Abstract
The joint implementation of carbon emission reduction and carbon sequestration projects and policies, a concept given birth at the Rio de Janeiro 1992 United Nations Framework Convention on Climate Change (Richards, 1995) and given a qualified endorsement at the First Conference ofthe Parties’ in Berlin, 28 March - 7 April 1995 (Yamin, 1995), is now being tested out in practice in an open ended pilot phase.
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Notes
COP 1 condoned AIJ not JI. AIJ confers no credits for emission reduction. Credit would be awarded in a joint implementation or a tradable permit system (see section 2.4.1).
In Poland $25 million was put forward by the GEF, $1 million by the Norwegian government, with $22.3 million coming from local sources (GEF 1994c). In Mexico $10 million was put forward by the GEF, $3 million by the Norwegians and $ 10 million by the Mexican Comisión Federal de Electricidad (GEF 1994d).
Table 3.1 below shows the marginal damage cost (shadow price) of carbon in S/tC, between 1991 and 2030, as calculated by Fankhauser, Peck and Teisberg and Nordhaus. (Pearce et al 1996, p. 215 present further results, including Cline 1992b, 1993 and Maddison 1994). These cost studies calculate the damage done by 1tC during the on average one hundred years that it is in the atmosphere, and discount this damage back to the year the 1tC is emitted. To convert these costs into 1997 prices we would need to discount the figures from the year of emission back to 1997: this is done in section 3.5.3 below, In this discussion, the carbon damage costs calculated by Nordhaus, Peck and Teisberg and Fankhauser are not discounted back to 1997.
The cost of carbon dioxide emission damage (and benefit of abatement/ sequestration) is given in terms of $s per metric ton of carbon. To convert from carbon to carbon dioxide one multiplies by 44/12; this calculation comes from the atomic weight of carbon dioxide: the carbon atom has a weight of 12, each oxygen atom has a weight of 16: 16+16+12=44.
It would be possible to subject the projects to benefit cost analysis. The benefit of the project is the present value of future carbon damage reduction achieved. The cost of the project is the present value of expenditure on future emission reduction. Subtracting costs from benefits and using a suitable discount rate, one could then say that projects with a positive net present value should be undertaken: where r = discount rate and periods run from 0 to n.
Fankhauser’s cost of $27.8/tC for 2025 means that the damage to be caused by a tC emitted in 2025 has a value of $ 27.8/tC in that year. To produce the 1997 value of the $27.8/tC figure we discount from 2025 back to 1997.
Vinson and Kolchugia (1996) writing about the methane emissions in the Rusagas project, incorrectly use the global wanning potential approach instead of equivalent damage.
Total undiscounted emission reduction achieved.
Whether a 0% or a 3% discount rate is used, the Fankhauser carbon damage ratio gives more weight to emission reduction in the future compared to at present than does the constant carbon damage ratio.
Some of the parameters for these relationships are well understood and uncontroversial, but others are controversial. Parameter y defines the relationship between temperature and damage. If temperature rises by 1%, damage rises by γ: %. There is uncertainty about its value although there is an assumption that damage is convex in temperature i.e. that γ: >: 1; Cline (1992) and Nordhaus (1993c) suggest a value of 1.3 (Fankhauser 1993 p. 126). Because of the uncertainty of some of the key parameters, Fankhauser’s model is a stochastic one where key parameters, including future emissions, vary randomly between prescribed values.
This chapter presuposes that the social discount rate should be a constant figure through time. Recently, Charles Kolstad has argued that the discount rate could very well change over time. What economists perhaps should be seeking is not a social discount rate but a social discount profile over time. Human beings may well discount events in one year’s time compared to today more greatly that they discount an event to take place in six year’s time compared to five year’s hence.
Stiglitz (1982) argues that every project’s particular market failures should be identified and the discount rate tailored to the magnitude of those market failures. In other words, each project should have its own discount rate.
It is important to note that those who argue for a zero pure rate of time preference (including Ramsey 1928, Pigou 1932 and Broome 1992) are not necessarily arguing that the social discount should be zero. Even if the rate of time preference a equals zero, the social discount rate itself can be positive if μ:.β:>0.
The idea of adjusting benefits to approximate wholly additional carbon emission reduction is similar to a technique used by Van der Burg (1994, p. 94). He argues that one should predict the probability that a project is additional. If the probability that a project is additional is Y, one multiplies the emission reduction claimed by the project by Y. 15 2,000 or 3,200 hectares. See annex 3A.
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© 1998 Springer Science+Business Media Dordrecht
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Ridley, M.A. (1998). The Cost of Carbon in a Carbon Permit Market. In: Lowering the Cost of Emission Reduction: Joint Implementation in the Framework Convention on Climate Change. Environment & Policy, vol 10. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-5256-3_3
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