I N T E R N AT I O N A L E N E R G Y A G E N C Y

ENERGY DYNAMICS AND
CLIMATE STABILISATIONENERGY DYNAMICS AND
CLIMATE STABILISATIONI N T E R N AT I O N A L E N E R G Y A G E N C YFOREWORD
Climate change remains an important issue for all governments aroundthe world. Efforts to reduce its future impacts will have importantconsequences for the energy sector.
Actions undertaken thus far are only first steps. Both the shortcomings
and the achievements of current international agreements provide
useful insights into what shape future agreements might take. Twoquestions, in particular, require attention:
How to cope with the uncertainties that make it difficult to take firm
decisions for the long term, even though near-term action makes sense
only in a longer-term perspective; and■How to create a global solution to this global problem in a world inwhich countries are at widely differing levels of development.

■This book surveys the science and the energy policy choices of climatechange. It assesses current commitments and technical change. It
discusses burden-sharing and possible forms of future commitments,
drawing on work undertaken both with the IEA’s Standing Group on
Long-Term Co-operation and with the Annex I Expert Group to the
UNFCCC.
This book clearly identifies the relevant questions – and proposes
solutions. Without prejudging countries’ positions, it seeks to clarify
the options. We look forward to continuing to provide a soundanalytical foundation to the debate.
Robert Priddle,
Executive Director

3

ACKNOWLEDGEMENTS
This book was written by Cédric Philibert and Jonathan Pershing, respectively
Administrator at, and Head of the IEA’s Energy & Environment Division. It wasedited by Kathleen Gray. Comments and suggestions from Tom Jones and Jan
Corfee-Morlot at the OECD’s Environment Directorate, Jenny Gell, Martina
Bosi and Richard Baron at the IEA, Erik Haites (Margaree Consultants) andvarious delegates to the Standing Group on Long-Term Co-operation and to theAnnex I Expert Group to the UNFCCC are gratefully acknowledged. The
Governments of France (through the French agency for the environment andenergy management – Ademe) and Canada provided the financial resources
needed to undertake this work.

5

TABLE OF CONTENTS
Foreword ............................................................................ 3
Acknowledgements ............................................................. 5
Introduction....................................................................... 11
1. Climate change and decision-making .......................... 19■ Reality of climate change ..................................................... 19■ Stabilisation dynamics ......................................................... 23■ Decision-making under uncertainty..................................... 28■ Certainty versus stringency .................................................. 34

2. Choices in the energy sector. ....................................... 39■ The predominance of energy-related emissions .................... 39■ Energy savings come first..................................................... 45■ Fuel switching ..................................................................... 50■ Non-carbon emitting energy sources.................................... 54

3. Current commitments .................................................. 59■ The need for international co-operation .............................. 59■ The UN Framework Convention on Climate Change

and its Kyoto Protocol ......................................................... 62■ Likely effects of current commitments ................................. 69
4. Inducing change ......................................................... 79■ Learning-by-doing............................................................... 79■ Co-ordinated policies and measures..................................... 82■ Ancillary benefits and sustainable development ................... 89

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■ Promises and limits of financial assistanceand the Clean Development Mechanism ............................ 93
5. Future Commitments: timing, allocation and structure....... 99■ Timing .............................................................................. 100■ Allocation .......................................................................... 106

6. Options for future agreements................................... 117■ Uncertainties are the problem............................................ 117■ The price cap..................................................................... 120■ Zero price cap: the non-binding target option ................... 127■ The dynamic target option ................................................ 132

Conclusion ...................................................................... 143
Appendix: Certainty versus stringency ............................. 147
List of Abbreviations and Acronyms ................................ 155
References....................................................................... 157

8

LIST OF BOXES
11. Greenhouse gas concentrations have increased ........................ 22
12. How greenhouse gases compare .............................................. 26
13. IPCC emission scenarios ......................................................... 42
14. Hydrogen and electricity ......................................................... 52
15. The US withdrawal and the new US policy ............................ 70
16. Technical and behavourial changes.......................................... 80
17. The GEF and “backstop technologies”................................... 86
18. China reduces CO2 emissions ................................................. 92
19. An application of the triptych approach: the European Union
and Kyoto ............................................................................. 110
10. Meanings of equity and acceptability .................................... 115
11. Illustrating the effects of uncertainties................................... 118
12. Sectoral targets for developing countries................................ 136
13. A formalisation of Weitzman’s result ..................................... 149

LIST OF TABLES
11. What different levels of CO2 stabilisation may require ........... 25
12. Global warming potentials ...................................................... 25
13. Energy-related CO2 emission pathways to stabilisingat 450 ppm ............................................................................. 45
14. Estimates of potential global greenhouse gas emission
reductions in 2010 and in 2020.............................................. 47
15. The EU burden-sharing agreement ......................................... 65
16. Countries ranked on per capita energy-related
CO2 emissions ...................................................................... 103
17. GNP per capita 2000, purchasing power parity .................... 104

9

LIST OF FIGURES
11. Indicative relationship between GDP reduction
and stabilisation level ...............................................................28
12. Average life-spans for selected energy-related capital stock........32
13. Certainty versus stringency.......................................................35
14. World energy-related carbon dioxide emissions ........................41
15. Comparison of reference and stabilisation scenarios .................42
16. Fossil fuel supply and implication for atmosphericconcentrations of greenhouse gases...........................................43
17. The Kyoto mechanisms............................................................67
18. Electric technologies in EU 1980-1995....................................81
19. Possible effect of baseline stringency and complexity
on project numbers and environmental additionality ...............96
10. Possible effects on an equal per capita allocation ....................108
11. Contraction and convergence.................................................108
12. Relationship between triptych targets and EU burden-sharing...111
13. Effects of uncertainty on economic growth ............................118
14. Price and quantity instruments are equivalent whencosts are known ......................................................................148
15. A hybrid instrument helps approximate the marginal benefit
curve ......................................................................................151
16. Climate change cost curves.....................................................152
17. A price instrument would be better in the caseof climate change ...................................................................153
18. The price cap .........................................................................154

10

INTRODUCTION
Climate change is one of the most difficult challenges facing the world today.
Preventing – or even significantly limiting – climate change will necessitate
profound changes in the way we produce, distribute and consume energy.
Burning fossil fuels such as coal, oil and gas provides about three-quartersof the world’s energy. However, when these same fuels are burned, theyemit gases (the so-called “greenhouse gases”) that are now recognised as
being responsible for climate change. These fuels are ubiquitous. Fossil
energy has fuelled industrial development, and continues to fuel the
global economy. We each use energy in many forms every day: heating,cooking, lighting, TV, commuting, working, shopping.... Almost every
activity requires energy. Beyond daily individual use, modern societies use
even more energy for agriculture, industrial processes and freighttransport. The primary greenhouse gas emitted through fuel combustionis carbon dioxide (CO2). Land-use and land-use changes, notably
deforestation, also involve emissions of carbon dioxide. Other greenhousegases are also emitted during energy use, the most significant of which aremethane (CH4) and nitrous oxide (N2O).
Improved global understanding of the potential consequences of climatechange has led the international community to begin to address the
problem. Following a series of scientific meetings during the 1980s whereclimate change was identified as a potential risk, in 1988 the World
Meteorological Organisation and the United Nations Environment
Programme established the Intergovernmental Panel on Climate Change(IPCC) to assess the state of understanding of the issue. In 1990, theUnited Nations General Assembly agreed to establish an
Intergovernmental Negotiating Committee to develop an internationalframework for addressing climate change. The Committee completed its
work in 1992, and in Rio de Janeiro, at the 1992 Earth Summit, theUnited Nations Framework Convention on Climate Change (UNFCCC)
was adopted by more than one hundred governments.
The Convention’s ultimate objective is to stabilise greenhouse gas
concentrations in the atmosphere. However, it provides only limited
11

guidance as to how to accomplish this goal – and by 1997, the nations of
the world had decided on a next step. In December 1997, at Kyoto in
Japan, a Protocol to the UNFCCC was adopted that committed
industrialised countries to individually and collectively limit theiremissions, with specific national targets adopted for six of the key
greenhouse gases. Further details on how to interpret the Protocol havebeen ironed out since Kyoto, facilitating its entry into force.
However, even with ratification of the Kyoto Protocol, commitments so
far agreed only constitute a first step on a long road ahead. Achieving
stabilisation of greenhouse gas atmospheric concentrations will ultimately
require much deeper cuts in global emissions than those agreed in Kyoto.
And cuts cannot be limited to emissions of industrial countries; to solve
the problem, cuts must be made by all countries in the world. The
difficulty in meeting this global obligation is underscored by the recent
announcement by the United States regarding its intention not toparticipate in the Kyoto agreement.
The climate change problem is unique in at least three important ways: it
is global in nature, it has an unusually long-term character, and bothclimate change itself and the effects of policies to mitigate it remain
inadequately understood.
The global nature of the climate problem is well known. Emissions ofgreenhouse gases mix rapidly in the atmosphere – within weeks, they are
spread around the globe. Furthermore, all countries release emissions;even the single largest (the United States) accounts for less than a quarterof the global total. Thus, no single country can address climate change
alone. Even all the industrial countries, acting together, would only beable to forestall climate change – they could not stop it unless thedeveloping nations also become engaged. It is thus clear that international
co-operation is required. The need for such co-operation is heightenedwhen issues of capacity to act are considered: industrial countries currently
possess more advanced technical capacity and the financial resources
needed to combat the problem. While developing nations have relatively
low per capita emissions, few have the technical or institutional ability towork toward climate mitigation without international assistance.
12

Climate change is also a long-term issue. Greenhouse gases released into theatmosphere today will linger for decades (in the case of short-lived gases likemethane) to hundreds of years (for carbon dioxide), to thousands of years(for long-lived gases like perfluorocarbons). Furthermore, the changes
induced by these emissions are slow to manifest: the IPCC speaks of impacts
such as global average temperature increases and sea level rise that will be
progressive, taking decades or even centuries to show their full effects. Finally,
mitigating climate change will require sustained efforts – that need to begin
immediately but which will only produce results after a long time lag. The
technical challenge for economic analysis is great. The usual analytic tools
suggest that long-term damage has only a limited present value. However, thelong-term nature of climate change presents an even more serious problem
for the policy community: for most elected officials, political horizons aremeasured in years rather than in decades or centuries.
Knowledge gaps are also important: the exact rate and extent of climatechange remain unknown, as does its likely regional or local consequences.
Our still limited understanding of how the climate system operates,
combined with the long-term nature of climate change, make it difficult
for the scientific community to offer policy-makers strong
recommendations on how aggressive their action needs to be to mitigate
the problem. In this area, for example, the IPCC has consistently been
unable (and unwilling) to make a recommendation concerning theappropriate level and timeframe for stabilising atmospheric greenhousegas concentrations. Clearly, these questions require not only a scientificresponse, but also one based on society’s values, including its attitudes torisk; ultimately, they remain political decisions.
The Convention on Climate Change essentially represents the worldcommunity’s first effort to synthesise a response to the climate change
problem. Its ultimate objective is relatively clear in intent – although notadequate for operational detail:“The ultimate objective of this Convention and any related legal instrumentsthat the Conference of the Parties may adopt is to achieve, in accordance withthe relevant provisions of the Convention, stabilization of greenhouse gas
concentrations in the atmosphere at a level that would prevent dangerous
13anthropogenic interference with the climate system. Such a level should beachieved within a time-frame sufficient to allow ecosystems to adapt naturally
to climate change, to ensure that food production is not threatened and toenable economic development to proceed in a sustainable manner.”Thus, for example, the Convention did not specify the level or thetimeframe. The Convention did, however, set a political direction for thenear term. It committed industrialised country Parties to seek to return
emissions to 1990 levels by 2000. The Kyoto Protocol committed
countries to additional steps; under its binding provisions, industrial
countries undertook, in most cases, to reduce emissions below 1990 levels
by 2012. However, neither agreement provided an indication of how thesenear-term actions would fit into the longer-term goal – or even explicitly
defined what that longer-term objective should be.
How might such decisions be taken – and what are the critical inputs into
making them? To arrive at a fully “informed” decision, two completely
different elements are required: information on the consequences ofclimate change at various concentration levels, and an assessment of thecosts and benefits of mitigation and adaptation and residual damage ateach level. This is not to say that such decisions could only be taken in thelight of a full cost benefit analysis: such an analysis seems quite difficult,if not impossible, to perform. However, it is clear that costs cannot be
excluded from the decision on how “dangerous” a greenhouse gas
concentration level might be. Otherwise, the decision would be quite
simple: since any rise in concentration increases the dangers of climatechange, the only logical choice would be to stabilise concentrations atcurrent levels – or even return to pre-industrial levels!
Unfortunately, such a decision appears impossible (at least in the shortterm): it implies immediately halving global emissions and thus radicallyaltering (and probably cutting) energy use. No matter how this burden isshared amongst countries, it is not an option that can be contemplated at
any feasible price. Clearly, the UNFCCC negotiators recognised this. Theirtext indicates that mitigation must be rapid enough to avoid climate changerisks, but also slow enough to avoid the economic disruption that could
arise from energy shortages or the huge costs incurred in moving too rapidly
from a fossil-fuel based energy system to a carbon-free energy system.
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To assess the scope of the cost problem, we must look at some of thetechnology paths and potentials. For example, we would like to knowwhat emission reductions would cost today, or in ten or even fifty years.
Today’s technological choices give us some insights. Nuclear power andrenewable energy sources (such as hydro, wind and solar) could provide
sufficient energy to the global economy with little or no carbon dioxide
emissions. Fossil fuel power generation, if coupled with technologies that
capture and sequester carbon from the waste stream, could also serve.
However, while these technologies exist today, they are not competitive inmost commercial markets when compared to traditional fossil fuelalternatives. Future costs are uncertain and depend in part on efforts toinvent and deploy new technologies. Technical change arises in part fromfocused R&D efforts and, perhaps even more, from entrepreneurs’ efforts
to penetrate competitive markets.
Unfortunately, it may be impossible to put off acting until all theinformation is in. Like the climate system, the energy sector and energy
consuming trends are characterised by significant inertia. This inertia
suggests that in the short-term, any major mitigation action might be rather
costly. On the other hand, the nature of the system’s inertia also suggeststhat early action is necessary to avoid becoming locked-in to carbon
intensive technologies or consumption patterns, and to foster technicalchange and R&D efforts to provide more no-carbon or low-carbon energy
sources at some point in the future. It is also clear that as time passes, if too
little or no action is taken, the range of long-term possibilities will narrowand climate change risks will increase in an irreversible manner. Balancing
the risks of climate change in the future against costs today is difficult. It is
for these reasons that so little progress has yet been made on a firm
recommendation on a specific concentration level.
Are there ways out of this dilemma?
One alternative might be to aim at the lowest possible GHG
concentration levels, at the same time placing a cap on the price society
would have to pay to meet this level. This price could be reviewed overtime as willingness to pay evolves.
15

An advantage of this approach is its compatibility with the least-cost
solutions advocated by economic theory, in particular, with the “cap-andtrade” regimes that allow emissions reductions to be made in locations
where the lowest cost potential is available. These mechanisms have been
elaborated in the Kyoto Protocol, and there is widespread support for theircontinued use in any future regime. Such support is likely to be critical asefforts are made to broaden the emission mitigation framework beyond theindustrialised world, and to achieve success in mitigating climate change.
A fundamentally different approach to determining the appropriate levelof mitigation effort is to focus on the areas where policy action could
simultaneously fulfil non-climate domestic policy objectives while
reducing greenhouse gas emissions. Removing energy subsidies, cleaning
the air, or improving mass transit systems usually belong to this category.
Developing policy initiatives – without specific climate targets – could be
the focus of such an effort. This policy approach could be attractive fordeveloped countries as well as for developing countries, which, thoughvulnerable to climate change, have more urgent priorities such as poverty
eradication, education challenges, sanitation, health, indoor and local air
quality, and access to energy services.
Policies to address these concerns could have so-called “ancillary benefits”– that is, domestic policies aimed at achieving sustainable development
might offer some global climate benefits. However, while this approach
may be politically acceptable, it does not seem likely to promote the kindof radical shift in the energy economy that is needed to decarbonise thesystem – and thus, in isolation, may not fully meet the goal of combatingclimate change.
Some middle ground could be found between these alternatives. For
example, while developing countries have shown great reluctance to taking
on binding emissions limitation commitments, they have shown aconsiderable and growing interest in participating in the Clean
Development Mechanism – a project-based approach to the concept ofemissions trading, and the only Kyoto Protocol mechanism intended toextend mitigation efforts beyond developed countries. The Clean
Development Mechanism also offers a means to promote technology
16

transfer and investments between industrialised and developing countries.
Alternatives that can build on this promising political interest may provide
a possible path to a global agreement, where all countries take on someform of commitment to reduce emissions, and ultimately, participate in a
global regime. Such a regime would also necessitate all developed countries
accepting sufficiently stringent commitments, which could be facilitated if
concerns about uncertain costs were dealt with, as suggested in this book.
Yet another alternative exists: one based on technological improvement
and widespread penetration of alternative energy options. In itself, theidea of technological change is consistent with the approaches describedabove. They seek to promote change through pricing carbon; as the priceincreases, market mechanisms provide incentives for carbon producers to
reduce emissions. Technological change as well as behavioural changes canresult. However, a more direct approach may also be considered to induce
more rapid technological change. Direct incentives such as R&D
subsidies, as well as market guarantees for new technologies or publicprivate technology partnerships may generate emissions savings directly.
While economic theory suggests that such an approach would be lesscomprehensive and efficient than those involving pricing or cap-and-trade
instruments, it may be more politically palatable – and thus, in somecases, more likely to succeed.
Ultimately, it seems likely that all of these approaches will be needed.
Operating in the uncertain world of future emissions and future costs,
governments and private sector decision-makers need to explore all
options. As the IPCC has put it:“Climate change decision-making is a sequential decision-making process
under general uncertainty. (....) The literature suggests a step-by-step resolution
aimed at stabilising greenhouse gas concentrations. This will also involvebalancing the risks of either excessive or insufficient action. The relevant
question is not ‘what is the best course for the next 100 years’ but rather ‘whatis the best course for the near term given the expected long-term climate change
and accompanying uncertainties’”.
A successful international mitigation framework for the longer term(including for the period following the first commitment period outlined17

in the Kyoto Protocol) could benefit from closer adherence to thisperspective. It is not too early to start considering the alternatives. The
review and analysis contained in this book aim to promote this debate.

18

1
CLIMATE CHANGE
AND DECISION-MAKINGREALITY OF CLIMATE CHANGE
Climate change is not science fiction. It’s real, it’s happening now and it
will be with us throughout this century.
For almost 15 years, the Intergovernmental Panel on Climate Change(IPCC), which brings together hundreds of leading scientists from aroundthe world, has regularly assessed our understanding of climate change. In
its Third Assessment Report (IPCC, 2001), which was endorsed by themost important academies of science around the world, the IPCC
confirmed both the reality and the threatening nature of climate change.
Human activities have been and are changing the composition of theearth’s atmosphere, thus modifying the energy balance between the sun,the earth and outer space. Increasing the so-called “greenhouse effect”
warms the earth – and changes the climate. Gases that are very minor
constituents of the atmosphere play an important role in shaping theclimate. They allow sunlight to enter the atmosphere and heat both theearth’s surface and the atmosphere, but they do not allow the heat emitted
in response by the earth – as infrared radiation – to escape from theatmosphere. This is the so-called greenhouse effect. Due to this effect, theaverage temperature on the earth’s surface is about 15°C; without thiseffect it would be –18°C. However, human activities are increasing theconcentration of such gases in the atmosphere. Carbon dioxide (CO2),
the most important long-lived gas, has increased 31 per cent since 1750.
The atmospheric concentrations of other gases have also increased (seeBox 1). This will warm the earth’s surface and trigger climate changes.
During this century, the global average surface temperature is projected toincrease by between 1.4 and 5.8°C. The projected rate of warming ismuch higher than that of the 20th Century and is without precedentthroughout at least the last 10,000 years. In order to appreciate themagnitude of this temperature increase, it should be compared to the19global mean temperature difference of perhaps 5 to 6°C from the middleof the last Ice Age to the present interglacial era.
Consequences will be detrimental to ecosystems
and human societies
There is likely to be a rise in the global sea level (projected to reach
between 9 and 88 cm by the year 2100, which would cause flooding in
low-lying areas and other damage); shifting of climatic zones towards thepoles by between 150-550 km (putting climatic stress on forests, deserts,
wetlands and other unmanaged ecosystems); and posing threats to foodsecurity and health.
Natural systems can be especially vulnerable to climate change because of
their limited capacity to adapt. While some species may increase inabundance or range, climate change can bring about both the extinctionof some of the more vulnerable species and the loss of biodiversity. The
geographical extent of the damage or loss, and the number of ecosystems
affected – such as coral reefs and atolls, mangroves, boreal and tropicalforests, polar and alpine ecosystems, prairie wetlands and native grasslands– will increase with the magnitude and rate of climate change. Increasing
fire, drought, pest infestation, invasion of species, storms and coralbleaching could all disrupt ecosystems.
Agriculture and forestry, water resources, fisheries and human health arejust a few of the human systems that are sensitive to climate change. Someregions and sectors could initially benefit from minor changes to theclimate (fewer cold spells and therefore less heating required in winter, forexample), but these benefits are expected to diminish as climate changes
intensify. In contrast, many identified adverse effects are expected toincrease both in extent and severity with the degree of climate change.
Regional adverse effects are projected to predominate throughout theworld, particularly in the tropics and subtropics. Climate change will
increase threats to human health, particularly in lower-income
populations. Projected changes in climate extremes could have severe
consequences, and their impacts are expected to fall disproportionately on
the poor. Many human settlements will face an increased risk of coastal
flooding and erosion, and tens of millions of people living in deltas, in20

low-lying coastal areas, and on small islands will be in danger ofdisplacement. Resources critical to island and coastal populations such as
beaches, freshwater, fisheries, coral reefs and atolls, and wildlife habitat
would also be vulnerable.
Overall, the impacts of climate change will fall disproportionately upondeveloping countries and poor people in all countries, thereby
exacerbating inequities in health and access to adequate food, clean water,and other resources. In addition, poverty and other factors make it
difficult for most developing countries to adapt to climate change.
Potentially, the capacity to adapt can reduce the adverse effects of climatechange and can often produce immediate ancillary benefits, but it will notprevent all damage.
Projected climate change during this century has the potential to lead tofuture large-scale and possibly irreversible changes. Examples include theslowing down of the ocean circulation, large reductions in the Greenlandand West Antarctic ice sheets, accelerated global warming due to carbon
cycle feedbacks in the terrestrial biosphere, and the release of terrestrial
carbon from permafrost regions and methane from hydrates in coastal
sediments. The likelihood of such changes is difficult to predict but
probably very low; however, it increases with the rate, magnitude andduration of climate change.
Global mean surface temperature increases and rising sea levels fromocean thermal expansion are projected to continue for hundreds of years
after the stabilisation of greenhouse gas concentrations, even at present
levels, albeit at a slower pace. Ice sheets will continue to react to climate
warming and contribute to rising sea levels for thousands of years after
climate has been stabilised. Climate models indicate that local warming
over Greenland is likely to be one to three times the global average. Someice sheet models indicate that local warming of more than 3°C, if
sustained for millennia, would lead to virtually a complete melting of theGreenland ice sheet with a resulting sea level rise of about seven metres.
However, the extent of global warming and its specific local impacts remain
uncertain. We do not know exactly what changes will occur in precipitation
patterns, what kinds of extreme weather events might follow, or, more
21

0Box 10

Greenhouse gas concentrations have increased

The most abundant long-lived greenhouse gas, carbon dioxide,
represents only 370 parts per million (ppm), or 0.037 per cent of theearth’s atmosphere. The atmospheric concentration of carbon dioxide(CO2) has increased by 31 per cent since 1750. The present CO2
concentration is higher than it has ever been throughout the past
420,000 years, if not the past 20 million years. The current rate ofincrease is unprecedented – at least for the past 20,000 years. During
the past twenty years, about three-quarters of the anthropogenic (manmade) emissions of CO2 in the atmosphere resulted from the burningof fossil fuels (for energy purposes). The rest is predominantly due tochanges in land-use, especially deforestation. Currently, the ocean andthe land together are absorbing about half of the anthropogenic CO2
emissions.
The increase in methane (CH4) concentration since 1750 isapproximately 150 per cent, and that of nitrous oxide (N2O) 17 percent. Slightly more than half of current CH4 emissions are humaninduced (e.g., use of fossil fuels, cattle, rice growing and landfills), whilecarbon monoxide (CO) emissions, mainly from fossil fuels, haverecently been identified as contributing to increasing concentrations ofCH4. Concentrations of man-made gases that deplete the stratosphericozone layer (CFCs) have been roughly stabilised, but although theirsubstitutes and a few other synthetic gases (perfluorocarbons andsulphur hexafluoride – PFCs and SF6) do not deplete the ozone layer,
they are nevertheless greenhouse gases and their concentrations are
increasing.
Water vapour, while not emitted in any significant quantity throughhuman activity, is the most abundant greenhouse gas. It is short-lived
in the atmosphere, and its concentration mainly depends on
temperature. Water vapour provides a strong positive feedback to thegreenhouse effect, approximately doubling warming from what it
would be from fixed water vapour content. Water vapour also amplifies
other feedbacks, such as that of clouds, which could be positive or
negative.
22

generally, what the regional consequences of climate change will be. To
provide an example of our uncertainty, we only have to consider the rangeof warming predicted with a doubling of greenhouse gas concentrations(from 275 parts per million in the pre-industrial era, to 550 parts per
million). The range is estimated by the IPCC to be from 1.5 to 4.5°C.
It is in face of this uncertain level – but certain damage – that we need toconsider mitigation options. To do so, some additional information on the
dynamics of the earth’s system is necessary.
STABILISATION DYNAMICS
The United Nations Framework Convention on Climate Change(UNFCCC) – which is discussed in more detail in Chapter 3 – has as its
main objective “stabilisation of greenhouse gas concentrations in theatmosphere at a level that would prevent dangerous anthropogenic
interference with the climate system”. Such a level “should be achieved
within a time-frame sufficient to allow ecosystems to adapt naturally to
climate change, to ensure that food production is not threatened and toenable economic development to proceed in a sustainable manner.”
An important point arising from the relatively long “lifetime”1 of CO2 in
the atmosphere is that the stabilisation of CO2 emissions at near-current
levels would not lead to the stabilisation of CO2 atmosphericconcentrations. However, the stabilisation of emissions of shorter-lived
greenhouse gases that have atmospheric sinks, such as CH4 or N2O,
would lead, within decades, to the stabilisation of their concentrations. In
contrast to methane and nitrous oxide, stabilising carbon dioxide
concentration – at any level – requires the eventual reduction of net global
CO2 emissions to a fraction of their current levels.
How small that fraction should be remains uncertain. A balance between
emissions and system uptake of CO2 might be reached when emissions are
reduced to approximately half of current levels. However, as the long-term
1

The lifetime of a gas, or its residence time in the atmosphere, is determined by its chemical composition andits reaction with other elements of the climate system. For carbon dioxide, there is no single agreed lifetime;
many simplified models use a lifetime of approximately 100 years. For methane, the lifetime is approximately
12 years, while for some very long-lived gases such as perfluoromethane, the lifetime is more than 50,000 years.

23release of CO2 from the ocean into the atmosphere continues, to achieve
the stabilisation of atmospheric concentrations would require even greater
reductions. Thus, over the span of the next few centuries, emissions willneed to decline to the level of persistent natural land and ocean sinks. This
amount2 is expected to be less than 0.2 GtC/y – a small fraction of current
estimate levels of circa 8 GtC/y.
A key determinant in the final level of concentrations is the timing of
reductions: the lower the chosen level for stabilisation, the sooner the
reduction in global net CO2 emissions needs to begin. More specifically,stabilising CO2 atmospheric concentrations at levels of 450 ppm would
require global anthropogenic CO2 emissions to drop below 1990 levels
within a few decades. To limit concentrations to 550 ppm would require
global emissions to peak by 2030, and drop to below 1990 levels before
2100, and to limit concentrations below 1000 ppm would require
reductions below 1990 levels within about two centuries. In each case, once
1990 levels had been reached, emissions would need to decrease steadily
thereafter to ensure that concentrations had indeed been stabilised.
Table 1 shows projected total emissions for this century, approximate years
in which global emissions would peak, and approximate years in which
global emissions would fall below 1990 levels in order to achieve thestabilisation of atmospheric CO2 concentrations at different levels from450 ppm to 1000 ppm. These figures show some uncertainty reflecting
the limited knowledge and understanding of the actual carbon cycle
involving the atmospheric reservoir and uptakes and releases by land andocean sinks. This uncertainty is magnified when climate feedback is
integrated, which is likely to reduce natural uptakes. However, the main
reason for the range of possible accumulated CO2 emissions for eachstabilisation level is the natural decay of carbon dioxide in the atmosphere.
Clearly, different emission pathways could lead to the stabilisation of
atmospheric concentrations at identical levels. Rapid early reductions
followed by steady, low-level emissions could have the same result as224

CO2 emissions are often expressed by the weight of their carbon content as this allows tracking the carbon
quantities in various forms within the carbon cycle. 1 GtC = 1 gigatonne of carbon = 1 billion tonnes ofcarbon = 1 PgC = 1 petagramme of carbon. There is 1 g of carbon in 44/12 g of carbon dioxide. Conversely,
there is 12/44 g C in 1 g CO2. Hence, current CO2 emissions are circa 30 Gt per year.

