EQUITY AND EFFECTIVENESS OF POSSIBLE CO2 TREATY PROPOSALS

EQUITY AND EFFECTIVENESS OF POSSIBLE C02 TREATY PROPOSALS

DUANE CHAPMAN and THOMAS DRENNEN*

The Montreal Protocol on chlorofluorocarbon control estab- lished an important precedent for global environmental treaties that include both developing countries and industrial countries. This paper evaluates seven possible treaty proposals to control carbon dioxide (C02) emissions. Growth-rate control proposals fail on effectiveness of control or on equity differences between developing countries and industrial countries. Complex proposals link policies in population growth, economic development, world energy taxation, and forestation. These complex proposals, which appear to be both effective and equitable, can defer or avoid C02 doubling.

I don’t accept being transformed into a doorman of a zoo for the Americans. (Nao aceito ser transformado mem porteiro de jardim zoologico para 0s americanos.)

-Elton Rohnelt, Brazilian adventurer, discussing rain-forest policy. (Veja, 1989, p. 109; translation by Steven Kyle.)

I . INTRODUCTION

The structure of the Montreal Protocol (1987) on chlorofluorocarbons (CFCs) raises one’s expectations for progress on other environmental treaties. One can generalize two major dimensions of the Protocol in a manner relevant to future global treaties involving pollutants such as carbon dioxide (C02) . The first dimension is effectiveness of control. The original 1987 Protocol failed to attain a sufficient reduction in CFCs so as to avert major upper-atmosphere ozone loss and consequent skin cancer.

The second dimension is equity. Growth in use by developing countries, as formulated, was restricted to a maximum per capita level of use. However, the western industrialized countries were to make a 50 percent rollback. This might have given western consumers a much higher per capita limit.

*Professor of Resource Economics and Research Assistant, Department of Agricultural Eco- nomics, Cornell University, Ithaca, N.Y. The authors appreciate the assistance of Wendy Bacon as well as the comments of the editor and two reviewers. This article was presented at the Western Economic Association International 64th Annual Conference, Lake Tahoe, Nev., June 21, 1989, in a session organized by Darwin C. Hall, California State University, Long Beach.

Contemporary Policy lssucs Vol. VIlI, July 1990

16

OWestern Economic Association International

CHAPMAN and DRENNEN: POSSIBLE COz TREATY PROPOSALS 17

The outstanding institutional characteristic of the treaty is its self- generated capability of evolution. The treaty requires regularly assessing available scientific evidence and provides for changing the control mechanism. As new information became available, 80 nations-now including China and India-met in Helsinki to consider phasing out CFCs completely. During 1990, parties to the Protocol will meet so as to consider the 1989 declaration of intent “to phase out the production and consumption of chlorofluorocarbons ... not later than 2000” (New York Times, 1989).

Analyzing the Montreal Protocol suggests three criteria for evaluating treaty proposals. A first criterion is effectiveness. A carbon dioxide control treaty should have some significant impact on deferring a doubling of C02 concentration. This paper takes 550 parts per million (ppm) C02 as a refer- ence point defining a value equal to 200 percent of the pre-industrial level of the 1860s. (Physical scientists have used many different base periods, including 1900 [Schneider, 19891 and 1800 [Trabalka, 19851).

A second criterion is equity. Legal scholars are examining the problem of developing nations’ expectations versus industrialized nations’ expectations. (Magraw, 1990, provides a detailed review of international treaty law relating to this.) The equity issue has effectiveness implications since developing countries’ cooperation is essential to an effective treaty. The relative impact on industrialized countries and developing countries must be such that neither group holds a permanent advantage in per capita use, and the levels of developing country per capita use must approach the levels of the industrialized group. Equity will be measured by future ratios of the per capita consumption of fossil energy by developing countries to that by industrialized countries.

A third criterion is economic feasibility. The proposal’s economic cost must be acceptable to the world’s residents. This criterion is hard to specify, though one can give extremes of infeasibility. For example, prohibiting ve- hicles would be economically costly and not feasible.

As interest in potential COz control increases, some research on economic feasibility is beginning. Manne and Reichels have examined the macroeconomic consequences of several policy alternatives: coal gasification for CO2 removal, nuclear power substitution, and improved energy use efficiency. (In addition to Manne’s and Reichels’ work, South et al., 1990, summarize some estimated costs of C02 control.)

