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Distributional Considerations in Climate Policy:
Co-Benefits, Carbon Rent and Adaptation
James K. BoyceDepartment of Economics & Political Economy Research Institute
University of Massachusetts, Amherst
Advanced Graduate Workshop on Development & GlobalizationBangalore – 14 January 2015
Lima CoP20 • Mitigation: Intended Nationally Determined
Contributions (INDCs)
• Adaptation: Green Climate Fund
Climate Policy:Three distributional issues
Mitigation policies:• Air quality co-benefits• Carbon rent
Adaptation policies:• Resource allocation
Air Quality Co-Benefits
Air Quality Co-Benefits
‘Co-pollutants’ from fossil fuel combustion include:
• particulates• sulfur dioxide • nitrogen oxides• air toxics (e.g., benzene)
• If CO2 emissions decline, so do harmful co-pollutants
• ‘Co-benefits’ from CO2 reduction are LARGE International research shows the co-benefits may
be comparable to the benefits of CO2 reduction itself
Magnitude of co-benefits varies across and within countries
WHY CO-BENEFITS MATTER
CO-BENEFITS ARE LARGE
“The nationally efficient CO2 price [based on non-CO2 domestic externalities] is typically quite large, for example, $63 per ton—estimated for year 2010 and in US $ for that year—in China, and averages $57.5 per ton among the top twenty emitters. For comparison, a US government study (US IAWG 2013) puts the global damage from CO2 emissions at $35 per ton.”
- Parry et al. (2014) ‘How Much Carbon Pricing is in Countries’ Own Interests? The Critical Role of Co-Benefits,’ IMF Working Paper WP/14/174.
CO-BENEFITS VARY ACROSS COUNTRIES
Source: Parry et al. (2014) ‘How Much Carbon Pricing is in Countries’ Own Interests? The Critical Role of Co-Benefits,’ IMF Working Paper WP/14/174.
CO-BENEFITS VARY WITHIN COUNTRIES
JAMES K. BOYCE & MANUEL PASTOR
CO2 benefits are global:
Marginal Average Benefit of reductions is the same across polluters
Co-benefits are local:
Marginal Average Benefit of reductions varies across polluters
WHY CO-BENEFITS MATTER: Efficiency
WHY CO-BENEFITS MATTER: Efficiency
An example
Power plant near Bakersfield, CaliforniaOil refinery in Torrance, California
PM emissions: 350 tons/yrPopulation within 6-mi radius: 800,000
PM emissions: 50 tons/yrPopulation within 6-mi radius: 600
WHY CO-BENEFITS MATTER: Equity
Difference between the minority share of health risk from industrial air toxics and the minority share of the population by state
Source: Michael Ash et al., 2009, Justice in the Air: Tracking Toxic Pollution from America’s Industries and Companies to our States, Cities, and Neighborhoods (Amherst, MA: University of Massachusetts Political Economy Research Institute and University of Southern California Program for Environmental and Regional Equity, 2009).
1. STRENGTHEN CARBON EMISSION REDUCTION TARGETS
POLICY IMPLICATIONS
Air-quality co-benefits should be counted in setting policy objectives for carbon emissions reduction.
2. CO-POLLUTANT MONITORING
POLICY IMPLICATIONS
Climate-policy implementation should be accompanied by monitoring of co-pollutant emissions. Remedial policies should be introduced if monitoring reveals the widening of disproportional co-pollutant impacts on low-income communities and minorities.
3. DESIGNATE HIGH-PRIORITY ZONES
POLICY IMPLICATIONS
Climate-policy design should include identification of high-priority zones where air-quality co-benefits are especially large. Policy should ensure that emissions reductions in these zones equal or exceed the average reductions achieved by the policy as a whole.
4. DESIGNATE HIGH-PRIORITY SECTORS & FACILITIES
POLICY IMPLICATIONS
Priority for carbon emissions reductions should be assigned to industrial sectors & facilities that pose high co-pollutant burdens and have disproportionate impacts on minorities and low-income communities. Policy should ensure that emissions reductions in high-priority sectors and facilities equal or exceed the average reductions achieved by the policy as a whole.
5. COMMUNITY BENEFIT FUNDS
POLICY IMPLICATIONS
Part of the carbon rent generated by price-based climate-policy instruments that is devoted to public investments should be allocated to community benefit funds to support environmental and public-health improvements in disadvantaged communities.
CO-BENEFIT VARIATION ACROSS COUNTRIES REVISITED
Source: Boyce & Pastor (2012) Cooling the Planet, Clearing the Air: Climate Policy, Carbon Pricing and Co-Benefits. Portland, OR: Economics for Equity and the Environment.
CO-BENEFIT VARIATION ACROSS COUNTRIES REVISITED
Source: Boyce & Pastor (2012) Cooling the Planet, Clearing the Air: Climate Policy, Carbon Pricing and Co-Benefits. Portland, OR: Economics for Equity and the Environment.
Carbon Rent
“Keep the oil in the soil”
P
Q
D
S
0 Q0
P0
Q1
“Keep the oil in the soil”: some basic economics
Carbon rent
S’
P1
Who pays carbon rent?
Consumers pay• in proportion to their direct and
indirect use of fossil fuels
• in absolute terms, richer households use more than poorer households
• as a share of income, in some countires poorer households pay more -> equivalent to a regressive tax
Carbon Emissions vs Expenditure Levels
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
0 5000 10000 15000 20000 25000 30000 35000
expenditure per capita
carb
on
em
issio
ns (
ton
s c
arb
on
)
Source: Boyce, James K. and Matthew Riddle, Cap and Dividend: How to Curb Global Warming While Protecting the Incomes of American Families, Amherst, MA: Political Economy Research Institute, Working Paper No. 150, November 2007. Available at: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_101-150/WP150.pdf
Carbon Emissions and Household Expenditure: U.S.
