Economic Implications of Global Convergence on Emission Intensities

1. Economic Implications of Global Convergence on Emission Intensities Govinda R. Timilsina Senior Economist The World Bank, Washington, DC 32nd USAEE/IAEE North American Conference Anchorage, Alaska July 28-31, 2013

2. Disclaimer The views expressed in this presentation are those of the speaker’s only, and do not necessarily represent the World Bank and its affiliated organizations

3. Introduction (1/3) CO2 Emissions in 2010 (Million tons) (2): 43% (5): 58% (10): 68% (20): 81% (30): 88%

4. Introduction (2/3) Countries in terms of absolute emissions and per Capita emissions in 2010 Vertical Axis – Per capita emissions (ton per capita) Horizontal axis – CO2 emissions (Million Tons)

5. Introduction (3/3) Per capita CO2 emissions (tons) (11.8 tons) (10.2 tons) 14% lower from 1990 level Intensity gap (7.4) Intensity gap (10.3) (-20%) 72% higher from 1990 level (2.7 tons) (1.6 tons) Although, emission intensity gap is decreasing, industrialized countries, on average, still release 3.7 times as high as CO2 emissions per capita than developing countries

6. The Question • Is stabilization of GHG concentrations to avoid climate change possible while converging the emission intensities between industrialized and developing countries? • Provided that: • To avoid climate change (or avoiding dangerous consequences in the earth’s atmosphere), the earth mean average surface temperature should not be higher than 2 degree Celsius from the pre-industrialization level • Concentrations of CO2 emissions should be stabilized below 450 PPM • Global emissions to peak before 2020, followed by substantial overall reductions of around 60% below the 2000 level by 2050

7. Our Approach • We introduced various levels of carbon tax (US$10 to 250 per ton of CO2) to Annex I countries to reduce their fuel consumption and thereby CO2 emissions and emission intensities. • Non-Annex I countries are exempted from carbon taxation, however they are impacted from Annex I countries carbon tax through international trade. • Since the emission intensities of Annex I countries would decrease in response to the carbon tax while Non-Annex I countries emission intensities would continuously increase, the intensity gap between these two groups of countries drops (i.e., we will be moving towards global convergence of emission intensities). • We used a global CGE model to simulate the effects moving towards global convergence of emission intensities.

8. Model & Data • Multi-sector, multi-region, global recursive dynamic CGE model • The model is flexible enough to accommodate new regions/countries or sectors and is calibrated with GTAP database • Nested CES and CET functional forms to represent production behavior and land supply, respectively • Representation of bilateral and international trade • Data are coming from the GTAP (Version 7.1)

9. Per Capita CO2 Emission (tons) under Different Carbon Tax Rates US$10/tCO2 US$50/tCO2 6.8 tons (- 9.4%) (- 36.5%) 4.8 tons 7.5 tons US$250/tCO2 US$100/tCO2 3.6 tons (- 51.6%) 2.1 tons (- 71.6%)

10. Impacts on CO2 Emissions Annex I Non-Annex I Global

11. Impacts on CO2 Emissions in 2030 Limiting temperature rise below 2°C, CO2 concentrations must be below 450ppm Global CO2 emissions should be reduced 60% below 2000 level by 2050 Even at the very high carbon tax rate of $250/tCO2, we find that global CO2 emissions in 2030 would be only 18% below from that in the baseline

12. CO2 Emissions with $250 Carbon Tax Case Compared to 2000 Emission Level Global 2000 Non-Annex I countries emissions would exceed global 2000 level by 2030 if there emissions are not limited Even if developed countries CO2 emissions are completely wiped out, meeting 2 degree target would be far out of reach unless Non-Annex I countries emissions are limited Annex I 2000 • Compared to 2000 emissions level, the emission convergence scenario (72% reduction of intensity gap through $250 carbon tax) would, in 2030, • decrease Annex I emissions by 52%, but • increase Non-Annex I emissions by 3 folds, thereby • increase global emissions by 28%

13. Impacts on GDP in 2030 The relationship between the carbon tax level and corresponding GDP loss is exponential There would be a carbon leakage effect (carbon intensive industries would move to Non-Annex I countries from Annex I countries). Despite the strong international trade linkage between Non-Annex I countries and Annex I countries, the former are not found to be negatively affected by the carbon tax in Annex I countries.

14. Combining Effects on GDP and CO2 Emissions (2030) Non-Annex I countries are also expected to reduce their GHG emissions, in that case, emission intensity will diverge instead of converge

15. Impacts on International Trade in 2030 • The carbon tax introduced in Annex I countries would cause international trade • to shrink (up to 2% in the case of $250/tCO2 carbon tax) • Since domestic production would be more expensive in Annex I countries due • to carbon tax exports would get impacted the most • Non-Annex I countries would benefit as their exports increase and imports drop

16. Country Results: CO2 Emissions

17. Country Results: Emission Intensity

18. Country Results: GDP

19. Country Results: International Trade

20. Conclusions • Developing countries’ argument to converge global CO2 emission • intensity could be reasonable from the equity perspective • However, their demand could not be realized in practice if global CO2 emissions are to be reduced to stabilize CO2 concentration to meet the ultimate objective of the UNFCCC • Limitations of GHG emissions is necessary in developing countries to avoid climate change; the 2 degree target can not be realized even if developed countries CO2 emissions are completely wiped out as long as developing countries’ CO2 emissions increase at the current trend

21. THANK YOU Govinda R. Timilsina Sr. Research Economist (Climate Change & Clean Energy) Development Research Group The World Bank 1818 H Street, NW Washington, DC 20433, USA Tel: 1 202 473 2767 Fax: 1 202 522 1151 E-mail: gtimilsina@worldbank.org