This paper focuses on the first two criteria: effectiveness in controlling C02 and equity between developing countries and industrial countries.

18 CONTEMPORARY POLICY ISSUES

II. THE BIOCARBON MODEL

The model used to determine the approximate doubling date is based on an airborne fraction model. It relates future atmospheric C 0 2 levels to current levels plus a percentage of future emissions from both biotic sources and fossil fuel use:

C@(t+l) = A * C02( t ) + [0.4721* AF * emit ( t ) ] (1)

where C&(t+l) is the atmospheric concentration of C 0 2 (in ppm) during year t+l, A is a decay factor (0.99900618) associated with ocean absorption allowing for a pre-industrial equilibrium for atmospheric C 0 2 (the factor 0.4721 converts billion metric tons of carbon into ppm of C 0 2 ) , AF is the airborne fraction (0.5, or the percentage of carbon released during year t that remains in the atmosphere), and emit(t) is the emission of carbon (in billion metric tons) during year t. The emission of carbon during any year depends on annual contributions from deforestation and on the quantity of fossil fuels used. Estimates of the current annual amount released from deforestation range from 0.6 to 2.6 gigatons per year (Trabalka, 1985, pp. 113-115). (This model assumes a value of 1.0 gigaton per year.) Fossil energy carbon releases are about 5 gigatons annually (Trabalka, 1985, p. 72).

This model uses a multiplicative function in calculating future energy demand for each specified region during any year t:

where P is price of the fuel type, p is price elasticity of demand, I is per 2 capita income, y is income elasticity of demand, and N is world population.

111. GROWTH RATE CONTROL POLICIES

Table 1 lists seven possible treaty initiatives focusing on fossil fuel use and tree planting. Certainly, policies emphasizing renewable energy and nuclear energy are of interest but are outside the domain of this paper. The

1. This is a modified version of models appearing in National Academy of Sciences (1983) and Mintzer (1987). See Drennen and Chapman (1989) for a complete discussion. Methane, ozone, nitrous oxides, and chlorofluorocarbons also contribute to global warming. During the period 1975- 1985, these non-COz gases contributed approximately 50 percent of the total heating (Ramanthan, 1988, pp. 293-299). However, because COz remains the primary contributor, and because policies directed at curbing fossil fuel use also would reduce some other greenhouse gases such as nitrous oxides, this paper focuses on reducing COz. If CFCs are prohibited, then COz will become an even larger component of greenhouse gases.

2. Using this equation ignores the possibility of fuel switching. For the scenarios discussed in this paper, this causes little problem since price increases and taxes are applied uniformly to all fossil fuels. As Drennen and Chapman (1989) discuss, the model uses standard conversion factors to translate energy use in quads (Q) into carbon releases.

CHAPMAN and DRENNEN: POSSIBLE C02 TREATY PROPOSALS

TABLE 1 Seven Possible Treaty Initiatives

19

Number Possible Treaty Initiative

(1)

(2)

(3)

Continue current reduction in industrial country per capita energya use.

Restrict all energy types to 1 percent growth.

Industrial per capita energy use constant; developing countries rise to this.

No growth in total energy use.

Reduce developing country population growth and increase income growth and energy taxation.

Same as ( S ) , but 2.5 million acres forested annually.

Same as (9, but 10 million acres forested annually.

(4)

( 5 )

(6)

(7)

Energy” in this case refers to fossil-fuel energy only: petroleum products including natural a”

gas liquids, natural gas, and coal.

analysis that follows uses the term “energy” to mean “fossil fuel energy.” For example, a 0.6 percent annual reduction in world per capita energy use means-in this context-a reduction in the total energy content of petroleum, natural gas, and coal on a per capita basis. The assumption here is that countries would agree to certain goals and would be responsible for attaining them.

