as prominent alternative to Kyoto-style absolute emission targets, especially for developing countries. This paper re-examines the case for intensity targets by critically assessing several of its properties, namely (i) reduction of cost-uncertainty, (ii) reduction of ‘hot air’, (iii) compatibility with international emissions trading, (iv) incentive to decouple carbon emissions and economic output (decarbonization), and, (v) use as a substitute for banking/borrowing. Relying on simple analytical models, it is shown that the effect on cost-uncertainty is ambiguous and depends on parameter values, and that the same holds for the risk of ‘hot air’; that the intensity target distorts international emissions trading; that despite potential asymmetries in the choice of abatement technology between absolute and intensity target, the incentive for a lasting transformation of the energy system is not necessarily stronger under the latter; and, finally, that only a well-working intensity target could substitute banking/borrowing to some extent—but also vice versa. Overall, the results suggest that due to the increased complexity and the potentially only modest benefits of an intensity target, absolute targets remain a robust choice for a cautious policy maker.

Equity weighting and the marginal damage costs of climate change
David Anthoff, Cameron Hepburn and Richard S.J. Tol
Ecological Economics (2009) 68(3): 836-849.
Climate change will give rise to different impacts in different countries, and different countries have different levels of development. Equity-weighted estimates of the (marginal) impact of greenhouse gas emissions reflect these differences. This paper analyses the impact of equity weighting on the marginal damage cost of carbon dioxide emissions, and reaches four main conclusions. First, equity-weighted estimates are substantially higher than estimates without equity-weights; equity-weights may even change the sign of the social cost estimates. Second, estimates differ by two orders of magnitude depending on the region to which the equity weights are normalised. Third, equity-weighted estimates are sensitive to the resolution of the impact estimates. Depending on the assumed intra-regional income distribution, estimates may be more than twice as high if national rather than regional impacts are aggregated. Fourth, variations in the assumed inequality aversion have different impacts in different scenarios, not only because different scenarios have different emissions and hence warming, but also because different scenarios have different income differences, different growth rates, and different vulnerabilities.

Differentiating Emissions Targets for Individual Developed Countries: Economics and Equity
Andy Reisigner
Economics Discussion Papers (2009) 41: 1-12.
A key challenge for a future climate change agreement is allocating emissions targets for individual developed countries that are perceived as equitable given differing national circumstances. Many economics-based frameworks for evaluating future targets use as a key criterion for individual country targets the notion that mitigation measures should result in similar costs (specifically, that the required mitigation actions relative to baseline emissions result in a similar percentage reduction of individual countries’ GDP in the target year or period). Such an economic criterion provides a transparent and objective basis for comparison, but it does not necessarily mean that comparable targets for individual countries are also equitable. A set of thought experiments demonstrates that such an approach indeed does not reflect equity between countries. This is because future business-as-usual emissions, against which the costs of mitigation are assessed, depend on past policy choices and mitigation pathways. An approach that sets future emissions targets at a specific date based on comparable costs, without regard to past policy choices and commitments, would penalise countries that have taken early action and provides a disincentive for taking strong domestic mitigation actions in future. This analysis suggests that the choice of ‘business-as-usual’ emissions against which the future costs of mitigation are assessed needs to receive more attention if economic comparability is intended to also reflect equity of emissions targets over time.

The political economy of global carbon emissions reductions
Stephen J. DeCanio
Ecological Economics (2009) 68(3): 915-924.
The discussion about what reductions in greenhouse gas emissions are required and how the emissions rights might be distributed globally has fostered the belief that there is a fundamental conflict between the rich nations of the "North" and the poor but populous nations of the "South." The argument is that grandfathering the rights will only reinforce existing global inequalities, while per capita distribution of rights would lead to such huge transfers of wealth to the South as to be unacceptable to the North. However, a simple general equilibrium model of the global economy shows that this perception is incorrect under a plausible interpretation of the goal of the United Nations Framework Convention on Climate Change to "avoid dangerous anthropogenic interference with the climate system." Instead of using an economic damage function to determine the optimal level of emissions reductions, the model's utility functions are calibrated to reflect scientific understanding of what would be required to stabilize the atmosphere at safe concentrations of greenhouse gases. Among policy options that would accomplish this, the United States would have a preference for grandfathering the allocation of emissions rights over a per capita allocation, but this preference is not strong and could be offset by other geopolitical considerations.