0Table 10

What Different Levels of CO2 Stabilisation May Require
WRE CO2
Stabilisation
profiles(ppm)

Accumulated
CO2 emissions
2001 to 2100
(GtC)

Year in which
global emissions
peak

Year in which
global emissions
fall below 1990
level

450

365 – 735

2005 – 2015<2000 – 2040

550

590 – 1135

2020 – 2030

2030 – 2100

650

735 – 1370

2030 – 2045

2055 – 2145

750

820 – 1500

2040 – 2060

2080 – 2180

1000

905 – 1620

2065 – 2090

2135 – 2270

Source: IPCC TAR Synthesis Report, Table 6.1.

limited reductions in the near-term, followed by rapid and greater
reductions in the future. However, it is likely that different emission
pathways would also impose different climate consequences. Different
emission time paths yield different time paths of temperature change.
Differences in climate change impacts might be larger if some – unknown– thresholds in the climate system or at ecosystem levels were exceeded.
However, climate change is driven by atmospheric GHG concentrations –not annual emissions.
0Table 20

Global Warming Potentials
Gas

Lifetime (y)GWP 20 y

GWP 100 y

GWP 500 y

1

1

1

Carbon dioxide

CO2Methane

CH4

12

62

23

7

Nitrous oxide

N2O

114

275

296

156

Hydrofluorocarbons

0.3 – 260

40 – 9400

12 – 12000

4 – 10000

Fully fluorinatedspecies

2600 – 50000

5900 – 15100

5700 – 22200

8900 – 32400

Ethers

0.015 – 150

1 – 12900

1 – 14900<<1 - 9200

Source: IPCC TAR Synthesis Report, Table 6.1.

25

0Box 20

How greenhouse gases compare: radiative forcing
and global warming potential

In order to measure the influence a factor has in altering the balance ofincoming and outgoing energy in the earth’s atmosphere, scientists use
the radiative forcing concept. It is expressed in Watts per square metre(Wm-2). Radiative forcing due to an increase of the well-mixed
greenhouse gases (GHG) from 1750 to 2000 is estimated to be 2.43
Wm-2: 1.46 Wm-2 from CO2; 0.48 Wm-2 from CH4; 0.34 Wm-2 fromhalocarbons; and 0.15 Wm-2 from N2O.
The depletion of the stratospheric ozone layer is estimated to havecaused a negative radiative forcing (-0.15 Wm-2) – in other words, acooling – but the total amount of ozone (O3) in the atmosphere isestimated to have increased by 36 per cent since 1750, corresponding
to a positive radiative forcing of 0.35 Wm-2. This is due primarily toanthropogenic emissions of several O3-forming gases such as nitrogenoxides (NOx), carbon monoxide (CO) and hydrocarbons (HC), whichprimarily arise from burning fossil fuels for energy purposes.
Fossil fuels and biomass burning are also the main sources ofanthropogenic aerosols that tend to cool the planet. Direct radiative
forcing are estimated to be -0.4 Wm-2 for sulphate, -0.2 Wm-2 forbiomass burning aerosols, -0.1 Wm-2 for fossil fuel organic carbon and+0.2 Wm-2 for fossil fuel black carbon aerosols. In addition, aerosols
have an indirect radiative forcing through their effects on clouds, themagnitude of which is uncertain.
Two natural factors, solar variation and volcanic aerosols, also influence
climate. Radiative forcing due to changes in solar irradiance since 1750
is estimated to be about +0.3Wm-2. Stratospheric aerosols from volcanic
eruptions lead to negative forcing, which lasts a few years.
Global warming potentials (GWPs, see Table 2) measure the relative
global warming contribution due to atmospheric emission of a kg of aparticular greenhouse gas compared to emission of a kg of carbon
dioxide, integrated over a chosen time period. They take into accountnot only the radiative properties of the gases, but also the removal of the26

27

substance from the atmosphere. GWPs are approximations. Radiative
forcing of one greenhouse gas depends not only on its own
concentration but also on other GHG concentrations, as their opticalproperties may overlap.
Finally, for the most important GHGs, the absorption of infrared
radiation does not vary linearly with their abundance, but more slowly.
Each kg adds a little less to the forcing than the previous one. For
example, the doubling of pre-industrial CO2 concentration would add
4 Wm-2 to the radiative forcing, and every further doubling of CO2
concentration would add an additional 4 Wm-2. GWPs would thus
evolve over time.

One of the relatively well-understood elements of the climate system is thedifferent effect different gases have on climate change. Thus, for example,
while carbon dioxide is the most prevalent gas emitted through humanactivities, it is the least potent in terms of its warming potential. The
GWP concept (albeit an imperfect political compromise) allows flexibility
in tackling global warming by allowing reductions in all man-madegreenhouse gases rather than just CO2 – therefore reducing the costs ofnear-term quantitative targets (see, for example, Burniaux, 2000).
Unfortunately, comparing the effects of different gases through an index(called the Global Warming Potential or GWP) may not be accurate
under all circumstances, and its validity is reduced as far as long-term
stabilisation is concerned.
Global mean surface temperature increases and rising sea levels fromocean thermal expansion are projected to continue for hundreds of years
after the stabilisation of greenhouse gas concentrations, even at present
levels, albeit at a slower pace. Ice sheets will continue to react to climate
warming and contribute to rising sea levels for thousands of years after
climate has been stabilised. Climate models indicate that local warming
over Greenland is likely to be one to three times the global average. Someice sheet models indicate that local warming of larger than 3°C, if
sustained for millennia, would lead to virtually a complete melting of theGreenland ice sheet with a resulting sea level rise of about seven metres.
27

DECISION-MAKING UNDER UNCERTAINTYGiven the uncertainties surrounding both the earth’s climate sensitivity (itsreaction to a change in GHG concentrations)3 and the availability and costs ofpresent and future emission reductions, it is critical to identify a robust
framework for decision-making. Such a framework should both facilitate
decision-making for near-term decisions, and draw the necessary links between
these near-term decisions and the long-term objective of the Convention.
Studies show that the costs of stabilising CO2 concentrations in theatmosphere increase as the concentration stabilisation level declines.
Different baselines can have a strong influence on absolute costs, as shownin Figure 1 (see also Box 3 in Chapter 2). While there is a moderateincrease in costs when the target is decreased from a 750 to a 550 ppm
concentration stabilisation level, there is a bigger increase in costs when it
is decreased from 550 to 450 ppm – unless the emissions in the baseline
scenario are very low, as shown in Figure 1. On the other hand, the IPCC
0Figure 10

Indicative relationship in the year 2050 between GDP reduction
and stabilisation level.
Global average GDP reduction in the year 2050
Percentage reduction relative to baseline
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0

Scenarios:
A1B
A1T
A1FI
A2
B1
B2
450

550

650

750

Eventual CO2 stabilisation level (ppm)
Source: IPCC, 2001. See Box 3 and Figure 5 for more information on the IPCC Special Report on
Emission Scenarios (SRES)

328

Note the IPCC uses the term in a more precise way to define the long-term temperature change resulting
from doubling pre-industrial CO2 concentration.

provides evidence that detrimental climate impacts might increase more
rapidly than GHG concentration levels. Impacts and risks associated witha 550-ppm stabilisation level might be significantly greater and more
expensive than those associated with a 450-ppm stabilisation level.
Climate mitigation policies also have many unknown costs – andpotential benefits. Uncertainties regarding benefits stem fromuncertainties as to the earth’s climate sensitivity, regional effects, valuation
methods for future and/or non-market damage (for a discussion of these
aspects, see e.g., Philibert, 1999; Neumayer, 1999 & 2001). Uncertainties
relating to costs stem firstly, as is suggested in Figure 1, from uncertain
business-as-usual emission trends that depend on uncertain economic
growth and on possible changes in value and behaviour. They also result
from uncertainties concerning not only the direct and indirect effects ofpolicy instruments, but also the unpredictability of future relative pricesof different energies, as well as the development and dissemination of lowor no-carbon energy technology. The wide range of cost estimates forachieving the modest targets of the Kyoto Protocol (see, e.g., Weyant &Hill, 1999) are a good illustration of the uncertainty about costs. This
could be exacerbated in the future by rigorous commitments or alleviatedby the experience gained from earlier emission reductions. It is not easy todetermine which of these countervailing effects will dominate.
It is in this context that the IPCC observation that “climate change decision
making is essentially a sequential process under general uncertainty” (IPCC,
2001) is particularly apt. Near-term decisions have to be taken while“desirable” levels of stabilisation remain indeterminate – and mightremain so for decades. Decision-making processes have to deal withuncertainties including the risk of non-linear and/or irreversible changes;
they must balance the risk between insufficient or excessive action. To doso, decision-makers must carefully consider the consequences (bothenvironmental and economic), the likelihood of such consequences, andsociety’s attitude towards risk. Such a sequential decision-making process
is already enshrined in the UNFCCC, which requires regular reviews andassessments – followed by additional action, as needed, by the Conferenceof the Parties. In this context too, the Convention and its Protocol
generally define the long-term goal (atmospheric concentration
29

stabilisation), but only interim shorter-term targets (e.g., in theConvention, for a ten-year period, and in the Protocol for 15 years).
These uncertainties apply equally to emission pathways. Economic
discounting (i.e., giving a low present value to long-term climate damage)and “autonomous” technical change tend to favour pathways with lateemission reductions: it is worth waiting to make reductions because
technical progress will make such reductions cheaper in the future. Delayalso helps avoid premature lock-in to early versions of rapidly developing
low-emission technologies. It allows a more natural – and cheaper – pathin the retirement of capital stock, which is replaced at the end of its usable
life instead of early, avoiding the high costs of stranded assets. However,the lack of clear signals for change in the short run might induce moreinertia. Such inertia could subsequently prove very costly to reverse, aphenomenon known as the “lock-in” effect.
Conversely, an emphasis on “induced” technical change favours earlier
reductions: early efforts will drive technical change (or push technicalchange in the direction of energy savings and lower-carbon energy
techniques) and thus make further efforts cheaper. More rapid near-term
action would also increase the range of choice possible in the ultimate
stabilisation levels – the earlier the reduction, the more likely a lower final
level could be achieved. This has indirect implications for both
environmental and human risks, as well as potential costs associated withprojected changes in climate. However, rapid changes in the short term
may be extremely expensive due to the requirement to prematurely retireor modify capital stock.
It is difficult to choose between these paradigms – although it may
ultimately prove unnecessary. In fact, the IPCC (2001, Synthesis Report)
argues for a step-by-step resolution aimed at stabilising greenhouse gas
concentrations. “The relevant question is not ‘what is the best course for the
next 100 years’, but rather ‘what is the best course for the near term given the
expected long-term climate change and accompanying uncertainties’”.
Let us consider what this would imply from a purely “scientific” viewpoint(the energy implications of the choices will be discussed in Chapter 2).
While uncertainties make decision-making difficult in the long term, it is30

useful to evaluate the implications of a short-term policy that aims to keep
all options open. It already appears to be impossible to return to preindustrial CO2 concentrations (275 ppm) – or even to stabilise
atmospheric CO2 concentration at 350 or 400 ppm. It is equally clear thatthe absence of any near-term action will progressively make stabilisation
at “relatively” lower levels more and more difficult – if not impossible(unless near-total elimination of CO2 emissions becomes technicallyfeasible, or radical geo-engineering alternatives are developed anddeployed). Thus, for example, without near-term action, the option ofstabilising emissions at 450 ppm would disappear from the range ofpossible alternative end-points within a few decades. While a decision on
any specific level is premature, retaining options does open the questionof appropriate hedging strategies.
Most studies on possible hedging strategies belong to one of the following
categories:■

Cost-effectiveness studies, which consider that at some point in time,a concentration level will be agreed, and will then have to be achievedat any cost;■

Cost-benefit approaches, which consider that, at any point in time,
new information about costs and benefits might change the desirable
level of mitigation and, ultimately, of desirable GHG stabilisationlevels. This book follows this approach.

In both cases, the level of hedging suggested mainly depends on theprobability given to the decision to reach a given concentration level (first
approach) or to the likelihood that new information will emerge regarding
climate change consequences or technologies (second approach).
Ultimately, the risk premium is a political decision.
Inertia
One prominent feature of our energy system is inertia. Individual capitalstock might have a lifetime extending from a few years for appliances, todecades for manufacturing or space heating and cooling equipment.
Equipment in the energy sector is relatively long-lived – refineries, power
stations, transmission lines or transformers and pipelines last up to 60 years
31

or more (see Figure 2). Buildings may last centuries. The level of inertia iseven more significant if one considers both the use and resources of theenergy system. For example, urban patterns, which largely determine
transport infrastructure, may develop over centuries – and are costly toreverse. Combined with the so-called “lock-in” effect, this might prevent
markets from selecting the most effective means of achieving their goal.
0Figure 20

Average Life-Spans for Selected Energy-Related Capital Stock
Light Bulbs incandescentLight Bulbs fluorescent
Office Equip: computers, printers, faxes, copiers…
Consumer Electronics: TVs, videos, stereos…
Cons. Appliances: stoves, fridges, washers, …
Residential Water Heating Equipment
Residential Space Heating and Cooling Equipment
Cars
Trucks, Buses, Truck Trailers, Tractors
Commercial Heating & Cooling Equip.
Manufacturing Equipment
Electric Transmis. & distrib, Telecom, Pipelines
Power Stations
Building Stock (Residential and Commercial)
Pattern of Transport Links & Urban develop.

0

20

40

60

80 100 120 140 160 180 200

Range of Expected Lifetime (years)

Note: Figures are intended to illustrate typical life-spans; there will always be exceptions. For example,
some hydroelectric power plants are over 90 years old.
Source: Compiled from a range of sources by the IEA.

Inertia in energy systems calls for relatively smooth but early action. The
economic costs of premature capital stock retirement suggest that changes
may need to be gradually phased in over time. However, the large amountof planned or necessary replacement energy infrastructure to be installedin the coming decades suggests that clear signals need to be sent todecision-makers – if future efforts to move from a “business-as-usual”
32

emission scenario are not to become prohibitively expensive and perhaps
extremely difficult politically.
One way of dealing with this issue is to consider the rate of requiredchanges in energy and/or carbon intensities (narrowly defined here ascarbon per unit of energy produced) in various scenarios, and to comparethem with historical rates. Using the IPCC scenarios as a basis, thestabilisation of atmospheric CO2 concentration at levels below about 600
ppm is only possible with reductions in carbon intensity and/or energy
intensity at rates greater than any that have been achieved in the past.
Long-term historically recorded annual rates of improvement of global
energy intensity and of carbon intensity are measured at approximately
1.0 to 1.5 per cent per year and 0.3 to 0.4 per cent per year respectively.
To achieve stabilisation of CO2 concentrations at about 600 ppm or
below, carbon intensity reduction rates would eventually have to change
by up to 1.5 per cent per year.
Historical average rates, however, hide some interesting lessons, such as
the “de-coupling” between economic growth and energy consumption –and to an even larger extent, between energy growth and carbon dioxide
emissions. Historic anomalies, such as the oil shocks, may partly explainthese changes: the first and second oil-shocks in the late 1970s and early
1980s suggest that energy prices, further amplified by government
policies, have a number of different effects on energy patterns with various
time lags and dynamics.
Aiming at low concentration levels: costs matter
The choice of keeping open the option to stabilise CO2 concentration at a
relatively low level (such as 450 ppm) is not the same as ultimately deciding
to achieve this level no matter the cost – or without taking into account thefurther development in our understanding of the science of climate and its
impacts. A political decision might be taken with regard to an acceptablelevel – notwithstanding the inadequacies in the science and economic
analysis: this is the approach taken by the European Union with its call fora cap at 550 ppm and a limit of 2°C increase in the temperature. However,
although this proposal has been part of the negotiating dynamic for several
years, the fact that it has not been picked up suggests the inherent political33

difficulty in negotiations like this. Innovative options considered in thisbook (see Chapter 6) follow the “step-by-step” approach advocated by the
IPCC to establish an automatic review process in the timeframe ofachieving short-term objectives. With dynamic targets for all countries,
and/or price caps (for industrialised countries) and non-binding targets (fordeveloping countries), effective realisation of commitments would be madedependent on actual abatement costs.
Such options might alleviate cost concerns that are exacerbated by cost
uncertainty (both intrinsic and relative to economic growth uncertainty)
and might thus help countries adopt sufficiently stringent commitments.
Thus, one possible way of keeping all options open as long as possible
would be to aim at defining near-term commitments compatible withstabilising CO2 atmospheric concentrations at a low level (e.g., 450 ppm).
This would then allow these near-term commitments to be relaxed if thecosts of achieving them appear excessive. In this “relaxation” case, thelong-term objective itself would be relaxed under a cost-benefit approach– unless new cheap possibilities that would justify a downward revisionappear at a later stage.
Even with higher concentration targets, the more gradual transition fromthe baseline does not negate the need for early action. All stabilisation
targets require future capital stock to be less carbon-intensive. This has
immediate implications for near-term investment decisions. New supply
options typically take many years to enter the marketplace. An immediateand sustained commitment to research and development is vital if lowcarbon low-cost substitutes are to be available when needed.
CERTAINTY VERSUS STRINGENCY
An analytical framework exists that can help weigh the respective values ofcertainty on emission levels (as offered by Kyoto-like, fixed targets) against
a possible higher “stringency” or ambition in setting (lower) near-termtargets.
Following Martin Weitzman (1974), environmental economists usuallyconsider that, in the face of uncertain costs, the choice of economic
34

instrument to tackle pollution problems should essentially be decided on
the basis of marginal cost and benefit curves. Marginal benefits are defined
here as the net present value attributed to avoid damages from the timethe decision is taken until an infinite point in the future. If the marginal
benefit curve is thought to be steeper than the marginal cost curve, thenquantity instruments should be preferred. If, on the contrary, the marginal
cost curve is steeper than the marginal benefit curve, then priceinstruments should be chosen.
If the marginal damage cost (“benefit”) curve is steep, the damage rapidly
increases with the level of pollution. It is then worth getting certainty
about the level of pollution, rather than risk suffering too much
environmental damage. If, on the contrary, the marginal benefit curve isflat, it means that the damage increases slowly with the level of pollution.
In this case it is preferable to be certain about the marginal cost ofabatement, rather than risk paying too high a price for too small an
incremental environmental benefit. The rationale for this conclusion is
illustrated in Figure 3.
Figure 30

Certainty versus Stringency

P

P

Q

Q

P stands for Price, Q for quantities of abatement. The origin marks the Business-as-Usual, uncontrolledlevel of emissions. The bold line indicates marginal damage costs (or abatement benefits), the three otherlines indicate marginal abatement costs: in the middle the expected cost curve, on both sides two otherpossible outcomes.

Following this rule, it is possible to minimise the social cost of theunavoidable mistake that would be made in deciding on the level of either
instrument (i.e., fixing the price or fixing the quantity). The uncertaintyof the marginal benefits is independent of the choice of instrument,
although it does have implications for its level.
35Extreme cases make these results more intuitive: an extreme case of thefirst situation would be that of infinite damage, a catastrophe arising whenconcentrations exceed certain thresholds. With such a vertical benefit
curve, a quantity instrument would be absolutely necessary (see Figure 3,
right-hand side). An extreme case of the second situation would be thatof constant marginal damage costs. With a flat horizontal marginal
benefit line, fixing a tax at this exact level would ensure optimality
regardless of the abatement cost curve. A price instrument would thus be
the best choice (see Figure 3, left-hand side).
In the case of climate change, costs are related to emission reductions,while benefits are related to concentration changes. Given the importanceof current CO2 stock in the atmosphere, (730 PgC, compared to 8 PgC
in annual anthropogenic emissions) concentrations change slowly. It isthus highly likely that in any short period marginal costs increase fasterthan marginal benefits. Studies4 have suggested that, even taking due
account of the likely effects on emission reductions in any one period on
all subsequent periods, price instruments would be far preferable toquantity instruments. Although the economic parameters chosen in thesestudies might be challenged, this result seems quite robust. The preference
for price instruments would be reversed only if climate change damages
were enormously greater than currently anticipated, or if damages were toincrease rapidly with increasing concentrations. This could happen in thecase of a “nasty surprise”: a strong, non-linear global climate change suchas the melting of the polar ice caps, or the cessation of the large-scaleocean currents. The probability of such events occurring is currently
estimated as “very low” by the IPCC, but could increase in the future withincreased greenhouse gas concentration levels.
If extensive damage of this kind were thought to be likely, it would leadto preferences for a quantity instrument. However, it would also require
short-term decisions to drastically reduce global emissions in order to keep
CO2 concentrations at roughly current levels. A sensitivity analysis
assuming significant damage suggests this preference would apply whenshort-term cuts exceed 40 per cent (see Newell & Pizer, 2000). In other4

36

Notably Newell & Pizer (2000), Pizer (1997, 2001), Hoel & Karp (2000, 2001). See Appendix for further
explanation of this analytical background.

words, fixed quantity instruments would be compatible with very
stringent short-term emission reductions. A threshold for the choice of aquantity instrument would seem to be approximately a 40 per centreduction in emissions.
If short-term reductions are to be less drastic (i.e., if the special cases of
non-linear damage are considered to be unlikely, and the damage isrelatively independent of emissions over the near term), the theory
strongly suggests that the instrument of choice should be a priceinstrument rather than a quantity cap.
This can be illustrated by considering what near-term global targets would
be required for stabilisation at 450 ppm. If we look only at energy-related
CO2 emissions, the World Energy Outlook (IEA, 2002) projects a global
emissions level in 2015 of about 9 GtC – slightly higher than the desirable
peak considered in the IPCC range. Returning to the 1990 level of 5.8
GtC would thus necessitate a 36 per cent decrease from the 2015 level.
According to the IPCC (see Table 1) such a level should be reached before
2040. This could be achieved through four 5-year commitment periods,
where the target during each period would be for a 10 per cent reduction
from the level of the previous period. Resulting emissions would thendecline from 8.1 GtC in 2020, to 7.3 GtC in 2025, to 6.6 GtC in 2030,
and finally, to 5.9 GtC in 2035. Three more periods with the same
reduction rate5 (in percentage points) would lead to emissions of 4.3 GtC
in 2050, at the lowest range of emission levels assessed by Berk et al.
(2001) as compatible with 450 ppm CO2 concentration.
As the total reduction is lower than 40 per cent, the instrument of choice
would be a price instrument. This conclusion seems even more robust
when considered over the span of any individual commitment period –where reductions are on the order of 10 per cent. However, it could beargued that there is little difference between 36 and 40 per cent – and thus
a fixed quantity cap – applied over a 25-year time horizon, could also be
justified. While in this very stringent case economic theory might suggest
5This is illustrative only. A constant –x% objective building from each period to the next represents a slowly
decreasing rate of effort that may not be optimal. But aiming at a long-term level under a cost condition
makes all short-term targets “illustrative only” and does not require an (impossible) optimality in setting thewhole set of targets over time.

37that either instrument could be used, there are significant politicaldifficulties in the quantity instrument choice. The primary difficulty is
one of application: there are few political institutions that have thecapacity to levy a single commitment and adhere to it over the span of 30
years or more. An even longer period might be necessary: the time lag
between taking on targets and the start of the first of these newcommitment periods could last several years.
Connecting the arguments
How does this theoretical preference for price instruments relate to thesuggested decision-making framework – to aim at a low GHG
concentration level under cost conditions? The answer is simple: theamount of abatement actually undertaken under a price instrument would
depend on abatement costs. If costs turn out to be higher than expected,
the amount of abatement can be reduced. If they turn out to be lower than
expected, the amount of abatement can be increased. Aiming at a low level
under a price cap allows essentially the same thing – with some variations.
These depend on the options retained for implementing this long-termemission path towards stabilisation through near-term quantitative
commitments, as will be further discussed in Chapter 6.
While price instruments seem to be preferable from an economic
perspective, quantity instruments have one key advantage from a political
economy perspective. In particular, they allow for emissions reductions to
be undertaken wherever they are cheapest – as long as the total quantity
reduced remains unchanged. The potential for geographic flexibility in
reductions allows dissociation between where emission reductions takeplace and who pays for them – the basis for international trade.
Thus, the concrete question (considered in the following chapters) is todefine the options that would provide the benefits of both price andquantity instruments – seeking the best of both worlds.

38

2
CHOICES IN THE ENERGY SECTOR
THE PREDOMINANCE OF ENERGY-RELATED EMISSIONS
Energy-related greenhouse gas emissions are the dominant humancontribution to climate change. The burning of fossil fuels is responsible
for at least three-quarters of anthropogenic carbon dioxide (CO2)emissions; fossil fuel production and use also emit methane (CH4),
nitrous oxide (N2O), ozone-precursors, and black soot. Fossil fuels arealso the main source of airborne aerosols that tend to cool the earth’s
surface; these aerosols can slightly offset the negative climate effects of
GHGs. However, due to concerns for human health as well as impacts on
the local and regional environment, industrialised and developing
countries have increasingly been taking measures to remove aerosols fromflue gases.
Approximately 20 per cent of all greenhouse gas emissions arise from
activities outside the energy sector. Studies have shown (e.g., Burniaux,
2000; Reilly et al, 2000) that there are numerous cost-effective options for
mitigating emissions from other sectors (e.g., CH4 from waste
management, agriculture and cattle, N2O from agriculture, fluorinatedgases from industries, or the increasing capture by natural sinks throughchanges in land use).
However, the breadth and depth of the necessary cuts to reach any
stabilisation levels cannot but imply profound changes in energy
production and use. Therefore, the choice of instruments and thetimeframe for action will affect and be affected by changes in the energy
sector.
Energy-related CO2 emissions are estimated with some accuracy at
6.5 GtC/y (or 23,900 million tonnes CO2) per year in 20006 out of a total
estimated at 8 GtC. The World Energy Outlook (IEA, 2002a) foresees
global energy-related CO2 emissions of circa 7.4 GtC in 2010 and
8.7 GtC in 2020. The International Energy Outlook of the US DOE’s
6

By both the IPCC (2001a) and the IEA (2002b) following the “reference approach”.

39Energy Information Administration (EIA, 2002) gives a higher figure for2020 (9.9 GtC), while projections using the POLES model7 (Criqui &Kouvaritakis, 2000) give 10.7 GtC for 2020.
As can be seen in Figure 4, according to IEA projections CO2 emissions
from the energy sector are increasing in both the developed anddeveloping world. While the rate of increase is higher in non-Annex I
countries, per capita emissions remain much lower – and converge only
very slowly through 2030. The projected paths of greenhouse gas
emissions reflect population growth and the expected continued increases
in living standards and energy use; the trends are for more rapid increases
in developing countries.
A number of conclusions can be drawn from such projections. First, thestabilisation of CO2 concentrations will be impossible to achieve unlessdeveloping countries, as well as developed countries, take part. Second,
unless additional action is taken, developed countries’ aggregate emissions
will continue to climb. Third, lower stabilisation levels require earlier
integration of developing countries into the global mitigating framework.
Fourth, the GDP levels projected for developing countries imply that
capital resources to reduce emissions will be extremely scarce – andsolutions must be found to finance emission reduction costs, particularlyin the developing world.
The 2002 World Energy Outlook projects that CO2 emissions in 2030 willbe 38 billion tonnes, or 10.4 GtC. Other models give a range of estimatedCO2 emission levels at the same date (e.g., the POLES model projects
13.4 GtC in 2030). The IPCC provides an even longer-term perspective.
In its Special Report on Emissions Scenarios (SRES) released in 2000, the
IPCC reviews a wide range of projections that extend through the year
2100. These scenarios do not assume any climate change mitigation
policies, and thus illustrate long-term uncertainties in global emissions
trends. While some lead “spontaneously” to stabilisation of CO2
atmospheric concentrations at various levels, most do not (see Box 3).

7

40

POLES is a sectoral equilibrium model of world energy developed in the framework of the EC-DGXII Joule
Programme.

0Figure 40

World Energy-Related Carbon Dioxide Emissions
45,000

million tonnes of CO2

40,00035,00030,00025,00020,00015,00010,000
5,000
0
1980

1990

2000

OECD

Transition economies

1990

2000

2010

OECD

Transition economies

World

2010

2020

2030

Developing countries

tonnes of CO2 per capita

14
12
10
8
6
4
2
0
2020

2030

Developing countries

Source: IEA (2002a). Figure 4 shows trends in energy-related CO2 emissions from OECD and Transition
economies (Annex I) and developing countries (non Annex I). The second graph shows per capita
emissions from the same regions.

410Box 30

IPCC emission scenarios

The IPCC scenarios incorporate a number of driving forces – from
population dynamics to societal values and governance structures – thatare expected to be relevant to future GHG emission levels. The
scenarios are grouped into six illustrative groups, none of which include
specific climate policy initiatives.
0Figure 50

Comparison of reference and stabilisation scenarios.
The six IPCC emission scenarios compared with CO2 emission
pathways leading to various concentrationlevels in 2100
4040

IPCC SRES A1B Scenarios

40

IPCC SRES A1T Scenarios

30

20

IPCC SRES A1FI Scenarios

30

30

20

20

A1FI

A1B
10

650
550
450

10

0
1990 2010 2030 2050 2070 2090

01990 2010 2030 2050 2070 2090

4040

IPCC SRES A2 Scenarios
30

A2

20

A1T
650
550
450

10
0
1990 2010 2030 2050 2070 2090
40

IPCC SRES B1 Scenarios

30

30

20

20

10

10

750
650
550
450

IPCC SRES B2 Scenarios

B2
750
10

0
1990 2010 2030 2050 2070 2090

55001990 2010 2030 2050 2070 2090

B1
550
450

650
550
450

0
1990 2010 2030 2050 2070 2090

Source: IPCC, 2001, Vol. 3, figure SPM-1.

The four “A” illustrative scenarios emphasise economic development,
while the two “B” scenarios emphasise sustainable development. In A1
and B1 scenarios, birth rates decrease after around 2050, while in A2
and B2 demographic growth continues unabated. The A1 scenarios are
subdivided into three distinct groups illustrating alternative energy
technology developments: A1F1 is fossil intensive, A1T assumes thefull use of non-fossil energy sources, and A1B balances across all sources.

