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Motivation OECD countries are (or will soon be) taking actions to reduce greenhouse gas emissions Major emerging economies will face pressures to get involved in the cooperative effort to reduce GHG emissions Analyze the implications of delayed versus immediate participation of developing regions in an international climate agreement Optimal investment strategies of emerging economies in response to a future commitment International carbon market as accession deal 1 1

EMF22 International Scenarios EMF22 modeling comparison exercise: 10 models X 10 scenarios Main results and complete dataset accessible (http://www.stanford.edu/group/EMF/projects/EMF22) Papers being published on Energy Economics Scenario design: Long term stabilization targets: 2.6,3.7,3.7OS,4.5 W/m^2 Rate of international participation: immediate (all in 2015), myopic (BRICs @ BAU till 2030, ROW till 2050, join afterwards) Degree of policy anticipation: foresight (non signatories can anticipate future policies) Analysis carried out with the I.A.M. WITCH (www.feem-web.it/WITCH) 2 1

The challenge of sharing the burden China/US ratio Total Emissions Per Capita Emissions From 1900 0.28 Rio:1992 0.48 0.10 Kyoto:1997 0.55 0.12 2007 1.13 0.26 2030 1.75 0.44 Source: EIA for the 1992, 1997 and 2030 projections. 2007 estimate is from MNP and BP 3 1

Stabilization pathways Energy-related CO2 emissions in the BAU and the stabilization scenarios for the WITCH model 4 1

Overcoming free riding incentives 5 1

Costs of delayed participation Global macro-economic costs of climate stabilization policies (GWP losses with respect to Business as Usual, annualized at 5% discount rate). RF Target (W/m^2) Immediate 2.6 infeasible 3.7 1.26% 3.7 OS 1.11% 4.5 0.06% 6 1

Costs of delayed participation Global macro-economic costs of climate stabilization policies (GWP losses with respect to Business as Usual, annualized at 5% discount rate). RF Target (W/m^2) Immediate Myopic Myopic penalty (USD Trillions) 2.6 infeasible - 3.7 1.26% 2.53% 25 3.7 OS 1.11% 1.50% 8 4.5 0.06% 0.10% 0.2 7 1

C tax for 3.7 W/m^2 (550 ppmeq) 8 1

C tax for 3.7 W/m^2 (550 ppmeq) 9 1

Some Forces affecting non-participatory countries Relax the assumption that non-signatories invest as in BAU, allow for foresight: Fossil fuel prices: leakage due to lower consumption and prices Technological spillovers: international flows of knowledge and experience. Policy anticipation: when perfect foresight is accounted for, countries ‘price-in’ the future carbon price in their investment choices and, given the low turnover of energy capital and the lag time in the innovation processes, adjust their portfolio of investments accordingly. Compare with myopic and immediate cases 10 1

CCS deployment 11 1

Cost of advanced breakthrough technology 12 1

Decomposition of technical change 13 1

Optimal Investments in China Nuclear power additions (5 yrs) Energy R&D Investments (Blns USD) Since 2000, China’s nuclear power generation output has grown at an average rate of 22% per year to reach 54.8 TWh in 2006 (NBS, 2008). During the 9th Five-Year Plan period (1996-2000), China developed four nuclear power projects with a total of eight units having a combined capacity of 6.7 GW. As a result, China has now mastered PWR nuclear power generation technology at unit sizes of 300 MW and 600 MW, with 60% of components manufactured locally. In August 2007, China began building its largest nuclear power project, the 4 320 MW Red River nuclear power plant in Liaoning, the first in the 11th Five-Year Plan period. China’s own CPR1000 nuclear technology will be used for all four units. China nuclear power plans: - 4 GW Red River under constr. - 2020: 40/60 GW China innovation plans: Total R&D now at 1.5% GDP (40 Billions), target of 2.5% in 2020 if energy R&D is 2% of tot R&D, 4 Blns in 2020 14 1

Optimal Emissions in China 15 1

The economic benefits of policy anticipation Region Efficiency gains of foresight World 38% 16 1

The economic benefits of policy anticipation Region Efficiency gains of foresight World 38% OECD 48% BRICs 22% 17 1

International carbon market The negative effects of delayed participation can be mitigated (besides via policy anticipation) by using carbon trading as an accession incentive and a mean to equalize marginal cost. The question is what allocation should be negotiated and what transfers would it imply: non-signatories at myopic BAU non-signatories at foresight 18 1

International carbon market Financial transfers (USD Billions,+ outflow, - inflow) Myopic (BAU) Foresight 2020 2030 OECD 94.2 197.2 23.6 147.8 BRICs -75.6 -152.8 -17.1 -65.6 OTHER -18.6 -44.4 -6.5 -82.2 19 1

Conclusions Delayed participation of emerging economies (BRIC) in an international climate agreement increase policy costs significantly limited for non stringent climate targets and overshoot Policy foresight has the potential to significantly ease the mark up of delayed participation. Optimal investment behavior for emerging economies is to anticipate their participation in a climate policy by roughly 10 years. China actual and projected trends in green innovation and low carbon technologies compatible with the adoption of an emission mitigation policy by 2030 The degree of policy anticipation is shown to be important in determining the financial transfers of an international carbon market. 20 1

The WITCH model Analysis carried out with the I.A.M. WITCH (Bosetti et al, 2006) Hybrid energy-economy-climate model Perfect foresight, dynamic optimization of world economies Technological change via experience and innovation processes Game-theoretical set up 21 1