How Could an Effective Climate Financial Mechanism Work? A Cunning Plan!

Much Said, Nothing Done

Contrary to all advice that they must not, and contrary to the declared intentions of the globes's nations, world emissions continue to escalate.  The scientific advice is strong: if taken globally on average emissions must peak as soon as possible and decline rapidly thereafter.  

However, all the rich 'Annex 1' countries have agreed (see UNFCCC and 2009 Copenhagen Accord) to act in accord with equity meaning they have the responsibility and capacity to act sooner and faster to allow longer before peak and more emissions to support the development of poorer developing nations.  

Anderson and Bows have shown how equitable division scenarios of the remaining 2ºC budget among Annex 1 and Non-Annex 1 affect the peaking and subsequent decarbonisation pathways for each.  It is clear from this research that there is very little carbon budget left for rich countries meaning that they will have have to pay the poorer countries for some of their potential budget thereby funding poorer countries to move to low-carbon energy and avoid fossil fuelled emissions.  

Economic growth continues to be largely dependent on activities that lead more consumption and investment in activities leading to more carbon emissions.  How then can growth be decoupled from emissions and how can poorer countries continue development for the poorest?

Currently emissions are measured on a domestic output basis.  The richest countries particularly are effectively avoiding counting the emissions due to their net excess consumption of goods and services, as well as the aviation and shipping they are responsible for.  High carbon manufacturing has been exported from rich countries so that poorer countries have become responsible for the emissions and rich countries can buy the cheap goods having 'leaked' the emissions to the poorer ones.  For example, in net terms around 40% of China's emissions belong to industrialised countries through imports.  Aviation and shipping emissions are not even counted in the figures.  

In the UK, Dieter Helm has researched and exposed the huge level of accounting problems and difficulties showing that although domestic emissions have dropped by over 20% since 1990, consumption emissions have gone up.  The EU boasts that it will achieve a 20% cut in emissions relative to 1990 by 2020 yet consumption emissions are currently only 4% lower and are heading again in the wrong direction.

Consumption emissions, the net value of imports versus exported goods and service added to the domestically produced GHGs are more difficult to measure though.  The footprint of any good or service can be very difficult to measure and therefore valuations are open to question

Meanwhile talks in the UNFCCC appear to be endlessly bogged down in complexity. 

A Cunning Plan: Money = Emissions

What's needed is a cunning plan.  This post imagines a possible simple regime to illustrate how linking the responsibility-cost for emissions with the need for decarbonisation and development could be managed, especially with regard to equity of development. 

The key element of this imagined regime is to avoid complexity and keep it simple.  To start, this regime ignores the developed countries' past emissions, letting them off the hook, and instead focuses on emissions from now on.  Any regime needs to penalise the hidden damages of greenhouse gas pollution by charging the consumers of the goods and services that caused them, and then needs to transfer funds to decarbonisation and development (especially in poorer countries).

We know from global statistics and from personal experience that money enables us to consume goods and services and therefore to cause GHG emissions.  CO2 emissions and total economic output (annual GDP) are strongly related.  A country is free to spend its income on more emissions.  Personally the situation is similar, if we save hundreds of euro in fuel costs after we insulate our house we might well decide to spend the savings on a holiday flight, burning even more CO2 than had been saved.  Without charging for these emissions there can be no doubt that emissions will continue to escalate as national and average incomes increase.

Money enables the holder to buy the right to create emissions.  However, the damage caused by emissions is global no matter where the emissions are created.  Therefore the imagined simple regime might charge for emissions on the basis of GDP and distribute the collected monies according to population to balance equity in development.  

The cost of GHG pollution could be set at the social cost of carbon (the SCC), for which the Stern Review used an estimate of $30 per tCO2 although many authorities consider it to be much higher, in the range of $100/tCO2.  Global emissions in 2011 were 34 billion tons of CO2.  Therefore with an SCC of $30/tCO2 the cost of all emissions would have been $1,020 billion and at $100/tCO2 the cost of all emissions would have been $3,400 billion.

So how does this work in practice.  Every country pays a fee for carbon emissions based on its GDP as a proportion of world GDP multiplied by the cost of all global emissions.  Every country receives a dividend, to be spent only on decarbonisation or development, based on its population.  The net amount would be paid to or received from the fund.

So in summary:

Pollution Fee = (National GDP / World GDP) x (Total world tCO2 x SCC) 

Low-Carbon Dividend = (National population / World population) x (Total world tCO2 x SCC)

'Keeping it simple & stupid' like this might spare us all the time wasting and cheating.  It also addresses the problem in line with the science and respects equity in the carbon budget.  

