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Quantification of an efficiency–sovereignty trade-off in climate policy

Author

Listed:
  • Nico Bauer

    (Member of the Leibniz Association)

  • Christoph Bertram

    (Member of the Leibniz Association)

  • Anselm Schultes

    (Member of the Leibniz Association)

  • David Klein

    (Member of the Leibniz Association)

  • Gunnar Luderer

    (Member of the Leibniz Association
    Technical University of Berlin)

  • Elmar Kriegler

    (Member of the Leibniz Association)

  • Alexander Popp

    (Member of the Leibniz Association)

  • Ottmar Edenhofer

    (Member of the Leibniz Association
    Technical University of Berlin
    Mercator Institute on Global Commons and Climate Change (MCC))

Abstract

The Paris Agreement calls for a cooperative response with the aim of limiting global warming to well below two degrees Celsius above pre-industrial levels while reaffirming the principles of equity and common, but differentiated responsibilities and capabilities1. Although the goal is clear, the approach required to achieve it is not. Cap-and-trade policies using uniform carbon prices could produce cost-effective reductions of global carbon emissions, but tend to impose relatively high mitigation costs on developing and emerging economies. Huge international financial transfers are required to complement cap-and-trade to achieve equal sharing of effort, defined as an equal distribution of mitigation costs as a share of income2,3, and therefore the cap-and-trade policy is often perceived as infringing on national sovereignty2–7. Here we show that a strategy of international financial transfers guided by moderate deviations from uniform carbon pricing could achieve the goal without straining either the economies or sovereignty of nations. We use the integrated assessment model REMIND–MAgPIE to analyse alternative policies: financial transfers in uniform carbon pricing systems, differentiated carbon pricing in the absence of financial transfers, or a hybrid combining financial transfers and differentiated carbon prices. Under uniform carbon prices, a present value of international financial transfers of 4.4 trillion US dollars over the next 80 years to 2100 would be required to equalize effort. By contrast, achieving equal effort without financial transfers requires carbon prices in advanced countries to exceed those in developing countries by a factor of more than 100, leading to efficiency losses of 2.6 trillion US dollars. Hybrid solutions reveal a strongly nonlinear trade-off between cost efficiency and sovereignty: moderate deviations from uniform carbon prices strongly reduce financial transfers at relatively small efficiency losses and moderate financial transfers substantially reduce inefficiencies by narrowing the carbon price spread. We also identify risks and adverse consequences of carbon price differentiation due to market distortions that can undermine environmental sustainability targets8,9. Quantifying the advantages and risks of carbon price differentiation provides insight into climate and sector-specific policy mixes.

Suggested Citation

  • Nico Bauer & Christoph Bertram & Anselm Schultes & David Klein & Gunnar Luderer & Elmar Kriegler & Alexander Popp & Ottmar Edenhofer, 2020. "Quantification of an efficiency–sovereignty trade-off in climate policy," Nature, Nature, vol. 588(7837), pages 261-266, December.
  • Handle: RePEc:nat:nature:v:588:y:2020:i:7837:d:10.1038_s41586-020-2982-5
    DOI: 10.1038/s41586-020-2982-5
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    Citations

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    Cited by:

    1. Bjoern Soergel & Elmar Kriegler & Isabelle Weindl & Sebastian Rauner & Alois Dirnaichner & Constantin Ruhe & Matthias Hofmann & Nico Bauer & Christoph Bertram & Benjamin Leon Bodirsky & Marian Leimbac, 2021. "A sustainable development pathway for climate action within the UN 2030 Agenda," Nature Climate Change, Nature, vol. 11(8), pages 656-664, August.
    2. Dorothée Charlier & Mouez Fodha & Djamel Kirat, 2023. "Residential CO2 Emissions in Europe and Carbon Taxation: A Country-Level Assessment," PSE-Ecole d'économie de Paris (Postprint) hal-03901487, HAL.
    3. Moritz A. Drupp & Frikk Nesje & Robert C. Schmidt, 2022. "Pricing Carbon," CESifo Working Paper Series 9608, CESifo.
    4. Dominic Lenzi & Michael Jakob & Matthias Honegger & Susanne Droege & Jennifer C. Heyward & Tim Kruger, 2021. "Equity implications of net zero visions," Climatic Change, Springer, vol. 169(3), pages 1-15, December.
    5. Chai, Shanglei & Yang, Xiaoli & Zhang, Zhen & Abedin, Mohammad Zoynul & Lucey, Brian, 2022. "Regional imbalances of market efficiency in China’s pilot emission trading schemes (ETS): A multifractal perspective," Research in International Business and Finance, Elsevier, vol. 63(C).
    6. Tim T. Pedersen & Mikael Skou Andersen & Marta Victoria & Gorm B. Andresen, 2021. "30.000 ways to reach 55% decarbonization of the European electricity sector," Papers 2112.07247, arXiv.org, revised Nov 2022.
    7. Chen, Xiaotong & Yang, Fang & Zhang, Shining & Zakeri, Behnam & Chen, Xing & Liu, Changyi & Hou, Fangxin, 2021. "Regional emission pathways, energy transition paths and cost analysis under various effort-sharing approaches for meeting Paris Agreement goals," Energy, Elsevier, vol. 232(C).
    8. Timo Goeschl, 2023. "(Un)Trustworthy Pledges And Cooperation In Social Dilemmas," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 23/1070, Ghent University, Faculty of Economics and Business Administration.
    9. He, Jianjian & Yang, Yi & Liao, Zhongju & Xu, Anqi & Fang, Kai, 2022. "Linking SDG 7 to assess the renewable energy footprint of nations by 2030," Applied Energy, Elsevier, vol. 317(C).
    10. Goeschl, Timo & Soldà, Alice, 2023. "(Un)Trustworthy Pledges and Cooperation in Social Dilemmas," Working Papers 0728, University of Heidelberg, Department of Economics.

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