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Efficiency Scenario

The reference scenario, however, is unsuitable for the purpose of calculating incremental abatement cost. No allowance is made for emissions avoided due to the inexorable increase in energy efficiency due to technical change in product and process design and operation, nor for steps taken each year to increase energy efficiency, use renewable energy, and to substitute lower for higher carbon intensity fuels. This adjustment is now made in the efficiency scenario.

Emission projections

The projected emissions in the efficiency scenario are shown in Figure 5.8.

Figure 5.8 Projected CO₂ff emissions, 1995-2025, efficiency scenario

Starting at about 6.6 GT/y of C in 1995, the world reaches about 8.6 GT/y C rather than 11.8 GT/y of C in 2025 in the unrestrained reference scenario, a fall of nearly 27 per cent. This reduction occurs because of the effect of what is referred to in the box above as Efficiency Rule I whereby the scenario assumes that only 40 per cent of the increment in the annual growth assumed in the reference scenario actually results in emissions. Increased energy efficiency associated with a wide range of managerial and technical measures are assumed to avoid the other 60 per cent of the emissions associated with annual growth in the reference scenario. This step serves as a proxy for the unknown increases in autonomous energy efficiency in each region.

I seek to determine the scale of funding in the South required for carbon abatement because of climate change. I am not suggesting that the North should embark upon an open-ended transfer in the form of compensation for its pre-emption of 'atmospheric space', although some have argued that it should. Only those activities required to abate carbon emissions from fossil fuel usage are included. But not all of the abatement (and therefore cost) in the South that is required to meet emission targets would be incurred as some energy efficiency and abatement would occur regardless of energy efficiency or climate change. In principle, this abatement needs no additional funding from the North and should be removed from the South's marginal abatement cost.

Additionally, this procedure does not cover any costs of 'autonomous', incremental reduction of carbon emissions that arises from economy-wide technical change. In fact, a substantial fraction of this 'autonomous' reduction potential that is reflected in the 'efficiency' projection of emissions will not be realized without additional funding beyond that focused directly on carbon abatement. It is impossible, however, to determine the impact of these two conceivable and opposite adjustments to the incremental cost of abatement in the South. Thus, no deduction is made to the transfer of resources justified by the obligation-to-pay index in order to reflect the net impact of these two flows.

Required reductions

The target global carbon dioxide emission level in 202415 in the efficiency scenario is set at 2.8 GT. This emission is halfway between two IPCC stringent emission reduction scenarios.

The first is IPCC's 'alternative accelerated policies scenario' in which CO₂ atmospheric levels are not allowed to exceed 400 ppmv in 2100, thereby keeping 'equivalent' CO₂ concentration at about 420 ppmv, or a fifty per cent increase of the pre-industrial level of 280 ppmv. (See case e in Figure 5.9). In this case, CO; emissions must fall to about 4 GT/y by 2025.

The second is IPCC's tougher projection of the reductions needed to simply stabilize CO₂ concentration at its current level in 2100, that is, 420 ppmv. The projected emission in 2025 that is consistent with this target is 1.5 GT. (See case f, Figure 5.9).

This goal is adopted as a conservative basis for estimating cost. If scientific understanding shows that the reductions are unnecessary, it allows the rate of reduction to slacken early enough so that significant positive cost is not incurred (the early phase of reductions should be achieved at negative cost). It requires that net terrestrial carbon emissions from biotic sources be reduced to zero by 2025 - something that needs to be done for many reasons other than the increasing greenhouse effect. Finally, it limits the rate of realized global mean temperature increase - assuming that the atmospheric models are correct - to about 1 degree centigrade by 2100 relative to 1980 (or about half a degree centigrade by 2025). Relatedly, the anticipated sea level rise from global warming is also restrained to about 25 cm by 2100 (or about 15 cm by 2030).27

Figure 5.9 Future CO₂ production roses vs atmospheric concentration

By adopting this approach, I am implicitly defining 'sustainability' as accepting ecological damage over the next decade associated with a possible rate of temperature increase of 0.1 degree per decade, and a sea level rise of 0.03 metres per decade. It is sobering to note, as the IPCC Working Group I stated at the Second World Climate Conference in 1990, that: 'If the forcing were then held constant, temperatures would continue to rise slowly, but it is not certain whether it would take decades or centuries for most of the remaining rise to equilibrium to occur.