42

While each group includes several scenarios built on different models,the focus is on the so-called “illustrative” or “marker” scenarios selected
as most representative of each family by the IPCC.
The most favourable climate scenarios – B1 and A1T – suppose relatively
rapid energy efficiency improvements. In B1 (the “sustainable
development” scenario), efficiency improves due to increased
monetisation of activities such as childcare or housework. B1 also
assumes lifestyle changes, such as increased public transportation. In A1T,
energy efficiency improvements derive mostly from the penetration of
new energy end-use technologies such as micro-turbines and fuel cells.
Significantly, in both cases, the total cost of energy services (evenincluding the cost of emission abatement allowing CO2 concentration
stabilisation at 450 ppm) remains lower than in scenarios where emissions
rise more rapidly (Roehrl & Riahi, 2000). Under scenarios with higher
emission levels, the total cumulative discounted costs of changes in theenergy systems to stabilise concentrations would be extremely high.
0Figure 60

Fossil Fuel Supply and Implications for Atmospheric Concentrations ofGreenhouse Gases
4000
3500
3000

GtC

2500
2000
1500
1000
500
0
Oil

Gas

Coal

1860 1998

B1

A1T

B2

A1B

A2

A1FI

■ Historic coal emissions ■ Historic gas emissions ■ Historic oil emissions■ Unconventional reserves and resources ■ Conventional resources (upper estimate)■ Conventional reserves ■ IPCC SRES Scenarios

Carbon in oil, gas and coal reserves and resources compared with historic fossil fuel carbon emissions
1860-1998, and with cumulative carbon emissions from a range of SRES scenarios and TAR stabilisation
scenarios up until 2100.
Note: the unconventional gas resources do not include clathrates. Source: IPCC, 2001.

43

CO2 constraint from a resource perspective
The IPCC TAR, as well as the IEA’s World Energy Outlook 2001 (IEA,
2001b) clearly demonstrate that fossil fuel resource constraints will not
limit emissions during this century. In fact, the utilisation of all provenconventional oil and gas reserves would add only 200 GtC to theatmosphere – clearly less than the lower estimate for the total amount ofcarbon emissions leading to stabilising concentrations at 450 ppm (seeTable 1 in Chapter 1). Burning all conventional oil and gas resources
would add another estimated 332 GtC. Thus, the full use of the total
resource base (i.e., the sum of all reserves and resources8) for conventional
oil and gas would still remain in the range of CO2 cumulative emissions
compatible with stabilisation at 450 ppm.
However, the use of unconventional oil and gas reserves and resources
could add another 440 GtC and 288 GtC, respectively, not taking into
account the immense clathrate (gas hydrate) resources. The use of known
reserves of coal would add more than 1,000 GtC, and potential resources
another 2,605 GtC (see Figure 6). The fossil fuel resource base (total ofreserves and resources, conventional and unconventional) represents a
carbon volume of some 5,000 GtC. Their full use would lead toconcentration levels closer to 2,000 ppm than to 1,000 ppm.
One clear implication of these statistics is that, in the long run, we cannot
burn the entire resource base and still expect to stabilise concentrations at
any reasonable level. Fuel switching between fossil fuels might play animportant role – but this can only be transitional since in the long term,
near elimination of CO2 emissions will be needed. The stabilisation of
CO2 concentration will ultimately require phasing in much larger sharesof zero or low carbon emitting energy sources, even though resource
scarcity would not exist – and thus, fossil fuel prices, in the absence ofpolicy intervention, could be expected to be relatively low. In turn, thissuggests that energy efficiency improvements alone cannot lead tostabilising CO2 concentrations – though they may bring large benefits.

8

44

The reserves are the fraction of resources that may be economically exploited in the future. The proven reserves
are the recoverable reserves from known deposits. Resources are postulated from geologic information andtheory to exist outside of known fields.

ENERGY SAVINGS COME FIRSTIn all scenarios showing constrained emissions paths, a real departure fromthe baseline will have to begin during the next decade. Even under the
low-emissions baselines (i.e., the B1 scenario), policy intervention will beneeded – although in this case it may be possible to achieve stabilisation
with relatively little action.
According to the IPCC (2001, Vol. 3, Chapter 3), sufficient technicaloptions exist to hold annual global greenhouse gas emissions through2010 to levels close to or even below those of 2000 — and even lower
levels are possible by 2020. For energy-related CO2 emissions alone, thetechnological potential exists for reductions of between 1,350 MtC/y and
1,900 MtC/y in 2010 and of 2,950 to 4,000 MtC/y in 2020. There are,however, conflicting views as to the costs of taking such actions.
Table 3 shows the estimates for energy-related CO2 emissions in each
IPCC TAR illustrative scenario, in 2020 and 2050. Not surprisingly, in
0Table 30

Energy-related CO2 Emission Pathways to Stabilisingat 450 ppm compared with Different IPCC Scenarios
and Other Projections, in GtC/yYEAR
SCENARIO GROUP

2010

2020

2030

2040

2050

path compatible
with 450 ppma

8.0

8.0

5.8

5.2

4.6

IEA-EIA/POLES

8.0/8.2

10.0/10.7

10.4/13.4

na

na

A1F1

8.7

11.2

14.6

18.7

23.1

A1B

9.7

12.1

14.0

15.0

16.0

A1T

8.3

10

12.3

12.6

12.3

A2

8.5

11.0

13.5

15.0

16.5

B1

8.5

10.0

11.2

12.2

11.7

B2

8.0

9.0

10.2

10.9

11.2

a. Figures for 2010 and 2020 have been taken slightly below that of the 2015 “peak”. The figure for 2040
is a linear interpolation between those for 2030 and 2050. These numbers are illustrative only.

45

order to remain compatible with stabilisation at 450 ppm, the A1F1, A1B
and A2 groups would require a wider range of, and more strongly
implemented, technology and/or policy measures than the A1T, B1 andB2 groups. None of these scenarios, however, gets close to a return to1990 emissions by 2030. Some are compatible with stabilisation – but at
higher levels than 450 ppm.
Table 4 summarises the results of several studies and estimates potential
greenhouse gas emission reductions in several sectors, taking into accountpossible overlaps between and within sectors. More than half of thepotential comes from the aggregate effect of hundreds of technologies andpractices for end-use energy efficiency in buildings, transport andmanufacturing. Most of this potential may be tapped by 2020 with direct
benefits – notably in the building and industry sectors (see IPCC 2001,
Vol. 3, Chapter 3 – which largely draws on insights from the IEAWorkshop on Technologies to Reduce Greenhouse Gas Emissions, IEA,
1999). This analysis suggests that a successful short-term climate
programme must include the removal of barriers to energy efficiency
improvements in the building and industry sectors.
The building sector
CO2 emissions from fuels and electricity used in both residential andcommercial buildings represent 98 per cent of all building-related GHG
emissions. However, while developed countries have by far the largest CO2
emissions from the building sector, energy use and related CO2 emissions
from buildings in developing countries, particularly in the Asia-Pacificregion, have grown about five times faster than the global average since 1980.
By 2010, it is projected that 500 MtC CO2 emissions from buildings
could be avoided in developed countries (including EITs) at negative
costs, while in developing countries more than 200 MtC CO2 emissions
could be saved at costs ranging from –US$200 to +US$50. Actions
include improving building thermal integrity, reducing the carbon
intensity of fuels used in buildings, and increasing the energy efficiency of
appliances and equipment. It should be noted that these figures (provided
by the IPCC) contradict the usual assumption that emission reductions
are always cheaper in developing countries.
46

0Table 40

Estimates of Potential Global Greenhouse Gas Emission Reductionsin 2010 and in 2020
(Adapted from IPCC TAR SPM Table 1)
Sector(CO2 Only)

Historic
emissionsin 1990(MtCeq /y)Historic
Ceq annual
growth rate
1990-1995(%)

Potential
emission
reductionsin 2010(MtCeq /y)Potential
emission
reductionsin 2020(MtCeq /y)

Net direct costs per
tonne of carbon
avoidedBuildingsa

1,650

1.0

700-750

1,0001,100

Most reductions areavailable at negative
net direct costs.

Transport

1,080

2.4

100-300

300-700

Most studies indicate
net direct costs lessthan US$ 25/tC but twosuggest net direct costs
will exceed US$ 50/tC.

Industry-energyefficiency-materialefficiency

2,300

0.4

Energy supply
and conversionb(1,620)

Othersc

1870-3420

Total

6,900
– 8,400d

300- 500

700- 900

~200

~600

1.5

50-150350-700n. a.

550-700

650-1050

1,900-2,600e

3,600-5,050eMore than half available
at net negative direct
costs. Costs are uncertain.

Limited net negative
direct cost options
exist; many options
are available for lessthan US$ 100/tCeq.

a) Buildings include appliances, buildings, and the building shell. b) Included in sector values above.
Reductions include electricity generation options only (fuel switching to gas/ nuclear, CO2 capture and storage,
improved power station efficiencies, and renewables). c) Includes Industry Non CO2 gases, agriculture (CO2and Non CO2 gases), waste (CH4 only) and Montreal Protocol replacement applications. d) Total includes all
sectors reviewed in IPCC 2001, Vol. 3, Chapter 3 for all six gases. It excludes non-energy related sources of CO2(cement production, 160MtC; gas flaring, 60MtC; and land use change, 600- 1,400MtC) and energy used forconversion of fuels in the end- use sector totals (630MtC). If petroleum refining and coke oven gas were added,
global 1990 CO2 emissions of 7,100MtC would increase by 12 per cent. Note that forestry emissions and theircarbon sink mitigation options are not included. e) The baseline SRES scenarios (for six gases included in the
Kyoto Protocol) project a range of emissions of 11,500– 14,000MtC Eq for 2010 and of 12,000– 16,000MtC
eq for 2020. The emission reduction estimates are most compatible with baseline emission trends in the SRESB2 scenario. The potential reductions take into account regular turn-over of capital stock. They are not limited
to cost-effective options, but exclude options with costs above US$100/tCeq (except for Montreal Protocolgases) or options that will not be adopted through the use of generally accepted policies.

47

Again, according to the IPCC, the technical and economic potential for
CO2 emission reductions in the building sector extends to more than 1
GtC by 2020 and not less than 2 GtC by 2050. However, the availabilityof technologies to achieve such savings cost-effectively depends on
significant R&D efforts.
Industry
Industry-related emissions accounted for 43 per cent of carbon released in
1995. Global industry emissions are slowly growing, while developed
country industry emissions are slowly decreasing. As in the building
sector, hundreds of sector-specific technologies combine to offer
considerable scope for lowering CO2 and other GHG emissions. The
IPCC estimates the potential at 300-500 MtC in 2010 and 700-900 MtC
in 2020 – of which a majority can be realised at net negative cost. Material
efficiency improvements (including recycling, better product design andmaterial substitution) could provide an additional 600 MtC emission
reductions in 2020.
In general, Japan, South Korea and Western European countries havemore energy efficient industries than developing countries, economies intransition and other OECD countries (notably the US and Australia). The
latter offer the highest technical potential for energy efficiency
improvements in the industry sector, though differences in economic
potential may be smaller given the lower energy prices that often occur inthe less efficient countries (IPCC, 2001, Vol. 3). IEA work on energy
indicators (see Unander, 2001) suggests a variety of reasons for suchdifferences – including energy pricing, geography, and local climate.
Transport
IPCC analyses suggest less optimistic prospects for the transport sector,
which currently contributes about 20 to 25 per cent of global CO2
emissions. Most evaluations suggest that technical improvements could
slow the growth in emissions, but not reverse it. The primary problem inthe sector is its very rapid growth rate. In fact, transport emissions could
be even further exacerbated by the so-called “rebound effect” possibly
arising from lower travelling costs (and thus, higher volumes) following
technical improvements.
48

The IEA WEO (2002) “Alternative Policy Case” considers a range ofpolicies that could help restrain OECD transport energy demand andCO2 emissions after 2010 — but makes it clear that these policies would
have only a limited near-term effect. It notes that effective policies areavailable for containing both passenger-vehicle and road-freight energy
demand, although it suggests that the growth in demand for aviation fuelremains a major concern, and the increasing volume of passenger andfreight-transport presents a long-term problem.
Electricity generation
Electricity generation accounted for 39 per cent of global carbon
emissions in 2000. Baseline scenarios anticipate emissions of 3.5 GtC and
4 GtC for 2010 and 2020, respectively. The IPCC sets the potential for
reductions at 350-700 MtC by 2020. Focusing on OECD Member
countries, IEA’s “Alternative Policy Case” predicts possible CO2 emission
reductions below reference scenarios of 4 per cent in 2010, 15 per cent in
2020, and 25 per cent in 2030 in these countries.
Prospects might be brighter in developing countries, where large
investments in the power sector will be needed. China and India alone are
expected to build up to 500 and 200 GW respectively of new power
generation capacity, of which at least 350 and 125 GW will be new coalplants. These new plants will partially replace older ones, thus increasing
the average energy efficiency of the sector. However, if new capacities wereof an advanced super-critical design rather than the classical sub-criticaldesign, their efficiency would be increased by a further seven percentage
points and their CO2 emissions reduced by about 15 per cent comparedto current projections. Here, the critical issue may not be costs, but
technology transfer, as even with low coal prices, subsequent fuel savings
would pay for the incremental cost of investing in the most efficienttechnology.
Global potential for emission reductions in the power sector arises asmuch from fuel switching as from energy efficiency improvements. The
distinction between these two categories is not clear-cut in the power
sector, where the most efficient conversion rates are associated with thelowest carbon intensive fuel – natural gas. Combined cycle gas turbines49

have conversion efficiencies approaching 60 per cent for the latest models.
Combined heat and power systems to meet space heating andmanufacturing requirements can further raise efficiency – and are moreconveniently fuelled by natural gas.
Energy efficiency improvements offer a number of other political benefits.
Most importantly, they increase energy security. They are often
employment intensive. They might generate ancillary environmental
benefits such as improved air quality – although in some cases, particularly
in developing countries, there remain more direct routes to such
improvements. Finally, many are believed to be “free” or beneficial: energy
savings necessitate up-front investments but often have short payback
periods as they produce savings in energy expenses.
However, clear barriers hamper the dissemination of technologies andpractices that could reduce GHG emissions. Market failures, such as
distorted or incomplete prices, network externalities, misplaced
incentives, vested interests, lack of effective regulatory agencies orinformation, lifestyles and behaviour, price volatility and uncertainties all
inhibit action. Addressing and removing these barriers (even partially) is
likely to require various specific policies and measures. Beyond “no costs”
options, achieving larger energy-saving potentials will require extended
policies and measures. If successful measures have already addressedmarket failures, it is likely that the most cost-effective way to further
reduce GHG emissions will be to set a price, either directly with pricebased instruments such as taxes, or indirectly through quantity-based
instruments such as emissions trading.
Immediate benefits can be obtained from currently available energy
efficiency technologies. However, to ensure continued efficiency
improvements beyond 2020 will require further research anddevelopment.
FUEL SWITCHING
In the near term, while energy supply and conversion remains dominatedby fossil fuels, switching from coal to oil or gas can play an important role50

in emission reduction. When energy efficiencies are unchanged, a shift
from coal to oil implies a reduction in carbon emissions of 26 per cent,from oil to gas 23.5 per cent, and from coal to gas 43 per cent per unit ofprimary energy. Taking into account the estimated methane leakage in the
production, transport and use of these various fuels would slightly reduce
the gap between oil and gas and widen the gap between oil and coal.
As discussed above, use of the full gas resource base, including
unconventional resources (but excluding clathrates), is compatible withstabilisation at 450 ppm. However, if all non-conventional oil resourceswere exploited, concentrations would rise above this level.
A number of factors are important in evaluating conventional versus nonconventional resources. In the case of gas, the distinction is not clear cut.
Unconventional gas reserves are usually more costly to exploit, but theirassociated CO2 emissions are still much lower per unit of energy thanthose of other fossil fuels. In some cases, as with coal-bed methane,recovery reduces methane emissions – with their larger-than-CO2 global
warming potential. However, the case for gas is not unequivocally
positive: in some cases, (even in conventional gas), resources contain ahigh share of CO2, sulphur or other toxic compounds that require large
amounts of energy to clean – thus increasing the effective carbon intensityof these resources.
In contrast to gas, unconventional oil reserves are usually more carbonintensive to exploit than conventional reserves. Technical improvements
have already reduced exploitation costs and are likely to continue doing so
in the future – but as other energy sources become more competitive, theprice advantage for oil may decline. It is possible that the higher carbon
intensity of unconventional oil resources may lead to delays in – or eventhe outright elimination of – efforts to exploit them in developed
countries with GHG caps (see Pershing, 2000). This could refocus oil
exploitation in OPEC and other developing countries, and while it mightraise energy security concerns in many consumer countries, it could prove
beneficial to countries with significant conventional resources.
A number of specific barriers exist for promoting a switch to low-carbon
fossil fuels. The first is the availability and distribution costs of natural gas:51

0Box 40

Hydrogen and electricity

Hydrogen is often cited as the clean fuel of the future. In climate terms,
it could provide the ultimate achievement: full decarbonisation ofenergy. However, hydrogen is not an energy source but an energy carrier– exactly like electricity.
Hydrogen offers some advantages over electricity, including
independence from a grid and, perhaps, storage, although it lags
electricity development by at least a century. Fuel cells are making
progress and could replace batteries in portable electronics, internal
combustion engines in cars and trucks and, to some extent, power
plants (providing more distributed heat and electricity).
But how will this hydrogen be produced? An incremental route isthrough the “on-board” reforming of gasoline and methanol, atechnique that has already been demonstrated in the transport sector.
This solution does not yield full carbon benefits: it still produces CO2
emissions. A more direct and cleaner path could be to derive hydrogenfrom natural gas and renewable energy. This approach would require
public policies to solve the simultaneous need to modify the supply anddemand sides of a hydrogen economy (Dunn, 2002). Some (optimistic)
models have assessed this potential: according to Barretto et al. (2002),
it is possible that in 2050 hydrogen could account for 25 per cent of the
global final-energy consumption in the transport sector and 38 percent of the residential/commercial sector. Under their scenario, steam
reforming of natural gas and gasification of biomass would be thedominant technologies; they also see an increasing use of coalgasification and solar thermal in the hydrogen generating mix.
transporting natural gas is more expensive than transporting oil. Concerns
may also arise for energy security and fuel costs – especially in countries
that have abundant coal reserves. Finally, in many regions, an expanded
use of gas beyond power production is likely to require huge infrastructure
investments. This is particularly true in the developing world: while there
are high densities of existing pipelines in North America and Europe,
there are only low densities in Africa, Latin America and Asia.
52

Although 90 countries hold significant natural gas reserves, 70 per cent ofworld reserves are located in the former Soviet Union and the Middle
East. The reserve/production ratio of 65 years globally is unevenly
distributed, from 250 years for the Middle East to only 9 years for North
America (IEA, 2001b). Thus, climate policies that promote fuel switching
are likely to benefit natural gas exporters. The political and economic
consequences of such policies need to be carefully evaluated.
Even more striking is the ratio of natural gas reserves to total energy
consumption, as suggested by Siddiqi (2002). This ratio is lower than
three years for some large countries with huge coal reserves such as China,
India and the USA. In these cases, fuel switching towards natural gas is
likely to aggravate rather than resolve energy security concerns.
A number of non-climate-related benefits contribute to offsetting some of
the costs of fuel switching. Perhaps the most significant of these is the
improvement in the local environment, particularly in air quality. This
benefit has driven countries with large coal reserves to shift towards gas
even where gas is not cheaper than coal. The most striking example is
China, where switching to gas is an official policy that goes far beyond theuse of the country’s gas reserves. In its “dash to gas”, China has aggressively
developed LNG terminals and international pipelines, as well as sought tosecure resources abroad (see also Box 8 in Chapter 4).
Conversely, a number of countries are switching away from zero-emitting
sources to fossil fuels. This is the case in several OECD countries that are
currently phasing out nuclear power; it is also the case in a number ofdeveloping countries that are expanding energy supplies (for example, in
Brazil, where constraints on hydro power are prompting the developmentof thermal generation facilities). Still other countries, seeing considerable
volatility in gas prices, are reconsidering the option to build new coal-fired
thermal generation (e.g., the US).
Switching to gas-fired generation may, in the near-term, be limited by gas
availability and costs. However, over the longer term, if a stringent GHG
concentration level (such as 450 ppm) is to be met, even the emissions
associated with gas consumption might be too high. Thus, fuel-switching
options will also need to focus on non-carbon emitting technologies if
53CO2 emissions are to remain compatible with low and stabilised
atmospheric concentrations.
NON-CARBON EMITTING ENERGY SOURCES
Although ranked third (after energy savings and fuel switching) in short-term
potential for reducing global CO2 emissions, non-carbon emitting energy
sources are not new. For longer-term reductions associated with all
stabilisation levels, these technologies become even more critical. Non-carbon
energy sources are of two main types: nuclear energy and renewable energy
sources. Both provide huge long-term technical potential – with pros andcons. A third way of producing non-carbon energy is to use fossil fuels withcarbon recovery and storage. Each of these three options is discussed below.
Nuclear power
Nuclear power accounts for about 7.3 per cent of world total primaryenergy supply, a sharp increase since 1973 (when it provided a mere 0.9
per cent). However, this growth has stalled in recent years, mainly because
lower fossil-fuel prices have made coal- and gas-fired generation more
attractive economically, and also because of increasing public concern,heightened after the Chernobyl accident in 1986 (IEA, 2000a). The IEA
projects that the nuclear sector will continue to lose its share in the worldenergy mix after 2005 as older plants are retired. Other than in Asia,
relatively few new plants are being proposed or built.
The future of nuclear power will depend on whether it can meet several
objectives simultaneously – reduced economic costs, convincingly safer
operations, increased proliferation safeguards, and effective solutions towaste disposal. More capital intensive than its competitors, nuclear power
is often disadvantaged in fully deregulated markets where the private
sector demands higher rates of return than public discount rates.
However, nuclear power remains competitive where natural gas
infrastructures are not in place and in circumstances where coal has to betransported over long distances (e.g., in China).
Current “evolutionary” technical development efforts tend to build on
experience gained with light water reactors to simultaneously reduce costs
54and increase safety, in particular by incorporating more passive safety
features. More “revolutionary” designs might offer new solutions in the
future, including less waste production (IEA et al., 2002). Nuclear fusion
could be an option in the second half of this century if technical feasibility
were demonstrated within a 20-30 year timescale.
Combustible renewable energy and waste
Combustible renewable energy sources, including waste, provide 11 percent of world total primary energy supply – equal to its share in 1973.
However, analysis suggests that biomass use may soon start declining. For
health, local environmental and sometimes growing scarcity reasons,renewable combustibles are often replaced by more efficient fossil fuelsources in poor households in developing countries. Developments intechnology may reverse these trends, particularly as more efficient uses ofbiomass find their way into the power sector, in particular throughgasification. Another possible source of progress could be the developmentof household stoves with improved combustion (rather than enhanced
thermal efficiency only) to reduce indoor pollution and health risks forusers (RWEDP, 2000). In addition, increases in sinks (which
simultaneously “gain time” in near-term mitigation policy) may provide
additional longer-term resources for biomass use (see, e.g., Schlamadinger
et al., 2001a; Read, 2002).
Hydropower
Hydropower provides 2.3 per cent of current global energy demand.
Hydropower is expected to increase in absolute quantities over the next
two decades, and its economic potential world-wide remains important.
However, its development remains largely dependent on resolving publicconcerns about the environmental and social consequences of building
large dams. Another important barrier is the increasing distance between
still non-exploited resources and potential consumers. Progress insuperconductivity could be a key for further development.
Other renewable energies
Other renewable energy sources such as wind, solar, geothermal and tidal
energies provide only 0.5 per cent of global demand for energy. Wind
energy is the fastest growing energy market but from a very narrow base.
55

However, these fuels hold considerable promise for the future. Solar energy
received by the planet is about 9,000 times current energy consumption.
Even though its technical potential is much less (and depends on factors
such as land availability), lower estimates for supply exceed current global
energy use by a factor of four. But the market potential for capture iscurrently low because of high costs, investment lead times and geographic
variations. The diffuse, intermittent and non-dispatchable character ofsolar energy suggests it may remain a marginal technology unless storage
becomes much cheaper. Again, progress in superconductivity could be akey, but other options exist, including hydrogen production.
With 1,538 GWh produced in 2000, solar electricity represents only 0.05
per cent of total electricity from renewable energy sources. Photovoltaic
systems and concentrating solar-thermal power plants have approximately
equal shares of that production. PV systems provide expensive energy but
have niche markets that could expand from remote consumers (including
a share of the estimated one and a half billion people without access toelectricity) to integration into building structures. However, large
reductions in costs are still needed for this source to compete with fossilfuelled power plants.
Concentrating technologies may offer the best prospects for economicallycompetitive large-scale production where solar resources are sufficiently
intense. Nine plants in the Mojave Desert close to Los Angeles haveprovided 354 MWe of power since 1989. Concentrating technologies
allows a back-up from fossil fuels or energy storage through heat transfer
fluid that guarantees the continuity of power – an important requirementof utilities. They offer much cheaper electricity than PV – though at
prices still higher than fossil fuels. However, similar plants could meetincreasing electricity needs in large urban areas close to such resources;
projects are currently underway in Egypt, India, Mexico and Moroccowith financing by the Global Environment Facility (see Box 7 in Chapter4), as well as in Iran, Israel, Jordan, South Africa, Greece, Spain and Italy.
In the future, this technology might be used to produce hydrogen or otherenergy carriers. For example, direct natural gas reforming with solar
concentrated heat could produce exportable hydrogen for otherconsuming regions while facilitating carbon recovery.
56

Wind power is the fastest growing energy source. In high wind areas, wind
power is competitive with other forms of electricity generation. IEA
estimates for 2020 project 1,200 GW of installed capacity, providing
almost 3,000 TWh/year. Global economic potential estimates vary from
20,000 TWh/y to more than twice as much. While declining public
acceptance of on-shore and high costs of offshore facilities are current
constraints to the increase of wind power, further cost reductions are
anticipated, e.g., through turbine efficiencies. As with other renewableenergy sources, recent technical improvements in this sector suggest that
research and development efforts are most valuable when they are
combined with market deployment and learning-by-doing.
Other renewable energy applications include solar hot water, solar spaceheating, solar drying of agricultural crops, solar cooling, passive solar
energy use in heating and cooling buildings, geothermal energy andmarine energy – including wave, ocean current, ocean thermal and tidal.
Some are already competitive – notably hot water and passive solar use inbuildings. However, even collectively, these are not estimated to provide asignificant share of the energy demand over the next twenty years. It may
be, though, that commercial energy statistics hide some uses of solar
energy (such as heating buildings) that tend to be merged with energy
savings. Given the current and projected low levels of use, it will takeconsiderable policy “push” to stimulate the growth of such technologies
over the next thirty to fifty years.
Capture and storage
Various technologies are now available for CO2 separation, transport andunderground storage, although costs remain high, and the long-term
environmental consequences are not entirely certain. Currently, thesetechnologies are best suited to dealing with emissions of large point
sources of CO2, such as power plants and energy-intensive industries,
rather than small, dispersed sources such as transport and heating.
Both pre- and post-combustion technologies exist for CO2 capture. Postcombustion CO2 capture uses amine solvents to scrub the flue-gases. The
amine leaving the scrubber is heated to release high-purity CO2 and isthen re-used. However, the low concentration of CO2 in the power57

station flue-gases means that a very large volume of flue-gas has to betreated. Equipment is thus large – and large amounts of energy are
required for solvent generation.
A pre-combustion capture technology avoids many of these problems – butnecessitates that hydrogen becomes a more widely used energy carrier. Steamreforming of natural gas frees the hydrogen atoms in the fuel. A second stepwith more steam produces carbon dioxide and more hydrogen. The CO2 isthen separated from hydrogen. Part of the natural gas is used to fuel theprocess – itself requiring significant amounts of high temperature heat.
While it would also be possible to produce hydrogen from oil, or evencoal, and capture and store carbon dioxide, this is less attractive than withgas that offers higher hydrogen to carbon ratio. More appealing may be
the production of hydrogen from biomass – or electricity in association
with carbon storage. If it is harvested in a sustainable manner, biomass use
is “carbon-neutral” for the atmosphere and thus, preferable to fossil fuels.
If hydrogen is produced from biomass and carbon captured and stored,
then the whole cycle would pump carbon from the atmosphere. Eachcarbon tonne stored would have a double value.
IPCC estimates for storage capacities range from 1,500 to 14,000 GtC; thisscale suggests that storage is not likely to be a major constraint on CO2
removal and sequestration potential, provided current knowledge is
improved and long-term storage guaranteed. Storage in the deep ocean
would further extend this capacity but raises serious environmental concerns.
Cost estimates vary with techniques, as well as with transport distances.
They range from $25/tonne C to $60 /tonne C, including storage. As
with most technologies, there is scope to reduce costs in the future
through technical improvements. If the CO2 is used for enhanced oil orcoal bed methane recovery, some of the costs will be offset – in fact the
IEA Greenhouse Gas R&D Programme estimates that there could be a
net benefit in some cases. Such a scheme is already operating at the
Sleipner off-shore drilling platform operated by Statoil. Analyses haveshown that stabilisation strategies at various levels are less costly when they
include the option of capture and storage of CO2.

