Balancing the carbon budget

As the talks heat up in Copenhagen, Pan Jiahua, Chen Ying and Li Chenxi argue that formulating emissions targets will require an overhaul of the current climate regime.

United Nations climate-change talks are underway in Copenhagen, but significant differences remain between participants – and continue to cast a shadow over the proceedings – notably on the issues of emissions targets and funding. Therefore, we should ask ourselves if, in fact, global climate mechanisms require fundamental reform. How can we fairly allocate the world’s limited emissions budget, both protecting the environment and ensuring that everyone’s basic development needs are met?

The Chinese Academy of Social Sciences’ Research Centre for Sustainable Development (the authors of this article are members) unveiled their Carbon Budget Proposal (CBP) at climate negotiations last year in Poznan, Poland. The research centre has since explored related international mechanisms, including those for balancing and financing carbon budgets, as well as issues of markets and compliance. The aim has been to put the principle of justice into the CBP.

The CBP assumes that global emissions will peak by 2020, with a fall of 50% on 2005 levels by 2050. Using 2005 population levels as a benchmark, it calculates a carbon budget of 2.33 tonnes of CO2 per person per year from 1900 to 2050.

Starting from the principle of equality of average accumulated emissions, this budget fairly apportions carbon between the nations of the world – that is, the initial carbon budget allocation will be in direct proportion to the population in the base year.

If a carbon budget for 1900 to 2050 were allocated to each country, initial calculations show that most Annex I (industrialised) nations are already heavily in arrears, on average by a factor of two. Some countries are more overdrawn: the United Kingdom by 2.7 times, the United States by 3.2 times. A small number of non-Annex I (developing) nations, such as oil exporters, also run a carbon deficit, but to a lesser degree.

The majority of non-Annex I nations enjoy a surplus in their carbon budget: for example, China has to date used 28% of its carbon budget, India only 10%. A few Annex I countries, such as Turkey and Spain, also have a small surplus.

Overall, the overdrawn nations have a total carbon deficit of 509.82 billion tonnes of carbon dioxide, compared with a 986.95 billion-tonne surplus for those nations under their allowance. A binding carbon budget would need a mechanism to deal with these imbalances in carbon emissions, a budget balancing process that would require three stages.

First, the system would need to allow domestic transfers to repay historical carbon arrears. Countries with historical arrears would offset that debt with future carbon budgets. This would allow some nations, such as Italy and Romania, to balance their historical carbon budgets.

Second, international carbon budget transfers could be used to repay historical arrears. Nations unable to pay off historical arrears during the first stage would need carbon budget transfers from the surplus of non-Annex I nations. This would involve the transfer of around 389.07 billion tonnes of carbon dioxide.

Third, international carbon budget transfers would be used to meet basic needs. Nations left without an adequate carbon budget to meet their basic needs would need carbon budget transfers from the surplus of non-Annex I nations. This would involve the transfer of around 120.75 billion tonnes of carbon dioxide.

These three stages would see each nation balance its carbon budget and historical emissions – and obtain the carbon allocation it needs for the future. The carbon budget allocation ratio between Annex I and non-Annex I nations will change significantly, from 19.5:80.5, to 40.9:59.1.

Developed nations still would have annual per capita emissions above the standard 2.33 tonnes of carbon dioxide: 7.63 tonnes for the United States, 6.74 tonnes in the UK, 6.59 tons in Germany and 5.43 tons in Canada. Meanwhile, the developing nations supplying carbon allocations would have an annual per capita average of only 1.61 tonnes. The large historical emissions of industrialised nations have infringed on the ability of developing countries to emit as much carbon dioxide in the course of their development.

Funding is also a crucial issue in the current negotiations. Poor nations propose that rich countries transfer around 0.5% to 1.5% of GDP to support responses to climate change in the developing world – but there has not yet been a positive response to this proposal.

The CBP suggests that international carbon budget transfers would become the basis for financing, with the cost of transfers varying across different periods of time. As humanity’s awareness of climate change alters, so should the price of carbon.

During the first stage, from 1900 to 1989, climate change was not an issue in international politics – although historical emissions still have an impact. The emitters were unaware of the harm they would cause, but the damage done cannot be entirely ignored. So a low price should be set, to be paid voluntarily. If we assume US$5 per tonne of carbon dioxide, then these carbon budget transfers would be worth around US$1.5721 trillion.

The second stage runs from 1990 to 2004, when climate change became a global issue. As international law made clear that greenhouse gases were harmful, a high and compulsory price should be set: assuming the current Certified Emission Reduction (CER) average of US$10 per tonne of carbon, these carbon budget transfers would be worth around USD 1.0705 trillion.

During the third period, from 2005 to 2050, carbon budget transfers would be made to ensure basic needs were met – so a low, but compulsory, price will be set. Assuming US$5 per tonne of carbon dioxide, these carbon budget transfers would be worth around US$607.16 billion.

In total, this financial mechanism would raise an estimated US$4.1498 trillion.

The balancing and financial mechanisms of the carbon budget affect the overall interests of developing nations, and should be resolved through international political negotiations, rather than a distributed market mechanism. Arrangements for the management, allocation and use of the funds would need to be determined through international political negotiations.

According to the CBP, each nation has a duty to keep its emissions within its budget – an approach compatible with existing emission quotas and trading mechanisms. If actual emissions are above the quota, emissions rights can be purchased on international markets. Nations which produce a carbon surplus can profit by selling those emission rights.

Currently the CBP considers implementation up to 2050, but actual implementation would need to be in stages. Nations would provide national allocation plans for commitment periods (of one decade, for example), both to ensure that buying nations achieve their commitments for the period, and that selling nations do not oversell. Initial calculations show that the CBP would require an international carbon market worth nearly US$50 billion.

Ensuring that the implementation of carbon budgets and trading is measurable, reportable and verifiable will require further mechanisms. For example, each nation might establish a carbon account showing its carbon budget, the use of that budget, purchases, sales and reserves. These accounts would be clear and transparent, and there would be regular analysis and evaluation of compliance and the international transfer of funds and technology.

Compliance mechanisms will be required for nations who fail to implement their legal obligations under international agreements. These are an important part of international climate-change mechanisms. The CBP includes both incentives and penalty mechanisms. The penalty mechanism would use a progressive carbon tax to increase the financial burden on nations that exceed emission quotas, and also deduct the excess emissions from the next commitment period’s carbon budget. The actual tax rate and the collection, management and use of the funds raised all need to be determined through international political negotiations.

Overall, the CBP uses a mechanism design to expound on the operation of a just and sustainable international climate-change mechanism. Based on a fair initial allocation of carbon budgets, it solves the issue of the historical arrears of developed nations and provides a number of methods by which they can meet future needs, and also provides a new route to raising the funds needed to deal with climate change while ensuring the global climate budget remains balanced.

The CBP has gradually become a consensus among Chinese academics, and has received a positive international reception. The German Advisory Council on Global Change has proposed its own version, known as the carbon budget approach. The proposal is an important step towards revolutionising the post-Copenhagen climate regime.

Plus – the chinadialogue team are reporting every day from the climate talks in Copenhagen on our unique, bilingual blog: “the daily planet”.

Pan Jiahua is executive director of the Centre for Urban Development and Environment at the Chinese Academy of Social Sciences.

Chen Ying is affiliated with the Centre for Urban Development and Environment at the Chinese Academy of Social Sciences.

Li Chenxi is a post-graduate student of the economics of sustainable development at the Chinese Academy of Social Sciences.

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