The first case assumes a continuation of the present reduction in world per capita energy use with increasing world population. From 1980 to 1986, this use has declined from 57.5 million Btu (MBtu) per capita to 55.5 MBtu per capita, as table 2 shows. The immediate cause has been the industrial world’s 0.5 percent annual decline, which has partially offset the developing world’s annual increase in per capita use. However, growth in developing country population interacts with growth in per capita use. Current rates of population growth ( 2 percent) and per capita energy use (1.7 percent) imply

3 a 3.7 percent growth rate in developing countries’ aggregate energy use. Consequently, continuing the current reduction in per capita energy use in the industrial world is associated with an overall 1.8 percent increase in aggregate world energy cons~mpt ion .~ The result is a C02 doubling in 70 years, as estimated with the Drennen and Chapman (1989) biocarbon model.

3. Formally, the interaction is multiplicative: 3.7 percent = (1 + 2 percent) (1 + 1.7 percent) - 1. (Rounding error causes this value to differ from the table 2 value by O.OOO9.)

4. I n t h i s case , to ta l wor ld energy use in t h e year 2035 e q u a l s (3.684*(1.02)**50)*(18.7*(1.017)**50) + (1.192*(l.O08)**50)*(169.2*(0.995)**50) = 654.7 Q. The other cases are defined analogously.


TABLE 2 Growth in World Energy, Population, and per Capita Use (in Q or MBtu):

1980 to 1986

All All World Industrialized Developing Total or

Countries Countries Average

Total Energy (Q) 1986 1980 Growth Rate (percentage)

Total population (billions) 1986 1980 Growth Rate (percentage)

Per Capita Energy (MBtu) 1986 1980 Growth Rate (percentage)

Per Capita Income (1986 $) 1986 1980 Growth Rate (percentage)

201.7 198.7

0.25

1.192 1.139 0.76

169.2 174.5 -0.5 1

10,988 10,131

1.36

69.0 55.2

3.79

3.684 3.275 1.98

18.7 16.9

1.70

57 1 565

0.18

270.7 253.9

1.07

4.876 4.414 1.67

55.5 57.5 -0.59

3,118 3,033

0.46

Sources: U.S. Energy Information Administration (1987); World Bank (1988); United Nations (1988); Pollard (1988). Fossil energy only.

(See table 3 and figure 1.) In a similar case (not shown), the same increase in COz is predicted if coal and natural gas use rises while petroleum consumption declines. (Natural gas increases at 1.6 percent, coal increases at 3 percent, and petroleum declines at 0.4 percent.) Therefore, simply continuing the industrial world’s decline in per capita energy use would not be an effective policy since it would lead to an early doubling of atmospheric C02 levels.

The second proposal allows for a uniform 1 percent annual increase in each country’s aggregate energy consumption. This defers CO;? doubling further into the future-to the year 2079. This proposal fails on the criterion of political equity since it would lower the ratio of per capita energy use between developing countries and industrial countries. In 2036, the ratio would be 6:lOO. In 1986, it was 11:lOO. This, of course, is due to the higher

CHAPMAN and DRENNEN: POSSIBLE C02 TREATY PROPOSALS 21

TABLE 3 Summary of Growth Rate Policies in Year 2036a

Future Future Total

Per Capita Per Capita Energy Growth in Energy, (Q) (and Year

Energy Use 50 years percentage of C02 Case (percentage) (MBtu) growth) Doubling

(1) Continue current reduction in industrial per capita use.

Developing Countries Industrial Countries World Total or Average

(2) Restrict all energy types to 1 percent aggregate growth.


(3) Developing countries rise to industrial level, 169.2 MBtu.


(4) No growth in aggregate energy.


+1.7 -0.5

1.8

-1.0 +0.2 -0.7

+1.7 0.0

+2.0

-1.9 -0.8 -1.7

43.4 131.0 56.6

11.6 190.5 38.5

43.4 169.2 62.5

7.0 115.9 23.4

(+1.8) 2059

426.5 228.1 654.7

(+1.0) 2079

113.5 331.7 445.2

(+2.0) 2056

426.5 294.6 721.1

(0.0) 2151

69.0 201.7 270.7

'Percentages are rounded to nearest one-tenth


FIGURE 1 Policy Results

population growth in developing countries. Given current population growth rates, the 1 percent energy growth proposal would mean a 1 percent annual decline in developing country per capita use and a 0.2 percent increase in industrial country per capita use.