58

3
CURRENT COMMITMENTS
The international community has responded to the need to address
climate change (see IEA 2002c). Ultimately, its actions aim to inducechanges in greenhouse gas emissions, predominantly in the energy sector.
Theory demonstrates the need for international co-operation; the climatechange convention and the Protocol are built on this approach. These
agreements, however, even if fully implemented, would have been unlikely
to significantly reduce GHG concentrations. Furthermore, the details of
implementation agreed by participant countries, as well as the extent ofcountry participation (including US disengagement), have altered theeffects of the agreements. However, they were always assumed to be
iterative, with countries adopting additional steps. Developing these next
steps requires an understanding of the existing agreements.
THE NEED FOR INTERNATIONAL CO-OPERATION
Mitigating global climate change, in theory, requires global co-operation. As
Barret (1999) made clear, countries acting in isolation to mitigate climatechange are likely to limit their efforts so that the marginal abatement costthey incur equals the marginal benefit they obtain from their own efforts.
On the other hand, countries co-operating in mitigating climate change arelikely to raise their level of effort so that their marginal cost equals thebenefits that each of them receives from their concerted action. In a worldof almost 200 countries, the difference is likely to be significant.
Sadly, a different paradigm operates: the prisoner’s dilemma. In thisframework, while collective welfare declines, individuals are better off ifthey “free-ride” – taking no action on their own, but benefiting from theactions taken by others. The unfortunate cumulative effect of this strategy
was well described in a famous paper by Garrett Hardin (1968). The
outcome is better known as the “tragedy of the commons” and in the caseof climate change, implies significantly increased emissions.
Game theory suggests ways to escape the dilemma, such as relaxing the
hypothesis of pure rationality of players, repeated games, and changes in59the matrix of benefits and losses. Countries co-operating in mitigatingclimate change illustrate this; they may resist defection and free riding fora number of reasons; at the national level, these take the form of national
pride, pressure from civil society, or willingness to build other countries’
confidence in their “fair” behaviour. This last motive could be inspired bya clear perception of the collective future benefits of building international
confidence in responding to climate change, or other benefits that may
arise from international co-operation. In this respect, climate change
might be thought of as a repeated game with players obeying different
rules from the classic homo œconomicus of economic textbooks. Also,
utilitarianism is not the only possible framework for explaining people’s orstates’ behaviour.
However, incentives for defection are likely to persist and have to beconsidered when shaping future agreements. Thus, international agreements
have sought to develop other incentives to stimulate performance: theConvention on International Trade of Endangered Species (CITES) and theInternational Whaling Convention (IWC) have successfully used trade
sanctions against non-complying member countries and even non-member
countries (Sand, 2001). The climate regime may not be able to apply thesekinds of instruments, as their success was largely dependent on the isolationof the sanctioned countries. Such isolation has not been (and may never be)achieved in the climate context – and both the Convention and the Protocol
recognise the right of Parties to withdraw.
Apart from aiming to raise the level of effort of individual countries, cooperation is also necessary to prevent the introduction of economically
detrimental trade distortions and economically and environmentally
detrimental “leakage” effects (further discussed below). It also contributes
to enhancing the cost-effectiveness/environmental efficiency of countries’
mitigation efforts. International co-operation will be needed to implement“win-win” projects or policies that cannot be undertaken by any country inisolation, due to concerns about economic competition. For example,
projects that could simultaneously reduce pollutants with local and global
effects but would raise the costs of internationally traded goods can only beundertaken in a world with internationally level playing fields.

60

Cost-effectiveness
Another important aspect of international co-operation to mitigate
climate change is that it establishes a cost-effective regime. This isimportant from both economic and environmental viewpoints. Emission
cuts of 50 per cent or more will be required to stabilise carbon dioxide
atmospheric concentrations over the next century. Achieving
concentration stabilisation is an ambitious long-term goal that requires
progressively more stringent short-term emission targets.
Cost-effectiveness is usually considered as a means of minimising the costs ofmeeting a given environmental objective. However, if society’s willingness-topay is somewhat limited, cost-effectiveness may be a way to achieve a better
environmental outcome at a given cost. As the ultimate objective of the
UNFCCC is not specified, and decisions are likely to be taken or revised
sequentially, building cost-effectiveness into the international regime will
help achieve GHG concentration stabilisation at lower levels.
Leakage
The need for global co-operation also arises from the risk of leakage, i.e.,
the part of emissions reductions in countries with a quantitative
commitment that may be offset by an emissions increase in nonconstrained countries. This can occur through relocation of energyintensive production in non-constrained regions, by increased
consumption of regional fossil fuels through a decline in the international
price of oil and gas triggered by lower demand for these energies, andthrough changes in incomes and thus in energy demand due to better
terms of trade. The risk of leakage is likely to increase with the stringencyof the targets accepted by constrained countries.
Leakage may be offset by a more positive phenomenon: spillover effect. Thisoccurs when technology is disseminated – and offers a particular advantage
when less developed countries can leap-frog to new, advanced technologies
without first adopting older and more polluting ones. In general, the levelof environmental awareness increases, and energy intensity decreases as acountry’s per capita GDP increases. While the level of the intensity peakvaries from one country to another, the spill-over effect results in the generallowering of global energy intensities (Martin, 1988).
61

THE UN FRAMEWORK CONVENTION ON CLIMATE CHANGE
AND ITS KYOTO PROTOCOL
Numerous studies have closely examined both the UNFCCC and the
Kyoto Protocol (see, for example, Grubb et al., 1999; Depledge, 2000;
Bodansky, 2001). However, it may be useful to review a number of key
issues in order to understand more clearly the implications for the next
steps to address climate change. The agreements can be examined withrespect to their success in addressing the three main elements describedabove – international engagement, cost-effectiveness and leakage. They
can also be examined with respect to key elements of the decision, – andhow these may be applied in future regimes: i) the establishment of goals(soft aims in the UNFCCC that were subsequently codified into legallybinding obligations in the Protocol); ii) the differentiation in the level ofcommitments between countries; iii) the coverage of all greenhouse gases,
including all sources and sinks; iv) the establishment of strong monitoring
and review procedures; v) the rejection of specific common policy
approaches and promotion of market mechanisms (emissions trading andproject-based offsets); vi) the general, albeit non-specific, encouragementof co-operation in technology development and diffusion; and vii) the callfor financial and technical support to assist developing countries.
International co-operation
The level of international co-operation in negotiating and ratifying the
UNFCCC and its Protocol are remarkable. Unlike many earlier
environmental agreements, both were negotiated under UN auspices,with full global participation. The ratification of the Convention by over
170 countries further attests to its global appeal.
However, in narrower terms, the agreement on the text masks deep andstill persistent divisions in the process. To maintain consensus, thesedifferences ultimately produced differentiated commitments – with
developing countries undertaking no quantitative obligations, anddeveloped countries assuming both a domestic emissions reduction
burden and a financial commitment to assist developing countries. In
some ways the Protocol deepened the divide: as long as commitments
were non-binding, countries could accept the relative levels of status62

assigned. However, once commitments began to bite, countries began toargue vociferously that competitiveness concerns - including vis-à-vis
those countries with no assigned targets – would make ratification costly,
if not politically impossible. This was one of the arguments brought bycountries within the EU that ultimately led to a “burden-sharing”
arrangement. It was also a key argument used by the United States when
it rejected the agreement at the beginning of 2001.
Other divisions also appeared early in the process, and have led toconsiderable difficulty in reaching a negotiated outcome. In particular,
OPEC countries, faced with potential, though uncertain, damage if global
efforts to reduce emissions result in a decline in oil and gas exports, fought
to delay much of the negotiating process, seeking compensation for
projected lost revenue9.
Differentiated commitments
Perhaps the key structural element of both agreements is thedifferentiation made between countries (or groups of countries) withregard to commitments. While the Climate Convention requires all
countries to limit their emissions of greenhouse gases, it recognises
differences between them. The concept of differentiation is noted in thepreamble of the Convention where it is acknowledged that the “global
nature of climate change calls for the widest participation by all
countries…in accordance with their common but differentiatedresponsibilities and respective capabilities and social and economic
conditions”. In the FCCC, four groups of Parties are recognised, and havedifferent commitments:■

Annex II (those Parties with OECD membership at the time of adoptionof the FCCC, which have both financial and technical assistancecommitments as well as emission reduction commitments);■

Annex I (Parties in Annex II plus Parties in the former Soviet Union andin Eastern Europe; countries in this latter group have emissions limits,
but are allowed flexibility in their “base year”, and have no financial or
technical assistance obligations);

9

It seems equally likely, however, that pricing carbon emissions would reinforce the market power of oil-exporting
countries by putting non-conventional oil resources with heavier carbon content at a disadvantage (seePershing, 2000).

63

■Non-Annex I, or developing countries (all Parties not in Annex I, whichhave generic reporting obligations but neither specific emissions targets
nor financial or technical assistance obligations); and,■Least developed countries (a group whose membership is not specificallydefined, but which is a subset of the non-Annex I group and which has
additional flexibility with respect to the timing of their first national
communications).

Clearly, the concept of establishing categories of Parties that haveobligations while excluding other Parties (even those with similar
characteristics) was not new. Nearly identical groupings are established in
the Montreal Protocol on Substances that Deplete the Ozone Layer, andin other environmental agreements. Conversely, some agreements do not
use this form of differentiation at all, instead assuming that all Parties haveobligations; these agreements differentiate not on whether commitments
exist, but rather on their relative stringency. One example of this approachis the UN schedule of payments for the budget – to which all countries
contribute, but at different levels.
Several arguments have been advanced to justify the requirement thatdeveloped countries act first. One of the most frequently cited has to dowith leadership: until the wealthier and more technologically advanced
Parties have adopted measures to mitigate emissions, developing countries
see little justification to act. Furthermore, it is suggested that the moreadvanced nations will have to instigate much of the push for technologicalinnovation that will support climate change mitigation, and, more
importantly, advance the development of poorer populations.
Another argument in support of this position is based on responsibility foremissions: historically, most emissions of greenhouse gases have occurredin OECD countries, while developing countries have contributed
significantly less. This perspective has even been included in the preamble
to the Convention. However, a global shift in the current sources ofemissions of greenhouse gases is underway – though current per capita
emissions remain widely divergent. This shift is projected to continue inthe future, as developing countries grow to meet their social anddevelopment needs.
64

The Kyoto Protocol further elaborates the concept of differentiation
between countries. The primary manifestation of this concept is evident
in the targets of developed country Parties: on the one hand, the EU has
a collective target to remain 8 per cent below 1990 levels while the US has
set 7 per cent, Japan and Canada 6 per cent, most Eastern European
economies in transition 8 and 5 per cent; on the other hand, Russia andUkraine have set targets at 1990 levels and Norway, Australia and Iceland’s
targets are respectively 1, 8 and 10 per cent above 1990 levels. As with the
FCCC, which imposed no emissions targets on developing countries, theProtocol too focused emissions limitation obligations exclusively on thedeveloped world.
A further differentiation is also implicit in the Protocol: Annex I
Countries can create a “bubble”, under which the total emission
reductions required from participating countries might be redistributed
among them. The European Union has reached such an agreement andhas proposed to further differentiate its commitments as indicated inTable 5.
0Table 50

The EU burden-sharing Agreement
Austria-13%

Germany-21%

Netherlands-6%

Belgium-6.5%

Greece+25%

Portugal+27%

Denmark-21%

Ireland

+13%

Spain

+15%

France

0%

Italy

-6.5%

Sweden+4%

Finland0%

Luxembourg-28%

United Kingdom-12.5%

Both agreements sought to further differentiate between countries,
providing specific remedies for perceived specific national circumstances.
In this context, among the most critical articles in the Convention are 4.8
and 4.9 (also reflected in Kyoto Protocol articles 2.3 and 3.14) whichaccommodate countries whose national economic or naturalcharacteristics make them vulnerable to climate change or the effects of its
mitigation.

65

Cost-effectivenessAs described above, the general concept of cost-effectiveness is critical in
maximising environmental benefits at the lowest possible cost. Both theConvention and Protocol sought to address this need through different
means. In the case of the Convention, the absence of a legally binding
commitment essentially ensured that no country would be obliged to pay
any price to meet its commitment should it choose not to. While thisvoluntary goal led to minimal greenhouse mitigation, most of the changes
that were made were at net benefit or cost-free.
To further increase the cost-effectiveness of the agreement, it was specified
that reductions could be undertaken in any gas, from any source, andthrough the enhancement of sinks. This form of flexibility assured thatthe lowest cost options would be pursued first. Appreciating the benefitsof such a structure, the Kyoto Protocol also adopted this approach – inspite of a growing perception that there are considerable difficulties inmonitoring and measuring reductions of some gases (particularly methaneand nitrous oxide in the agricultural sector), and that substantial errors are
inherent in assessing sinks of greenhouse gases.
In addition, beginning with the UNFCCC’s “activities implemented
jointly” (AIJ) and extending to the development in the Protocol of thethree market-based mechanisms (emissions trading (ET), joint
implementation (JI) and the Clean Development Mechanism or CDM),
the use of efficient market mechanisms were incorporated into theagreements. Emissions trading (ET) is a mechanism that enables countries
with legally binding emissions targets to buy and sell emissions credits
among themselves. AIJ, JI and CDM are all forms of “project-based”
activities; under rules established for these activities, a country may receive
emissions credit for a specific emissions reduction project undertaken inanother country. Projects fall under AIJ rules during the test phase; under
JI rules when both countries have Kyoto commitments, and under CDM
rules when one – or neither – country has a target but both are Kyoto
Parties (see Figure 7).
However, the extent to which countries focused exclusively on costeffectiveness was limited: many were concerned that unless prices for66

emissions were set at a relatively high level, there would be little if any
incentive to develop the new technologies needed for longer-term
reductions. In addition, there was concern that due to significant
differences in the caps agreed in Kyoto, countries could ultimately“purchase” GHG credits and leave the world essentially with no net
reductions in emissions. Constraints on a “perfect” trading market werethus envisioned.
0Figure 70

The Kyoto Mechanisms

Emissions trading
Reductions from Joint Implementation
Reductions from the Clean Development Mechanism

One of the most significant of these was the proposal to limit the use of
these mechanisms so that countries would be restricted to using them tomeet only 50 per cent of their reductions. While a quantitative limit was
ultimately rejected, it still lingers in some countries’ domestic
programmes. Another form of constraint lay in the issue of eligibility: it
was agreed that only those developed countries that were in compliancewith detailed monitoring and reporting requirements would be eligible(although it may also be argued that stringent compliance structures are
required for robust market operations). Separate restrictions were67

developed for project-based activities. CDM activities were required, on
top of yielding additional emissions reductions, to meet undefined“sustainable development” criteria. In addition, a levy (at 2 per cent of the
project’s transferred emissions credits) was placed on all CDM projects.
Finally, the open flexibility assigned to Parties in the use of sinks to offset
emissions was capped: only certain sinks projects were allowed under the
CDM, and the extent of total sinks projects could not exceed 1 per centof a Party’s emissions.
The Kyoto Protocol, notwithstanding its reduction commitments, may
bear more than a passing resemblance to the non-binding UNFCCC: one
interpretation of the process agreed by the Conference of the Parties(COP 7) at Marrakech in 2001 is that countries which do not accept thecompliance provisions would not be bound by them. Thus, these Parties
would bear no penalty if they did not meet the Protocol’s commitments.
This would essentially make the provisions non-binding – and similar to
the non-binding ‘aim’ of the Convention itself.
Technology transfer, financial assistanceand engagement of developing countries
It is clear from economic theory that the structure of differentiatedcommitments – particularly when the groups trade – can create market
distortions and competitive imbalances. While a number of countries arecontemplating national policies (e.g., tariff barriers or border-tax
adjustments against goods from non-Parties or Parties with no GHG
obligations), the Convention and Protocol also sought another route toaddress this problem. In particular, the emphasis was on raising thewelfare of Parties with no obligations (developing countries).
While the expectation was that development was a goal in its own right,
it was also anticipated that further development would allow thesecountries to take on commitments. Promoting development underpinned
the long-term focus of the technology transfer and financial assistanceprovisions of both agreements (although these efforts to date have been
relatively limited). Development policies were also presumed to have anancillary benefit: most of the technology used in developing countries was
assumed to derive from the Annex I Parties – providing a trade benefit
68even if the recipient did not take on a GHG target. This solution worked
as long as the gap in required action between countries with targets andthose without was relatively small and the technology and financial
obligations not too onerous. However, for those countries that perceive
themselves as obliged to take significant action while competitors are
exempted, neither the current agreement (in the case of the US), nor
future agreements may pass domestic scrutiny.
To date, there has been widespread resistance to allowing countries to“graduate” into the Annex I group. Proposals for modified targets –suggested by Argentina, Mexico and Korea – have not been taken up in
the formal debate. Furthermore, with the emissions reductions obligations
required of some countries to comply with Kyoto approaching 35 per centbelow their baseline levels, the trade consequence of non-Party
competition – and conversely, of leakage – have grown considerably.
LIKELY EFFECTS OF CURRENT COMMITMENTS
Direct effects on emissions
Though limited to developed countries, if the Kyoto Protocol had been
fully implemented and its provisions relative to sinks discounted, its
effects would have been substantial. According to IEA projections (IEA,
2000a), for energy-related CO2 emissions a 5.2 per cent reduction below
1990 levels in 2008-2012 for Annex I countries would have turned into
an average 22 per cent reduction against their baseline. While the growthin developing country emissions would collectively offset these gains,
global emissions would nonetheless have been roughly equivalent to a
10 per cent reduction against the baseline.
The various provisions and interpretations agreed during the past year toseal the agreement (i.e., during negotiations in Bonn at the resumed 6th
session of the COP and in Marrakech at COP 7) together have the effectof reducing the necessary level of actual emission reductions. In particular,
according to IEA analysis, the decision to allow the use of existing“managed forests” as sinks reduces the overall reduction required of Annex
I countries from about 5 per cent below 1990 levels to only approximately
3 per cent. If the United States is excluded from the calculation (and its
69

0Box 50

The US withdrawal and the new US policy

In June 2001, the new Bush administration, while recalling the UScommitment to the objective of the UN Convention on Climate
Change, announced its intention not to ratify the Kyoto Protocol. Thisdecision was based on a number of criticisms against the Kyoto Protocol,
notably the cost incurred by the US to achieve its target, and the absenceof legally binding quantitative targets for developing countries:“The Kyoto Protocol is ineffective in addressing climate change because it
excludes developing countries. (...) Developing countries can continue
business as usual under the Kyoto Protocol, despite their rapidly growing
emissions. (...) The Kyoto Protocol’s targets are not based on science. Its
targets and timetables were arrived at arbitrarily as a result of politicalnegotiations, and are not related to any specific scientific information of
long-term objective. The Kyoto Protocol targets are precipitous. (...) Meetingits target would require the United States to reduce its output of greenhouseemissions by one third in less than seven years. This would require U.S.
firms to retire large amounts of capital stock prematurely, imposing
substantial and unnecessary costs on the US economy. (...) Many analysts
have pointed to trading as the only way that the United States could meet
its Kyoto target. Yet few countries will have many excess tonnes to sell otherthan Russia and several other Eastern European countries that negotiatedtargets well above their expected emissions during the period 2008-2012.
(...) Even if these countries met their (monitoring) requirements and wereallowed to sell their emission allowances, U.S. purchases of allowances
would amount to many billions of dollars of financial transfers annually –without achieving any meaningful greenhouse gas emission reductions or
climate benefit.” (The White House, 2001).
In February 2002, the US administration announced a new policy totackle climate change. It is based on emissions intensity: units ofgreenhouse gas emissions per unit of GDP. Specifically, the proposal
calls for reducing US emissions from 183 metric tonnes of emissions
per million dollars GDP emitted today, to 151 tonnes of emissions per
million dollars of GDP by 2012. The Administration plan states that
this is a decrease of 18 per cent.

70Intensity targets belong to the broader family of “dynamic targets” –targets indexed on the evolution of an economic indicator such as GDP– and constitute their simplest possible form. They present obvious
advantages for climate change mitigation, a problem well stated in theBush Administration document:“The close connection between economic growth, energy use and GHG
emissions implies that fixed appropriate emission limits are hard to identify
when economic growth is uncertain and carbon-free, breakthrough energy
technologies are not yet in place. Such targets are also hard to identify fordeveloping countries where the future rate of emissions is even more
uncertain. Given its neutrality with regard to economic growth, greenhousegas intensity solves or substantially reduces many of these problems.” (TheWhite House, 2002)
IEA statistics show a 14.9 per cent decrease in carbon intensity of the US
economy over 10 years (1990-2000), or about 1.5 per cent a year. Using
the forecasts of the US Department of Energy’s Energy Information
Administration, US economic growth is projected to be 3 per cent per
year, and carbon dioxide emission growth 1.5 per cent a year for the nextten years. Based on these statistics, the US would have a projected
decrease in carbon intensity of energy-related CO2 emissions of 15.5 percent. The difference with the new commitment is rather small.
Apart from its intensity target, the proposed US policy embraces a
number of policies and measures at the federal level. Moreover, there
are a number of initiatives from the private sector, individual States andother local authorities that seek to reduce greenhouse gas emissions. It
is hard to assess, however, if these policies and initiatives would be likely
to bring emissions below the level represented by the main objective of
the new US policy.
anticipated emission increases not counted), the reduction below 1990
levels is even less: approximately 2 per cent. Afforestation and reforestation
activities, however, as well as agriculture changes, revegetation or sink
activities under the CDM are not accounted for in these figures. If theywere, they would further reduce the level of gross emission reductions
necessitated by the Protocol after Bonn and Marrakech.

71

The US policy announced in February 2002 makes it possible to project
likely US emissions in 2012. Assuming that the intensity target is met, USemissions for all six greenhouse gases under consideration within the
Kyoto Protocol would be approximately 30 per cent above 1990 levels by
2012. Aggregating US emissions into the global totals reached under theProtocol suggests that cumulative Annex I emissions would beapproximately 9 per cent above 1990 levels in 2012. This supposes
extensive emissions trading with no banking10. Banking of, say, half of thepotential surplus emission rights from Russia and Ukraine would bringthe increase in Annex I emissions down to approximately 7 per cent.
For the EU to meet Kyoto commitments (if they were to comply
exclusively through domestic action), energy-related carbon dioxide
intensity has to go from 102 tonnes per million dollars of GDP to 75.5 –a 26 per cent decrease. Japan must meet a similar level of intensity
decrease: using IEA projections for GDP increases in the Pacific region asa proxy for Japan, energy-related CO2 intensity would need to decrease by
about 30 per cent from 2000 levels if they are to comply with Kyoto
exclusively through domestic action. Given that Japanese energy intensity
has essentially remained unchanged between 1990 and 2000, thisrepresents a formidable shift indeed. If the US were to meet its Kyoto
objectives without sacrificing GDP growth, its emissions intensity would
need to decline by approximately 40 per cent. Of course, as Kyoto offers
the potential for emissions trading, changes in intensity could besignificantly lower than suggested from these examples.
Direct effects on concentration levels and climatechangeSoon after Kyoto, Bert Bolin, then chairman of the Intergovernmental
Panel on Climate Change, published an assessment of the likely effects of
the agreement on CO2 concentration levels in 2010 (Bolin, 1998). This
assessment revealed that a full implementation of the Protocol would
avoid the emissions of 4 to 6 Pg of carbon dioxide out of 140 Pg likely tobe emitted during the 1990-2010 period. On concentration levels, while

10 Kyoto Protocol Article 3.13 allows countries to carry over parts of their assigned amounts in one commitment
period for use in subsequent commitment periods – which is usually referred to as “banking”.

72

business-as-usual trends are expected to raise CO2 concentration fromcirca 370 ppm today up to 383 or 384 ppm, the full implementation of
the Kyoto Protocol would have limited this rise to 382 ppm. Thus, evenwith full compliance and US participation, the agreement would have had
only a limited effect on the underlying concentrations. After the Bonnand Marrakech decisions and, more importantly, the US withdrawal fromthe Protocol, current commitments will bring very little change in the
GHG concentration levels by the year 2012. No significant modificationin radiative forcing and climate consequences might be reasonably
expected at that time. This is all the more true since the inertia in climate
response is amplified by the thermal inertia of the oceans that tend to“hide” and delay committed climate change.
It was clear from the signing of the Protocol, however, that it would only
represent the very first step on a long road toward reducing global
emissions and stabilising GHG concentrations. Thus, a better test of theefficacy of the agreement is whether the next steps can be negotiated – andif negotiated, can be met. A process through which an international,
legally binding regime is established and implemented would, over the
longer term, have considerable potential to mitigate climate change.
A carbon price?
Numerous estimates have been proposed to assess the costs of the Kyoto
targets for the countries involved. All show that the costs are likely todiffer substantially across regions. As an example, the analysis undertaken
for the World Energy Outlook 2000 (IEA, 2000a) suggested that aggressive
transport and power generation policies would, even in combination, beinsufficient to meet the Kyoto commitments if OECD nations act alone.
However, the same model, using the Kyoto mechanisms, and assuming afull trading regime among all Annex I countries, could reduce total costs
by 89 per cent with a marginal cost of around $32 per tonne of CO2.
IEA analysis also suggests that the withdrawal from further participationin the Protocol by the United States (with approximately 35 per cent of
the developed world’s emissions) makes the Kyoto targets easier to achievefor other countries. Without competition from the United States as abuyer in a world market for emissions credits, the trading price is likely to73

fall to less than US$5 per tonne of CO2 – and possibly further as a resultof the decisions on sinks adopted in Bonn and Marrakech.
Actual costs may depend largely on the policies adopted by thosecountries that are likely to have assigned amounts (i.e., allocated emission
rights under the Protocol) higher than their projected domestic emissions,such as Russia and Ukraine. If these countries were to make use of the“banking” provision of the Protocol in an attempt to maximise theirrevenues from international emissions trading (i.e., holding credits for use
in subsequent periods), the carbon price would rise on international
markets. Another possibility is that some of the countries likely to bebuyers on these international markets for their domestic emission
abatement costs would restrict themselves voluntarily to “protect” theirdomestic policies and measures and prevent carbon price from reaching a“too low” price.
Overall assessment
The UN Convention on climate change has created a dynamic for addressing
climate change at a global level, recognising “common but differentiatedresponsibilities” by all countries. While most countries have taken steps toaddress climate change, more has been achieved, so far, in raising awarenessthan in bringing about reductions in emissions: globally, energy related CO2
emissions climbed by nearly 10 per cent between 1990 and 1999. Overall
growth in emissions from developing countries has been particularly
significant, although their per capita emission levels remain low. Technically,
the Convention’s aim to stabilise emissions in developed countries as a whole
has been met, due to the significant decline in emissions in Russia andEastern Europe (the so-called Economies in Transition) which has effectively
offset the collective growth in OECD countries.
Under the Kyoto Protocol, only industrialised countries have madequantitative commitments to limit or reduce their emissions. Emissions
from these countries represent 58.5 per cent of 2000 global energy-related
CO2 emissions. With the announced US withdrawal, the share of 2000
global emissions controlled by the Kyoto Protocol falls below 35 per cent.
The Protocol is similarly limited in terms of longer-term commitments: thetargets that have been adopted only apply for the period 2008 to 2012.
74

The Kyoto Protocol has introduced (at a level unprecedented in priormultilateral environmental agreements) the concepts and mechanisms forflexibility in implementation. This may be critical for further negotiations
for two reasons. The first is that the cost-effectiveness they drive may beessential for adopting further commitments compatible with thestabilisation of greenhouse gas concentrations. The second is that they
permit the dissociation of actual reductions from the allocation of emission
rights, or assigned amounts. From a perspective of procedural equity this isimportant, as there is no reason that a cost-effective allocation would
necessarily be perceived as fair by all. Conversely, there is no particularreason for an acceptable allocation to be spontaneously cost-effective.
One of the strengths of the Kyoto Protocol is that it allowed differentiation,
not only between large groups of countries, like the Convention itself, butalso between individual countries. One of its weaknesses may be that it was
set up without any clear rules or guidelines to establish differentiatedcommitments – but purely on the basis of political negotiations.
Financial contributions under the Convention have been managed by the
Global Environment Facility (GEF), operating under the aegis of theWorld Bank, the United Nations Development Program, and the United
Nations Environment Program. Total contributions to the fund so far
have amounted to approximately $3.6 billion, of which approximately $1
billion have been devoted to climate change (the GEF also supports thepreservation of biodiversity, the protection of the stratospheric ozone
layer, and other environmental activities). These funding mechanisms,
further augmented as a result of the Bonn and Marrakech accords, havestarted to help capacity building and disseminate clean technologies. Such
resource transfers may be expected to help develop and disseminate lowcarbon or carbon-free technologies. However, there is no link between
these initiatives and any efforts that might be mounted in the Annex I
countries to address the same technologies.
The Convention and the Protocol (as interpreted by the Bonn agreements
and Marrakech Accords) provide a framework for debating futureinternational co-operation. However, they provide only a very limited step
toward achieving the Convention’s ultimate objective.
75

The next step is to extend emission reduction efforts beyond 2012 – andto include those countries currently without commitments.
Unfortunately, neither the Protocol nor the Convention provides much
guidance in these two areas. No clear rules were followed in developing
the differentiation levels, so they do not serve as guidelines for ratchetingthem up. Even the underlying Framework Convention provides limited
guidance: while calling for the stabilisation of GHG concentrations at alevel that would prevent dangerous interference with the climate system (alevel that is still undefined), it provides no guidance on targets or goals
beyond the year 2000. Similarly, the amendment procedures needed tobroaden participation in the agreement may be overwhelmingly
constricting – and make any enlargement of the group of participating
countries extremely difficult.
However, the current structure has a number of features that seemvaluable, and could be critical elements in any future accord. It iscomprehensive and allows for flexibility between sectors, gases, emission
sources and sinks. Its multi-year commitment and its banking provision
not only protect countries against unexpected short-term changes inemission patterns from economic or climatic surprises, but also allow the
reduction of carbon price volatility that could discourage emissionreducing investments, in the same way as energy price volatility alreadydiscourages energy-saving investments (see, e.g., Hasset & Metcalf, 1993;
Awerbuch & Deehan, 1995)11.
Moreover, the negotiations that preceded and followed the Protocol’s
adoption have introduced a wide audience to emissions trading and its
advantages of near-term cost-effectiveness and long-term environmental
effectiveness. Through the Clean Development Mechanism, they havealso introduced the idea to experts and decision-makers in developing
countries that they could enter into a global mitigation framework at little
or no cost – with benefits for the local environment, economic growth andtechnology transfer. Certainly, project-based mechanisms and emissions
trading should remain part of any future agreement based on quantitative
11 Nordhaus (2002), however, notes that banking in the sulphur oxides emissions trading regime in the USA
has not prevented price volatility.

76

targets. However, the question remains as to whether Kyoto-like targets,
i.e. fixed and legally binding quantitative commitments, are best suited fordeveloping countries – or even for industrialised countries – in the near
future. Some adaptations to the already negotiated framework may help
broaden the action against climate change.

