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«ENVIRONMENT AND DEVELOPMENT The Changing Wealth of Nations ENVIRONMENT AND DEVELOPMENT A fundamental element of sustainable development is ...»

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One of the principal policy messages of WDR 2010 is that the development process itself must be transformed in a greenhouse world. High-carbon growth, which has been the historical norm, is no longer an option. While low-income countries have contributed only a little over 1 percent of the anthropogenic stock of CO2, developing countries as a whole are now the largest annual emitters of CO2, and most of the growth in emissions during this century is likely to take place in developing countries.1 This establishes the setting for the analysis in this chapter. Climate change is happening now, is driven by human activities, and will likely accelerate unless action is taken to reduce greenhouse gas emissions very substantially. Its greatest impact will be on countries most dependent upon climate-sensitive sectors of the economy: developing countries characterized by high dependence on natural resources as a share of wealth. Accounting for carbon stocks and flows can contribute to the needed transformation of the development process.

Some Economics of Climate Change In order to account for and value CO2 stocks and flows, it is essential to understand some of the basic economics of this pollutant. Two basic physical properties of CO2 have a profound influence on the economics of climate change: (a) it is a uniformly mixed pollutant, meaning that emissions at one point on the globe will affect the whole globe, and (b) it is a highly persistent pollutant.2 The high persistence of CO2 in the atmosphere is an important element in the economic analysis of climate change. Carbon cycles naturally through the biogeosphere, with stocks held in the atmosphere, in living matter, in soils, and in the ocean. The rate of decay of CO2 from the atmosphere after it has been emitted has been modeled by the United Nations Framework Convention on Climate Change (UNFCCC 2002), and this model has been applied in the Climate Analysis

78 THE CHANGING WEALTH OF NATIONS

Indicators Tool (CAIT) used in this chapter.3 To give a feel for the extent of this persistence, the model predicts that, while 50 percent of CO2 will have dissipated from the atmosphere 15 years after emission, 36 percent will remain in the atmosphere after 50 years, and 30 percent will remain after 100 years.

This has two basic implications. First, in accounting for the stocks of CO2 in the atmosphere that have been emitted by any given country, long time series of country emissions will be required. This is provided by the CAIT dataset. Second, in establishing the value of damages inflicted by a ton of CO2 that is emitted now (or has been emitted in the past), it will be necessary to model damages a century or more into the future and to take the present value of this flow of damages. This is how we measure the social cost of carbon. As this definition suggests, any estimate of the social cost of carbon is scenario- or model-dependent and is subject to all of the uncertainties that integrated climate-economy modeling entails.4 Table 4.1 summarizes the range of estimates of the social cost of marginal carbon emissions constructed by Tol (2005). Depending on model assumptions, and particularly on discounting assumptions tied to the pure rate of time preference, the range in mean values is from roughly $4 to $70 per ton of CO2 in 2005 dollars. In this chapter we use a figure derived by Fankhauser (1995) of $20 per ton of carbon in 1995, the same figure used in estimates of adjusted net saving published by the World Bank since 1999. Translated to dollars per ton of CO2 ($/tCO2) and 2005 dollars, this amounts to $6.69 per ton of additional CO2 emissions. This figure lies within the range of estimates in table 4.1, roughly one-half of the mean social cost of carbon appearing in peer-reviewed papers, and nearly twice the median.

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Note that the social cost of carbon is a marginal figure, that is, it represents the damage inflicted by one extra ton of CO2 emitted. It is like a price in this regard, and is therefore useful in many aspects of the economic analysis of climate change. When we value flows of carbon emitted, in the next section of this chapter, it is the marginal value of the social cost of carbon that is applied.

However, when it comes to valuing stocks of CO2, it is clear that a marginal value of the social cost of carbon looking forward is not appropriate.

