Measuring unilateral and multilateral gains from tackling current economic inefficiencies in CO2 reductions: Theory and evidence

Paper number: 16/04

Paper date: July 19, 2016

Year: 2016

Paper Category: Discussion Paper

Authors

Sushama Murty

Abstract

We develop a methodology for (a) constructing unilateral profit (producer surplus)- increasing and emission-decreasing policy reforms and (b) measuring marginal abatement cost (MAC), when countries operate ineciently in meeting their self-imposed emission caps and when instantaneous radical jumps from their inecient status-quos to their emission-constrained optima are infeasible due to existing institutional and political constraints. Data from 118 countries combined with the theoretical methodology developed reveals that (a) allocative ineciencies are pervasive, (b) our proposed unilateral-effciency increasing reform can result in more than 8% increase in global profit and 30% reduction in net global emission of CO2 { the biggest gainers being USA, China, Japan, Russia, India, and several countries from western European, and (c) MACs range from zero to 3,000 USD per ton of carbon (USDptc) in 94% of countries in our sample. MAC is more than (resp., less than) 1,000 USDptc in 80% of OECD (resp., 61% of non-OECD) countries. While MACs are zero for many countries in the former Soviet block, they are more than 2,000 USDptc for countries in western Europe. These differences in MACs imply considerable scope for multilateral eficiency improvements in meeting voluntary emissionreduction targets through international emission trading and other international climate initiatives.

JEL classification codes: Q5, Q54, Q58

Keywords: allocative ineciencies under an emission cap, marginal and non-marginal effciency-improving policy reforms, marginal abatement costs, ability to abate, reduction in profit.

Measuring unilateral and multilateral gains from tackling current economic inefficiencies in CO2 reductions: Theory and evidence Measuring unilateral and multilateral gains from tackling current economic inefficiencies in CO2 reductions: Theory and evidence