Carbon Emissions vs Expenditure Levels: China
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
591 840 1,022 1,218 1,451 1,771 2,258 3,097 4,414 8,866
expenditure per capita (yuan)
carb
on e
mis
sion
s (to
ns c
arbo
n)
Source: Mark Brenner, Matthew Riddle, and James K. Boyce, “A Chinese Sky Trust? Distributional impacts of carbon charges and revenue recycling in China,” Energy Policy 35: 1771-84 (2007).
Carbon Emissions and Household Expenditure: China
Who gets the carbon rent?
“Keep the oil in the soil” ?
Who gets the carbon rent?
P
Q
D
S
0 Q0
P0
Q1
P1
Cap
Pricing carbon via cap or tax
Tax {
P
Q
D
S
0 Q0
P0
Q1
P1
Cap
Pricing carbon via cap or tax
Tax {
Carbon rent
Pricing carbon 1 permit = 1 ton CO2
Instrument Target
Tax Price
Cap Quantity
BIG price increases due to inelastic demand
% change in quantity
% change in price
Example: A 7% reduction in quantity a 23% increase in price
A 7% reduction in quantity is just the beginning.
= – 0.3
Carbon capping:costs versus transfers
Source: Dallas Burtraw et al., “The Incidence of U.S. Climate Policy.” Washington, DC: Resources for the Future, April 2009.
COST TRANSFERN
CAPPING CARBON in the U.S.HOW MUCH RENT?
period tons CO2/yr $/ton $/yr revenue 2015-20 6 billion $15 $90 bn
$540 billion2021-30 4.5 billion $30 $135 bn $1.35
trillion2031-40 3 billion $60 $180 bn
$1.8 trillion 2041-50 1.5 billion $120 $180 bn
$1.8 trillion
Cumulative revenue (2015-2050): $5.49 trillion
Climate policy ≠ open access
Climate policy as property creation
Open access Regulatory
standards (aka “command-
and-control”)
Polluter pays abatement costs
Price-based regulation
Polluter pays abatement costs + pays to pollute
Property right to set access rules
Property rights to set access rules + to receive income
(resource rent)
Congestion problem Pricing solution
Charging for parking does not mean the parking lot is for sale …It means use of the parking lot Is not free.
Why carbon pricing as part of the policy mix?
• Short-run timing: Immediate reductions in carbon emissions
• Long-run incentives: Induce demand-side changes
• Carbon rent: Allocation opportunities
Who owns the atmospheric “parking lot”?Who gets the money?
Consumers pay in proportion to their use of the scarce resource.
Option 1: Fossil fuel corporations?
• Free permits = windfall profits.
Cap-and-giveaway-and-trade
• Profits distributed in proportion to stock ownership.
• Some profits flow to foreign shareholders.
Option 1: Fossil fuel corporations?
• Free permits = windfall profits.
Cap-and-giveaway-and-trade
• Profits distributed in proportion to stock ownership.
• Some profits flow to foreign shareholders.
Option 2: The government?
• Permits auctioned, not given away.
Cap-and-spend
• Revenue retained by government.
• Funds used to increase spending or cut taxes.
“Double dividend” via tax shift?
#1: internalizing externality
#2: cutting ‘distortionary’ taxes (e.g. income and sales taxes) increases incentives to supply labor (and capital), leading to increased output (reducing ‘excess burden’ of taxation
Really?Assumption: full employment of labor & capital
Option 3: The people?
• Permits auctioned.
Cap-and-dividend
• Revenue recycled to the public in equal dividends per person.
• Protects the purchasing power of working families.
“La tierra es de todos com el aire el agua i la luz i el calor de sol.”
- Diego Rivera, La Asamblea Primero de Mayo. Ministry of Public Education, Mexico City.
Adaptation
Adaptation
Two distributional issues
• Costs: Who will pay?
• Benefits: Who & what will be protected?
“The Fund will promote the paradigm shift towards low-emission and climate-resilient development pathways by providing support to developing countries to limit or reduce their greenhouse gas emissions and to adapt to the impacts of climate change, taking into account the needs of those developing countries particularly vulnerable to the adverse effects of climate change…
“The Fund will operate in a transparent and accountable manner guided by efficiency and effectiveness.“
- Source: http://www.gcfund.org/about/the-fund.html
Allocation: within & among countries
Wealth-based approach“The measurement of the costs of health-impairing pollution depends on the forgone earnings from increased morbidity and mortality. From this point of view a given amount of health-impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic of dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that.”
.
Lawrence Summers, “Let them eat pollution,” The Economist, February 8, 1992.
Rights-based approach
“Every person shall have the right to an environment which is not detrimental to his or her health or well-being.”
- Constitution of the Republic of South Africa (1994)
“The people shall have the right to clean air and water, freedom from excessive and unnecessary noise, and the natural, scenic, historic, and esthetic qualities of their environment; and the protection of the people in their right to the conservation, development and utilization of the agricultural, mineral, forest, water, air and other natural resources is hereby declared to be a public purpose.’”
- Constitution of the Commonwealth of Massachusetts (1780)
Recap: Three distributional issues in climate policy
• Air quality co-benefits• Carbon rent• Adaptation costs & benefits
Climate policy is not just about people versus the planet.
It’s not just about the current generation versus future generations.
It’s also about the distribution of rights, income, health and safety within the current generation.
Thank you.