The Greenhouse Development Rights framework
Sivan Kartha, Paul Baer, Tom Athanasiou and Eric Kemp-Benedict
Climate and Development (2009) 1(2): 147-165.
The vast majority of emission reductions required to prevent dangerous climate change must be made in the developing world. Yet the human development aspirations of developing countries requires expanded energy services, which has historically always been accompanied by rising carbon emissions. Developing countries have thus firmly asserted that a solution to climate change cannot come at the expense of their development. The Greenhouse Development Rights (GDR) framework is a climate regime architecture explicitly structured to safeguard a right to development, and thus make an ambitious global solution possible. It is a burden-sharing framework that defines national obligations, based on responsibility for the climate change problem and capacity to solve it. Both are defined with respect to a "development threshold" that serves to relieve from the costs and constraints of the climate crisis those individuals still striving for a decent standard of welfare. Highlighting the United States and China, we discuss implications in the context of an international funding mechanism and a global cap and trade system. The GDR approach is relevant to a next phase of the global climate regime negotiated in Copenhagen as a framework for principle-based commitments for industrialized countries, and a basis for future evolution toward a globally differentiated system.

The effects of tariffs on coalition formation in a dynamic global warming game  
Kai Lessmann, Robert Marschinski and Ottmar Edenhofer
Economic Modelling (2009) 26(3): 641-649.
The prospects for cooperation on climate protection beyond 2012 are currently uncertain. Thus policy instruments which foster participation in International Environmental Agreements (IEA) are in demand. Among the instruments under discussion are trade sanctions. Multi-region optimal growth models are a state of the art tool for integrated assessment, but introducing trade sanctions distorts the competitive equilibrium, making it difficult to compute numerically. We introduce trade and trade sanctions into a model of coalition stability to assess the potential of trade sanctions to support an IEA. Trade is modeled by having all countries produce a generic output good, but adopting national product differentiation (Armington assumption). Coalitions are free to impose tariffs on imports from non-cooperating countries. We solve the model numerically using a refined version of Negishi's [Negishi, T., 1960. Welfare economics and existence of an equilibrium for a competitive economy. Metroeconomica 12, 92–97] basic algorithm. We then apply the model to analyze the influence of tariffs on international cooperation. The model suggests that there is indeed a significant potential to raise participation through trade sanctions, even when goods from different countries are nearly perfect substitutes. Furthermore we investigate the effect of trade sanctions on global welfare, environmental effectiveness, and the credibility of the tariff mechanism.

Equity in climate-economy scenarios: The importance of subnational income distribution
Paul Baer
Environmental Research Letters (2009) 4: 1-11.
It is widely accepted that climate change raises equity considerations on many levels. This paper looks in particular at the IPCC’s ‘Special Report on Emissions Scenarios’, in which equity is primarily quantified as the distribution of income between countries, and highlights the need for more explicit treatment of equity both within and across national borders. An existing method for modeling subnational income distributions shows that this affects the results of welfare calculations of the type used in economic analyses of climate policy. Additionally, the paper suggests ways in which this kind of equity analysis could be applied to broader questions of climate policy and development, such as burden sharing in the allocation of obligations, and concludes by framing the scenario development process in the context of ‘the contested storyline of the present’.

Greenhouse Development Rights: Towards an equitable framework for global climate policy
Paul Baer, Glenn Fieldman, Tom Athanasiou and Sivan Kartha
Cambridge Review of International Affairs (2008) 21(4): 649-669.
The assignment of obligations to pay for mitigation of greenhouse gas emissions and for adaptation to unavoidable climate change is a critical and controversial component of international negotiations under the United Nations Framework Convention on Climate Change. In this article we present a new framework called 'Greenhouse Development Rights' (GDRs): a formula for the calculation of national obligations on the basis of quantified capacity (wealth) and responsibility (contribution to climate change). GDRs seek to preserve the 'right to development' by exempting from obligation any income and emissions under a 'development threshold'. By taking into account the distribution of income and emissions within countries, and calculating national obligations as if they were the aggregated obligations of individuals, the framework treats every global citizen identically, and allocates obligations even to poor countries that are proportional to their actual middle-class and wealthy populations. When coupled to a trajectory of rapid emissions reductions (for example, 80 per cent reduction below 1990 levels by 2050), the framework results in larger reduction obligations for both rich and poor countries than they currently seem prepared to accept. However, the formula may be 'fair enough' to break the impasse that currently separates rich and poor countries in the negotiations.

Climate change, social justice and development
Terry Barker, S. Serban Scrieciu and David Taylor
Development (2008) 51(3): 317-324.
This article discusses the implications of climate change for social justice and the prospects for more sustainable development pathways. The authors state that the analysis and discussions surrounding the climate change problem, particularly those drawing on the traditional economics literature, have relied on a crude economic utilitarianism that no moral philosopher would endorse. Such arguments have typically ignored the concept of justice itself and wider ethical considerations. The authors argue that climate change is inherently inequitable and inevitably raises ethical issues. Climate change policy should therefore be informed by moral philosophy relating to scientific findings with respect to climate change impacts, rather than just informed by economics in isolation. Climate stabilization policies should be designed by international negotiation to support development and they should not jeopardize the prospects for the well-being of the poor.