To value CO2 stocks, we first turn to the question of starting points. The approach applied in this chapter is to measure a country’s entire stock of CO2 residing in the atmosphere as a result of emissions dating from the start of the Industrial Revolution.5 To value this CO2 stock, we evaluate the reduction in global damages that would have occurred if that country’s stock had not been emitted. That is, we invoke the assumption of ceteris paribus—“other things being equal.” Because this value assumes that all other stocks of CO2—the result of emissions by all other countries—are still in the atmosphere, it is not possible to add up the stock values across countries to arrive at a global total because this would violate the “other things being equal” assumption. This also implies that the value of the CO2 stock for an aggregation of countries, such as the European Union (EU), will not equal the sum of the stock values for the individual countries in the group.

Figure 4.1 presents the stylized approach to valuing an atmospheric stock of CO2.





It assumes that the social cost of carbon is a quadratic function of the atmospheric concentration of CO2. At the 2005 CO2 atmospheric concentration level of 379.8 parts per million by volume (ppmv), the social cost of carbon is $6.69, as indicated above.6 Since the social cost of carbon measures damages from anthropogenic emissions of CO2, it is assumed to be zero when its atmospheric concentration was at preindustrial levels: 284.0 ppmv.

Suppose now that country X has emitted a stock of atmospheric CO2 that, if removed from the atmosphere, would bring concentrations down to 359.8 ppmv. Then the reduction in global damages that would be incurred if country X’s stock had not been emitted is measured by the area under the curve between points a and b, times the conversion factor from ppmv to tons of CO2.7 This is the “other things being equal” value of the stock of CO2 attributed to country X.

To make this question of average versus marginal social values of the stock of carbon more concrete, we can take the example of the EU, treated as a single emitter in this instance. CAIT estimates that the EU’s share of the stock of anthropogenic CO2 in 2006 is 23.8 percent. Applying the approach shown in figure 4.1, we calculate the average social value of the EU stock of CO2 to be $5.72 per ton, obtained by dividing the value of damage (the area under the curve in figure 4.1) by the CO2 stock, measured in tons, attributed to the EU. This compares with the marginal social value of $6.69 per ton.

80 THE CHANGING WEALTH OF NATIONS

FIGURE 4.1 The Value of a Reduction in the Stock of CO2

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Source: Authors.

Estimated Values of Carbon Stocks and Flows in 2005 The CAIT database covers most countries in the world, providing estimates of each country’s share of the stock of CO2 remaining in the atmosphere in 2006.

It includes emissions from fossil fuel combustion and cement manufacture from 1850 to 2006 and emissions from land use change since 1990. These shares of the stock in 2006 are in effect discounted emissions, since they are estimated by summing up the amount of each year’s historical emission net of dissipation from the atmosphere since the time of emission. We combine the shares of the stock from CAIT with an estimate of the total stock of anthropogenic CO2 in the atmosphere in 2005 to arrive at estimated stocks by country.8 Figure 4.2 shows the estimated stock of CO2 for the top 10 emitters, where EU countries feature both as part of the EU aggregate (of 27 countries) and singly.

The stocks for the United States and the EU clearly dominate, but China and India feature in the top 10, as does the Russian Federation.

The value of these stocks of CO2 is shown in figure 4.3, normalized to gross national income (GNI) measured at nominal exchange rates. Here, we see a very different picture of the top 10 historical emitters, with Russia, China, and India exhibiting the largest value of CO2 stocks as a share of national income.

Compared with the United States and the EU, these countries have had higher ratios of CO2 emissions to GNI.

WEALTH ACCOUNTING IN THE GREENHOUSE 81

FIGURE 4.2 Stock of CO2: Top 10 Emitters gigatons of CO2

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Source: Authors’ calculations based on CAIT data for 2009.

FIGURE 4.3 Value of CO2 Stock as a Percentage of GNI: Top 10 Emitters % GNI

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Source: Authors’ calculations based on CAIT data for 2009 and World Bank (2007).

Table 4.2 summarizes both stocks and flows of anthropogenic CO2 for all countries exceeding 1 percent of the total atmospheric stock in 2005.

