Figure 1 (taken from ‘Our World In Data’)[1]: This interactive graph shows Global Carbon emission by world region over time. The share of total global emissions from emerging economies (such as China) increases over time, while the share from advanced economies such as the US and EU countries decreases.

Why and how to fund climate change policy

Summary: The economic and social costs of climate change will be high. They will be higher still if temperatures rise by more than 6 degrees Celsius, of which there is a probability of around ~10%. The policies of advanced economies often overemphasize reducing their own emissions: Emerging economies already emit 65% of global emissions; as their citizens adapt modern energy-intensive lifestyles, this will rise to 75% by 2040. Thus, advanced economies must optimize their policies to reduce emissions on a global scale. Policies that stimulate public and private clean energy innovation to provide the global public good of cheap clean energy technology are most effective in helping all countries reduce their emissions.

The impacts of climate change, energy poverty, and air pollution

The economic and social costs of climate change will be high. According to estimates by the World Bank, climate change will push 100 million people back into poverty by 2030.[2] From thereon it will also cause 250,000 deaths per year according to the WHO.[3] Even some of the most skeptical environmental economists concede that, long-term, the impacts of climate change will be negative and poorer countries will suffer the most.[4] An even bigger worry is the 10% chance that temperatures will rise by more 6 degrees celsius.[5] The effects of this ‘tail risk’ are uncertain and understudied but potentially very harmful. The direct effects of climate change are unlikely to pose a direct existential risk to humanity[6]; however, there is a nontrivial chance that indirect effects such as geopolitical instability would cause global catastrophic risks[7].

As we will argue, clean energy innovation is a great way to tackle climate change, and also tackles energy poverty. This is still a major problem: almost 1 billion people still do not have access to electricity[8] and are often willing to spend substantial parts of their income on energy.[9] People are still poor even if they make $1.90 per day and move out of extreme poverty. Similarly, people who have some access to electricity are often still energy poor[10]. For instance, roughly 3 billion people do not have access to clean cooking fuels[11]. Indoor and outdoor air pollution are major drivers of poor health and cause more than 10% of all premature deaths worldwide (~6.5 million)[12]. industrial electrification also increases industrial activity and development, which is crucial in reducing poverty[13].

What is the problem with current climate change policies?

Globally, carbon emissions are increasing and are projected to increase even further under current policies [14]. But while advanced economies will soon emit less than 25% of all emissions globally and their emissions are projected to go down slightly, emissions from emerging economies will continue to increase and make up 75% of all emissions. Thus, in order to effectively reduce emissions globally, advanced economies must focus more on clean energy innovation. This way they can provide a global public good: the knowledge of technology that is necessary to use cheaper clean energy in all countries. Clean energy technology also includes technologies that reduce/remove emissions from agricultural or industrial processes, carbon capture and storage, and carbon air-capture technologies.

Do advanced economies do enough to stimulate clean energy innovation?

Are advanced economies’ emissions becoming increasingly insignificant?

None of the major advanced economies, including most EU member states[15], are currently on track to fulfill the requirements of the Paris Agreement[16]. This is despite having set their own targets. Worse yet, even if countries did meet their targets, temperatures with still increase by 3.3 degrees celsius by 2100 (and not the 2 degrees deemed safe by some)[17], [18]. Defenders of the Paris Agreement note that it includes commitments to reduce emissions even further than the current pledges.

In fact, even if advanced economies were to reduce their emissions to zero, this would still not halt dangerous climate change. This is because emissions from advanced economies represent an increasingly smaller share of overall emissions. Consider the following graph, which shows how emissions from emerging and advanced economies change over time. Everything above the red line represents emissions from all advanced economies, everything below it emissions from emerging economies.

Figure 2 (taken from[19]): Current and projections of the share of total global emissions from emerging economies (e.g. China, India) vs. advanced economies (e.g. US, EU). The red line separates emissions from all advanced economies, everything below it emissions from emerging economies. While in 2010, only 18 of 30 Gigatonnes or 60% percent of emissions were produced by emerging economies, and 40% by advanced economies. By 2018, the split was already 65% in emerging vs. 35% in advanced economies, but by 2040 emerging economies will emit 75% of all emissions and only 25% in advanced economies.

Note that emerging economies make up an increasingly large share of total global emissions, while the share from advanced economies is dwindling, now accounting for only 35% of global emissions. This trend continued past 2015 and is forecast to continue in the coming years[20],[21],[22].

