Heep Papers: 2017-1

Linking Heterogeneous Climate Policies

Enel Foundation offers additional support to the Enel Endowment for Environmental Economics to the Harvard Environmental Economics Program (HEEP). HEEP develops innovative answers to today’s complex environmental issues, by providing a venue to bring together faculty and graduate students from across Harvard University engaged in research, teaching, and outreach in environmental and natural resource economics and related public policy.

The program sponsors research projects, convenes workshops, and supports graduate education to further understanding of critical issues in environmental, natural resource, and energy economics and policy around the world. In the context of this relations, since 2012, Enel Foundation has promoted the development of discussion papers adressign important topics in international climate policy, especially those pertaining to market- based approaches to climate change. The papers are discussed during side events that take place in the framework of the Conference Of the Parties.

Linking Heterogeneous Climate Policies (Consistent with the Paris Agreement)

The Paris Agreement achieved broad participation by countries accounting for some 97% of global GHG emissions. As negotiations begin to elaborate key details of the Agreement, a critical question is how to create incentives for countries to increase ambition over time, to have any hope of limiting global average warming to 2° C. The ability to link different climate policies, such that emission reductions undertaken in one jurisdiction can be counted toward the mitigation commitments of another jurisdiction, may help Parties increase ambition over time. The paper explores options and challenges for facilitating such linkages in light of the considerable heterogeneity that is likely to characterize regional, national, and sub-national efforts to address climate change.

Linkage is important, in part, because it can reduce the costs of achieving a given emissions-reduction objective. Lower costs, in turn, may make it politically feasible to embrace more ambitious objectives. In a world where the marginal cost of abatement — that is, the cost to reduce an additional ton of emissions — varies widely, linkage improves overall cost-effectiveness by allowing jurisdictions with relatively higher abatement costs to finance reductions from jurisdictions with relatively lower costs. In effect, linkage drives participating jurisdictions toward a common cost of carbon, equalizing the marginal cost of abatement and producing a more efficient distribution of abatement activities. These benefits are potentially significant: The World Bank has estimated that international linkage could reduce the cost of achieving the emissions reductions specified in the initial set of NDCs submitted under the Paris Agreement 32% by 2030 and 54% by 2050.

Article 6 of the Paris Agreement provides a foundation for linkage by recognizing that Parties to the Agreement may “choose to pursue voluntary cooperation in the implementation of their” NDCs through “the use of internationally transferred mitigation outcomes” (ITMOs). In contrast to the Kyoto Protocol (which likewise included provisions for international cooperation), the voluntary and flexible architecture of the Paris Agreement allows for wide variation, not only in the types of climate policies countries choose to implement, but in the form and stringency of the abatement targets they adopt.