In terms of shares of the stock, high-income countries dominate with 60 percent of the total, compared with 40 percent for developing countries (comprising uppermiddle-income, lower-middle-income, and low-income countries). Looking at values of CO2 stocks per capita, the top countries, at over $3,000 per capita, are the United States, Germany, the United Kingdom, and Canada; China and India

82 THE CHANGING WEALTH OF NATIONS

are notably low. For CO2 stocks as a share of total wealth (a better comparator than GNI, since one stock is being compared to another), the big figures belong to developing and transition countries, including China, Russia, India, Ukraine, Poland, and South Africa. In aggregate, developing countries exhibit a value of CO2 stocks exceeding 1 percent of total wealth.

Turning to current emissions, table 4.2 shows that the big emitters per capita are high-income countries—the United States, Japan, Canada, and Australia— plus the Russian Federation. However, when share of GNI is considered, the

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largest emitters are developing countries—China, India, and South Africa—plus Russia and Ukraine.9 The large number of transition economies seen in table 4.2 reflects an important legacy of the years of central planning. Table 4.3 takes a closer look at the countries of Eastern Europe and Central Asia. The values of CO2 stocks per capita exceed $2,000 in Kazakhstan, Poland, Russia, and Ukraine. As a share of total wealth, CO2 stocks exceed 5 percent in Azerbaijan, Kazakhstan, Moldova, Turkmenistan, Ukraine, and Uzbekistan. The value of current CO2

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emissions as a share of GNI exceeds 1 percent in the majority of countries in the region.

Discussion: Issues of Law and Equity While it is tempting to consider the value of these stocks of CO2 as a type of “environmental debt,” and thus as figures that would appear as liabilities in the national balance sheet accounts, doing so would require a legal framework that first establishes responsibility for all the past emissions included in our calculations and then creates an obligation for emitters to pay the countries harmed by their emissions. Similar difficulties accompany any attempt to establish liability for current CO2 emissions. An insightful article by Weisbach (2009) describes the major obstacles these endeavors would face.

Taking the common law of tort as the model of corrective justice, Weisbach identifies the central issue as finding fault. To take just a few examples, are high CO2 emitters like Canadians at fault for living in a cold climate? Is consumption of meat unethical in the climate context, given that meat production is a major source of CO2 emissions? Do countries that industrialized earlier, before widespread awareness of the connection between emissions and the greenhouse effect, necessarily bear full historical responsibility? Weisbach notes, “To determine fault on a global scale for pervasive activities that span more than a century is simply impossible.” The alternative to finding fault is to impose strict liability. In the climate context this would imply that all emitters of CO2 would be liable for damages, without the need for a finding of fault as in tort law. But as Weisbach notes, applying strict liability retroactively—which would be required if historical emissions were to be subject to corrective justice—is almost unprecedented. As a general principle of due process, agents who would be subject to strict liability should be entitled to advance notice prior to any assumption of liability.

In addition, corrective justice requires that there be some demonstrable connection between the agent causing harm and the party being harmed. When we consider the problem of damages from CO2 emitted over time, it is difficult at this time to see how this evidentiary requirement would be met.

Finally, as already noted, imposing some form of sanction on developingcountry emitters, whether the emissions of CO2 are current or historical, raises serious questions of equity. As a general principle it seems inequitable to require developing countries to finance a global public good, particularly when the largest portion of historical emissions creating the need for that public good has come from high-income countries.

If we wish the solution to the climate problem to be equitable, the inevitable next question concerns the equity criteria to be applied. A variety can

WEALTH ACCOUNTING IN THE GREENHOUSE 85

be identified, including egalitarianism (implying equal per capita emission rights, for example), ability to pay, sovereignty (implying status quo rights), “maxi-min” (maximize net benefits to the poorest nations), horizontal equity (similar economic circumstances receive similar emission rights), vertical equity (higher compliance burdens should fall on those with higher ability to pay), Pareto compensation, and market justice (seek efficient solutions to the climate problem) (Rose et al. 1998; Rose and Kverndokk 2008).

Applying any of these equity criteria would result in different outcomes concerning who pays for dealing with climate change, and making a choice among them is ultimately the responsibility of the nations of the world as they progress toward a comprehensive solution to the climate problem.



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