October 24th, 2012

How to make rich countries pay for climate change

Climate Change & Environment

Economics & Politics


The absence of a discussion on climate change in the three debates between Barack Obama and Mitt Romney is a sign of how the topic has fallen off the US policy agenda since the financial crisis. This is a sad gap and one the next president must address.

Looking globally, however, there is some cause for hope. Last week, the board of the Green Climate Fund, a very important but little known international institution, decided to locate the fund permanently in South Korea. This was a good move. South Korea has been a global leader in promoting the important concept of “green growth”: economic growth combined with reduced greenhouse gas emissions.

The Green Climate Fund, agreed by the 191 countries that are signatory to the UN Framework Convention on Climate Change, is the key global instrument for enabling poor countries to undertake investments in renewable energy and climate change adaptation (that is, making the economy more resilient to the climate change that is already underway). The Green Climate Fund has been given a daunting assignment: to raise $100bn per year for low-income countries by 2020.

Rich countries need to finance poor countries for three reasons.

First, they owe it to the them. Around 75 per cent of the greenhouse gas emissions to date have come from the rich countries, but it is the poor countries, notably in the tropics, that are reeling from the brunt of human-induced climate change. If we had global tort law, the poor countries would sue the rich countries for damages in destroying their climate. Instead, we have an agreement on compensation.

Second, the world has rightly accepted that climate change action must be addressed within the overall context of development, meaning that poor countries must not be hampered by the costs of low-carbon energy and the burdens of climate-change adaptation.

Third, the world has accepted a pragmatic reality: without incremental climate financing, poor countries simply can’t afford a development strategy that combines low-carbon energy with universal access to electricity. They will be forced to choose the lower-cost, carbon-intensive energy systems.

Yet the rich countries have not yet accepted a formula to meet their $100bn-a year pledge. Those who have participated in the backroom negotiations know that it is the US above all other countries that has resisted a clear and accountable financing mechanism. This is par for the course. The US these days resists almost all calls for sharing the financial burdens of sustainable development. As a striking example, the US official development assistance budget, though large in absolute terms, is the lowest share of GDP of any advanced economy, just 0.18 per cent of national income.

The basic principles of financing the Green Climate Fund should be clear enough. Polluters should pay for the damages they are causing, so contributions should be linked to carbon emissions. Payments should be graduated in terms of ability to pay (and implicitly, as least, historical responsibility). And the use of the funds should be directed to the low-income countries, those in need of the climate financing.

Here is a straightforward way to reach $100bn that abides by these principles. The world would adopt a base assessment rate of $5 per ton of CO2 emitted by each country. The high-income countries would pay the full $5 per ton on their emissions. Upper-middle income countries would pay half-fare, that is, $2.5 per ton. Lower-middle income countries would pay half of that, $1.25 per ton. The low-income countries would not pay into the GCF, but would be the recipients. The World Bank’s country-classification scheme would be used to categorize countries by income.

Using the 2010 emissions by country reported by the International Energy Agency, we find that a $5-per-ton base levy would lead to combined assessments of $101bn. The largest assessment would be on the US, at $27 billion, equal to roughly 0.18 per cent of GDP. This reflects the U.S. 5.4bn tons of CO2 emitted in 2011. The second largest contribution would come from China, at $19bn and equal to roughly 0.17 per cent of GDP, reflecting China’s 7.7 billion tons assessed at $2.5 per ton.

Suppose that countries cover these assessments through carbon levies that are passed along to the consumer at the petrol pump and the home electricity bill. A tax of $5 per ton of CO2 emission would amount to roughly 1.1c per litre, or 4.4c per gallon of petrol. Similarly, that same carbon levy on the electricity produced by a coal-fired power plant would amount to roughly 0.5c per kilowatt-hour.

The advantage of this approach to the GCF is fairness – as it is based on the “polluter-pays” principle adjusted by ability to pay – and its simplicity, transparency, and predictability. There are no other financing proposals on the table that have these properties, nor are there likely to be. The US has been resisting such a simple formulation precisely because it would then be held accountable for the scale of its emissions and its ability to pay, if not for its historical responsibility in bringing the planet to the current state of climate instability.

Another advantage, clearly, is that such a global carbon-based levy would push countries to the right kind of domestic policy intervention: setting a social cost of carbon emissions to be collected through a carbon tax or the sale of carbon emission permits. Interestingly, the US has actually set a social cost of carbon of $21 per ton of CO2 for purposes of cost-benefit analyses by US regulatory agencies, but the government has not yet taken the next obvious step, of introducing that social cost of carbon into market transactions through corrective taxes or permits. The move to a global carbon levy for the CGF would nudge it and other governments to do just that, thereby promoting the market-based transition to low-carbon energy.

This post originally appeared in The Financial Times.

 

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