77

4
INDUCING CHANGE
Stabilising CO2 and other greenhouse gas atmospheric concentrations –at whatever level – will require changes in the way we produce andconsume energy products and services. These changes may be partly
behavioural but will be mainly technical (see Box 6). By technical change
we include here the development of new technologies, their disseminationin the marketplace, and technology transfer between countries.
It is possible to induce technical and behavioural change through the useof a number of policy instruments (see, e.g., IEA, 2000c). However,ascertaining the effectiveness of those instruments – and therefore judging
the stringency with which they need to be applied – requires a clear
understanding of how such change is induced, and whether there are
specific directions in determining which technologies to promote.
LEARNING-BY-DOING
The view that technology deployment in the marketplace – not only
research and development efforts – is a key element to speed up technicalchange, is borne out by lessons from past technological developments12.
They reveal that the costs of technologies decrease as total unit volume
rises. The metric of such change is the “progress ratio”, defined as the
reduction of cost as a consequence of the doubling of cumulative installed
technology. This ratio has proven roughly constant for most technologies– although it differs significantly from one technology to another.
However, the fact that the progress ratio is usually constant means thattechnologies learn faster from market experiences when they are new thanwhen they are mature. The same absolute increase in cumulative
production has a more dramatic effect at the beginning of a technology’s
deployment than it has later on (see IEA, 2000b). This is why newtechniques, although more costly at the outset, may become cost-effective
12 It is also backed by recent developments in economic growth theory known as the Schumpeterian view on
economic growth and technical change. The essential characteristic of this view is the occurrence of a
succession of innovations in one or more sectors, resulting from research activities and made more rapid througha business stealing effect. See, e.g., Mulder et al, 2001.

79

0Box 60

Technical and behavioural changes

The respective roles of these changes are a matter of debate. The
canonical example of purely behavioural change is “switching off thelights when leaving a room” – while technical changes could be
replacing incandescent lamps by more efficient compact bulbs or
inserting a sensor in the lightning circuit that will automatically shut off
the light when the room is empty. Some of the interactions are complex:
for example, labelling of appliance efficiencies may modify consumer
behaviour – which in turn creates competitive pressures for thedevelopment of more efficient technologies.
There are many cases where technical and behavioural changes areinterlinked. For example, the choice of riding a bicycle rather thandriving a car or taking public transport for short distances may bethought of as purely behavioural or individual. But this choice may alsostem from a determination of the relative safety of the two choices –which itself depends on the building of bicycle paths. The case for using
a mass-transit system may be affected by parameters such as its
proximity, frequency, comfort, safety, and cost. In some cases technicaland behavioural components are even more closely linked. To choose tobuy a “hybrid” car, twice as energy efficient because it associates a small
thermal engine with an electric one, currently implies accepting thatdriving faster than certain speeds is only possible for short periods.
Another problem is the “rebound effect” – when technical changes
reduce the costs of an activity, leading to increases in that particular
activity. For instance, more-efficient cars might be able to travel longer
distances at lower cost – but the lower cost may induce drivers to use
their cars more frequently and for longer trips – offsetting some of theefficiency gains. The increase in real income derived from increases in
efficiency can also be used for other activities – some of which maythemselves lead to increases in emissions.
Some policies are designed to induce technical change (e.g., funding for
R&D), while others are primarily focused on behavioural changes (e.g.,
daylight saving time in winter and summer; awareness campaigns; etc.).
Still other policies seek to influence both (e.g., taxes).

80

0Figure 80

Electric Technologies in EU 1980-1995
Cost of Electricity (ECU(1990)/kWh)10
1985
Photovoltaics (~65%)
1
1995
1980

Wind Power - Average (82%)

0.1 Wind Power - Best
Performance (82%)

Supercritical Coal (97%)
1995

0.01
0.01

0.1

Electricity from
Biomass (~85%)

1

10

NGCC (96%)
100

1000

Cumulative Electricity Production (TWh)Numbers in parenthesis are estimates of progress ratios. They indicate the change in cost when market
size doubles. Thus, for example, if the size of PV markets double, the cost of PV electricity is reduced to
65% of its previous value. Source: IEA, 2000bover time if they benefit from sufficient dissemination. Figure 8 below
shows this phenomenon in the power-generating sector.
In many cases, niche markets allow the deployment required to drive
sufficient cost reductions to make the technologies commercial in otherarenas. However, policies can speed up – or slow down – this penetration.
In some cases, new technologies may be locked out; in others, certain
technologies can be advantaged and outpace their competitors.
Projecting forward using concepts of learning-by-doing is risky; there is aclear indication that some mature technologies no longer follow the
progress ratio of their early development. However, the concept does seemto be robust for many of the new technologies such as renewable energy.
Using these ratios, it is possible to gain some idea of how competitive
advantages may change with time. For example, in photovoltaics, a breakeven point with fossil fuels might be expected around 2025 if historical
growth at 15 per cent per year continues. Much of the progress in PV
growth is supported through niche markets – in remote places where
photovoltaics are already the most cost-effective solution. In the case ofwind power, market deployment has increased in a number of countries
where policies drive consumers to pay extra for wind power. The US in the81

1980s, and Denmark in the 1990s were the main leaders, and more
recently Germany, Spain and India have seen extensive growth in wind
generation. These extra prices constitute “learning investments” –cumulative costs for supporting new technology.
This “learning-by-doing” concept of technical change provides a strong
argument in favour of global early action (see Grubb, 1997, OECD,1999). However, it does not provide guidance on how to induce change –i.e., what policies to adopt to make new, climate-friendly technologies
fully economically competitive.
CO-ORDINATED POLICIES AND MEASURES
A number of questions arise when considering the tools to promotetechnical change.
Is the manner of inducing change necessarily a matter for international
negotiation? If a global agreement is reached on targets, the choice of how
to induce that change might well be better left to purely domestic
decisions, and based on specific national circumstances. In fact, this is the
choice that was made during the course of the UNFCCC and Kyoto
negotiations: the international community established only an“indicative” list of policies and measures under Article 2 of the Kyoto
Protocol, and set no requirements for any country on how to achieve theagreed targets.
Of course, the caps that were agreed by individual countries act assignificant incentives to create new technology options. This occurs
directly – when governments, in seeking to meet their targets, mandate
the use of new technologies such as renewable power. It also occurs
indirectly: the mere existence of a cap imposes a commodity scarcity – andunder market structures, imposes a price. Technology responds to pricemechanisms.
However, there may be other means to induce change.
The value of co-ordinated policies and measures has been the subject of along-standing debate amongst countries. While it has not formally
adopted such a policy structure, the Conference of the Parties recognises
82

its possible value: Article 2 of the Kyoto Protocol requires co-operation
between industrialised countries “to enhance the individual and combined
effectiveness of their policies and measures”. The consideration of theways and means to co-ordinate certain policies and measures devolves tothe Meeting of the Parties to the Protocol if it decides that it would be
beneficial to do so.
Clearly, there are a number of policies and measures that could benefit
from international co-ordination – or that could simply be made possible
through it. International markets for goods such as automobiles orappliances become fragmented if each country sets its own emission orenergy efficiency standards, and this fragmentation has a cost. Conversely,
the promotion of new, low- or no-carbon emitting energy technologies
could greatly benefit from concerted efforts to expand current markets.
However, beyond these obvious advantages to international co-operation,
the debate on co-ordinated policies and measures has also involved an(albeit partially hidden) debate on the value of co-ordinated price policies,
and in particular on carbon taxes.
Co-ordinated carbon taxes
Taxing carbon is one way to charge for carbon emissions, and thus
encourage their reduction. Taxes give price signals to economic agentsthrough markets, while leaving each of them free to reduce emissions – orpay for them. As revenue raising would not (presumably) be the main
purpose of such tax policies, carbon taxes could enable reductions to bemade in other taxes or charges and facilitate some other policy goal – suchas reducing unemployment. This “double dividend” would thus reducethe cost of the climate policy. A number of European countries havealready introduced carbon taxes as one of the policy tools to meet nationalemissions targets.
As extensively discussed in the literature (see Cooper, 1998; Nordhaus,
2002; OECD, 1999; etc.), co-ordinated carbon taxes could offer analternative form for an international agreement. Economically, such an
agreement would be as cost-effective as one based on quantitative targets
with emissions trading: cost-effectiveness is obtained by equalisingmarginal costs of abatement efforts within and between countries. In fact,83

all economic general equilibrium models use taxes to simulate efficient
policy actions! Finally, given the main feature of the climate change
problem – in particular the fact that abatement costs are linked to current
emissions, while abatement benefits are linked to much slower
concentration changes – prices ought to be preferred to quantity
instruments, as discussed earlier13.
However, the idea of co-ordinating global efforts through co-ordinatedimplementation of pure price instruments has proven unsuccessful in thecourse of climate negotiations. In particular, countries are reluctant toaccept the “intrusion” into their domestic policies that such a scheme
would necessitate. Carbon taxes seem politically difficult to introduce,and often incur opposition, including from energy-intensive industries,
whose profitability is often better preserved through some free allocationof tradable permits. Moreover, co-ordinated carbon taxes do not provide
an efficient means to incorporate countries with very different levels of
willingness-to-pay into a single, integrated framework. In this respect,
carbon taxes would do little to help extend existing agreements to new
countries, even though such an extension would increase the agreement’s
cost-effectiveness and reduce the risks of leakage. Finally, it is not clearthat taxes are universally effective in reducing emissions. For example, in
situations of market power (such as that existing in oil markets),
widespread carbon taxes might be offset through the willingness of themonopoly powers to reduce their share of the rents – leaving the level of
end-use prices unchanged.
An agreement to promote backstop technologies
Low- or no-carbon emitting energy technologies have many
characteristics of a public good – especially when the carbon externality is
not reflected in prices. As an alternative to both the international cap andthe GHG pricing mechanism, one possible way of promoting technicalchange could be a concerted effort to promote a small number of selected“backstop” technologies – those that offer a great potential for providing
energy with no or few carbon dioxide emissions. These could include, forexample, carbon storage and recovery in the power sector and/or
13 In Chapter 1 and in the Appendix.

84

liquefaction of coal, off-shore wind power technologies, concentrating
solar technologies, safe nuclear technologies, and fuel cells.
The focus of such an effort would be on accelerating the “learning-bydoing” process that might bring technologies more rapidly into themarket, and ultimately make them fully competitive. Such an approach
could be valuable particularly for those technologies that are still high on
the learning curve, e.g., for technologies that have no niche markets, or are
not competitive under current economic conditions.
Promoting such technologies by “internalising the externality cost” would
be the perfect answer from an economic standpoint. However, for political
economy reasons, such pricing policies could be difficult to implement. A
second-best solution would be to subsidise clean technologies directly.
The insufficient market production of public goods is the canonicaljustification for subsidies. It is fair to say, however, that countries with adevelopment policy for new technologies usually enjoy direct benefits interms of industry competitiveness – as is currently the case for the US,
Danish and German wind power industries.
However, within a global agreement, countries are likely to provide more
subsidies than they would in isolation: basic research and development,with relatively long payback periods (although high benefits) can best be
supplied co-operatively. Numerous examples of such co-operative ventures
are provided by the IEA’s “implementing agreements”– more than 40
international collaborative energy research, development anddemonstration projects14. Other examples can be found with the Climate
Technology Initiative or the Global Environment Facility – in particular
its operating programme n°7.
There is little doubt that more could be done in this respect. New
international agreements focusing on climate backstop technologies
could, inter alia, aim at linking together existing technology promotion
efforts – for example, those introduced by the G8 strategy to promoterenewable energy sources, and the still embryonic technology transfer
mechanisms under the Climate Convention. Such links might provide amore organised and aggressive strategy to speed up the development and
14 See the IEA website: www.iea.org and more specifically www.iea.org/techno/index.htm

85

0Box 70

The GEF and “backstop technologies”

One of the objectives of the seventh Operational Programme of the
Global Environmental Facility (GEF) is the reduction of greenhousegas emissions from anthropogenic sources by increasing the market
share of low greenhouse gas-emitting technologies. The focus is ontechnologies that have not yet become widespread, least-cost
alternatives in recipient countries, but where technical (and economic)
potential exists for specified applications. The objective is to beachieved through tools such as purchase agreements, and the aim is toincrease installed capacity – thereby improving learning, and taking
advantage of economies of scale. Ultimately, it is anticipated that energy
costs will decline to commercially competitive levels, rendering further
GEF assistance unnecessary. Several backstop technologies for bothsupply and demand sides are to be considered. Initially, following
consultations with the GEF Scientific and Technical Advisory Panel,
the following supply-side technologies are to be emphasised:(a) Photovoltaics for grid-connected bulk power and distributed power(grid reinforcement and loss reduction) applications;(b) Advanced biomass power through biomass gasification and gas
turbines;(c) Advanced biomass feedstock to liquid fuels conversion processes;(d) Solar thermal-electric technologies in high insulation regions,
initially emphasising the proven parabolic trough variant for electric
power generation;(e) Wind power for large-scale grid-connected applications;(f ) Fuel cells, initially for mass transportation and distributed combined
heat and power applications; and(g) Advanced fossil fuel gasification and power generation technologies,
initially to include integrated coal gasification/combined cycle
technologies.
Other solar thermal technologies (central receivers or parabolic dishes) or otherfuel cell technologies (molten carbonate, solid oxide, and proton exchange
membrane) may be considered for programmatic support in the future.

86

dissemination of these technologies than that offered by independent
national efforts.
Might such a technology approach be an effective alternative to global
GHG caps or GHG pricing policies? The problem is primarily one oftiming. As discussed in Chapter 1, to keep all future concentration
options open requires prompt and aggressive near-term action. In the nearterm, it is unlikely that major new technology development andpenetration can be accomplished without substantial costs. Most analyses
suggest that the main near-term alternative for abatement is energy
savings – and “hundreds of technologies” in all areas, according to the
IPCC, are required to provide these savings. Launching separate
technology agreements in each of these areas would be a daunting andprobably unsuccessful process.
A separate problem with such an approach lies in the difficulty in choosing
which technologies to select for subsidisation. History has shown thatgovernments are often less effective at “picking winners”. However, such a
concern could be overcome if the selection process was made by the market– with governments offering purchase agreements for technologies thatmeet certain specified criteria – rather than picking specific technologies.
Notwithstanding these potential drawbacks, a number of recent proposals
have been made for technology-based international agreements as
successors to the Kyoto Protocol. Scott Barrett (2001) suggests thenegotiation of a new agreement focusing on R&D funding. While suchan agreement might complement the current Kyoto Protocol, Barrett
maintains that over time it could fully replace it. Under his proposal, baselevel contributions would be determined on the basis of both ability andwillingness to pay, and could be set according to the United Nations scaleof assessments. To provide incentives for participation, each country’s
contribution to the collaborative effort would be contingent on the total
level of participation. The research emphasis would be on electric power
and transportation. This would be a “push” programme for R&D – adimension absent from the Kyoto approach.
However, Barrett also proposes a complementary “pull” incentive toencourage compliance and participation. He suggests that the most87

attractive approach would be to agree on common standards fortechnologies identified by the collective R&D effort, and established incomplementary protocols. As examples, energy efficiency standards could
be established for automobiles, requiring the use of new hybrid engines or
fuel cells, or standards for fossil fuel fired power plants might require
capture and storage.
A standards-based approach was also advocated by Edmonds & Wise
(1999). Under their hypothetical protocol, any new fossil fuel electric
power plant and any new synthetic fuels plant installed in industrialised
countries after 2020 would be required to capture and dispose of any
carbon dioxide from its exhaust stream or conversion processes.
Developing countries would undertake the same obligations when their
per capita income equals the average for industrialised countries in 2020
in purchasing power parity terms.
The proposal is built on the idea that given the finite oil and gas resources,
the climate change problem would be solved if coal could be displaced.
Part of the merit of this idea lies in its simplicity – it may be easier to “sell”
to politicians than the complex structures of taxes, or cap-and-trade
regimes that are currently in vogue with analysts. In addition, such a
proposal does not take on the entirety of global industry – but only
focuses on a single sector – and one that collectively, within OECD
countries, employs a relatively small total number of people.
However, the Edmonds and Wise proposal would need to overcome anumber of significant hurdles: there are likely to be huge difficulties ingetting a global agreement that would require either abandoning coal or
exploiting it only with additional costs; this will be particularly problematicin countries that have vast reserves – and even more so in countries with noimmediate alternative power options. Even for countries that do not use
coal in their power mix, the increased demand for alternative fuels once coal
had been displaced would be certain to drive up electricity costs – at least
until a backstop technology had been developed. Edmonds & Wisethemselves recognise that the cost of achieving a given concentration levelwith such a protocol would be 30 per cent higher than the economicallyefficient cases of taxes or tradable permits. This estimate may even be too
low, as the structure of the agreement would not encourage some of the88most cost-effective energy efficiency improvements. In addition, while thenumber of coal miners may constitute a small proportion of the population,
efforts to disadvantage them through government action have provenextremely difficult to introduce. In the UK, efforts to close down moneylosing coal mining operations took decades. In Germany, in spite of themulti-billion-dollar/year cost, coal subsidies are maintained to provide jobs
to a very small mining community, and coal capacity is seen as an important
contribution to national energy security goals.
While the near-term potential for a narrowly focused technology
agreement does not seem to provide an adequate “solution” to the climate
problem, the same may not be true over the longer term. Ultimately,solving the problem will require huge reductions in emissions – essentiallydecarbonising the world’s energy system. Current technologies are notavailable to do this on the scale required. Options such as large-scale
capture and storage (see Chapter 2), or enormous reductions in costs andincreases in capacity of nuclear or renewable energy would be needed tomeet this goal. Massive R&D investments would seem to be critical overthe longer term – and inasmuch as these can be enhanced throughinternational co-operation, agreements may indeed provide the criticalmissing element to a successful next step.
In sum, the adoption of more comprehensive and aggressive international
agreements to promote world-wide a handful of backstop energy
technologies with large potential would add a “push” to the research anddevelopment of these technologies. This could be extremely valuable in theabsence of a global agreement that directly or indirectly imposed a price on
carbon emissions - but is unlikely to fully substitute for such an agreement.
ANCILLARY BENEFITS AND SUSTAINABLE DEVELOPMENT
While inducing technical change directly is the focus of considerable
attention, solutions to the climate change problem may also come aboutfrom indirect efforts. These may take two forms: i) benefits in other areas
as a result of action to mitigate climate change, and ii) benefits to climatechange from policies in other areas. Both may be referred to as ‘ancillary
benefits”.
89The lure of ancillary benefits provides significant incentives for policy
action on climate change both in developing and developed countries.
Analyses of ancillary benefits from OECD countries’ policies to mitigate
climate change indicate that they could offset as much as 30 per cent of
mitigation costs. Such analyses assess, inter alia, air pollution and related
human health effects of GHG mitigation measures. Other OECD work
assesses the extent of ancillary benefits in selected developing countries(Brazil, Chile, and China) in close consultation with national experts(OECD, 2000). Local air and water pollution has long been associatedwith urban areas in many developing countries. The use of coal and noncommercial energies accounts for a high share of energy use, giving rise toacute levels of indoor and ambient air pollution. Increasing energy
efficiency, switching from coal to gas or electricity, and promoting clean
uses of renewable energy sources could simultaneously reduce local air
pollution and greenhouse gas emissions.
Other types of ancillary benefits exist, though they have been studied lessextensively. Reducing emissions from the transport sector, for example,
could lead to policies aimed at increasing different modes of transport
other than the use of the private car, thereby reducing congestion, traffic
noise and road accidents, and facilitating personal mobility. Switchingaway from imported fossil fuels toward domestic renewable resources
could add an energy security benefit to health and environment benefits,
as well as increasing energy efficiency in all sectors.
Another important arena for such ancillary benefits is that of energy
subsidy removal. Subsidies entail costs, and often fail to achieve theirintended goals, such as facilitating access to energy services by the poor.
This is often the case in the power sector: subsidies often go to the highor middle-income populations that have access to electricity, but deprive
utilities of the necessary resources to extend their grids and build newgenerating capacities.
IEA and OECD studies (see, e.g. IEA, 1999 and IEA, 2000a) haveexamined the implications of subsidy removals in the energy sector andconclude that considerable CO2 emissions reductions would accrue fromsuch policies. For a sample of eight countries – China, India, Indonesia,
Iran, Kazakhstan, Russia, South Africa and Venezuela – energy subsidy
90removal could lead to an average of 15 per cent reductions in CO2emissions from business-as-usual. Cumulatively, from these eight countries
alone, global emissions would be reduced by more than 4 per cent.
However, caution must be exercised in removing subsidies. In some cases,
they support cleaner fuels or cleaner appliances. For example, somecountries subsidise gas or kerosene lamps or stoves, providing immense
health benefits. While the climate benefits of the alternatives (often
combustible waste or biomass) may be superior, the new fuels provide
direct and immediate health benefits, particularly in countries whereindoor air pollution is one of the major factors contributing to morbidity
and mortality in women and children.
Studies have pointed to a large number of relevant policy actions being
taken in developing countries (Reid & Goldemberg, 1998). Many of thesepolicies have been adopted for reasons independent of climate change –but have had enormous emissions reduction benefits, as illustrated by thecase of China (see Box 8). A similar trend also seems to be developing inIndia, where CO2 emissions have almost stabilised since 1997.
There is a general consensus that ancillary benefits should be taken into
account in considering climate policies – as they might reduce their costs.
However, climate policies might also have ancillary costs (beyond directabatement costs). An example already mentioned is the risk of
constraining the removal of biomass fuels burned in an unhealthy fashion.
In countries with large coal reserves but low gas resources, fuel switchingmight reduce, not increase, energy security. Ancillary benefits must thenbe compared to similar benefits that would arise from more direct policies.
Local environmental benefits could be significant if a more efficientdesign is chosen for a coal-fired power plant, in the absence of an end-ofpipe device. However, if SOx and particulate emissions are the primaryconcern, scrubbers and filters would provide a higher level of abatement –but the benefits from improved energy efficiency would be scaled down.
Ancillary benefits have many links to the concept of sustainable
development and in particular its environmental dimension (see, e.g.,
Biagini, 2000; IEA 2001c). Sustainable development, however, cannot
ignore the global benefits of mitigating policies. As the IPCC (2001,91

0Box 80

China reduces CO2 emissions

Chinese CO2 emissions peaked in 1996 at 3.2 Gt CO2 and havedeclined every year since then, although China’s GDP has continued to
grow. While questions have been raised as to the precise extent of the
reductions (they may be exaggerated due to methods of calculating
emissions, particularly from coal), the de-coupling between economic
growth and CO2 emissions seems real and impressive. China is theworld’s largest coal consumer, and second in CO2 emissions after theUSA. Energy-efficiency improvements are the most probableexplanation; Chinese policy, combined with a degree of market
opening, has led to a pronounced decline in energy intensity (albeit
from initially quite high levels). Price reform and liberalisation, subsidy
removal, pollution taxation and legislation tightening can be expected
to continue to foster additional improvements. Furthermore, thousandsof small (and inefficient) coal mines and small industries have closed
down for economic and environmental reasons – and most of theindustry growth has occurred in recent years in newly-built, moreefficient, cleaner and larger plants.
It is hard to guess, however, whether this emission reduction willcontinue, or whether, with some of the larger inefficiencies eliminated,emissions will again become coupled to GDP (for a discussion, seeSinton & Fridley, 2000).
Synthesis Report) notes, local, regional and global environmental issues
often combine in ways that jointly affect the sustainable meeting of
human needs. Several environmental issues – air pollution, biodiversity,
land degradation and desertification, fresh water degradation – are linked
with climate change via both common biogeochemical and socioeconomic processes. These interactions offer opportunities to capturesynergies in developing response options, enhancing benefits and reducing
costs. Moreover, approaches that exploit synergies between environmental
policies and key national socio-economic objectives like growth andequity could help mitigate and reduce vulnerability to climate change, as
well as promote sustainable development. The application of supply- anddemand-side energy-efficient technologies, for example, simultaneously
92reduces various energy-related environmental impacts and can lower thepressure on energy investments, enhance energy reserves and facilitate
access to energy services. The same would probably apply to sustainabletransport or land-use policies, with many other ancillary benefits.
Policy implications are less clear. Ancillary benefits might help countries
adopt or strengthen climate commitments – but may not be sufficient forthe majority of developing countries to take on stringent targets such as
those adopted under Kyoto by the Annex I Parties. For these countries,
the concept of possible climate benefits from non-climate policies might
be more attractive.
The multiple and complex linkages between climate change andsustainable development require policy integration at all levels (Beg et al.,2002). This does not necessarily mean that the climate change negotiatingprocess should be merged into the broader sustainable development
agenda. Mitigating climate change requires urgent and specific action: its
solution cannot be made dependent on solving all other pressing needs.
Unless we are prepared to accept high atmospheric CO2 concentrations,
we cannot afford to wait for action to be taken – and this cannot wait
until all other development problems have been solved in developing
countries. The threat of climate change certainly strengthens the sense of
responsibility, and reinforces public opinion on the importance of
supporting developing countries. Beyond its environmental benefits, cooperating to solve climate change at a global level might also become an
opportunity for sustainable development, and help build more confidence
in international relationships.
PROMISES AND LIMITS OF FINANCIAL ASSISTANCEAND THE CLEAN DEVELOPMENT MECHANISM
The effort to induce technical change has several components, including
both the development and the diffusion of technologies. While thepreceding discussion has focused mostly on development, it is also useful
to consider policy instruments that may foster dissemination. Over the
past few decades, the primary policy tool to promote the spread oftechnology to the developing world has been financial assistance – either
93through grants or through preferential or concessional loans. In the courseof climate negotiations, a new instrument has also been added: the Clean
Development Mechanism (CDM).
Financing under the Convention and the Protocol now takes a number ofdifferent avenues. The Global Environmental Facility is the main “financial
mechanism” of the Convention, though it also addresses biodiversity,international waters and ozone depletion, and finances project in economies
in transition as well as in developing countries. Since its inception, the GEF
has given $1 billion for climate change projects and leveraged more than
$5 billion in co-financing. Usually, GEF funds are linked to other loans
from multilateral institutions (e.g, the IBRD or the ADB); they are also
linked to projects financed with national or bilateral funds. More than half
has been devoted to renewable energy projects in 47 developing andtransitional countries. While GEF funds have increased slightly over time,they are not considered adequate to address climate issues.
The Marrakech Accords instituted three new funds: i) a Special Climate
Change Fund under the Convention to provide additional assistance foradaptation, technology transfer, energy, transport, industry, agriculture,
forestry, and waste management, and broad-based economic
diversification; ii) a Least Developed Country Fund, also under the
auspices of the Convention, to support these countries, primarily in theireffort to adapt to climate change; and iii) a Kyoto Protocol Adaptation
Fund to finance adaptation to climate change; this last fund is to befinanced by the CDM levy as well as voluntary contributions.
What these funds will be able to deliver remains an open question. They
have been created in a context of declining funding of official
development assistance (ODA) and, more generally, in a context ofincreasing scarcity of public spending in most OECD countries. Manyobservers believe that while they will help to finance capacity building at
national levels, they will never be large enough to finance the bulk of costs
associated with the profound changes in the energy sector required topromote development while reducing global emissions.
Concerns about the adequacy of funding, an interest in lower-cost
opportunities for Annex I emissions reductions, and an interest in94

engaging non-Annex I Parties in actions to mitigate climate change largely
drove the negotiators at Kyoto to create the Clean Development
Mechanism, one of the most innovative features of the Kyoto Protocol.
While the GEF and other Funds rest on public financing, the CDM isintended to facilitate the financing of emissions reductions in developing
countries and technology transfer from the private sector.
The CDM’s objective is to assist developing countries in achieving
sustainable development. At the same time, it aims to contribute to theultimate objective of the Convention, in part by assisting industrialised
countries in achieving compliance with their quantified emission
limitation and reduction commitments. The main difficulties in making
the CDM work arise from the twin issues of “additionality” and“baselining”. To obtain “certified emission reductions” – that is, newemission rights – from investments in developing countries, investors
must demonstrate that emission reductions are “additional to any thatwould occur in the absence of the certified project activity”. Ways andmeans to determine that additionality and to establish relevant “baseline”
emission scenarios that would allow calculating the amounts of emission
rights that could accrue from each project have been – and still are –subject to intense research and debate.
However, for the purposes of considering the next steps to mitigate
climate change, only a few key issues are relevant: whether the CDM will
work; whether the number of projects flowing through the CDM pipeline
will be large enough to affect developing country emissions; and whether
the CDM mechanism can establish sufficient incentives to promote thedevelopment and dissemination of new technology.
The jury is still out on how effectively the CDM will work. Proposals to
restrict the number of projects accepted (through legitimate fears that someprojects might not actually contribute to “real” reductions) are frequently
made by Parties. Ultimately, if too few projects are allowed through, the net
environmental benefits will be lower – even if each individual project isenvironmentally better. If, on the other hand, too many of these projects“would have happened anyway”, not only will the global level of emissions
increase above agreed levels (Bernow et al., 2001) but, perhaps more95

importantly, truly additional projects that would expand niche markets for
new technologies may be crowded out (see Figure 9).
0Figure 90

Possible effect of baseline stringency and complexity on project
numbers and a project’s environmental additionality(from OCDE/IEA, 2000)

Baseline stringency

Stringent(Highadditionality)Lax(noadditionality)

Some projects

Few projects

Many projects

Some projects

Simple: Lowertransaction costs

Complex: Higher
transaction costs
Baseline
complexity

Many projects

Some projects

Information from economic models does provide some context forassessing the environmental and financial potential of the CDM regime.
In simple terms, CDM can be modelled as emissions trading with sometransactions costs. Thus, models that examine the benefits of global
trading can provide some estimate of both the volume of CO2 reductions
that would be generated through projects, and the financial revenues suchprojects would generate for clean technology.
Model results of a “perfect” CDM system suggest annual revenues ofabout $10 billion/year (presuming US participation). While thisrepresents only about 10 per cent of current foreign direct investment in
the developing world, it is likely that a significant share of the investment
would be in the energy sector – and could certainly influence the types oftechnology choices made.
Unfortunately, while total investments may be large, the CDM value ofmost projects would be relatively small. Some of the most innovative
projects may need more than a small carbon price adder to make them96commercial – so CDM by itself may not promote market penetration of
expensive options without other price supports. These considerations
partly explain the decisions at Bonn and Marrakech to develop simplified
rules for small-scale projects, notably in the fields of energy efficiency andrenewable energy sources. Small projects can hardly afford transaction
costs and would benefit from simplified procedures, while any
environmental risks in promoting such projects would be minimal.
Another quite different approach to the CDM process has yet to be legallytested in the political arena of the UNFCCC. Under this interpretation,
policies may be defined as CDM projects – and governments could get
CDM credit for adopting them as long as the results could be quantified,and additionality was verifiable. An example of such a programme might
be an effort by a city to put in new bus lanes, or set renewable energy
targets. If the GHG reductions from these plans could be assessed, thecredits they generate could be offered on the international market. In sucha case, the CDM process would have characteristics more closely related
to the emissions trading regime – and could bring significant benefits
both in terms of technology development – and in terms of engaging
developing countries in the climate mitigation effort. A possible
additional advantage of CDM projects under a so-called “unilateral”
scheme would be – as with emissions trading – that the host country
could get a share of the “surplus” – the difference between local abatement
cost and international permit price.
Technology development and diffusion is a relatively slow process. However,
it is clear that it is critical to solving the climate change problem – and that
we must take full advantage of all the means at our disposal to facilitate its
further and more rapid evolution and widespread penetration. In both thenear and long term, countries will continue to have higher environment anddevelopment priorities than climate change. This is particularly true fordeveloping countries, where the immediate needs for food, water and healthpre-empt other secondary and longer-term questions. However, policy tools
do exist to promote the technologies that will be needed to mitigate climatechange, even when it may not be a high priority issue. Governments,
particularly governments in industrialised countries, can reap both direct
and indirect benefits from undertaking such policies.
97

5
FUTURE COMMITMENTS:
TIMING, ALLOCATION
AND STRUCTURE
At Kyoto, assigned amounts were set in a largely political process with little
underlying analysis of its implications – and even less transparency. The
magnitude of the overall commitment, and the differentiation that resulted
from the process have been questioned by a number of commentators.
Berk and den Elzen (2001), for example, noted that “In order to secure theparticipation of all developed countries, the negotiations have resulted in asituation where countries that bargained hard got exceptional allowances, whileothers committed themselves to lower targets than they were originally willingto accept. Thus, without accepted principles and rules for determining a fairdifferentiation of commitments, negotiations resulted in a watering down of theoverall emission reduction target and weakened the principle that all developed
countries should lead by reducing their emissions.”
While it is likely that in the next “round” of climate negotiations politicalprocesses will again have the final word, it is possible that an agreement
on some rules, guidelines or principles to establish future assigned
amounts will facilitate this political process. Three different but related
questions should be considered:■

Timing: when should (or could) additional countries take oncommitments?