Running the Numbers

The key outcome of this thought experiment is to illustrate the implications of action, and yes the fact that it would cost rich countries money (as it should).  Running the numbers gives some surprising results though regarding the level of fees and dividends, especially when given as a percentage of GDP.  All the data used comes from the World Bank excel sheets for GDP, population and global total carbon emissions.  The following is based on 2009, the most recent year with data.  The entire Excel spreadsheet I made is here with every country and region covered from 1964 to 2009.  

The total social cost of all emissions at $30/tCO2 would have been $961 billion [or $3,204billion for $100/tCO2].

Let's start with the USA with SCC set at $30/tCO2, [or $100/tCO2]:

Pollution Fee = $230 billion  [$768 billion] 

Low-Carbon Dividend = $43 billion  [$144 billion]

Net =  $187 billion [$624billion] paid to fund every year.  A cost of 1% of GDP [4%]

Now China:

Pollution fee = $83billion  [$277 billion] 

Low-Carbon Dividend = $188 billion  [$626 billion] 

Net  =  $105billion [$350 billion] received from fund.  A development dividend equal to 2% [7%]of GDP

Bangladesh

Pollution Fee = $1.5billion  [$5 billion] 

Low-Carbon Dividend = $21billion  [$70 billion] 

Net  =  $19billion [$65 billion] received from fund.  A development dividend equal to adding 22% [72%] of GDP

Congo Dem. Republic

Pollution fee = $186 million  [$619 million] 

Low-Carbon Dividend = $9.1billion  [$30.1 billion] 

Net  =  $8.9billion [$29.5 billion] received from fund.  A development dividend equal to 79% [264%] of GDP 

Ireland:

Pollution fee = $3.7billion  [$12.3 billion] 

Low-Carbon Dividend = $629 million  [$2.1 billion] 

Net  =  $3billion [$10.2 billion] paid to fund every year.  A cost of 1% [4%] of GDP

UK

Pollution fee = $36billion  [$120 billion] 

Low-Carbon Dividend = $8.7 billion  [$29 billion] 

Net  =  $27.4billion [$91 billion] paid to fund every year.  A cost of 1% [4%] of GDP

Overall, the annual transfer from high income countries (almost all from OECD nations) would be $526billion [$1,755billion] or less than 1% [4%] of GDP.  Poorer countries would receive the equivalent of 27% [90%] of GDP in annual development aid.  

There now, doesn't this plan spare us all these tedious UNFCCC meetings.  Do I hear yowls of protest? Nope, I can't hear anything.  Excellent.  Motion carried! 

Climate Damage: Pay Now Or Pay Much More Later

The above details a simplistic regime but nonetheless the simplicity illuminates two very serious points:

First, any regime is entirely is dependent on big assumptions in the social cost of carbon.  If the SCC is $30/tCO2 then the annual damage is one trillion dollars our of a total GDP of $70trillion, about 1.4% per year.  Or this rises to about 4.5% of GDP for $100/tCO2.  The PAGE09 integrated assessment model run by Chris Hope at Cambridge University currently (in 2015) estimates a current SCC of $100/tCO2 rising to $125/tCO2 if tipping points are included.

However, currently developed countries have only 'pledged' to 'mobilise' $100billion per year for developing countries, about a tenth of the $1 trillion per year (at $30/tCO2 SCC) cost of global emissions.  One could say that the developed countries have priced the SCC at $3/tCO2.  The difference between these values might be termed greed.  Meanwhile fossil fuels subsidies are estimated by the IMF to total $1.9 trillion.  

Of course, if global warming were thought likely to cause total economic collapse to say a world GDP of $10 trillion per year for a hundred years after 2100 (a total loss of $6,000 trillion  over the century, compared to current GDP) then for the sake of continuing civilisation, it might be worth spending pretty well all of global GDP ($6,000 trillion divided by 90 years is $66 trillion per year) to mitigate against that eventuality.  Can the economists please guarantee this is not a real risk?  It would be interesting to see their risk analyses.

Second, the huge difficulties involved in administering, and especially in spending, the monies effectively, ringfenced to spending on decarbonisation and low-carbon development, can well be imagined.  But how can a real global policy be effective at all without a serious scale of commitment from those countries who benefit most from the goods and services that cause emissions.

And the alternatives?  If, as all of the recent major reports acknowledge, it is necessary to leave 80% of all proven reserves of fossil fuels in the ground, the simplest solution would be to ensure that is what happens.  Does anyone want a military taskforce to control all mines and wells, and dole out the allowed per-capita ration of carbon-bearing fuel?  Might be the cheapest option?  Thought not.

The fact that the IEA and the World Bank, and governments of course, do not follow carbon budget logic through in their energy and GDP forecasts tells us all we need to know about how seriously policy analysts and governments treat the science.  It seems increasingly likely that future generations, including our children, will pay the costs that rich nations, companies and individuals today are so keen to avoid currently.

[Article edited 15 July 2015]