More Palatable and Less Effective

The current standoff in international climate negotiations has given rise to parallel tracks for carbon emission mitigation strategies. As an alternative to the conventional cap-and-trade structure, emission intensity targets have helped bring developing countries to the table to discuss a multilateral climate treaty.

China and India (pdf) have both proposed voluntary, GDP-linked carbon intensity targets (pdf), preferring the less restrictive policy for the extra space it allows for economic growth. While such targets have mostly been lauded in the international arena, a recent paper (pdf) by Robert Marchinski and Ottmar Edenhofer casts doubt on the effectiveness of intensity targets.

Emission intensity targets limit the amount of greenhouse gas emissions per dollar of GDP, in contrast to an absolute emission cap. But can national intensity targets be integrated with an international carbon market where some countries operate under pure emission targets? Marchinski and Edenhofer demonstrate that:

free permit trade between countries with absolute and intensity target always leads to an inefficient international allocation of emissions, and net imports (exports) of permits by intensity constrained countries always lead to an increase (decrease) in total combined emissions.

The authors also argue that emission intensity targets may increase uncertainty in mitigation targets. This will be noticeable in developing countries that are in the midst of significant economic change: GDP and emissions may not be highly correlated in the short term. This uncertainty in abatement requirements can lead to significantly higher abatement costs relative to a fixed-cap mitigation framework.

Further, forecasts of emissions and GDP for China, Russia, and India from 1999 turned out to be significantly inaccurate. Had emission intensity reduction targets been imposed, large over-allocations of permits (“hot air”) or an expensive, overly-stringent cap would have followed.

Instead of carbon intensity targets, the authors support the adoption of pure emission targets with banking and borrowing arrangements to hedge against cost or volume uncertainties.

But are emission intensity targets preferable to no policy at all? On this the authors take no stance. Instead they argue that a more efficient solution to the current proposals is for developing countries to join a cap-and-trade system with extra emission allowances. This plan, based on common but differentiated responsibilities, would take advantage of an efficient carbon market without unfairly limiting economic growth in developing countries.

China and India continue to invest heavily in fossil fuel-based energy. It is estimated that China adds nearly 2 large coal fired power plants every week. Given the pace of industrialization and investment in brown sources of energy in these countries, it now remains to be seen how well — if at all — these efficiency targets align with IPCC benchmarked goals (pdf) of limiting the concentration of atmospheric carbon dioxide to 450ppm.