A third potential initiative recognizes the need for developing country growth in per capita use and allows such use to grow to the current industrial level of 169.2 MBtu per capita over the next century while holding industrial use constant. (Increase the developing country per capita use at 1.7 percent annually to 169.2 MBtu by the year 2117.) After 50 years, energy use would rise to an aggregate 721 quadrillion Btu (Q). This policy is appealing in terms of equity-the per capita ratio is 26: 100 in 2036-but it actually leads to an earlier C02 doubling compared with the first case.

A fourth possibility considers no growth in total energy. This is effective in that it defers the doubling date until the 22nd century-in 2151. However,

CHAPMAN and DRENNEN: POSSIBLE COz TREATY PROPOSALS 23

the proposal fails on the equity criterion since it would result in a per capita use ratio of 6:100-lower than the current ratio.

IV. COMPLEX CONTROL POLICIES

Some other approach is needed. The last three options combine economic and social policy with forestation. The major problem with the preceding four cases is the high population growth and low income growth in developing countries. Total gross domestic product (GDP) growth in developing countries recently has slightly exceeded total GDP growth in industrial countries: 2.2 versus 2.1 percent. Both defined a world average of 2.1 percent. Population growth, however, was quite different: 2.0 versus 0.8 percent. Consequently, per capita income growth was only 0.2 percent in developing countries.

This problem is further complicated by the geoeconomic differences in the developing country group. China experienced a healthy 9.1 percent growth in GDP per capita and a growth of 1.3 percent in population (see appendix table Al). By contrast, the rest of the developing world experienced a 1.1 percent decline in per capita income while its population grew at 2.3 percent. As a group, one-half of the world’s population experienced de- clining per capita incomes.

Others have recognized this problem. Sen. Wirth (1989, p. xvii), for example, stresses the linkage between population policies and global warming.

One remedy would be macroeconomic policies that reduce population growth and increase per capita income growth. This means reducing birth rates and increasing capital investment, employment, and output growth. Assume for the purpose of this study of C02 that appropriate policy can reduce population growth to 0.8 percent and can maintain developing country aggregate income growth at 2.2 percent. Also assume a growth in energy prices of 2 percent annually. (World Bank, 1984, chap. 5, gives a useful discussion of the interaction between income and population growth.)

The results are encouraging. The doubling year for C02 is postponed to 2309-three centuries into the future. On the effectiveness criterion, this policy is the most effective of the first five options. On the equity criterion, it has a slowly rising ratio of developing country energy use to industrialized country energy use-reaching 13: 100 in 2036. (See table 4.)

Case (6) adds 2.5 million acres of new forest annually to case (5). Note that in figure 1, C 0 2 asymptotically approaches the doubling benchmark. Case (7) assumes 10 million acres of new forest annually. In this case, C02 concentration declines after 250 years. Given the current world forest cover of 7.3 billion acres,5 case (6) adds 0.034 of 1 percent of this annually and

5. See International Institute for Environment and Development and World Resources Institute (1986) and Trabalka (1985, p. 123). For summary, see Drennen and Chapman (1989, p. 24).


case (7) adds 0.14 of 1 percent of this annually. Assume that the forestation costs are $1,000 per acre.6 This defines an annual cost of $2.5 billion for case (6) and $10 billion for case (7). Assume that the 2 percent annual price increase is divided equally between taxation and revenue for producers. The energy tax is 4 cents per MBtu in the first year, when it collects $10 billion. In 10 years, the energy tax reaches 42 cents per MBtu and so it collects $1 10 billion in revenue despite falling energy use.

In the above discussion, fossil energy prices increase at 2 percent annually. This arises because Manne and Reichels and others have recognized that global policy may require a tax on carbon or C02 releases. The revenues from such a tax might be allocated to renewable energy research and development, to promotion of fossil energy substitutes in developing countries, and/or to forestation programs. The 2 percent annual price increase was selected for examination here because such an increase, coupled with population and forestation programs, defines C02 accumulation levels that could avoid a C02 doubling.

A world forestry policy might meet the equity criterion. The effect of an energy tax would be primarily on industrial countries, and the forestation expenditures would be directed predominantly toward developing countries. Certainly, other considerations are relevant to forestation: species selection, cost, location, biomass energy use, and environmental impact. However, these preliminary results suggest that one should seriously consider including forestation in C02 control policies.