Allocation rule
A rule is now needed to allocate the permissible global carbon dioxide emissions from fossil fuel of 2.8 GT among states in 2025. Assuming that the same states exist, the total projected emissions are distributed in proportion to each nation's share of carbon sinks for emissions in 1987. Thus, each nation's target emission rate in 2025 must not exceed its allocated carbon sink property right. This property right was calculated on the basis of current population (for oceanic sinks) and national territory (for land-based sinks).

A nation's oceanic sink was obtained by dividing the estimated 1987 oceanic sink by 1987 global population and multiplying by national 1987 population; and a nation's terrestrial sink was obtained by dividing the estimated 1987 terrestrial sink by all rations' lend area and multiplying by national land area. A nation's fraction of total sink equals the sum of the two divided by global sink. Converted to a fraction of total sink, the national distribution of emission rights can be used to allocate the permissible emissions in 2025.

Specifically, the total estimated 1987 carbon sink was about 4.7 GT of carbon, spread equally between land and oceans. Thus, the average terrestrial sink in 1987 was about 0.18 tonnes of carbon per hectare; and the oceanic sink was about 0.48 T C per capita sunk at sea. This approach assumes that all people have a natural right to oceanic sinks as a common heritage; but that nations have a property right to (and responsibility to maintain) national terrestrial carbon reservoirs in forests and soil.

It is noteworthy that estimates of sinks are still highly uncertain. Recent investigations have shown that terrestrial ecosystems of the northern hemisphere may be taking up substantially more carbon than previously thought. Alternatively, the northern oceans may be bigger sinks than the southern oceans. Other scientists have noted that four possible terrestrial biotic carbon exchanges may account for the missing sink. These processes are net deforestation in tropical rainforests, carbon fixing by temperate and high latitude boreal ecosystems, and carbon dioxide fertilization of primary productivity, especially in tropical rainforest. Substantial uncertainty therefore remains as to the size and location of sinks that are assumed here to become national property rights, or the basis of claims to the future permitted level of carbon emissions in 2025.

Each country is then placed on a trajectory that smoothly reduces its annual emissions from 1995 down to its permissible fraction of the 2025 global total. This identity is achieved by imposing two kinds of reductions on emissions, referred to as Efficiency Rule 2 in the box above. The first applies to the base year emissions; and the second, to the remaining growth increment.

The base year (1995) emissions must be reduced by 6 per cent annually in the North and East, and by 2 per cent per year in the South, whether by offsetting expansion of the carbon sink, or by additional reductions to emissions relative to those projected. (The divergent reduction rates for the North/East versus the South are required to avoid forcing the South to reduce more than their target 202415 emission rate.) I assume that existing emissions can be phased out only as fast as existing capital stock is turned over, thereby constraining the rate of abatement of base year 1995 emissions.

Each year, the growth increment must be further reduced by 65 per cent (or 45 per cent in the case of the South) to ensure that the total reductions avoid sufficient emissions by 202415 to meet the target levels. In the efficiency scenario's projected emissions, each nation's and national grouping's required annual reduction must increase rapidly each year from an initial global 0.3 GT C abatement in 1995 to 5.7 GT C abatement in 202415 (see Figure 5.10). Thus, the absolute required reduction must increase at about 10 per cent per year to achieve this goal.

Concurrently, the two IPCC scenarios that provide the target global emission adopted in this chapter assume that deforestation is halted and that biotic sinks have become major net sinks by 2025. Controls are also required on other greenhouse gases if the 'equivalent' carbon dioxide targets are to be achieved. Implicitly, therefore, I assume in these scenarios that these measures have been implemented to match the control on carbon dioxide from fossil fuel usage. I do not include the costs of these measures except and insofar as they provide an option to 'sink' fossil fuel carbon emissions. Forestry management, for example, is one of the technological options included in the cost curve for Case 2.

