Under reasonable assumptions, China could achieve parity in living standard with Western Europe by 2100, and India by 2150. Climate change, however, may be a key obstacle preventing such a convergence. The business-as-usual (BAU) growth path of the world economy might increase concentrations of atmospheric greenhouse gases to unsafe levels and cause significant negative environmental feedback before China achieves parity in living standards with the OECD countries. We use a dynamic multi-country general equilibrium model (the G-Cubed Model) to project a realistic BAU trajectory of carbon dioxide (CO2) emissions, and we find it to be even above the CO2 emissions from the high-growth scenario estimated by the Energy Information Agency in 2007. This outcome is a reminder that it has been usual so far to underestimate the growth in China energy consumption.
We compare the merits of the different market-based CO2 reduction mechanisms like a carbon tax, a cap-and-trade scheme, and the McKibbin-Wilcoxen Hybrid (MWH) approach. Unexpected developments cause the different CO2 reduction mechanisms to create very different costs. Both the international carbon tax and the MWH approach are more economically efficient responses to uncertainty than the cap-and-trade scheme of the Kyoto Protocol. We use the G-Cubed Model to study the economic outcomes under each CO2 reduction mechanism, and under the deployment of advanced green energy.
The reduction of CO2 emissions would only delay, not stop, the increase in CO2 concentrations toward the “danger level.” As the only long-term solution is likely to be shifting to non-fossil emitting energy, it is important to combine a market-based CO2 reduction mechanism with an ambitious program to accelerate the development of green technology. Such a program would probably have a higher chance of success if some important parts of it were based on international collaboration. We conclude the paper with recommendations about the form of future international climate agreements and how China could be encouraged to participate.