The results in cases (3, (6), and (7) depend on several assumptions. The price elasticity is -1, the income elasticity is +0.5, and the population elasticity is +l . (In Bohi’s (1981) review of energy demand elasticities, the median price elasticity of energy-use sectors is -1.1.) For world energy use to decline, the following is necessary:

The left side is the absolute value of the product of price elasticity and price growth. The right side is the sum of elasticity and growth terms for per capita income (subscript i) and total population (subscript n). For world energy use to decline, the left side of equation (3) must exceed the right side. The product of price elasticity and price growth is the important figure. For ex-

6. This assumes a growth ratio of 6 tons pcr acre per year. The cost estimate includes site preparation, weed control, planting, land rental, fertilizer, harvesting, and removing trees from the site. This is based on estimates from Perlack and Ranney (1987, pp. 224-229) and assumes the use of Short Rotation Intensive Culture (SRIC), which utilizes fast-growing trees on managed plantations. One possible scenario allows the trees to grow for 25 years before being harvested for use as a fossil fuel substitute or for other uses not resulting in the carbon’s being returned to the atmosphere. New trees then are grown on that same acreage. This maintains or even increases the carbon bank.

CHAPMAN and DRENNEN: POSSIBLE C02 TREATY PROPOSALS 25

ample, given a 2 percent price growth and a -1 elasticity (or a 4 percent price growth and a -0.5 elasticity), C02 concentration does not double under the forestry program. (See figure 1 and table 4.)

V. CONCLUSION

The results here suggest several avenues of future analysis regarding possible treaties (see Drennen, 1990). First, energy growth-rate policies alone appear unlikely to satisfy both the effectiveness criterion and the equity criterion. Any such proposed treaty that would be effective would be unacceptable to developing nations.

Second, elevated per capita income growth rates in developing countries are necessary so as to provide for a slow increase in the ratio of per capita energy use between developing countries and industrial countries. Generally, development economists have concluded that population growth and per capita income growth are competitive. Therefore, developing countries should be considering population policies that enhance income growth. Reduced world population growth also is necessary so as to reduce aggregate energy demand.

Taxation, beginning at 4 cents per MBtu, initially would provide about $10 billion annually for a forestry program of the same magnitude. Such tax also would be available for renewable energy research and development, nuclear power research, and energy efficiency implementation in developing countries. If the tax rises, then additional international funds would be available for investment in developing countries’ infrastructure or commerce. For example, if one-half of a 2 percent annual energy price increase were to be

7 an international tax, then about $110 billion would be available in 1996, and energy prices would be 22 percent higher.

The exploratory results in this paper suggest that C02 doubling can be deferred. An effective and equitable policy will require international agree- ments involving macroeconomics, population, energy taxation, and forestry.

7. In 10 years, the tax would be 42 cents per MBtu, equivalent to 5 cents per gallon of gasoline. The current average price is about $3.80 per MBtu, based on U.S. data.


TABLE 4 Summary of Economic Policies in Year 2036a

Future

Per Capita Per Capita Energy Growth in Energy, (Q) (and Year Energy Use 50 years percentage of CO2

Future Total

Case (percentage) (MBtu) growth) Doubling

(5) Reduce population growth, increase developing country income, 2 percent price growth with one-half as taxation. (-0.4) 2309

Developing Countries -0.9 12.0 117.8 Industrial Countries -1.3 89.0 154.9 World Total or Average - 1.2 30.8 223.8

(6) Same as (3, but add 2.5 million forest acres annually. (-0.4) never

Developing Countries -0.9 12.0 117.8 Industrial Countries -1.3 89.0 154.9 World Total or Average -1.2 30.8 223.8

(7) Same as (9, but add 10 million forest acres annually. (-0.4) never

Developing Countries -0.9 12.0 117.8 Industrial Countries -1.3 89.0 154.9 World Total or Average - 1.2 30.8 223.8

aPercentages are rounded 10 nearest one-tenth.