Figure 5.10 Required reduction, 1995-2025, efficiency scenario

The resulting reductions profile generates CO₂ff emissions in 2005 that are about 30-40 per cent above the Toronto Target emissions that year (that is, 80 per cent of the recorded 1988 emissions). Thus, the required reductions in this chapter are lenient with respect to medium term abatement targets that some industrial countries have already adopted. But the required reductions are stringent by 2025 relative to projections in order to minimize climate change induced damage associated with keeping carbon dioxide concentrations to between today's carbon concentration (already a 25 per cent increase over the pre-industrial level) and a 50 per cent increase in the pre-industrial carbon load of the atmosphere.

Required reduction ratio
With the projected annual emission and calculated required reduction available for each nation or national grouping, it is now possible to compute a ratio of the two, the 'required reduction ratio' or 'RR' factor. This ratio, calculated for each year for each nation and national grouping, is shown in Figure 5.11. As can be seen, the global RR starts quite low (at 0.05 in 1995) and reaches about 0.66 in 202415. However, it starts low in the South in 1995 (at 0.02) and remains relatively low in 202415 (at 0.45), whereas it reaches about 0.82 in the North and 0.80 in the East by 202415.

Figure 5.11 Required reduction ratio 1995-2025

Incremental abatement cost

The RR ratio is used to trigger the next abatement level of cost in the marginal cost curves discussed above (see footnote f). The incremental abatement cost for a given year is then calculated for each nation and national grouping by applying the RR ratio for that year by the relevant marginal cost curve.) This procedure generates a stream of annual abatement costs for each of the marginal cost curves which are called 1, 2 and 3.

Incremental abatement cost 1
In Figure 5.12, l show the incremental cost calculated for the RR ratio noted above and the Nordhaus marginal cost curve, that is, for Case 1. As can be seen, the global, annual cost (undiscounted) starts at $16.8 billion in 1995 and reaches $876 billion in 2024. The cost is always positive and is substantial for all nations and national groupings.

Figure 5.12 Incremental abatement cost, Case 1 (Nordhaus MC) 1995-2025

Incremental abatement cost 2
In Figure 5.18,1 show the incremental cost for the North/East and the South respectively. In this case, the incremental abatement cost is calculated for the RR ratio noted above and the US National Academy of Sciences marginal cost curve, that is, for Case 2. As can be seen, the global, annual cost (undiscounted) starts at -$58 billion in 1995 and reaches $276 billion in 2024.

Global incremental abatement cost is much smaller in Case 2 than in Case 1 because the South's cost begins and remains negative until 202415. This result in turn is due to the fact that the South's RR of 0.44 in 2020 remains below the 0.47 needed to kick in the positive cost in the marginal cost curve. Indeed, the South's cost remains a negative (undiscounted) $101 billion in 202415.

The North and the East, however, pass this point in 2007-8, after which they begin to incur positive cost, reaching an annual, undiscounted cost of $239 and $131 billion respectively in 202415.

From a purely economic perspective, therefore, no transfer payment can be justified from the North to the South when a marginal cost curve in the South is assumed to be close to that presented by McKinsey & Co. or the US National Academy of Sciences as portrayed in Case 2. This issue is dealt with in greater detail below and in Chapter 6.

Figure 5.13 Incremental abatement cost, Case 2 (US NAS), 1995-2025

Incremental abatement cost 3
To provide an intermediate estimate between the high cost structure assumed by Nordhaus and the low cost structure derived from the US National Academy, a third composite marginal cost schedule was derived that assumed the NAS Case 2 for the North and the East - the same as in the previous run but substituted my own estimates below Nordhaus but above NAS for the South (see footnote f).

Figure 5.14 Incremental abatement cost, Case 3, 1995-2025

Naturally, the North and the East follow the same trajectory as in the previous section (see Figure 5.14). After an initial burst of negative cost, they move into a protracted phase of positive cost that accumulates between 2008 and 2025. This latter phase more than offsets the initial phase of negative cost. In the South, however, cost is positive from the start, building up to an (undiscounted) $85 billion by 202415 from $1.7 billion in the base year 1995.

