Marginal reforms to facilitate climate change mitigation: An assessment of costs and abilities to abate of different countries.
Paper number: 15/08
Paper date: May 2015
Paper Category: Discussion Paper
Employing the by-production approach to modelling emission-generating technologies proposed in Murty, Russell, Levkoff  and Murty  and adapting the policy reform approach to taxation policy in public economics due to Feldstein  and Guesnerie , we propose a methodology to identify profit-increasing and emission non-increasing input and sequestration reforms and to compute marginal abatement costs (MACs) of countries. The proposed formulae are based purely on data that defines the current status-quo and gain significance when long-run abatement plans based on future projections of the economy are implemented in a piecemeal manner. We show that the so derived MAC of any country is the ratio of its reduction in profit (RIP) and its ability to abate (ATA) at the status-quo. The RIP and the ATA measure, respectively, the decrease in profit and the reduction in emission at the status-quo when the abatement strategy that results in the greatest proportional decrease in emission is adopted. While the RIP depends on factors such as the profitability of various inputs and the costs of sequestration at the status-quo, the ATA depends on factors such as the extents of usage of fossil-fuels and carbon sequestration efforts. The formulae derived are used to compute the RIP, ATA, and the MACs of a sample of 118 countries. A wide international variation is found in the estimates, indicating potentials for gains from international trading in emission given the current state of the world economy and its level of technological development. In particular, countries that have submitted the highest emission-reduction targets under the Intended Nationally Determined Contributions (INDC) scheme to the UNFCCC are also among the countries with the highest MACs in our sample, while countries that have thus far shown caution in submitting their INDCs have low MACs. Carbon sequestration efforts such as afforestation contribute towards lowering MACs in countries that do undertake them.
JEL classification codes: Q5, Q54, Q58, H23, H21, H20
Keywords: marginal abatement costs, policy reforms, by-production model of emission generating technology, ability to abate, reduction in profit.