■

Allocation: how to share emission reductions – or emission “rights”(or assigned amounts in the Kyoto Protocol language)?

■

Form: is a Kyoto-like fixed legally-binding target the best option fordeveloping countries or even for industrialised countries – and should
differentiation of commitments extend from setting the numbers toshaping the nature of targets?

The discussion on timing and differentiation dates back to even before thesigning of the UN Convention. This long-standing debate overflows into
formal negotiations from hotly debated philosophical issues as well as
99

economic and environmental concerns. However, the equally importantquestion of the form has been raised only recently.
TIMINGAs earlier discussions have made clear, to keep open the options forstabilising GHG concentrations, all countries, including all developing
countries, must ultimately participate in efforts to reduce emissions. The
lower the level of acceptable concentrations, the more rapidly cuts must
be introduced – and the greater the participation required to ensure
success.
While ultimately developing countries must engage (and if significant
climate change is to be avoided, such engagement must come soon), thespecific timing of their acceptance of emissions reduction obligations ismore difficult to ascertain. Resolving this question will requireconsidering both how the overall obligations for reduction are to be shared
among countries, and the capacity of countries to take action.
A number of arguments exist as to why developing countries should takeon commitments early. These include:– reducing global emissions – and thus, the climate change to whichdeveloping countries are the most vulnerable;– early adoption would accelerate the attainment of ancillary benefits (innew technology and often cleaner local environments) brought by many
GHG reduction initiatives; and,– increased foreign direct investment (FDI) and official development
assistance (ODA) – a growing share of which is now coupled to climate –and even more of which might flow if commitments were undertaken.
However, developing countries have responded with corresponding (andother) objections:– near-term actions might make subsequent action more costly;– developing countries may take local pollution abatement efforts anyway,
but do not wish to be bound by climate commitments;100

– they have little confidence that foreign assistance would be forthcoming:the declines in levels over the past few decades leave little room for
optimism;– developed countries should act first.
While each of these objections leads to counter-arguments, the politicaldebate is extremely divisive. Some additional analytic rigour, may,
however, open other possibilities. Accommodating concerns while moving
the system forward argues for a significant level of differentiation in
obligations.
The Climate Convention already provides for “timing differentiation” in
two aspects: i) it allows countries with economies in transition to establish
their own base year (and countries have chosen years ranging from 1987
to 1990), and ii) it allows least developed countries flexibility in choosing
the year for their initial communications. The Kyoto Protocol provides forfurther timing differentiation by allowing countries to choose whether touse 1990 or 1995 for the base year for CFC substitutes.
There are many different schemes that could be used to determine thetiming for future agreements. One way to assess timing parity would be touse the Convention process itself as a model: given that approximately 15
years will have elapsed between the time the Convention entered into
force and the time that Annex I Parties would need to have binding
commitments, a similar timeframe might be applied to developing
countries. Thus, a subsequent negotiation might assign new Party
commitments to begin 15 years from the conclusion of the newnegotiations. Other existing environmental agreements have used suchtiming differentiation mechanisms. For example, the Montreal Protocol
on Substances That Deplete the Ozone Layer provided for a ten-year lag
between the requirements for developed and developing country actions.
Another alternative is to phase in a country’s commitment once it hasreached a certain level of development. This might be expressed in generalterms such as GDP per capita or in more climate relevant terms such as
CO2 or GHG emissions per capita. It is clear that, in general terms, sucha distinction was used in deciding how to allocate classifications in theConvention: while no specific index was chosen, OECD countries were101

grouped together with commitments, while other countries had fewer, or
none. Arguably, on both GDP and emissions grounds, they were among
the top-ranked countries in the world, and using almost any index, would
have been obligated to undertake actions. The other countries included in
Annex I of the Convention were part of Eastern Europe or the FSU – andfor political reasons insisted that they be classified at the same level asOECD Members. On emissions grounds, these countries too would ranknear the top of a global list. For the purposes of adopting commitments,
all other countries were exempt.
However, while the ranking of countries may have been accurate at a
specific point in time, it is clear that such rankings are ephemeral at best.
Today, about twenty-five non-Annex I countries have per capita emissions
above those of the lowest Annex I Party, about forty such countries have a
per capita GNP (on a purchasing power parity basis) above that of thelowest Annex I Party (see ranking on per capita CO2 and GDP in Tables
6 and 7). Thus, either a periodically updated list may be necessary, or aswitch to an entirely different regime.
Claussen and McNeilly (1998) further codify the differentiation concept forthe climate process. Using three criteria – standard of living, historicalresponsibility and opportunity – to rank countries into groups, they assign
to each an informal “timing”: the first group “must act now”, the second
group “should act now, but differently”, while the third group “could actnow”. While the potential concrete implications of this different groupingof countries are not specified, it is worth noting that the first group includes
some non-Annex I countries – but does not include all Annex I countries.
Berk and den Elzen (2001) have assessed the compatibility of such “multistage” approaches with low CO2 concentration objectives (aconcentration goal of 450 ppm under the A1 emissions scenario – amember of the IPCC Special Report on Emission Scenarios family, see
Box 3 and Figure 5 in Chapter 2). They assume that developing countries
will take on targets when their per capita income reaches half the 1990
Annex I per capita income. When they reach three-quarters of 1990
Annex I per capita income, it is assumed that developing countries will
join the Annex I group. Within this group, the emission reduction burden102

0Table 60

Countries Ranked on Per Capita Energy-related
CO2 Emissions (2000, tonnes per person)
Rank

FCCC Party

CO2 per
capitaRank

FCCC Party

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
19
21
22
23
24
25
26
27
28
29
30
31

Qatar
KuwaitUnited Arab Emirates
USA**
Bahrain
Luxembourg**
Australia**
Canada**Netherlands Antilles
Brunei
Saudi Arabia
Belgium**
Trinidad and Tobago
Czech Republic*
Netherlands**
Ireland**Finland**Singapore
Russia*Estonia*
Germany**
IsraelOman
Chinese Tapei
North Korea
Denmark**
Republic of Korea
Japan**
United Kingdom**
CyprusGreece**

59.99
31.53
23.66
20.57
20.44
18.24
17.19
17.13
15.23
14.95
12.58
11.73
11.63
11.56
11.13
10.88
10.59
10.45
10.34
10.22
10.14
10.01
9.82
9.69
9.51
9.38
9.17
9.10
8.89
8.36
8.31

32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62

Kazakhstan
New Zealand**Austria**
Iceland**
Poland*Norway**Italy**
Libya
Slovenia*
Spain**
Slovakia*
South Africa
Turkmenistan
France**Ukraine*Portugal**
Sweden**
Malta
Switzerland**Belarus*
Hungary*
Venezuela
Bulgaria*
Uzbekistan
Islam. Rep. Iran
Malaysia
Former Yugoslavia
Macedonia
Croatia*
Bosnia Herzegovina
Romania*

CO2 per
capita
8.26
8.26
7.74
7.69
7.58
7.48
7.38
7.34
7.27
7.13
7.01
6.91
6.59
6.18
6.08
5.96
5.86
5.84
5.80
5.55
5.51
5.32
5.23
4.64
4.59
4.56
4.31
4.14
4.06
3.86
3.85

Source: Data from IEA. * indicates Annex-I membership, ** indicates Annex-II membership

103

0Table 70

GNP per capita 2000, Purchasing power parity(international dollars)

104

45,47032

New Zealand**

18,530Liechtenstein... aUnited States **34,100

33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62

Slovenia*
Korea
Portugal**
Greece**Malta
BahamasBarbados
BahrainCzech Republic*
Argentina
Hungary*
Saudi Arabia
Slovak Republic*
St. Kitts and Nevis
Seychelles
Antigua and Barbuda
Mauritius
Estonia*South Africa
Chile
Poland*Uruguay
MexicoMalaysia
Trinidad and Tobago
Russian Federation*
Costa Rica
Croatia*
Belarus*Brazil17,31017,30016,99016,86016,53016,40015,02014,410 a
13,78012,05011,990
11,39011,04010,960... a
10,000
9,940
9,340
9,160
9,100
9,000
8,880
8,790
8,330
8,220
8,010
7,980
7,960
7,550
7,300

1

Luxembourg**

2
3
4

Bermuda... a

5

Switzerland**

30,4506

Norway**29,6307

Iceland**28,710

8

Cayman Islands

... a

9

Belgium**

27,47010

Denmark**

27,25011

Canada**27,170

12

Japan**

27,08013

San Marino

... a

14

Austria**

26,33015

Netherlands**

25,85016

Monaco**

... a

17

Ireland**25,5270

18

Australia**

24,97019

Germany**

24,92020

Brunei24,910 a

21

Singapore

24,91022

Finland**24,57023

France**24,42024

Sweden**23,97025

United Kingdom**

23,55026

Italy**

23,47027

Cyprus

20,78028

U. Arab Emirates

19,410 a29

Israel19,33030

Spain**

19,26031

Kuwait18,6900Table 7 (continued)0

GNP per capita 2000, Purchasing power parity(international dollars)
63
64
65
66
67
68
69
70

Botswana
Latvia*TurkeyLithuania*
GrenadaNamibia
Romania*
Thailand

7,170
7,070
7.030
6,980
6,960
6,410
6,360
6,320

71

Tunisia

6,070

72

Colombia

6,060

73

Iran

5,910

74

Venezuela

5,740

75

Dominican Republic

5,710

76

Panama5,680

77Equatorial Guinea

5,600

78

Bulgaria*

5,560

Source: Data from World Bank
Notes: a: 2000 data not available; ranking is approximate. Figures in italics are the most recent estimatesfor 1998 or 1999. * indicates Annex-I membership, ** indicates Annex-II membershipis shared proportionally with their per capita contribution to CO2induced temperature increase – following the Brazilian Proposal (Brazil,1997). Other countries follow their baseline emissions.
Modelling these assumptions using the FAIR model15 leads to theconclusion that the emission pathway leading to stabilisation at 450 ppm
is abandoned in 2020 – even if Annex I country emissions were below
zero. The reason is that major developing countries like China and India
would only start participating after the middle of this century.
Stabilisation at 550 ppm remains possible, but would leave very little
emission space for the whole Annex I. As a result, write Berk and den
Elzen, “In the case of stringent climate goals, a per capita income threshold forparticipating in global emission reduction efforts may result in too long a delayin the participation of non-Annex I regions to meet these goals.”
As long as the delay in emissions reductions from all nations, including
developing countries, continues, the world cannot hope to remain on a
low concentration path. It is therefore vital that mechanisms be found to
15 Framework to Assess International Regimes for differentiation of future commitments. Berk & den Elzensuggest de-carbonisation targets or carbon intensity targets that represent one form that “indexed” ordynamic targets could take. However, the form of the target does not influence the result; it is entirely
dependent on the assumed timing.

105

accelerate the phase-in of commitments – if not for all countries, than atleast for the large emitters. Establishing a global regime that benefits thewhole world – including developing countries – could be a partial solution
to this goal.
Ultimately, reducing the issue of differentiation to no more than aquestion of the delay in the timing of developed and developing country
action is likely to be unsatisfactory. Other means, including differentiationin assigned amount levels, or in the form of commitments, may better
address developing country concerns and speed up the point at which
global emissions begin to decline.
ALLOCATION
There are two basic ways of considering this issue: resource-sharing andburden-sharing. The first of these raises the question of how to allocate
global emission rights in a manner compatible with the objective of theConvention. The second concerns how to allocate the efforts needed todepart from business-as-usual emission trends and associated climate risks.
While these two opposite paradigms might lead to rather different
outcomes, the search for an outcome acceptable by all parties tends tonarrow the range of concrete possibilities.
Resource-sharing and equal per capita emission
rightsIn the context of this approach, the “resource” in question is the ability of
the carbon cycle to absorb man-made CO2 and other greenhouse gases so
as to keep their concentrations constant. This defines a level of global
emissions compatible with the objective of the Convention. Under aresource allocation scheme, this global amount of emissions would thenbe allocated to countries, or perhaps to individuals. Both options haveadherents in the climate negotiating community.
However, there might be many reasons for per capita emission levels todiffer from one country to another, such as climate, natural resources, etc.
(see, e.g., Neumayer 2002). Thus, a fair distribution might need to takeaccount of certain national circumstances with global benefits, such as106

whether a country refines oil, or produces energy-intensive materials(steel, cement, etc.), or extracts clean natural gas (with overall emission
reductions but local emission increases). However, differences in
economic structure account for far less of the variability in carbon
intensity in the industry sector than the energy intensity of the underlying
economy (as revealed in “mine-yours” comparisons, Schipper et al, 2001).
Some potentially improbable outcomes might emerge under a strict percapita allocation system. For example, Denmark would pay Norway (orArgentina would pay Brazil) forever for the zero-carbon content of theirexported hydropower – even after a safe world level of emissions is reached.
An equal per capita distribution would imply large wealth transfers fromthe North to the South. Industrial countries would have much less thanthey are accustomed to using, developing countries much more. If there
were no emissions trading under such an allocation, it would proveenormously inefficient economically: no emission reductions would beundertaken in developing countries, where they are likely to be cheaper.
Instead, the entire obligation, and hence the reductions, would all takeplace within industrialised countries, where costs would not be expected
to be the cheapest. High costs would in all probability generate resistanceto stringent targets – if indeed they were accepted at all.
If emissions trading is allowed, the system becomes more efficient.
However, developing countries still receive more emissions allocations
than they can possibly use, and industrialised countries much less.
Industrialised countries would need to buy surplus emission rights indeveloping countries. This may have perverse consequences and have a
critical impact on the stringency of the targets. This is illustrated in Figure
10. In the case where a significant amount of hot air (surplus emissions
rights) is assigned, the majority of the compliance would be in transfers of
payments – and not in “real” emissions reductions. As the marginal costsof “real” reductions theoretically drive the price for hot air, and given alikely limit on “willingness to pay”, the negotiated outcome would
probably be of limited stringency.
It is far from clear whether, in spite of their superficial attractiveness, percapita allocations would indeed be equitable. There is no guarantee that107

0Figure 100

Possible effects of an equal per capita allocation
Surplus
allowances(above BaU)

Current emissions

AssignedamountDeveloped

AssignedamountCurrent emissions
Assignedamount(on BaU)

AssignedamountDeveloping

Developed“No harm” rule

Developing

Equal per capita allocation

Respective assigned amounts of developed and developing countries, in solid lines. The dotted lines
indicate current emissions of the two groups. In this purely illustrative figure, an illustration of a noharm rule is shown on the left. Assigned amounts for developed countries represent an absolute
reduction (of 25 per cent), while those for developing countries represent an absolute increase (of say,
30 per cent), which is close to business-as-usual (BaU) trends. On balance, there is a 7.5 reduction in
global emissions. On the right, an illustration of an equal per capita allocation is given for the same
global reduction. The amount of rights that developed countries must buy is more than four times thatof actual reductions – and so is the price they should accept to pay.
0Figure 110

Contraction and Convergence (CO2 emissions in GtC)
10
9Deforestation

8
7
6

Rest of World

5
4
3

Annex 1
(nonOECD)

2

OECDminus USA

India
China

1
UNITED STATES

060 880 900 920 940 960 980 000 020 040 060 080 100 120 140 160 180 200
2
2 2
2
2 2
2 2 2
2
2
1 1
1
1 1
1

18

Source: Global Commons Institute, 2000.

108

the developing countries receiving surplus permits would be those that
suffer the most from climate change. The adaptation fund created by the
Marrakech Accords seems to be designed to serve this purpose.
Furthermore, while the allocation on a per capita basis might be theintent, the actual practice is more likely to be an allocation to thegovernment on the basis of population – and there is little evidence thatstate-to-state transfers always yield economic growth and development. It
is more probable that this distribution of rights will depress economic
growth in the North and thus also in the South. As a result, the situationof the poor in developing countries may worsen.
Contraction and convergence
Given the obvious shortcomings of an immediate “equal per capita”
allocation of emission rights that would be compatible with scenarios
leading to stabilising GHG concentrations at low levels, their proponents
usually see it as a longer-term objective (see, e.g., Agarwal & Narain,
1998; Meyer, 2000). Allocation for near-term targets would thus be aninterpolation between current emission levels and a longer-term equal per
capita allocation (see Figure 11). Others recognise that per capita
allocation does not fully account for differing national circumstances, andsuggest that a better solution to the allocation problem would be to mix
per capita and other criteria (see, e.g., Aslam, 2002).
This view is partly reflected in the Marrakech Accords (Decision 15/CP7)that states that Annex I Parties shall implement domestic action “with a viewto reducing emissions in a manner conducive to narrowing per capita differences
between developed and developing country Parties while working towards
achievement of the ultimate objective of the Convention”. If this is the case fordomestic action, it may, a fortiori, also be the case for emission allocations.
Berk and den Elzen (2001) suggest distributing emission allowances with a
global CO2 emission profile for stabilising CO2 concentration at 450 ppm,
with a linear convergence in per capita emission rights either in 2030 or in
2050. In the case of convergence as early as 2030, allocations for countries
like China and India remain constantly above baseline needs, while forindustrialised countries reductions by 2030 would be in the range of minus
60 per cent (Western Europe) to minus 75 per cent (North America).
109

In comparison with the “multi-stage” approach (see above), Berk and den
Elzen find that the “convergence regime offers the best opportunities for
exploring cost-reduction options as all parties can fully participate in global
emission trading. There may be excess emission allowances (hot air), but thiswill not affect the effectiveness nor the efficiency of the regime, only the
distribution of costs. Second, there will be no so-called carbon leakage.”
However, it should be noted that these advantages are those of any scheme
allowing immediate global participation in emissions trading – and notnecessarily those of the suggested distribution.
This “contraction and convergence” proposal has some of the shortcomingsof an equal per capita allocation – although to a lesser extent – notably
creating hot air that should be bought back by industrialised countries. Suchan approach might be superior to the “multi-stage” approach in delivering
the desired concentration level, as it requires that actual emission reductions
begin in developing countries before they reach a given threshold.
However, as with all longer-term commitments, there is a problem inensuring that future governments in these countries will feel bound bysuch agreements after they cease to deliver surplus allowances but instead
become constraints. In actual practice, this discussion may be entirely
moot: developing countries are currently refusing to take on fixed andbinding commitments, and no proposal for short-term generous
allocation seems to have much likelihood of being accepted. The fear

0Box 90

An application of the Triptych Approach:
The European Union and Kyoto

One form of such an analysis was undertaken by the European Union
prior to determining the level of its own internal burden sharing. In its
assessment (the “Triptych Approach”; described in Phylipsen et al.,1998), levels were determined by dividing emissions into three parts(electricity generation, heavy industry, and domestic sectors), and thenestablishing targets for each sector and for each country – which werethen aggregated to determine a national objective.
110Electricity generation emissions were assumed to be highly country
specific (largely as a function of different initial fuel sources), but targets
limiting growth to less than 1 per cent per year were established. While
heavy industry emissions also differed, such differences were smaller
than for electricity; in this area, countries agreed to the same fixedemission reduction factor. Finally, it was agreed that countries should
move to a per capita convergence with respect to domestic sectors – anda figure of 20 or 30 per cent below 1990 levels in the year 2030 was
established for purposes of analysis. Aggregating these sectors provided
a range of reductions for European Union members.
As can be seen in Figure 12, there is a reasonable correlation between
the reductions derived from this analysis and the first internal burdensharing agreement reached within the EU following Kyoto. Differences
seem to emerge from a consideration of new data, the additional
stringency of the targets agreed in Kyoto, and some internal
negotiations.
0Figure 120

Relationship between EU member country triptych targets
and finally-adopted Kyoto targets under burden-sharing
arrangement
30
20

Final Kyoto Target

10
0
-30

-20

-10

-10

0

10

20

30

-20
-30
-40
Target based on Triptych

Source: based on Phylipsen et al., 1998

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(with this as with other proposals for current commitments, no matter
how weak) is of a progressive “ratcheting” process leading at some future
point in time to real constraints on their economic development – andeven worse, that such constraints would begin to take effect long before
they reach current industrialised countries’ levels.
There are a large number of other proposals offering possible solutions to
the global burden-sharing issue. Groenenberg et al., 2000, for example,
suggest extending the “Triptych approach” that has been used to support
the EU burden-sharing agreement to enlighten global burden-sharing
negotiations (Box 9). The Triptych approach distinguishes the energyintensive industry sector, the power sector and the domestic sectors.
Another example is the “multi-convergence” approach suggested by Sijm
et al. (2001). It combines elements of the “multi-stage” approach, the“Triptych approach” and contraction and convergence.
Burden-sharing and “no harm” rule
Another way of framing the whole issue is that of “burden-sharing” or “costsharing”. Using this approach, the overall cost of compliance is assessed, andthis cost is allocated between countries. A number of approaches have been
provided in the literature to evaluate the overall cost – essentially of
decarbonising the global economy. As noted in the preceding discussion, theissue of “when” such decarbonisation is achieved will affect the overall levelsof atmospheric concentration; it will also affect the cost.
Other alternatives have been suggested to address these issues. One is the“no-harm” rule (after Edmonds et al., 1995), where poor people would
have to pay nothing. If objectives were set on the uncontrolled emission
baselines for most developing countries, after “win-win” actions have beenrealised, then any further (and implicitly costly) actions would be financed
by industrialised countries through emissions trading (Philibert &Pershing, 2001). Efforts to keep permit allocation as close as possible totheir real (and growing) needs while ensuring that they don’t have to pay
might be reflected in options such as “dynamic targets” and “non-binding
targets”. Thus, a right to develop would be given to those in developing
countries. They would benefit from such an allocation if they could sellpermits at an international price for emission reductions that were112

cheaper. This is not grandfathering: allocation for industrialised countries
would decrease over time and would increase for developing countries (tosome extent and a certain level of development), but current situations
would not be ignored.
Emissions trading: the need for new options
In fact, independent of the allocation regime, the prospects for anequitable solution to the burden-sharing problem are enhanced throughthe use of emissions trading. Economically efficient allocation would
allow cuts to take place where they cost less: (presumably) in developing
countries. Numerous modelling exercises (see, e.g., Weyant & Hill, 1999;
Babiker & Eckaus, 2000; Rose & Stevens, 2001) have shown how a global
trading regime would reduce the overall costs of achieving a given climate
target. Global trading could then, in the long run, allow the achievementof more ambitious environmental objectives.
Jean-Marc Burniaux and Paul O’Brien (OECD, 1999) compare threedifferent scenarios for global participation, that lead to three different
levels of GHG concentrations by 2200:■“Kyoto forever”: Annex I Parties limit their emissions at the levels
specified in the Kyoto Protocol, other countries are not constrained.
Atmospheric concentrations would not be stabilised under this scenario;■“740 ppm”, representing a doubling from current concentration;■“550 ppm”, roughly twice the concentration at pre-industrial times.

A comparison of the global economic cost over a 2010-2050 horizon
provides striking results: Annex-I countries would spend as much toachieve a “Kyoto forever” emission objective without trading – nostabilisation of concentrations – as they would to reach stabilisation ofconcentrations at 550 ppm if global emission trading were made possible.
Furthermore, most of the scenarios for allocation targets that involve
trading deliver net economic (i.e., trading) benefits to non-Annex I
regions, from a scenario where they would take no action to reduce their
GHG emissions.
Emissions trading allows negotiators to focus on equity criteria rather thanon efficiency criteria in making the initial allocation. The best possible
113

outcome for any party in this process is to have to support zero cost – thatis, to be allowed to emit greenhouse gases at the same rate as it might havein the absence of any need to address climate change. In cases whereability to pay, or responsibility for the effect of climate change effects is thedetermining factor, it is fair that most developing countries would nothave to pay for mitigating climate change. However, in cases where
polluter pays rules apply, all countries would need to take steps.
Developing countries, however, have also expressed a different kind ofconcern about emissions trading – or even the Clean Development
Mechanism. Mwandosya (2000), reflects a common argument in thenegotiations: if cheaper options (often called low-hanging fruit) in the
reduction of emissions existing in developing countries are sold throughthe mechanisms, once developing countries take on their own
commitments, only the more expensive options for reductions would thenbe available to them. However, cheap emission reduction options indeveloping countries arise in large part from the fact that they are building
their infrastructures anew. Were they to do so following high-emission
paths, most of these cheap options would simply no longer be available.
The task is to find solutions that balance the principles of equity in a waythat induces acceptability. To date, the UNFCCC represents one example
of success; with the withdrawal of the US from the Kyoto Protocol, it isclearly less effective as a paradigm. Next steps must build on successes asa way forward.

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0Box 100

Meanings of equity and acceptability

It is often said that equity is the key to acceptability. This is probably
true in general terms, but it may be useful to distinguish between
distributive justice and procedural equity. Regarding the former, there
are multiple equity principles (and all have adherents and opponents),
and the debate between them has coloured the interpretation of theallocation issue. According to the IPCC, more than a dozen different
equity rules are defined and extensively discussed in the literature (see
IPCC, 2001, Vol. 3, Chapter 10). These range from egalitarian rules(where equal rights are assigned on a per capita basis), to sovereignty
rules (where allocation is to governments), to ability to pay rules(varying according to national well-being), to polluter pays (whereabatement costs are distributed in proportion to emissions levels), toutilitarian rules (where the goal is the greatest happiness for the greatest
number), to procedural equity (related to how a decision is made).
Acceptability is linked to the relationship between each party’s
expectations from an agreement and what it would achieve without it,that is, the reference situation. If all parties to an agreement benefit, it
is likely to go forward. Not all systems of allocation – even if they havea degree of distributive justice – would necessarily be considered
acceptable by all parties; this is particularly the case in which, for one
Party, the distribution entails losses. In cases where decisions (such as
international agreements) are determined by consensus, it is unlikelythat action will be taken where any Party feels disadvantaged, and where
it has the capacity to block the agreement. It is only where a majority
rule is adopted (as in most national frameworks) that redistributive
measures might be imposed, despite the opposition of those who will
incur losses (see, e.g., Godard, 2000).

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6OPTIONS FOR FUTURE
AGREEMENTS
In the preceding chapters we have discussed several alternative approaches
to addressing climate change – as well as some of the key criteria that any
successful approach must consider. It is clear that until scientificuncertainties have been resolved, any agreement must aim for the lowest
possible emission or concentration levels that are feasible – recognisingthat their achievement would be constrained by costs. Because national
circumstances differ significantly, any agreement must reflect thesedifferences between countries. And finally, a new agreement must engage
all countries, because any agreement that omits a large share of global
emissions will not succeed in addressing the problem. This chapter seeks
to develop further possible ideas on instruments that meet these criteria.
UNCERTAINTIES ARE THE PROBLEM
While the issue of scientific uncertainties has been discussed in Chapter 1,
the issue of uncertainties in the cost of mitigation is equally troubling for thepolicy-making community. If too much is spent on programmes to mitigate
climate change, other, equally pressing programmes could go unfunded.
Conversely, if not enough is spent, emissions will rise, and the consequencesof global warming, which might have been avoided, are manifest.
Any solution would have to address these two issues. Setting an ambitious
climate goal through emissions targets, but qualifying them with a cap on
the price, is a potentially pragmatic mechanism that meets both concerns.
Such a hybrid mechanism could help industrialised countries take on
progressively heavier commitments by removing concerns about possible
skyrocketing costs. Such a mechanism could have an even greater impact
in developing countries, many of which may be willing to engage in
specific and binding commitments if legitimate concerns about possible
constraints on their economic development are removed. For this to work,
two further sets of issues must be resolved: the form of the quantitativeemissions limits, and issues pertaining to the price cap.
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0Box 110

Illustrating the effects of uncertainties

An illustration of the potential effects of the uncertainties on economic
growth may be helpful. In practice, effects could be considerable ifcompounded, for example, over 15 years (the time lag between Kyoto
and the end of the first commitment period for industrialised
countries). Let us suppose that a particular developing country’s
objective is for its GDP to grow by 10 per cent each year. This aim
would be difficult to contest, for even if it may not appear feasible, it isdesirable, and other countries would be reluctant to challenge such an
objective. Fixed assigned amounts would be derived from this projectedeconomic growth, with some rate of reduction in carbon intensity,
partly to take into account the autonomous progression of energy
efficiency, as well as to fix an objective of relative reductions inemissions (i.e., an absolute increase in emissions, but a reduction
relative to business as usual).
0Figure 130

Effects of uncertainty on economic growth
450
400

~100

350
300
250
200
150
100
2005

2010

2015

8%/year

10%/year

2020

Over a 15-year period, an annual growth rate of 8 per cent leads to a tripling of GDP, while a
growth rate of 10 per cent per annum leads to its quadrupling,. The difference is roughly equal
to current GDP.