Vulnerable coastal states and sea level rise

The potential impacts of climate change on island and coastal developing states have been widely discussed. Ten per cent of the world's population lives within 20 km of the coast. Ten per cent of the world's coastal zone has a population density greater than 100 people per square km. One study showed that no less than twenty-seven states are highly vulnerable to the impacts of climate change on populations due to inundation of land by sea level rise, given their national abilities to take protective measures against this threat. Among the most potentially affected are Bangladesh, Egypt, The Gambia, Indonesia, Maldives, Mozambique, Pakistan, Senegal, Surinam, and Thailand and a host of other low-lying island microstates such as Kiribati. Areas at high risk in Asia Pacific are shown in Figure 5.15.

Bangladesh is a candidate for the worst case scenario. Nearly 80 per cent of Bangladesh is composed of a complex delta that feeds from three rivers into the Bay of Bengal. Agricultural output from these lands produces about 55 per cent of national GDP, and employs about 85 per cent of the population. Bangladesh is already susceptible to enormous storm surges. A recent cyclone, for example, cost over $3 billion in repairs, ignoring loss of life, production, and environment. One analyst estimates that sea level rise induced by climate change may force the relocation of up 80 million people, reduce rice-producing land by up to 2.6 million hectares and projected rice output in 2010 by 8-15 per cent.

Many problems arise, however, when one attempts to attribute cost to sea level rise. First, it is still scientifically problematic to assign causality for sea level rise to climate change. Indeed, climate scientists are still trying to resolve the many practical problems involved in quantifying the regional and local effects of global climate change on small spatial scales where topography, proximity to the ocean, and local biogeography all affect the local climate. It is still not possible to predict the long run effects of global climate change on the frequency and intensity of storm systems, temperature and rainfall, and monsoons.

Also, relative sea level rise is caused by a number of factors, including some non-climatic ones. Along the coast in Bangladesh, for example, the deltaic plains are subsiding due to tectonic shift or the weight of accumulating sediment, resulting in a tilting from west to east and a shift in the relative sea level with or without climate change.

Finally, in many high risk coastal zones, human habitation and economic uses are already highly questionable and should change - with or without climate change risks superimposed on existing stresses. Furthermore, if climate change induces people and production to shift out of vulnerable coastal zones, some of the cost will be absorbed by private parties and will not require supplementation by additional public funds.

Figure 5.15 Vulnerable coastal/island states

Finally, data on 'natural disasters' and vulnerability of different social groups are poor and unsuitable for purposes of determining compensation for damages related to climate change. Indeed, a strong argument can be made that reducing stress on the poorest, least adaptable social strata in vulnerable states requires that such compensation be spent on welfare and development, not on climate change mitigation projects.

For all these reasons, it is impossible to quantify the costs of sea level rise due to climate change. Instead, I estimated only the costs associated with a barrier protection against sea level rise for the developing world, although it should be noted that in general, selective retreat is preferable to erecting capital defences against the fury of the oceans.

I adopted a Dutch estimate of $488 billion provided to the IPCC as the global cost of a barrier defence for vulnerable coastal states against sea level rise of one metre in 100 years. This figure does not allow for annual maintenance costs, population relocation costs, losses of production such as fisheries, loss of land values, loss of national existence and associated international environmental refugees, or the increased costs of exploiting continental seabed resources. Given the uncertainty, this figure is used to illustrate how this cost might be allocated according to the obligation-to-pay index. It is not presented as a definitive estimate of the costs of sea level rise induced by climate change. In future calculations, a range of estimates should be used.