CHAPMAN and DRENNEN: POSSIBLE COz TREATY PROPOSALS

APPENDIX TABLE A.l World Population and Incomea: 1986

27

Industrialized Soviet- Market- Eastern China Economy Developing Europe and World Countries Countries Group Indochina Totals

Population (millions) 760.7 2,535.6 431.7 1,148.3 4,876.3

Annual Population Growth Rate

(percentage) 0.8 1980- 1986

Per Capita Income (U.S. $) 13,767

2.3

713

0.8

7,482

1.3 1.7

258 3,242

Annual Change, Per Capita Income, 1980-1986 (percentage) +1.0 -1.1 +1.3 +9.1 +1.8

Sources: World Bank (1988); United Nations (1988); Pollard (1988).

'The industrialized countries consist of North America, Western Europe, Japan, Australia, and New Zealand. The developing countries consist of Latin America, Africa, and Asia outside the China and Soviet Group. The Soviet-Eastem Europe data group includes Cuba and Mongolia. The data assume that Indochina (Laos, Kampuchea, and Vietnam) has the same per capita income as does China. All data are for 1986 or 1980-1986. Income figures are gross domestic product for all regions except the Soviet-Eastern Europe Group, for which they are gross national product.


REFERENCES

Bohi, D., Analyzing Demand Behavior: A Study of Energy Demand Elasticities, Resources for the Future, Johns Hopkins University Press, Baltimore, 1981.

Drennen, T., and D. Chapman, “Biocarbon: A Model of Energy Use, Forestation, and Climate Change,” Cornell Agricultural Economics Staff Paper No. 89-9, Ithaca, N.Y., April 1989.

Drennen, T., M. Crane, and R. Gupta, ‘A Possible COz Protocol and Analysis,” draft, Cornell Department of Agricultural Economics and Cornell Law School, Ithaca, N.Y., April 1990.

International Institute for Environment and Development and World Resources Institute, World Resources 1986, Basic Books, New York, 1986.

Magraw, D. B., “Existing Legal Treatment of Developing Countries: Differential, Contextual, and Absolute Norms,” in A. Aman Jr., ed., International Low and the Global Environment, draft, Cornell Law School, Ithaca, N.Y., 1990.

Manne, A. S., and R. G. Reichels, T O 2 Emission Limits: An Economic Cost Analysis for the U.S.A.,” Energy Journal, forthcoming.

Mintzer, I., A Matter of Degrees: The Potential for Controlling the Greenhouse Effect, World Resources Institute, Washington, D.C., 1987.

National Academy of Sciences, Changing Climate: Report of the Carbon Dioxide Assessinem Committee, National Academy Press, Washington, D.C., 1983.

New York Times, ‘80 Nations Favor [CFC] Ban to Help Ozone,” May 3, 1989.

Perlack, R., and J. Ranney, “Cost Objective Overview for Short Rotation Woody Crops,” in Economic Evaluations of Short-Rotation Biomass Energy Systems, International Energy Agency and University of Minnesota Natural Resources Research Institute, Duluth, 1987.

Pollard, A., ed., U.S.S.R.: Facts and Figures Annual, 1988, vol. 12, Academic International Press, Gulf Breeze, Fla., 1988.

Ramanthan, V., “The Greenhouse Theory of Climate Change: A Test by an Inadvertent Global Experiment,” Science, April 15, 1988, 293-299.

Schneider, S. H., “The Changing Climate,” Scientific American, September 1989, 70-79.

South, D. W., et al., A Fossil Energy Perspective on Global Climate Change, U.S. Department of Energy and Argonne National Laboratory, ArgOMe, Ill., January 1990.

Trabalka, J., ed., Atmospheric Carbon Dioxide and the Global Carbon Cycle, U.S. Department of Energy, Office of Energy Research, Office of Basic Energy Sciences, Carbon Dioxide Research Division, Washington, D.C., 1985.

United Nations, Statistical Yearbook 1985-86, New York, 1988.

U S . Energy Information Administration, International Energy Annual 1987, Washington, D.C.,

Eja , July 5, 1989, p. 109.

Wirth, T. E., “Introduction,” in D. E. Abrahamson, ed., The Challenge of Global Warming, Island

World Bank, World Development Report, Oxford University Press, New York, 1984, 1988.

1988.

Press, Washington, D.C., 1989.

Legislation

Montreal Protocol on Substances That Deplete the Ozone Layer, Final Act, 1987 (Federal Regisrer, December 14, 1987).

EQUITY AND EFFECTIVENESS OF POSSIBLE CO2 TREATY PROPOSALS

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