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Now let us suppose that this country’s average annual economic growthduring this 15-year period is 8 per cent – which would be considered agood result. However, the difference in GDP amounts at the end of theperiod would be very large. With an 8 per cent rate of annual growth,
GDP would be multiplied by 3.2 over 15 years, whereas with 10 per
cent annual growth it would be multiplied by 4.2, as shown in Figure
13. If actual emissions were closely linked to GDP growth, then theamount of surplus allowances at the end of the commitment period
would be roughly equal to the current emissions of that country.
Let us now suppose that, on the contrary, the target was set at an annual
economic growth rate of 8 per cent and that the final growth rate was
10 per cent. The country would then have to achieve emission
reductions close to its current amount. This is not only unrealistic, butalso highly unfair from a developing country perspective... and makes
this scenario less likely to happen.
Historically, developing countries have made it clear that they are neither
politically nor economically prepared to take on reduction obligations.
However, their rejection was largely due to the open-ended structure of the
reduction target, which was presumably of the same nature and stringency asthat adopted by Annex I Parties. Developing countries have argued that
uncertainties in their economic growth – coupled with an expectation thatany target would slow that growth – are sufficient justification for rejecting anagreement. However, it is clear that most developing countries could take ona quantitative target close to their business-as-usual emission trends. Under anemissions trading regime, such a target would give the international
community access to cheap emission reduction potential through emissions
trading, and on a much broader scale than is possible with the Clean
Development Mechanism. Participating in the trading regime would give
developing countries access to finance for further growth and development.
Industrialised countries often share the same concerns, although, unlike
developing countries, where poverty renders action difficult and limits
their willingness to pay, developed countries have already expressed awillingness to bear some of the financial costs. However, uncertainty
about costs is still a significant problem, even though economic growth119rates in developed countries have been more stable and predictable overthe past few decades. This uncertainty is likely to lead developed countries
to take on relatively less ambitious commitments than if abatement costs
were known in advance. These costs depend mainly on business-as-usual
emissions and economic growth scenarios that are, at least in part,
uncertain. If the problems arising from cost uncertainties were addressed,
countries would be in a better position to adopt a more stringent policy.
Three options are considered here that can apply to developed and/or
developing countries and that seek to address the issue of uncertainty. The
first two apply respectively to developed and developing countries, but arevery similar in nature and provide a link between both groups: the pricecap and non-binding target options. The third option – the dynamic
targets option – could be applied to both developed and developing
countries, while allowing full differentiation. These options also allow
developing countries to participate in global emissions trading while
addressing concerns about restricting economic growth.
THE PRICE CAP
Using hybrid systems associating a quantitative target and a “price cap” todeal with climate change has been suggested by Pizer (1997), in adomestic context by Kopp & al. (1999) and Morgenstern (2002), and at
the international level by McKibbin & Wilcoxen (1997), Kopp & al.
(2000), Victor (2001), Schlamadinger et al. (2001), Aldy et al. (2001) andJacoby & Ellerman (2002). We will now consider the potential advantagesof such an instrument, and some aspects of its implementation:■

How to get an agreement on the level of the price cap■

Where the money might go – if any■

How it could work in a global context

Hybrid instruments and price cap
Roberts and Spence suggested “hybrid instruments” as far back as 1976.
Such hybrid instruments associate a quantitative target, a “floor” price anda “ceiling” price. If abatement costs in achieving the quantitative target120

remain below the floor price, a subsidy is paid to all agents, thus providing
further abatement. If, on the contrary, abatement costs reach the ceiling
price, additional permits are sold at this fixed price. This allows theemissions trading regime to spontaneously adapt the level of abatement toactual abatement costs – essentially acting in the same way as a tax.
Economic textbooks (see, e.g., Baumol & Oates, 1988) usually consider
hybrid systems at least as efficient as pure permit or price instruments.
Either of these pure instruments may be considered as a special case in a
hybrid system: a floor price equal to the ceiling price would make it a priceinstrument (while the need for any subsidy disappears), a zero floor priceand an infinite ceiling price would make it a permit instrument.
When quantity instruments are to be preferred over price instruments,
setting ceiling and floor prices could help to avoid mistakes in choosing
quantities in a context of cost uncertainty. One type of error could occur if
costs were significantly underestimated (i.e., if targets were too stringent,and costs to meet them were substantially higher than willingness to pay).
The second type of error would occur if costs were overestimated – that is,if the targets set were too lax (due to an erroneously perceived high cost)
and too few benefits were attained as a result.
If price instruments are to be preferred over quantity instruments – as is
the case with global climate change – hybrid instruments could help
approximate more closely the expected marginal benefit curve – which a“fixed” price cannot do, unless the marginal benefit itself is constant (seeAppendix for further elaboration).
As a result, whatever our beliefs about the slope of the marginal benefit
curve of climate mitigation policies, hybrid instruments perform better (interms of welfare maximisation) than either pure quantity or priceinstruments. In that sense, in the case of climate change, the argument thata price instrument should be preferred over a quantity instrument because
the marginal benefit curve is fairly flat is not necessary in arguing in favourof a hybrid instrument, although it makes the case much stronger.
Moreover, the main advantage of hybrid instruments in the case of climatechange may be their ability to associate some of the advantages of a pricemechanism with those associated with a trading regime. Permit systems have121already demonstrated important advantages in achieving an international
agreement. They may also help in implementing the agreement on adomestic scale and offer incentives to extend it to a global scale.
This reasoning has led a number of authors to recommend hybrid
instruments in climate change negotiations. Most of them have notconsidered the “floor price” component of a “textbook” hybrid
instrument, perhaps on the grounds that at the international level (and in
most domestic contexts) a “floor price” has little chance of ever being
adopted and implemented16. Their proposals have concentrated on the“ceiling price” – or price cap – part of the argument.
However, it must be recognised that a hybrid instrument limited to a pricecap would not perform as well as a complete hybrid instrument. If costs turnout to be much lower than expected, the abatement provided by fixed targets
will remain far below what would have been optimal. The price cap only
works in the opposite case – when costs turn out to be higher than expected.
The quantity allowed should be reduced to compensate for the absence ofa subsidy and the resulting risk of too little abatement. Therefore, not only
“could” countries adopt more stringent policies if they chose a better
option than mere fixed quantity instruments, as suggested above, but infact they “should” do so with an asymmetric hybrid instrument – in orderto achieve optimality and maximise expected welfare.
A cap – but at what price?
As Aldy et al. (2001) stated:“The safety valve is not intended to set an inefficiently low carbon price overtime. Indeed, the safety valve may allow a higher price of carbon than would
otherwise be the case, because it provides assurance that the costs will not
exceed that level. (...) The cost insurance provided by the safety valve could
thus have environmental benefits, once the political economy of the emission
reduction effort is taken into account”.
If the marginal benefits were known with certainty, or at least with a highdegree of confidence, this would drive the level of the price cap. But this16 However, Newell & Pizer mention the “dynamic efficiencies” usually associated with using direct subsidies
to reduce pollution. Such subsidies may well reduce firms’ emissions but risk increasing the emissions of thewhole industry (see Baumol & Oates, 1988).

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is not the case, at least at present. Still, the level should be set somewherein the range of expected marginal climate benefits. Given this uncertainty,
cost estimates would enter the discussion on the price, which is likely tofollow or be closely associated to that of assigned amounts for futurecommitments.
To be effective as a price cap while keeping all the advantages associatedwith a trading regime, the price cap should be set somewhere in the upperrange of cost estimates resulting from quantitative targets on a global scale.
Therefore, it is only in the case of significantly higher-than-expected costs
that the price cap will relax the quantitative targets and provide thenecessary flexibility. In the majority of situations, the price cap will not be
activated.
It will be necessary to agree on a common “trigger price” – at least for
relatively similar countries that want to have full emissions trading
between themselves. As Pizer (1999) stated:“There would be a need for either harmonisation of the trigger price acrosscountries, or restrictions on the sale of permits from those countries with low
trigger prices. Otherwise, there would be an incentive for countries with a low
trigger price to simply print and export permits to countries with higher permit
prices. This would not only effectively create low trigger prices everywhere; itwould also create large international capital flows to the governments ofcountries with the low trigger prices.”
Müller et al. (2002) argue that “setting the price cap on an international level
would be a political nightmare, especially under the consensus principle”.
While negotiating assigned amounts or “quantities” allows differentiation,
this is not the case for negotiating a common “price”. Willingness-to-pay
is likely to differ from country to country. Moreover, there is a risk thatnegotiating both quantities and a common trigger price would complicate
the negotiating process even further.
There are, however, a number of arguments that offer a different and morepositive perspective. First, and most importantly, countries’ willingnessto-pay is best expressed by concepts such as “level of effort” (total costs
over GDP), rather than by marginal costs. While a price cap would cap
the marginal cost of the global effort, if set as suggested above, countries’123respective total costs and thus, levels of effort, will be more influenced byquantitative commitments – and these may be widely differentiatedamongst countries.
Second, it seems that negotiators often associate expectations of high costswith beliefs of low benefits, or expectations of low costs with beliefs ofhigh benefits17. This may facilitate an agreement on a common price.
Countries willing to pay a lot but expecting low costs, and countries
willing to pay less but expecting high costs could find a common cap
price. The former would see it as unlikely to be attained, and the latter as
an instrument that will actually cap compliance costs.
Finally, negotiating a trigger price could make the negotiating process more
complex. However, its existence may facilitate successful negotiations on
assigned amounts, since it alleviates the risk of the adverse economic
outcomes they imply. On balance, it is not clear if negotiating a price cap
would increase or reduce the overall difficulty of future negotiations.
Some guidance may be available on the price itself. At present, countries
are engaged in quite different domestic levels of effort (with concomitantassociated prices). For example, tax policies or backstop energy R&D
policies have relatively low associated prices – often in the range of $5-50
a tonne CO2. Few countries have explicitly priced the policies being takenin the energy or industry sector – although many countries’ policies focus
on those that have net benefits and show a real return on investment, andthus have extremely low costs. Further guidance is available from themarket: emissions trading, as simulated in global markets (with the US
out of the system), suggests prices in the range of $1-20 a tonne of CO2,
while the World Bank’s Prototype Carbon Fund is contracting for units at
a price of less than $5 per tonne of CO2. On the low side, therefore, prices
of $5–30 a tonne may be reasonable.
Conversely, Annex I countries expected to pay up to $100/tonne CO2 toabate emissions under Kyoto (according to most econometric models andwith all Annex I Parties adopting commitments, including the US). Suchcosts would be reduced through agreements on all gases (most models
address only CO2), and with sinks (excluded from models). However, at
17 Tomas Heller, presentation at the invitation of French Authorities, Paris, 27 March 2001.

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$100/tonne of CO2, several countries are still unwilling to ratify – notably
the United States. This price may then represent a maximum, although it
is only in association with quantitative commitments that the level ofeffort can be assessed and accepted. A lower price, at least during the next
period, may help ensure maximum participation in the agreement.
Where the money might go – if any
With a price cap, unlimited amounts of supplementary permits would besold at a fixed price – but only if abatement costs reach this price. Where
should the revenue go? What should the money finance? Who should sell
these supplementary permits – the countries themselves, or someinternational body?
It has been suggested that the money should allow “full” restoration, thatis, be used to buy enough additional emission reductions – presumably indeveloping countries – to cover the compliance gap and guarantee theenvironmental integrity of the Kyoto Protocol. However, by construction,
full restoration is impossible, as there would be no cheaper reductions left
untapped anywhere. If the money is used to buy more abatement, it
would do so at progressively greater costs – and costs now higher than thevalue of the marginal environmental benefit they entail. Using the pricecap money to reduce the gap between the short-term objective and what
has been achieved might make the price cap approach more palatable.
Kopp et al. (2000) have suggested a mechanism, based on a reverse
auction, that would minimise bureaucracy and maximise reductions.
Schlamadinger et al. (2001) made an interesting proposal in the context
of the Kyoto Protocol: using the price-cap money to mitigate emissions insome “sinks” projects in developing countries. Specifically, these projects
would be among those not allowed through the Clean Development
Mechanism. These could include, inter alia, projects that exceed the limits
put on using sinks under the CDM in the Marrakech Accords. Thus, full
restoration or even “over-restoration” could be possible – if not necessarily
granted – as these presumably cheap options would not have been tapped
through the CDM.
Such a proposal may face the same objections as the non-restricted use of
any kind of “sinks” projects under the CDM – such as concerns about
125

national sovereignty in the case of forest conservation. However, as
Schlamadinger et al. point out, “because the incentive would not be purely tomaximise carbon sequestration, many of the problems associated with crediting
land-use activities would be reduced or removed. It would then be far easier tostrike a balance between carbon uptake and the many other objectives of landuse management, such as protecting and enhancing biodiversity, protecting
watersheds, reducing soil erosion, or improving local livelihoods.”
Another possible use of this money could be to finance adaptation. One
interpretation of the price cap is that it represents what we believe is thecost of the GHG externality. When adaptation is possible, its cost isusually considered as the best proxy for the cost of the externality itself.
Thus, it is the level above which money is best used to finance adaptation
rather than further emission reductions. It could therefore be argued that
this money should be added to the “Adaptation Fund” created under theBonn agreement.
It has also been suggested that the revenue from the price cap could
support co-ordinated efforts to speed up the development anddissemination of backstop technologies. Again, this would not “restore”
the environmental integrity of near-term targets, but would fulfil theirmost important objective in making available cost-effective technologies
for deeper cuts in subsequent periods.
There is, however, a completely different way of implementing a hybrid
instrument, namely, requesting each participating country to create
supplementary permits at an internationally agreed price. For example,
the price cap could take the form of (domestic) “non-compliancepenalties”. Indeed, the price cap concept does not necessitate thatcountries pay. Rather, it supposes that economic agents within all
countries are faced with this price – but this could be paid to eachgovernment. The money could then be used, say, to finance mitigating
technology research and development at the country level, or reduce
diverse taxes, or for other purposes.
If implemented internationally, the price cap would allow countries toavoid being in non-compliance if they purchased additional permits at the
fixed price; no legal stigma would be attached to such purchases. There126

may, however, be a reluctance to allow money to flow out of the country,
as implied with full trading. If implemented domestically it would
suppose that all emitters be regulated through an “upstream” trading
regime, or that emitters not part of a trading scheme be tapped through acarbon tax at the same level. A domestic price cap may face some of thesame political difficulties as internationally co-ordinated carbon taxes, andcountries may be reluctant to submit to its “intrusive” character. Theremay be resistance to allowing the international community to closely
monitor national compliance to ensure that permits are only sold once
abatements have been reached, and no excess sales are undertaken.
ZERO PRICE CAP: THE NON-BINDING TARGET OPTION
Supporters of hybrid approaches seem to have devoted little effort so far
to include developing countries in a global mitigating framework18.
Although carbon taxes could bring a “double dividend” and thus be an
option for developing countries too (Philibert & Pershing, 2001), it isunlikely that many developing countries would agree to adopt a “trigger
price” that would represent the same marginal cost as applied toindustrialised countries.
An emission trading global regime with two different price caps runs therisk that the lower price would be globally determinative. Economically, it
would be advantageous to buy permits in the country with the lowest
price (and for the emitter to pay that price if selling more permits resulted
in it exceeding its assigned amount) than to realise any emission
reductions at a higher cost – even if lower than the higher price cap.
However, as Pizer (1999) pointed out, there is an alternative to a fully
harmonised trigger price: restrictions to emissions trading. In fact, such
restrictions could even allow trading to occur between one zone with apositive price cap, and another with a zero price cap. The latter would be
18 McKibbin & Wilcoxen (2000) offer one alternative. They suggest a distinction between emission permits,
valid for one year, and emission endowments, allowing emissions forever. Developing countries would begiven endowments above current levels – but limited. Although incurring no immediate cost, economic agentswould thus be given the long-term signals that would encourage them to act early. However, both thelikelihood of a successful negotiation on such endowments, as well as the efficacy of any agreement along
these lines, would seem to be low.

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no more than a “non-binding” target, or “emission budget”, without
penalties if not attained, but could still allow emissions trading if thetarget was reached, as suggested by Philibert (2000).
Clearly, non-binding targets could hardly be an option for all countries. If
we want to preserve the advantage of establishing a global trading regime,
we need potential buyers, and they would necessarily be Annex I countries
with binding commitments19. The need for trading restrictions is evenmore obvious in the case of the non-binding cap. If a country could sellpart of its emission budget while its actual emissions exceeded this budget(diminished by selling), the “value” of permits would become
meaningless. In fact, in an extreme case, a country could even sell its entire
budget and thus flood the market while keeping its emission levelunchanged! As targets under this scenario are by definition non-binding,countries taking this path would not be “out of compliance”.
There are several different options for avoiding these pitfalls (Philibert &Pershing, 2001). One possibility is that as soon as a country with anemission budget starts to sell allowances it automatically assumes a limit
on its emissions. It thus becomes a binding commitment, but only at thetime it sells emissions (i.e., during the commitment period, when
uncertainties are reduced, and not years in advance). Another possibility
is to allow countries with emission budgets to trade only at the end of thecommitment period, that is, when an actual surplus of allowances has
been determined. This does not, however, allow for the provision of
immediate up-front financing for emission reductions.
A third possibility is to require countries to buy back the allowances soldif the budget is exceeded. If a country has an emission budget of 100
million tonnes and sells 10 million tonnes, and if its emissions then exceed
90 million tonnes, the country should buy back the surplus of up to 10
million tonnes – but not beyond the amount it has sold. Such an option
preserves the non-binding character of the targets, while allowing
emissions trading to occur on a sound basis. A commitment period
19 David Bradford (2001) proposed a No Cap but Trade system in which all countries would have non-binding
targets set on their estimated baseline emission scenarios. A world agency, financed by proportionate
contributions by countries, would buy a certain amount of emission reductions. The trouble with such ascheme is that it requires more public funding and the establishment of a new (and potentially unwelcome)institution.

128

reserve, as adopted in the Bonn and Marrakech Accords, may help inestablishing desirable levels of liquidity and safety to prevent overselling(IEA, 2001a).
How to set non-binding targets
As is the case with the price cap described above, a non-binding target
allows developing countries to accept more ambitious objectives. The
rationale is clear: if developing countries were to accept fixed and binding
targets, these would have to be safe from both an energy and an economic
perspective – and not put development at risk. Assigned amounts would
thus be above any expected reasonable level of business-as-usual.
Conversely, if targets for developing countries are non-binding, thesituation is quite different: the discussion is simply about a potential
advantage, not about a potential disadvantage. It becomes easier tonegotiate reasonable baselines, since the only risk is of being unable toparticipate in emissions trading. There is no risk of being forced to buy
emission reductions elsewhere, to finance more costly emission reductions
domestically or to slow economic growth to fulfil the commitment.
There are multiple interests in this process that could help promote a
more environmentally sound outcome. While developing countries havean interest in having the largest assigned amounts possible, if their “hotair” floods the market, permit prices will decline, and revenues decrease.
For other countries, a balance will also have to be struck between the riskof creating large amounts of hot air with a weak target, against that ofleaving the country out of the trading regime if the target is too strict.
In setting the level for developing country targets, it would make sense tofollow (as closely as possible) a “business-as-usual” emission scenario –albeit after taking into account the “win-win” or “no-cost” potential.
There is no reason for industrialised countries to pay developing countries
to achieve such win-win emission reductions (such as those provided bysubsidy removal). Setting the target in this manner would open the door
for full – and profitable – emissions trading, reinforcing the incentive toachieve the non-binding target.
Determining the “correct” business-as-usual emission scenario is by nomeans easy; it is precisely its uncertain character that justifies this option!
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A number of models are available to develop and assess such a policy. On
the development side, most countries project economic welfare (either
through national treasuries or other such institutions); such projections
are standard in formulating tax and revenue policy and setting
government expenditures. Using these projections could help make theprogrammes consistent with those already implemented – and the factthat any emissions sales are likely to be only a minute share of government
expenditure could contribute to keeping projections relatively unbiased.
In addition, many developing countries already submit information on
their economic projections to international institutions in order to qualify
for loans or grants. Again, consistency with such reporting would help toensure accuracy. Finally, a process would need to be set up in the
UNFCCC to assess such reports. As noted above, those countries alreadyin the trading regime – and who have purchased permits at a given price– would be reluctant to see the price decrease as a result of “hot air”
granted to newcomers to the system. Thus, a review in which existing
permit holders were engaged could help to ensure a rigorous process, andmaintain stringency in setting new targets.
Once established, non-binding targets would be similar to a structure inwhich policy actions would be accepted under the Clean Development
Mechanism (i.e., unilaterally funded, country-wide policies would be
accepted for credit as long as they were below “business as usual”). In fact,
it would be almost possible to implement non-binding targets using the
CDM mechanism of the Kyoto Protocol. However, there would be anumber of differences. First, at present, unilaterally funded policy actions
have not yet been made explicitly creditable under the CDM regime.
Partly because of this, in CDM projects, investors from industrialised
countries are allowed to take the full rent accruing from the difference intheir country’s abatement costs and that of the host country. Withemissions trading or unilaterally funded projects, certified emission
reductions would be sold according to the international permit price. This
price will be somewhere in between these two marginal costs (and, if
markets are efficient, equal to the marginal cost of global abatement).
However, perhaps the key difference lies in how the baseline isdetermined: the baselines for CDM projects must be agreed by the130

Executive Board or its operating entity. Assigned amounts may be a matterof negotiating non-binding targets, which would undergo a different
review process – and which, presumably, could change as economies
matured.
From non-binding targets to price caps
The trigger price for developing countries need not – and probably should
not – be zero. A low, but non-zero trigger price in developing countries
may be justified under a “no-harm” rule, as emissions trading withindustrialised countries is likely to be beneficial for developing countries,and some of these benefits may be used to mitigate climate change.
However, given the refusal of many developing countries to discussbinding targets, it is clear that non-binding targets offer greater potential
for political agreement. In fact, many countries, including China andIndia, may not (yet) be prepared to consider anything else.
Some other developing countries may be in a different position. Argentina
and Kazakhstan have suggested a willingness to take on targets of the“dynamic” type (see below). Korea and Mexico, which are developing
countries under the UN Climate Convention, have since joined theOECD and are also expressing a willingness to consider taking oncommitments. As already mentioned in Chapter 5, according to per capita
emissions or per capita GDP criteria, a number of developing countries
are close to, or even better placed (for GDP) or worse placed (foremissions) than some industrialised countries.
Just as a non-binding option might facilitate the integration of developing
countries into global emissions trading, a price cap might facilitate acountry’s graduation from one group to another, albeit with continued,
differentiated quantitative commitments. In fact, in addition to a zero
price cap or non-binding targets for most developing countries, or abinding commitment and a single price cap for most industrialised
countries, there is a possible third alternative: to take an intermediategroup of countries and explore a binding agreement with a lower pricecap. As long as simultaneous trading restrictions were put into place (i.e.,
to ensure that cheaper or free supplementary permits do not invade zones
with costlier obligations), such a regime might be worth considering. This131

may make the agreement more complex. However, cost effectiveness orleakage prevention would not be restricted by multiple ceiling prices,
except if some countries stopped trading after having exceeded theirassigned amounts. Emission reductions at a cost fixed between two cap
prices will remain an attractive option if abatement costs are more
expensive in countries with the highest cap price. Restrictions will prevent
countries from reselling supplementary permits if they do not achieve
their commitments (domestically or in buying reductions from othercountries) but would not prevent more expensive abatement than thelower cap price to be undertaken.
A final remark on non-binding targets: the Marrakech Accords cautiously
state that “the Kyoto Protocol has not created or bestowed any right, title orentitlement to emissions of any kind on Parties included in Annex I”. This
reflects the fears of developing countries that the allocation of assigned
amounts to developed countries (mirroring their emission reduction
commitments) could create a precedent. The concern also reflects adeveloping country fear that the non-allocation of assigned amounts may
preclude them from holding rights in the future. However, non-binding
targets for developing countries would establish a clear distinction
between entitlements and transferable property rights. While the latter are
strictly defined by the assigned amounts and for a limited period of time,
the former would remain unlimited.
THE DYNAMIC TARGET OPTIONIn this option, emissions would not be capped in absolute terms. Assigned
amounts would be defined ex ante on the basis of some shared expectation
about economic growth (though other variables could enter the picture,such as population, exports, etc.). These assigned amounts would then be
adjusted ex post according to actual economic growth.
Dynamic targets have been suggested or endorsed as an efficient means tointegrate developing countries by Frankel (1997), Hargrave (1998; 2001),
Baumert et al. (1999), and Lutter (2002). Moreover, in 1998 Argentina
suggested that it could adopt a dynamic target provided that the Kyoto
framework evolved to allow countries with such targets to take part in132

global emissions trading. The idea of using dynamic targets for developed
countries too is more recent, and has been supported by Philibert &Pershing (2001) and Lisowski (2002), but challenged by Müller et al.
(2002) and Moor et al. (2002) – particularly in the light of its adoption
by the new US administration. To date, the bulk of the dynamic target
literature has only considered the cases of “carbon intensity” or“greenhouse gas intensity” targets; these constitute only a few of thepossible forms that dynamic targets could take.
Indexing assigned amounts
Dynamic targets allow for differentiation between countries.
Differentiation might affect the levels of assigned amounts or theformulae for indexation. Carbon intensity targets represent one extreme:as the target would be expressed by a fixed ratio, that of greenhouse gas
emissions over GDP, an evolution of the denominator (the GDP) vis-à-vis
expectations would allow a similar evolution of the numerator (theassigned amount). If GDP during the commitment period is 10 per centmore than expected, the assigned amount will be augmented by 10 per
cent. If GDP is 10 per cent less than expected, the assigned amount will
be reduced by 10 per cent. However, it could just as well be decided thatin the case of a 10 per cent gap between expected and actual GDP,
assigned amounts be reduced or augmented by 8 per cent, or 5 per cent,or 2 per cent. As we will see, there are many reasons to prefer a “less-thanproportionate” indexation of assigned amounts. This reasoning should
not be followed to its extreme – which would bring the targets back totheir “fixed” form. In sum, dynamic targets allow all variations between
carbon intensity targets and fixed ones20.
Other indices have been proposed – with considerably different levels ofcomplexity. For example, the Argentinian proposal in 1998 was not acarbon intensity target, but much more complex: it was based on
20 Lisowski (2002) defends the straight “carbon intensity target” concept. He believes that such targets could
be based on best practice levels – and his examples are of interest for industrialised as well as developing countries,
or economies in transition. Botswana and South Africa have comparable per capita GDP and geography, as
do Greece and Portugal, and Estonia and Lithuania. However, Botswana emits 70 per cent more carbon dioxide
per million dollars of GDP than South Africa, Greece 73 per cent more than Portugal, Estonia 185 per centmore than Lithuania. Thus, Bostwana, Greece and Estonia might accept carbon intensity targets similar to
the actual carbon intensities of South Africa, Portugal and Lithuania, respectively. However, as the differencesreflect different economic structures, a full convergence would be unreasonable. Reasonable best practice targets
could be calculated by normalising for economic structure.

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emissions/square root of GDP index, implying a positive relationship not
only between allowed emissions and GDP, but also between the level ofeffort and GDP. This criterion was chosen to take account of the large
agriculture and livestock sector – from which emissions are relatively
independent of the growth rate of the general economy.
It has also been noted (e.g., Müller et al., 2002) that emissions ofgreenhouse gases other than CO2 are not as well correlated to economic
output. For example, (and as in the case of Argentina), gases like methane
are often correlated with agricultural activity – which, while it may lead tosignificant emissions, represents only a relatively small share of the economy.
There is no need for the rules to be the same for all countries. Eachcountry has specific features (e.g., national circumstances or politicalconstraints) that cannot be addressed in a single formula or framework.
However, an agreement on some basic principles could guide thenegotiation of individual dynamic targets. Naturally, and even if
intermediate cases might be suggested, the polar cases of industrialised
and developing countries must be considered separately. It is unlikely,
however, that a single, simple rule will yield dynamic targets suitable forall countries. More complex rules such as the triptych or multi-stage
approaches mentioned in the previous chapter are likely to be needed.
The setting of future targets will most probably have to take into accountcurrent carbon intensity performances (or more generally greenhouse gas
intensities). However, other equally important aspects, such as per capita
emission levels, will also have to be an intrinsic part of these negotiations. One
drawback to using carbon intensity as the sole criterion is the implicit notionthat countries should aim at converging on one carbon intensity target. The
concept would limit the potential scope of the dynamic target debate, andmay also be a form of unacceptable burden sharing. The distinction between“dynamic targets” and “carbon intensity targets” should thus be retained.
Dynamic targets and developing countries
The basic definition of assigned amounts for developing countries underdynamic targets could use a process similar to that described above in thesetting of non-binding targets. It could also derive from the “no-harm”
concept and allow targets to be set for most of the poor developing134countries based on a business-as-usual emission scenario, once “win-win”
emission reductions have been taken into account. Comparing carbon
intensity and per capita emission levels between roughly similar countries
would be useful in such a discussion.
It may make sense, as a general principle, to aim to index targets in a “lessthan-proportional” fashion than strict carbon intensity targets would allow.
If economic growth is higher than expected, more no-cost options arise ascapital stock rotation accelerates, in particular in the energy sector. For“advanced” developing countries (and for industrialised countries as
discussed below), the level of effort could increase along with economic
growth. This would be reflected in an increase of the assigned amount thatwould be less than proportionate to the increase of GDP over expectations21.
If economic growth is lower than expected, the basic energy needs of the
population will not diminish, whereas those related to market activities
will, and this might be reflected in a decrease of the assigned amount thatwould be less than proportionate to the GDP decrease over expectations.
In other words, the country would be allowed a relative increase of energy
intensity in comparison with a strict carbon intensity target. This might
be particularly necessary for countries at an early stage of industrialisation.
It would thus be possible to offset the risk pointed out by Müller et al.
(2002) that dynamic targets could become a “double pain” in the case ofrecession, no doubt a real fear in the case of carbon intensity targets forcountries “at the bottom end of the wealth ladder”.22
Randall Lutter (2000) has further analysed this scenario, by modelling the riskthat developing countries would face in accepting binding targets. He also
computed coefficients for indexing developing countries’ assigned amounts
21 There are also arguments in favour of a “less-than-proportionate” indexation that seek to ameliorate the effects
of possibly unexpectedly-high economic growth: increased wealth justifies increased levels of effort while
accelerated capital stock turnover multiplies opportunities for cheap emission reductions. The case of
unexpectedly-low economic growth might be slightly different: for Moor et al. (2002) the risk of carbon intensity
targets is not so much that of a “double pain” but that of non-compliance. This is also likely to depend on
the stringency of the targets and the level of effort they represent as expressed as a percentage of GDP.
22 Müller et al. (2002) illustrate the risk of “double pain” associated with carbon intensity targets in a case of
economic recession using the example of the economic collapse of Russia. However, Lisowski (2002) notesthat while Russia’s intensity increase between 1990 and 1999 has been 18 per cent, the economies intransition improved their collective carbon efficiency by 12 per cent over the same period: “Given Russia
all but completely lacks a climate change programme and has numerous, inexpensive emissions reductions
opportunities, an emissions intensity target may not have proven overly burdensome”.

