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Emissions Targets in Cap-and-Trade: Choosing Reduction Goals Compatible with Global Climate Stabilization

Bryan K. Mignone

This paper is part of a series of studies on the policy design issues for cap-and-trade. As part of the Energy Security Initiative Policy Brief Series, this paper focuses on domestic cap-and-trade targets.

Introduction

Among the major environmental threats facing the world today, climate change stands out as both the largest in scope and the most unique in character, in the sense that the atmosphere truly does not recognize national boundaries when it comes to carbon dioxide (CO2) emissions. Simply put, a ton of CO2 emitted in the US yields exactly the same global environmental damage as a ton of CO2 emitted in China, and each country stands to lose from (the damages associated with) what is emitted by the other just as it does from what is emitted within its own borders. Conversely, any nation derives benefits from abatement pursued elsewhere, meaning that individual (national) incentives to abate are greatly undermined by the desire to “free ride” on the actions of others (Hardin, 1968). The upshot is that, without greater explicit coordination among nations, the amount of global abatement realized will almost certainly be undersupplied relative to the true magnitude of the climate change threat.

The history of international environmental politics
and its implications for the development of a
negotiated agreement are outside the scope of this
paper.[1] However, an important starting point for
this analysis is the assumption that a consensus
climate stabilization target will ultimately emerge as a result of ongoing political discussions. This
target will most likely take the form of a number
that expresses the maximum acceptable deviation
of the global average surface temperature
from its preindustrial value. For example, at the
most recent G-8 meeting in June 2009, leaders
from the industrialized countries committed to
limiting the long-term temperature increase to 2
degrees Celsius (3.6 degrees Fahrenheit) above
its preindustrial value. Although this particular
goal has not been endorsed by major developing
countries, it does have the virtue of being broadly
consistent with scientific developments showing
that the risk of dangerous climate impacts, such
as the disintegration of polar ice sheets, increases
significantly above ~2 degrees C.

Assuming scientific information is successfully
coupled with political judgment to yield a consensus
target such as the one suggested above, science
can be employed once more to translate this goal
into a corresponding greenhouse gas concentration
target and a global emissions reduction pathway.
Although significant uncertainty remains in
the climate sensitivity (the relationship between
the equilibrium temperature change and the
global greenhouse gas concentration), as well as
in the abatement potential of non-CO2 gases (the relationship between the overall greenhouse gas
concentration and the CO2 concentration) and in
the response of the carbon cycle (the relationship
between the total CO2 concentration and the CO2
emissions path), we will show that a 50% global
reduction of CO2 emissions by 2050 relative to
2005 levels, another often stated policy goal, is
plausibly consistent with the 2-degree C temperature
target. However, this response is on the low
end of what might ultimately be required, given
the nature of the scientific uncertainties involved.

In light of the many known uncertainties associated
with the climate system response, policymakers
may wish to revise the global emissions
path in order to improve the likelihood of attaining
the 2-degree temperature target, or they may
decide to adopt a different target altogether. In
either case, when considering the implications
for the design of a US cap-and-trade system, we
will take the 50% reduction in CO2 emissions by
2050 relative to 2005 levels as the basic policy goal
to be explored in this paper. Assuming that this
target is widely recognized and shared among
the “major emitters” (a group that typically refers
to those countries who participate in the US-led
“major emitters forum”), a potentially more difficult
problem involves dividing up the implied
abatement burden among nations whose historical
responsibility, vulnerability to climate change,
adaptation capacity and economic resources to
devote to environmental improvement vary considerably. [2]

In order to examine the sensitivity of US policy
choices to international action, we consider several
possible approaches for determining what
might constitute “comparable effort” or an “equitable
distribution” of burden. Combining basic
scientific information with a set of plausible burden sharing rules allows us to define a range
of US targets broadly consistent with global climate
stabilization. An important conclusion from
this analysis is that the specification of US targets
is relatively insensitive to the choice of comparability
metric, at least in the near-term, provided
that the notion of “common-but-differentiated”
responsibilities envisioned by the UN Framework
Convention on Climate Change (UNFCCC) is incorporated
in some way. [3]

In addition, we find that the amount of new
technology needed to satisfy US emissions targets
generally falls within the range of plausibility,
given current information about the pace of
future technological deployment. This implies
that uncertainty related to future technology is
probably not sufficient to warrant ex ante revision
of the emissions targets derived from a topdown
analysis, as some have suggested. Rather,
to hedge against worst case outcomes, cap-and-trade
policy could be designed flexibly, in a way
that would allow targets to be adjusted ex post if
technology deployment turned out to be much
weaker (and the associated costs much higher)
than anticipated. Such flexibility could be directly
incorporated into the design of policy through
explicit cost containment provisions, a subject
that is discussed at greater length in a related paper
(Mignone, 2009).

In this paper, we consider each of these issues in
greater detail. Section 2 examines possible global
temperature and concentration goals, making
use of the guidance provided by the UNFCCC
and subsequent technical and political judgments
about the meaning of “dangerous interference”
with the climate system. Section 3 discusses how
available scientific information could be used to
translate any such concentration or temperature target into a single global emissions reduction
pathway. Section 4 considers various proposals for
dividing up the global abatement burden, given
different notions of “comparability,” and discusses
what this implies for the design of emissions reduction
targets in the US Section 5 considers the
implications of these emissions reduction targets
for the transformation of the US energy system
and examines whether top-down emissions goals
derived from a global disaggregation of abatement
are consistent with bottom-up technological
constraints on the future energy system. Section
6 concludes with a recap of the major issues and
with appropriate policy recommendations.


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[1] For more background on international environmental negotiations and the structure of possible future climate treaty architectures, see, e.g.,
Aldy and Stavins (2007), Barrett (2003), Benedick (1998), and Mintzer and Leonard (1994).

[2] For more on the Major Emitters Meetings, see: http://www.state.gov/g/oes/climate/mem.

[3] The concept of “common but differentiated” responsibilities was first introduced in Article 3 of the Framework Convention on Climate
Change. For full text of the Convention, see: http://unfccc.int/resource/docs/convkp/conveng.pdf.

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