I further assumed that half the total 100-year cost is incurred in, and spread equally over, the first 30 years of our scenario. This cost is present valued for each region and is added to the total cost of abatement to produce an overall incremental annual cost consisting of carbon abatement and coastal protection. Of course, abatement will reduce the rate of sea level rise and thus the 100-year cost. However, even if carbon emissions were reduced to levels that restrain atmospheric CO₂ to a so per cent or less increase above pre-industrial levels, the IPCC's best guess of the inexorable sea level rise associated with our carbon emission/abatement scenario - the legacy of our ancestors' profligate energy usage - is about 15 cm by 2025. Richard Warrick and Atiq Rahman call this momentum the 'committed' see level rise. It is therefore prudent to assume that defensive actions will be taken earlier rather than later, especially as many of these works will take up to fifty years to complete.

No account was made in this chapter of other climatic change related costs imposed on the South. In this regard, losses of agricultural, forestry and fishery production are particularly important, especially in the poorest developing countries in semi-arid tropical and sub-tropical regions. However, careful studies summarized by Martin Parry suggest that the net yield and welfare impacts of a range of climate change scenarios on agricultural GDP are likely to be small, and offset by increased output elsewhere in a given nation or national grouping. Moreover, the net impact on the food production system and the geographical distribution of these costs and benefits cannot be determined at this time. For this reason, no compensation for foregone agricultural, fisheries, or forestry production is included. In the future, however, such costs should be estimated using long time horizons and low discount rates.

Discounted incremental

In line with the three marginal cost curves introduced earlier, three distributions of discounted total cost are presented in the following section. In all cases, a real discount rate of five per cent is used to present value streams of cost arising from abatement and coastal protection. No adjustment is made at this stage for obligation-to-pay based on historic contribution to climate change and ability to pay. This redistribution of cost is performed in the next chapter.

Discounted incremental costs, Case 1

A Abatement Costs

Definition: Incremental Cost 1, using Nordhaus marginal cost curve
Net Present Value (not adjusted for Obligation-To-Pay), 1990-2025, $billion/ year

B Global, 100 Year, Instantaneous Coastal Protection Costs
Total: 488 billion

B1 South's Island/Coastol Protection Costs
Total cost estimated at 206.6 billion over 100 years
Estimate that 50% of cost incurred between 1995-2025
Annual cost is (0.5 x 206.6 billion)/30 years = 3 billion/year
NPV of South's coastal protection cost = 53 billion

B2 North's Coastal Protection Costs
Total cost estimated 227.6 billion over 100 years
Estimate that 50% of cost incurred between 1995-2025
Annual cost is (0.5 x 227.6 billion)/30 years = 4 billion/year
NPV of North's coastal protection cost = 58 billion

B3 East's Coastal Protection Costs
Total cost estimated 53.9 billion over 100 years
Estimate that 50% of cost incurred between 1995-2025
Annual cost is (0.5 x 53.9 billion)/30 years = 1 billion/year
NPV of East's coastal protection cost = 14 billion

B4 Global Coastal Protection Costs
NPV of global coastal protection cost = 125 billion

B5 Total Abatement Plus Coastal Protection Costs

Discounted incremental costs, Case 2

A Abatement Costs

Definition: Uses US National Academy of Science marginal cost curves for all areas

Net Present Value (not adjusted for Obligation-To-Pay) 1990-2025, $billion/ year

B Global, 100 Year, Instantaneous Coastal Protection Costs
Total: 488 billion

B1 South's Island/Coastal Protection Costs
Total cost estimated at 206.6 billion over 100 years
Estimate that 50% of cost incurred between 1995-2025
Annual cost is (0.5 x 206.6 billion)/30 years = 3 billion/year
NPV of South's coastal protection cost = 53 billion

B2 North's Coastal Protection Costs
Total cost estimated 227.6 billion over 100 years
Estimate that 50% of cost incurred between 1995-2025
Annual cost is (0.5 x 227.6 billion)/30 years = 4 billion/year
NPV of North's coastal protection cost = 58 billion

B3 East's Coastal Protection Costs
Total cost estimated 53.9 billion over 100 years
Estimate that 50% of cost incurred between 1995-2025
Annual cost is (0.5 x 53.9 billion)/30 years = 1 billion/year
NPV of North's coastal protection cost = 14 billion

B4 Global Coastal Protection Costs
NPV of global coastal protection cost = 125 billion

B5 Global Coastal Protection Costs

C Net present value adjusted by South s Obligation to Pay No transfer to South is called for on the grounds of Obligation-to-Pay, so the South pays for its own coastal costs in this case.