1350Box 120

Sectoral targets for developing countries

Sectoral targets could be a pragmatic first step towards morecomprehensive action. Sectoral targets could be preferable for various(although possibly somewhat contradictory) reasons. A developing
country, for example, might wish to complement the Clean
Development Mechanism by targets in sectors not readily addressedwith project activities, such as household and transport. Alternatively,
sectoral targets might be adopted for industry sector(s) while leaving
emissions more directly linked to consumption unregulated for various
reasons (from lack of monitoring to perception of unfairness). Sectoral
targets might be fixed or dynamic, binding or non-binding.
One key issue that has been raised as an objection to sectoral targets isthat of leakage. Concerns have been expressed both with respect tointer-country leakage (where competitors in different countries would
see different policy constraints), as well as competitive consequence
between sectors.
The implications of the extent of the leakage are governed by the
relative stringency of the targets in the particular countries, as well as
the forms of the targets. Thus, if a developed country undertakes abinding target, and a developing country adopts only a single-sector
target, the extent of the leakage in that sector will be reduced by thelevel of the stringency of the sectoral target.
Unlike country-level dynamic targets, sectoral dynamic targets forindustries offer little protection against leakage. The protection
provided by country-level dynamic targets is essentially based on thefact that leakage would take place for energy-intensive industries thathave a higher carbon intensity than the country’s economy as a whole.
The increase of economic output of these industries would presumably
not be sufficient to make the country-level target ineffective. This may
not be true with a sectoral dynamic target, where the pertinent criteria
may be the carbon intensity of the sector, not that of the whole country.

136based on recent statistics, and assessed the risk of economic losses fordeveloping countries that had taken on fixed or dynamic targets. This analysis
suggests that if a developing country agrees at this point in time to a fixednational emissions cap equal to the emissions expected between 2008 and2012 under business-as-usual policies, there would be a 60 per cent chance ofa net economic gain. It is unlikely, however, that developing countries would
take the corresponding risk (with a probability of 0.4) of a net economic loss.
In addition to measuring the risk of economic loss, the international
community will need to give serious consideration to potential
environmental damage: allowing developing countries to sell excess
permits on the market may increase global emissions if they do not reflectcorresponding real emissions reductions. To control such risks, Lutter(2000) suggests that international negotiators should index the emissions
limits of developing countries to variables that predict business-as-usual
emissions. Another possibility is that adjustment should continue
throughout the commitment period itself. This indexation could have theadded benefit of lowering the likelihood of net losses for developing
countries accepting emissions limits — according to Lutter, by about
5 per cent – from 40 to 35 per cent23. Although Argentina furnished an
example of a developing country willing to accept a dynamic target
provided it was allowed to enter global emissions trading, Lutter’s analysis
suggests that binding dynamic targets might still be perceived as entailing
too large a risk of economic loss from a developing country perspective.
Overall, analyses suggest that the economic risk to a developing countryof accepting a target is negatively correlated with the depth ofcommitments taken by industrialised countries, but positively correlatedwith the number and size of developing countries entering global trading.
Dynamic targets and industrialised countries
In the case of industrialised countries, the prevailing concern is theinherent uncertainty about the environmental effectiveness of dynamic
targets, as measured by reduced emissions of greenhouse gases in theatmosphere (Moor et al., 2002).
23 While these estimates are based on the assumption of an international price of permits of 23$/tonne of carbon,
they would be lower if the permit price were higher, down to roughly 20 per cent and 10 per cent for aninternational permit price around 80 $/t.

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Müller et al. (2002) point out that emission levels in the commitment period
cannot be guaranteed with intensity targets. They suggest that intensity
targets would only be able to deliver substantial emission reductions if therequired reduction of intensity is greater than the output growth, and thatsuch tough targets would lose their comparative attractiveness comparedwith Kyoto-type (fixed cap) targets. However, this suggests that dynamic
targets would only be economically attractive if they lead to lower abatement,i.e., higher emission levels than fixed targets. This misses the starting point of
the analysis: the existence of an ex ante uncertainty about abatement costs,
partly driven by uncertainty about economic growth projections.
Of course, if the economic projection on which a target is basedmaterialises, the assigned amount will not be adjusted and the costs
supported will be the same under fixed and dynamic target regimes. The
differences rest, though, in the expected costs before uncertainties areresolved. While they provide more abatement if costs are lower than
expected, dynamic targets have lower costs when abatement prices arehigher. This allows countries to adopt more stringent commitments forthe same expected costs and this would have environmental benefits. The
value of eliminating the risk of paying “too much” is clearly articulated by
Lisowski (2002): “The risks associated with a 1°C temperature increase overthe next couple of decades might be unacceptable if world economic growth
were to stop, but perfectly acceptable if world economic output were toquadruple. Economic growth can facilitate climate change adaptation while
alleviating poverty and improving health care and education.”
Dynamic targets and emissions trading
Critics have also suggested that the uncertainty about actual assigned
amounts under a dynamic target approach could make trading difficult(Moor et al., 2002). Countries with dynamic targets would not be sure of
their assigned amounts, and this could complicate passing on these targets
to domestic entities – unless these are given equally dynamic objectives.
This is already the case in the UK trading regime, though an absolute,
fixed target binds the country itself 24.
24 The UK system may also provide an analogue for trading between countries adopting fixed targets and thoseadopting dynamic targets.

138However, assuming that the calculated link between economic growth andemissions holds, this may not be a problem; the uncertainties about both will
essentially compensate for one another. In fact, the uncertainty regarding theavailable or required units of assigned amounts at the end of the period, i.e.,the difference between the assigned amount and actual emissions, is likely tobe reduced, not increased, by dynamic targets in comparison to fixed targets.
Here again, a commitment period reserve such as that instituted by the
Marrakech Accords might help in fine-tuning the balance between liquidity
and the prevention of possible mistakes and the risk of overselling.
Data issues
Dynamic targets need a higher amount of indisputable information thanstraight fixed targets. GDP measurement is relatively inaccurate in many
developing countries. Official Chinese and OECD estimates of Chinese
economic growth have substantially differed in the recent past – in someyears, by as much as 10 per cent. Such inaccuracies need to be
substantially reduced for dynamic targets to work satisfactorily.
Another important issue might be the choice of the measurement unit forGDP. For example, using different means to compare GDP between
countries – such as exchange rates or purchase power parities – would also
lead to a different assessment of the GDP evolution over time of any single
country (see Müller et al., 2002). Using a constant local currency would
avoid this sensitivity problem, although at the cost of abandoning thecapacity for international comparisons of absolute intensity levels(Baumert et al., 1999).
Comparing or combining the options
The key difference between a price cap and a dynamic target is fairly
obvious: a price cap protects the international community against errors
in fixing the global target by shaving marginal costs when international
permit prices reach the cap price. Dynamic targets protect individual
countries against mistakes in fixing countries’ assigned amounts on thebasis of expected economic growth.
All options considered here would allow differentiation amongst
countries. With dynamic targets, differentiated assigned amounts and139

indexation formulas could be considered so as to take into account levelsof development and national circumstances. With the price cap, a single
price is preferable for unrestricted trading. However, presuming the pricecap would be set in the upper range of cost expectations, levels of effort
could differ from one country to another, thanks to differentiated assigned
amounts.
The introduction of a ceiling price over a structure of fixed targets would
better deal with cost uncertainty. A price cap need not be difficult toimplement or institutionally complex. It would add some complexity to
the negotiations, but might also facilitate them in helping countries adopt
more stringent commitments. Provided the ceiling price is set in the upper
range of cost estimates, advocates of stringent policies should be satisfied
as they usually assume that abatement costs will be low. If they are right,
the ceiling price will never be used in practice. Countries with a strong
aversion to taxes may also feel better with such a “high” ceiling price, since
it would probably maintain the “tradable permit” structure of theagreement. Clearly, the level of the ceiling price will be fixed bynegotiation – between those favouring rapid reductions and arguing for ahigh price, and those in favour of limiting economic shocks, andsupporting low prices. As the ceiling cost (like target levels themselves) can
be changed over time, starting lower and building with time may be apractical solution.
Capping the price is not comparable to withdrawing from the Convention
or the Protocol. Withdrawing from these treaties puts countries in theposition of acting unilaterally – with the higher costs and reduced
advantages such action entails. Conversely, the price cap ensures that any
action below an agreed cost is taken – and a country does not need towithdraw from the agreement when the price exceeds that cost. Inasmuch
as the initial agreement under which the cap was negotiated incorporates
elements of fairness and cost-effectiveness, they are kept with the price cap– in a way that is certainly not retained when a Party withdraws. Naturally,
the existence of the price cap does not offer a full guarantee against
withdrawal. However, it makes it less likely.
The price cap option would presumably only apply to industrialised
countries. However, the non-binding option for developing country140

commitments would be similar to the adoption of a price cap – where thecap price is set at zero. A global emissions trading regime involving a pricecap at two different levels is thus conceivable, but would require some
restrictions on trading.
Dynamic targets do not entirely remove cost uncertainties. Over time,
however, as we learn more about abatement techniques and related costs,
cost uncertainty will be more and more dependent on economic growth
uncertainty – precisely the issue that dynamic targets can offset or reduce.
Dynamic targets have the added advantage of being able to remove the hot
air that would result from unexpectedly low economic growth –something that a price cap would not do (except insofar as it may promote
more stringent commitments from the outset).
By allowing differentiation on both assigned amounts and index formulas,
dynamic targets remain a valid option for engaging developing countries
in an effective and acceptable manner – but only if the difficulties
surrounding the measurement of the appropriate variables can be resolved.
The extent to which dynamic targets would alleviate cost concerns is alsoquestionable. If dynamic targets do not offer sufficient guarantees todeveloping countries for accepting a commitment, they might prefer nonbinding targets to binding ones. However, dynamic non-binding targets
may prove more effective than fixed ones, as they would increase thechance that a country enter global emissions trading.
As far as developing countries are concerned, the two options of“dynamic” and “non-binding” targets could be merged in a single conceptof “non-binding dynamic targets”. Such hybrids may offer attractive
options for developing countries to proceed beyond the CDM. Whiledeveloped countries could also consider architectures for futurecommitments encompassing both dynamic targets and price caps, it is notclear if the advantages would outweigh the added complexity: economic
growth uncertainty is usually less important in mature economies than indeveloping ones, with the notable exception of economies in transition.
Both dynamic target and price cap options are likely to increase thecomplexity of negotiations over fixed targets. Both would need an agreement
on two elements: assigned amounts and index formulas, on a country-by141

country basis, for dynamic targets; and assigned amounts and common pricecaps for the price cap option. This added complexity – probably greater inthe case of dynamic targets – might be the price for achieving the dual
objectives in question: powering the global economy while stabilisinggreenhouse gas atmospheric concentrations at acceptable levels.

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CONCLUSION
While some uncertainties remain in the science and economics of climatechange, the international community already knows enough to be certainthat action will be needed. We also know that energy is the prime culprit
in the climate change problem – although it is also intimately linked toour aspirations for economic and social development. However, knowing
this is not the same as being able to commit to a precise long-term
objective – we do not know at what levels concentrations of greenhousegases in the atmosphere will become dangerous. The critical question thus
remains: how to develop appropriate near- and long-term solutions given
our current levels of uncertainty.
The type of near-term targets adopted at Kyoto may not be the mostappropriate if the principal concerns relate to uncertainties in damage orabatement costs. The approach adopted in Kyoto inherently entails therisk of spending too much at the margin for too small an incremental
environmental benefit. Climate change is a “stock” pollutant: the precise
level of today’s emissions matters less than the accumulation of pastemissions – even if, in the end, reductions are needed to avoid
unprecedented changes in the earth’s climate.
Economic uncertainty is also one of the elements that prevent developing
countries from taking on targets – and concurrently participating inemissions trading, although their potential for relatively cheap emission
reductions suggest that they could benefit from such participation. The
global community would also benefit from their inclusion, even if they
adopt relatively modest targets (e.g., close to their baseline emission
levels). The same uncertainty may also prevent developed countries fromadopting emission goals stringent enough to achieve climate stabilisation– today or in the future.
Some different solutions have been suggested – and are explored in thisvolume. For example, according to economic theory, GHG taxes provide
a reliable alternative to the “cap-and-trade” model of Kyoto. However,such taxes would impose a direct cost on developing countries,
unacceptable at this stage. The North-South transfers required to offset
143this burden would mean a considerable departure from the approachtaken by countries so far to address their global problems.
Recognising the contribution that energy makes to greenhouse gas
emissions, it is clear that energy-related policy choices will be critical toemissions reductions. It is also evident that continuing on a business-asusual course, and burning the entirety of the world’s fossil fuel resources
will lead to an untenable future. Emission reduction strategies can bedivided into three categories: using less (i.e., promoting efficiency),
switching fuels (i.e., changing the fuels used – from fossil to nuclear or
renewable energy), and capturing and storing emissions (i.e., throughextraction and permanent storage of greenhouse gases). Actions in all
sectors are clearly possible: buildings, power generation, transport,
residential and commercial use and industrial activities all offer scope for
reducing emissions. Individual government policies may promote action
along one or more of the three alternative paths. However, it is ultimately
likely that a combination of all three categories will be needed to meet the
reductions demanded for stabilising atmospheric concentrations at a“safe” level.
The literature is also clear that a long-term solution is possible only iftechnology development proceeds along climate-friendly lines. Thus, anessential component of any successful near-term target is that it provides
a strong impetus to technical change through a price signal, rather than
exclusively a sizeable and/or immediate effect on greenhouse gas
emissions. Specific technology agreements thus may offer an alternative toa tax or cap-and-trade policy. But the number of such agreements, thedifficult negotiations among countries with radically different cultures,
geography and resources, and the high cost of command-and-control
measures when compared with economic instruments may render thisoption difficult to adopt in a global regime, although the approach could
yield significant benefits.
Another alternative that is often suggested is that efforts be made to link
climate change with development issues. History has clearly indicated thatas countries develop, their focus on the local (and global) environment
increases. However, while this might help, it will not necessarily produce
the desired results: the richest countries today are responsible for the144largest part of global emissions – and the richest – the USA – for thehighest share. Following a trend of economic growth clearly does not byitself lead to emissions reductions. Furthermore, while increasing
affluence does allow cost savings and energy efficiency technologies to be
adopted, this route is very slow: it is hardly likely to drive the changes inenergy production and use that are necessary to limit climate change toacceptable levels.
It has also been suggested that global international agreements may bepolitically impossible, as national and regional differences are too great toallow them to be adopted. If this is true, regional agreements (or otheragreements between limited sets of countries) could be an alternative.
However, they also pose problems – for example, they are likely to be lesseconomically efficient (they would not allow global trading and theequalisation of global marginal abatement costs).
Recognising the pros and cons of possible alternatives, the current
negotiated framework has much merit – including the experience of ten
years of international negotiations and agreements. A world that was
reluctant at the outset has become accustomed to the view that market
mechanisms can help protect the environment, and help reconcile anacceptable global allocation of reduction efforts with a cost-effective
distribution of emission reductions. The Kyoto Protocol’s combination ofa cap on emissions and tradable permits allows an acceptable allocation ofeffort without losing economic efficiency – something that a global
carbon tax could not have achieved without significant financial transfers.
This framework could be even more acceptable for a broader set ofcountries if the nature of the targets is changed. Dynamic targets and theprice cap option – including the non-binding target option for developing
countries – could help deal with cost concerns. The international
community could use them to undertake the necessary profound changes
in energy production and use, to keep open the option of stabilisinggreenhouse gas atmospheric concentrations at relatively low levels. The
achievement of targets would be conditional on actual costs. In addition,such a modification of the current international climate change regime
may be easier to negotiate than many other alternatives – as it could buildon the decade of past agreement under the UNFCCC.
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The international community is sending mixed signals on climate change
policy. While the EU, Japan and others have ratified the Kyoto Protocol,
it is already clear that at least several major countries will not.
Furthermore, even if all remaining countries ratified the agreement, it
would yield little in the way of changes in the trend of atmosphericconcentrations of greenhouse gases. The agreement currently placesbinding obligations for emissions limits or reductions on only about onethird of global emissions – and some parties to the agreement have statedthat they will be unable to take additional actions unless all countries –both developed and developing – are engaged.
Thus, it is necessary to find ways of bringing all countries back to thenegotiating table. Due consideration must be taken of the basic issues of
equity, responsibility and capability to act. Economic principles that guideeffective and efficient action clearly provide tools to help guide robust
policy choices.
Countries are clearly taking action at the local and national levels – andmany industries are seeking cost-effective and appropriate solutions. The
issue confronting us now is how to move forward at a rate sufficient tolimit the expected damage caused by climate change, while ensuring
humanity the social and economic advances – and the energy resources –needed for future development.
This book has sought to put forward options that respond to all of theconcerns voiced by different parties. However, no option can be a
substitute for political will. While concerns about uncertain costs arelegitimate – and can be dealt with – all countries must engage if the world
is to stop climate change from rising beyond acceptable levels.

146

APPENDIX:CERTAINTY VERSUS STRINGENCY
Economic theory provides important insights into choosing between two
types of economic instruments to deal with pollution problems – priceinstruments such as taxes, and quantity instruments such as tradable
permit schemes.
In search of the optimum level of abatement
Economists use graphs like the one shown in Figure 14 to define the“optimal level” of pollution or – an equivalent, but perhaps more
acceptable definition – the optimal level of de-pollution. They usuallyconsider that the marginal benefit of abatement decreases with the level ofabatement, because it is common that when pollution increases, its
marginal environmental cost increases too. Marginal benefits here
represent the present value of all future benefits arising from mitigating
emissions over an infinite horizon25.
Conversely, the marginal cost of abatement increases with the level ofabatement. The first tonne of a pollutant is easier to eliminate than thelast. Of course, over time things may change. But graphs like Figure 14 do
not represent how costs and benefits may evolve over time – but how they
relate to the level of effort undertaken at some point in time, or in someshort period.
Finally, the optimal abatement quantity should be fixed at the point where
the increasing marginal cost of abatement curve crosses the decreasing
marginal benefit curve, according to the best estimate. Beyond that point,
abatement costs are too high for too little additional environmental benefit.
The salient point here is that if abatement costs are known with certainty,
fixing a quantity fixes a price. Conversely, fixing a price would define aquantity. Thus, price and quantity instruments (say, taxes or tradable
25 We are looking here at marginal costs and benefits, not total costs and benefits. If each additional tonne ofpollution is worse for the environment than the previous one, the marginal cost of pollution increases. But
in this case, when one looks at the marginal benefits of abatement, the opposite happens: the marginal benefitof abatement decreases when its volume increases – while of course, the total benefits of abatement continue
to increase.

147

quotas) are equivalent from an economic standpoint. This remains true
even if the benefits are uncertain.
0Figure 140

Price and quantity instruments are equivalent
when costs are known

Marginal cost

Price (tax)
Marginal benefit

Quantity(global)Reductions

In order to reflect benefit uncertainty, three alternative marginal benefit curves are shown as a functionof emission reductions produced during a given period (with the total level of reductions increasing fromleft to right).

Prices and quantities when abatement costs
are uncertain
If abatement costs are not known with certainty, price and quantity
instruments are no longer equivalent. As Martin Weitzman showed in
1974, it is the relative slopes of the benefit and cost curves that areimportant in this case. If the marginal damage cost (“benefit”) curve is
steep, the damage rapidly increases with the level of pollution. In this case
it is worth determining the level of pollution rather than risk suffering too
much environmental damage. If, on the contrary, the marginal benefit
curve is flat, it means that the damage increases slowly with the level ofpollution. It is then preferable to get certainty on the marginal cost ofabatement, rather than risk paying too high a price for too small an
incremental environmental benefit. A steeper benefit curve calls forquantity instruments, a steeper cost curve calls for price instruments. This
is what Figure 3, in Chapter 1, illustrates. A more formal demonstrationof these results can be found in Box 13.
148

0Box 130

A formalisation of Weitzman’s result

This rests on the important notion of expectations. Expected costs (orbenefits) take into account all possible outcomes regarding uncertain
costs (or benefits) and weigh them according to their probability ofoccurrence. Although they do not express the actual costs that will be
incurred, they are useful instruments for making decisions in thecontext of uncertainty.
Weitzman showed that the value of the expected costs of choosing a
price policy over a quantity is always negative: with a price instrument,
the expected costs are always lower than with the equivalent (under abest guess) quantity instrument.
Let us denote:c = marginal cost curve slopeb = marginal benefit curve slope
s2 = variance of the cost curve function
The value of expected costs (E[C]) from choosing a price policy over aquantity policy writes:
σ2
E [C price − C quantity ] = −2c
The solution is intuitively obvious: the price instrument drives more
reductions if costs are lower than expected, or less reductions if costs arehigher than expected; however, the volume of supplementary costs incurredin the first case is less significant than the volume of costs saved in thesecond case. The marginal cost of abatement increases with its magnitude.
The value of expected benefits (ignoring the costs) of choosing a pricepolicy over a quantity policy is also always negative. This is because thevolume of supplementary benefits gained if the marginal cost is lower
than expected is less significant than the volume of benefits lost if themarginal cost is higher than expected. The marginal benefit ofabatement decreases with its magnitude (reflecting the increasing
marginal damage when emissions increase). As a result, expected
benefits are always lower with a price instrument than with theequivalent (under a best guess) quantity instrument.

149

The value of expected benefits (E[B]) from choosing a price policy over aquantity policy is:σ2
E [B price − B quantity ] = − 22cThese results help explain why people primarily concerned withenvironmental protection often show a preference for quantity
instruments.
Let us now consider the difference between net expected benefits witha price instrument and net expected benefits with a quantity instrument– taking into account both costs and benefits. This difference is positive
if the slope of the marginal cost curve is steeper than that of themarginal benefit curve, i.e., if costs grow faster than benefits26. In otherwords, saved costs are larger than lost expected benefits with the priceinstrument. The latter should be preferred over a quantity instrument.
If, on the contrary, benefits grow faster than costs (because the marginal
cost of pollution increases with its amount), a quantity instrument
should be preferred. If a price were chosen instead, lost expected
benefits would be more significant than saved expected costs.
The difference (benefit minus costs, or net benefits) is shown as:

σ2
c −b
2c 2
As a result, the preference for price or quantity instruments only
depends on the relative slopes of the marginal cost and benefit curves.
∆=

Hybrid instruments always perform better
In 1976, Roberts & Spence showed that a hybrid instrument, consistingof a quantity target, a price cap and a price floor as shown on Figure 15,
would perform better than either a pure quantity or price instrument.
If abatement costs reach the price cap, less abatement is undertaken;
emissions beyond the quantitative target are taxed at the price cap level. If
abatement costs remain below the floor price, a subsidy finances
additional abatement. The quantities actually achieved (solid vertical
26 Again, not over time, but with the quantity of abatement undertaken.

150lines) are closer to the optima (dotted lines) than a fixed quantity (boldline). They are also closer to the optima than the quantities (QT or QT’)that a pure tax would achieve (broken lines). This is due to the slope ofthe marginal benefit curve.
0Figure 150

A hybrid instrument helps approximate the marginal
benefit curve

Price cap
T
Price floor

Q
QT

QT’

In other words, a hybrid instrument allows for a fairly good
approximation of the marginal benefit curve (near optimality) whenabatement costs are uncertain. It would perform better than either a pureprice or a quantity instrument, unless the benefit curve is perfectly
horizontal (when a tax would prevail) or perfectly vertical (in which casea pure quantity would prevail).
The case of climate change
Climate change is a “stock” externality. GHG concentrations drive theclimate. Given the importance of the “stock” (740 Pg of C in atmosphericCO2) compared to annual emissions (8 PgC), the concentration evolves
only slowly. This is what makes the marginal benefit curve rather flat or
horizontal (reflecting a fairly constant marginal climate change damage
cost: each additional tonne adds roughly the same stress as the one before).
For example, consider the Kyoto Protocol in Figure 16. Its full
implementation would reduce CO2 concentrations in 2010 to 382 ppm,
as opposed to 383 - 383.5 ppm under a business-as-usual scenario (Bolin,1511998). We don’t know how the marginal climate change should be valued,
but it is unlikely that it would be much different around 382 ppm than it
would be around 384 ppm.
It should be noted that although the two “possible” benefit curvesindicated here may seem to be parallel, in fact, they are not - they have acommon origin, likely to be close to zero at pre-industrial concentrationlevels. Extremely high valuations of this damage could thus make thesecurves steeper.
Another limitation is that we cannot exclude a non-linear climate changethat would introduce a turning point. But as we don’t know at what
concentration level this may happen, it hardly affects the expected damage
function – particularly not within such a narrow range of emission levels.
0Figure 160

Climate change cost curves
100 €?

Possible

Improbable
20 €?

Possible

Emissionreductions

0
Concentrations of CO2 384 ppm (without KP)

382 ppm (with KP)

A consequence of the “flatness” of the marginal benefit curve is that priceinstruments should be preferred over quantity instruments to combat
climate change. As shown in Figure 17, a fixed quantitative objective
might be far from the optimum quantity once uncertainty on abatement
costs is resolved, whereas a tax would always be close to the optimum
price.
Newell and Pizer (2000) have adapted Martin Weitzman’s analyticalframework to deal with stock externalities, such as climate change. These
adaptations take into account the persistence over time of expected benefit
152

losses when price instruments are preferred over quantity instruments. If
a price instrument leads to less mitigation in one period, this has longlasting effects on subsequent periods. Thus, these adjustments tend tofavour – in relative terms – quantity instruments.
0Figure 170

A price instrument would be better in the caseof climate change
Higher than expected costs

Marginal cost

Price
(tax)

Marginal benefit

Q

Reductions

However, these may not suffice to reverse policy preferences. A general
conclusion is that the performance of price instruments is always increasedby the size of the externality stock – given that benefits are relative toconcentration level changes while costs are linked to short-term emission
reductions.
In the case of climate change, this suggests a strong preference for priceinstruments. The adaptation made to the original framework cannot
reverse the dominance of the stock nature of the externality. The
parameters of Newell and Pizer’s model may be questioned on a number ofgrounds. However, to reverse the policy conclusions, it would be necessary
to give the marginal benefit – or climate change cost – a value more than
1,000 times higher – or a very rapid, non-linear increase of these costs.
If this were the case, not only would the policy preference for priceinstruments be reversed; but the quantitative objective should also aim at
reducing global emissions in the short term – from 40 to 100 per cent! This153

would be equivalent to stabilising CO2 concentration at current levels. In
other words, quantity targets are inconsistent with targets leading to reducenear-term global emission levels by 10, 20 or even 30 per cent.
However, quantitative instruments have a number of advantages. They
help deal with sovereignty concerns; governments’ fine-tuning between
free allocations and auctioning in order to deal with vested interests; and,moreover, they help integrate countries with uneven levels of development
into one single framework. This makes hybrid instruments even more
appealing.
If a floor price appears impossible (or not desirable), it is necessary to set
a more stringent quantitative objective than under a “best guess” on costs
and benefits, as shown on Figure 18. This compensates for the risk ofunderinvestment in abatement policies in the absence of a floor price(Cournède & Gastaldo, 2002). The quantity of abatement undertaken is
known, unless costs are higher than expected. In this case, the actual
abatement will be less than the objective but still more than the optimum(dotted line on the left-hand side).
0Figure 180

The price cap
eMarginal cost
Price cap

BaU

154

Objective(global)Reductions

LIST OF ABBREVIATIONS
AND ACRONYMS
ADB
AIJ
BaU
CDM
Ceq
CH4
CO
CO2
COP
CFCs
EITs
ET
FAIR
FDI
FSU
GDP
GEF
GHG
GtC
GWPs
HC
IBRD
IPCC
JI
MtC
N2O
NOx
ODA
O3
PFCs

Asian Development Bank
Activities Implemented Jointly
Business-as-usual
Clean Development Mechanism
Carbon equivalent (weight of another GHG multiplied by
its GWP – see those words)
MethaneCarbon Monoxide
Carbon Dioxide
Conference of the Parties
Cholofluorocarbons
Economies in Transition
Emissions Trading
Framework to Assess International Regimes
Differentiation of future commitments
Foreign Direct Investment
Former Soviet Union
Gross Domestic Product
Global Environment Facility
Greenhouse gases
Gigatonnes (billion tonnes) of Carbone (or PgC)
Global warming potentials
Hydrocarbons
International Bank for Reconstruction and Development
Intergovernmental Panel on Climate Change
Joint Implementation
Million tonnes of Carbon
Nitrous oxide
Nitrogen oxides
Official Development Assistance
Ozone
Perfluorocarbons
155

PgC
ppm
PV
SF6
SRES
TAR
UNFCCC
WRE
Wm-2

156

Petagramme of Carbon
parts per million
Photovoltaic
Sulfur hexafluoride
IPCC Special Report on Emission Scenarios
Third Assessment Report of the IPCC
United Nations Framework Convention on Climate
ChangeWigley, Richels and Edmonds
Watts per square metre

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