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ABSTRACT
In response to anthropogenic climate change, developed countries have committed themselves to raising 100 billion USD a year from 2020 onwards to address the needs of developing countries. In this paper, we investigate the economic consequences and CO2 emission impacts of three options for raising climate funds from public sources in developed countries: (i) CO2 emissions pricing, (ii) an electricity consumption tax, and (iii) the removal of fossil fuel subsidies. Using computable general equilibrium analysis, we find that these three options not only induce very different global costs to raise given amounts of climate funds, but also have quite diverging implications for the cost incidence between developed and developing countries. Likewise, the global CO2 emission impacts of alternative fund-raising policies differ significantly.
Key policy insights
CO2 emission pricing and a tax on electricity consumption in developed countries shift substantial shares of the cost burden for raising climate finance to developing countries, while the removal of fossil fuel subsidies in developed countries leads to welfare gains for developing countries.
While CO2 pricing and a tax on electricity consumption lead to positive carbon leakage, i.e. increased emissions in developing countries, the removal of fossil fuel subsidies incentivizes decarbonization of developing economies through higher prices for fossil fuels.
From a global cost-effectiveness perspective the removal of subsidies is the least attractive option, but it gains in attractiveness for a policy portfolio when taking into account the cost incidence between developed and developing countries, and also the impact on CO2 emissions in developing countries.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Correction Statement
This article has been republished with minor changes. These changes do not impact the academic content of the article.
Notes
1 Under the UNFCCC, climate finance is poorly defined (Haites & Mwape, Citation2013). The Copenhagen accord refers to a wide variety of sources, public and private, bilateral and multilateral. However, it has been left up to external organizations to come up with their own accounting metrics. As a consequence, there is no common definition of what individual countries can count as climate finance. Estimates on climate finance depend on who is doing the counting (Weikmans & Roberts, Citation2019) and there is little clarity as to whether climate finance stems from new and additional funds or is simply re-routed from elsewhere (Michaelowa & Michaelowa, Citation2011).
2 The AGF refers to this instrument originally as a ‘wires charge on electricity".
3 A detailed algebraic description of the core model logic is provided by Böhringer et al. (Citation2015, Citation2018). The model code and data to replicate all simulation results are readily available from the authors upon request.
4 UNFCCC Annex II lists the following countries: Australia, Austria, Belgium, Canada, Denmark, European Economic Community, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, UK, USA. As explained in the notes to Table 1, for the purposes of our analysis, we also include in our Annex II category those Eastern European countries that are EU members.
5 For technical details of the forward-projection see Böhringer et al. (Citation2009).
6 The OECD data is reported in current local currencies. We use data from World Development Indicators (World Bank, Citation2017) and the implicit price deflators for GDP from the Bureau of Economic Analysis (BEA, Citation2019) to translate local currencies into 2014 USD that correspond to the monetary units of GTAP version 10.
7 Note that climate finance stems from public and private funds. Hence, our scenarios, in which we go up to 100 billion USD revenues per public policy instrument, constitute upper bounds on financing requirements.
8 This point is visible as kinks in our graphical exposition of results (see Figures 1–4 in Section 4).
9 The HEV in income denotes the amount which is necessary to add to (or subtract from) the BAU income of the representative household so that the household enjoys a utility level equal to the one in the counterfactual policy scenario on the basis of ex-ante relative prices. In our model setting, percentage changes in the HEV in income readily translate into percentage changes in real consumption.
10 CO2 emission prices increase roughly linearly with the targeted revenue under scenario CO2. In order to collect 1 billion USD in revenues Annex II would have to increase their effective CO2 price by about 0.1 USD per ton of CO2 starting from the BAU price of 10 USD. With revenues increasing up to 100 billion USD, the required effective CO2 price in Annex II goes up linearly to 20.26 USD. This is roughly in line with the suggestion by the AFG, who found that for each 1 USD carbon tax, 10 billion USD could be raised in revenues.
11 This is true for all fuels at the aggregate Annex II level and in all Annex II regions except for coal in the EU and natural gas in Australia and New Zealand.
12 With compensating income transfers, by definition no costs are inflicted on Non-Annex II countries; thus, the costs for Annex II are identical to global cost.
13 In principle, indirect terms-of-trade gains could even more than offset the direct economic welfare cost of domestic policy reforms (note that emission pricing and charging electricity consumption is used here as a source for public revenues rather than a means to correct for climate change externalities).
14 In our model, these demand elasticities are endogenous to sectoral import shares and to the Armington trade elasticities, which govern the degree of substitutability between domestically produced goods and imported goods. For sensitivity analysis, see Appendix.
15 Note that we report results in absolute USD. In relative terms, that is, as a percentage change with respect to the BAU consumption welfare, Canada, as well as Australia and New Zealand, as large fuel exporters lose the most.
16 Recall again that we focus in our presentation of results on the scenarios without compensating transfers because the changes due to transfers are negligible.