Figure 3: Based on current projections advanced economies greenhouse gas emissions will decrease slightly to China’s emissions will increase to 300% from baseline of 100%, other emerging economies emissions will also increase by almost 240%.[23]

This trend is probably because of the relative comparative advantage that emerging economies have. As their labor costs are low, it makes sense for them to specialize in energy-intensive sectors such as industry and manufacturing[24]. More advanced economies often specialise in less energy-intensive sectors such as services (though the relationship between labor costs and energy intensity of the economy is nonlinear – c.f. environmental Kuznets curves[25]).

The point here is not to shift responsibility away from advanced economies. They have caused more emissions historically and their citizens’ carbon footprints are much higher[26]. For instance, the typical carbon footprint of someone in an emerging economy is only one tonne per year, compared to up to 30 tonnes per year in advanced economies such as the US and Luxembourg[27]. Much of it is due to consumption of energy-intensive goods imported from emerging economies[28]. Energy footprints[29] take into account the energy embodied in imported goods, with the downside that they see all energy, even clean energy that adds value as bad per se (country data can be found in this spreadsheet).

Using carbon or energy footprints to rank advanced economies would be a better measure than merely looking at a country’s overall emissions and we should encourage advanced economies to reduce their emissions. But crucially, reducing emissions in advanced economies is overemphasized when it comes to preventing climate change (of course, countries might have an interest in reducing emissions on e.g. air pollution grounds). Rather, we should prioritize policies optimized to reduce emissions globally. We will elaborate on this point.

Deep decarbonization (80%-100% reduction in emissions) of advanced economies (or at least their power sectors) is theoretically possible[30]. And it would not be prohibitively expensive with current technology (it might not be very expensive at all[31]some argue that the costs are ~$120 trillion till 2050[32]). But even taking into account the current pace of energy innovation, energy costs might not come down to the point where deep decarbonization is politically feasible. This is evidenced by the fact that after many years of climate concerns, per capita carbon footprints in advanced economies have barely reduced: for instance, average household CO2 emissions in the US only fell from 37.8 tons in 1996 to 33.9 tons in 2009[33]. Of course, it would be good if we could decarbonize advanced economies with current trajectories of technology and incurring associated (high) costs. But crucially, this would still leave the problem of the more numerous citizens in emerging economies. They are likely to use lots of cheap energy to grow their economies: global energy demand is forecasted to rise by 30% until 2040[34] (see Figure 2) because energy demand and thus per capita carbon footprints increase proportionally to income[35] (see Figure 3).  

Figure 4 (taken from World Energy Outlook 2017[36]): Change in primary energy demand, 2016-2040 in Mtoe. Global energy demand is forecasted to rise by 30% until 2040, mainly due to increases in China and India

Figure 5 (taken from ‘Our World In Data’[37]): CO₂ emission from fossil-fuel burning, cement production, and gas flaring per capita vs GDP per Capita, 2014. Carbon dioxide (CO₂) emission per capita (tonnes per year) vs. GDP per capita (international $). The size of the bubbles represents population size. The visualization of these measures across time suggests a causal relationship, so that wealth increases emissions and vice versa.

So what should advanced economies’ policy priorities be in the light of this problem?

They should reorient their focus on policies that create the global public good[38] of cheap clean energy technology. With access to cheaper clean energy and more energy efficient technology (e.g. smart grids and homes), countries can grow their economies without emitting as much carbon. Cheap clean energy also makes decarbonizing more advanced economies more politically palatable. This is the best way to combat the global public bads of dangerous climate change and also intercontinental transport of air pollution[39].

Through this lens, it is not as important for a relatively small high-income country (think: Denmark) to get its own emissions down to zero as it is to enable bigger emerging economies (think: India) to keep their emissions down. And because of diminishing returns, reducing the last tonne of carbon in Denmark will be far less cost-effective than prioritizing helping other bigger countries avert carbon that are not as far along the road to decarbonization. To see diminishing returns in practice, consider aviation: there have been commercial test flights with biofuels, which can replace up to 50 percent of petroleum fuel in existing aircraft and reduce emissions by 50%[40],[41]—but getting to zero carbon electric or electro-fuelled aircraft seems technologically challenging and far off[42],[43]. On the other hand, in emerging economies, there seem to be many unpicked, low hanging fruit to reduce emissions[44],[45] (for examples see section 8 on high-impact climate aid and deforestation prevention).

But what is the best way for advanced economies to stimulate energy innovation? In other words, what kind of policies can the social planner push that will most increase global spillovers in terms of technology transfers?

In the next report we review the effectiveness of 10 policy levers, from carbon taxes to regulation to cutting fossil fuel subsidies, available to advanced economies to stimulate more innovation and reduce emissions on a global scale.

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