Equity implications of two burden-sharing rules for stabilizing greenhouse-gas concentrations
Asami Miketa and Leo Schrattenholzer
Energy Policy (2006) 34(7): 877-891.
This paper focuses on the equity aspects of international burden sharing for global CO2 emission stabilization. It first summarizes and classifies equity principles proposed in the published literature of the field. Of these, the authors selected three major equity principles, i.e., egalitarian equity, horizontal equity, and proportional equality (often referred to also as sovereign equity) to carry out a detailed examination of two sets of quantitative emission entitlements, which are based on two burden-sharing rules, i.e., the equal emissions per capita approach and the carbon intensity approach. The two burden-sharing rules were chosen as not only particularly popular, but also because their application results in distinctly different burden sharing among countries. To make the two rules comparable, we used a global carbon-emission path until the year 2050 that leads to an atmospheric CO2 concentration of 550 ppm. We then used the two rules for allocating the global emissions described by that path to allocate carbon emission entitlements to 67 countries and 9 world regions. In general, developing countries receive relatively higher entitlements under the equal emissions per capita approach whereas industrialized countries are relatively better off under the carbon intensity approach. In some countries and regions, emission entitlements as calculated by any of the two burden-sharing rules are so low that it would be unrealistic to assume that actual emissions can be limited to the emission entitlements assigned to them without using flexibility mechanisms such as those defined in the Kyoto Protocol. In this sense, the calculated entitlements can be also interpreted as the initial allocation of tradable emission allowances of countries or regions. Nonetheless, we considered any numerical determination of resulting carbon trade flows to be outside the scope of our paper.

Allocation of CO2 emission permits: Economic incentives for emission reductions in developing countries
Tobias A. Persson, Christian Azar and Kristian Lindgren
Energy Policy (2006) 34(14): 1889-1899.
The economic impacts on developing regions following a global cap and trade system for carbon dioxide are assessed through the use of an energy-economy systems model. Both an equal per capita allocation and a contraction and convergence allocation with convergence of the per capita emissions by 2050 are shown to offer economic incentive for Africa, India and probably also Latin America to accept binding emissions commitments under a 450 ppm carbon dioxide stabilization scenario. The gain for Latin America is mainly a result of increased export revenues from sales of bio-fuels as a result of the climate policy. It is, on the other hand, unlikely that these allocation approaches would offer an economic incentive for China to join the regime because of its high economic growth, present higher per capita emissions than India and Africa, and more costly mitigation options than Latin America. A more stringent allocation for developing countries such as contraction with convergence of the per capita emissions by the end of this century is estimated to generate reduced net gains or increased net losses for the developing regions (though Africa is still expected to gain).

Who should abate carbon emissions? A note
Kristen A. Sheeran
Environmental and Resource Economics (2006) 35(2): 89-98.
Economists commonly believe that failure to equalize the marginal cost of carbon abatement across countries implies a loss of global efficiency. Chichilnisky and Heal (1994) first challenged this consensus more than a decade ago, demonstrating that, in general, efficiency does not require equalizing marginal abatement costs. This note revisits that important debate. It provides the missing intuition behind Chichilnisky and Heal’s surprising result, explains what critical assumption gives rise to their result, and clarifies the role a social welfare function plays in their model. The implications of Chichilnisky and Heal’s result are increasingly important, given international debate over the preferential role given to developing countries in the Kyoto Protocol and the role those countries will play in future climate negotiations.

Side payments or exemptions: The implications for equitable and efficient climate control
Kristen A. Sheeran
Eastern Economic Journal (2006) 32(2): 515-532.
The predominant approach thus far to achieving equity in international climate control treaties has been to exempt developing countries from compulsory emissions reductions. Granting exemptions to developing countries, however, can compromise the efficiency of the treaty. Side payments in international treaties provide inducements for voluntary cooperation by countries for whom treaties would otherwise fail to yield welfare gains. This paper analyzes the conditions under which the side payments that are necessary to induce the participation of developing countries in an efficient climate control treaty can also satisfy prevailing notions of fairness in international climate control.

Who should abate carbon emissions?: An international viewpoint
Graciela Chichilnisky and Geoffrey Heal
Economics Letters (1994) 44(4): 443-449.
We review the optimal pattern of carbon emission abatements across countries in a simple multi-country world. We model explicitly (with the model in Chichilnisky, 1993b) the fact that the atmosphere is a public good. Within this framework we establish conditions for it to be necessary for optimality that the marginal cost of abatement be the same in all countries. These conditions are quite restrictive, and amount to either ignoring distributional issues between countries or operating within a framework within which lump-sum transfers can be made between countries. These results have implications for the use of tradable emission permits, which as normally advocated will lead to the equalization of marginal abatement costs across countries. The observation that the atmosphere is a public good implies that we may need to look at a Lindahl equilibrium rather than a Walrasian equilibrium in tradable permits