Case 1: High discounted incremental costs
To calculate the net present value of the stream of incremental cost using the Nordhaus marginal cost curve (see box), table, the flow of discounted abatement cost is added to the discounted value of the stream of costs arising from the construction of coastal protective barriers in the South. The sum of discounted abatement cost ($867 billion) and coastal protection cost ($53 billion) equals total cost in the South with a net present value of $0.92 trillion or 16 per cent of the total global cost of $5.6 trillion (with the North paying $3 trillion or 54 per cent and the East $1.7 trillion or 30 per cent).

Case 2: Low discounted incremental costs
The low ratio of required reduction to projected emissions in the South means that it never reaches a level on the low abatement cost curve that incurs positive cost (see footnote f and Figure 5.11). This outcome contrasts with that in the North which does incur significant positive costs that outweigh the early negative costs, even when discounted (see box). Adding coastal protection costs does not offset the overwhelmingly abatement-related savings in the South although it does increase the North's costs from $104 to $162 billion; and that of the East from $69 to 83 billion.

Consequently, the accumulated net savings in the South ($949 billion of cost) overwhelm the overall positive discounted abatement costs of the North and the East ($162 and $83 billion respectively). This result emphasizes the need for carbon abatement demonstration programmes and research on a scale sufficient to ascertain the shape of cost curves reliably at required reduction ratios of between 0.2 and 0.5 in the South. The empirical cost curves reported in Part III of this book (and summarized in Figure 5.5) mostly address the lower end of the reduction requirement ratio. We remain largely ignorant of the shape of the curve or even its sign above this level in most countries.

There is strong reason to believe that the South's ability to realize its technological potential for low cost abatement - if it exists - will face political and institutional constraints, market imperfections, and high transaction costs. In addition to the impact of outright poverty, these obstacles in the South include competing social priorities, poorly developed capital markets, politicized energy prices, weak state administrative and political structures, powerful private interests, unstable political regimes, high inflation rates, dependent and weak scientific and technological sectors, and short planning horizons.

Case 3: Medium discounted incremental costs
By changing the South's marginal cost to a positive cost, this case adjusts the previous scenario to provide an intermediate cost estimate - above that of the US National Academy of Sciences, but below that of Nordhaus. In this case, the South's total discounted cost for abatement is about $441 billion (see box). The North incurs $104 billion total discounted cost, and the East

Discounted incremental costs, Case 3

A Abatement Costs

Definition: Same as Case 2 but South uses a positive cost curve

Net Present Value (not adjusted for Obligation-To-Pay) 1990-2025, $billion/year

B Global, 100 Year, Instantaneous Coastal Protection Costs
Total: 488 billion

B1 South's Is/and/Coastal Protection Costs
Total cost estimated at 206.6 billion over 100 years
Estimate that 50% of cost incurred between 1995-2025
Annual cost is (0.5 x 206.6 billion)/30 years = 3 billion/year
NPV of South's coastal protection cost = 53 billion

B2 North's Coastal Protection Costs
Total cost estimated 227.6 billion over 100 years
Estimate that 50% of cost incurred between 1995-2025
Annual cost is (0.5 x 227.6 billion)/30 years = 4 billion/year
NPV of North's coastal protection cost = 58 billion

B3 East's Coastal Protection Costs
Total cost estimated 53.9 billion over 100 years
Estimate that 50% of cost incurred between 1995-2025
Annual cost is (0.5 x 53.9 billion)/30 years = 1 billion/year
NPV of East's coastal protection cost = 14 billion

B4 Global Coastal Protection Costs
NPV of global coastal protection cost = 125 billion

B5 Total Abatement Plus Coastal Protection Costs

After coastal protection costs are added, the North's total discounted cost increases by $58 billion, the East's by $14 billion, and the South's by $53 billion. In this case, the South shoulders 67 per cent of the total cost, the North 22 per cent, and the East 11 per cent.

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