8. Sitzung International Issues 39765471

International Environmental IssuesNo single authority (EPA)→ not necessarily joint welfare maximization→ not necessarily joint welfare maximization

Spillover – Effects throughp g

1. Transboundary / global pollution

Problem: EPA internalizes own pollution only to the extent it affects the home countryaffects the home country.

→ only partial internalization of the external effecty p→ suboptimal policy from the perspective of joint welfare

maximization

Prof. Dr. G. Schulze; environmental economics

1

2. Commodity trade and factor movements2. Commodity trade and factor movements

Two directions of possible causalityTwo directions of possible causality

a) Commodity and factor trade may affect pollution in the homea) Commodity and factor trade may affect pollution in the home country and abroad– Comparative advantage: trade patternp g p– Gains from trade: increased economic activity– Technological progress


2

Three effects due to trade liberalization

1. Scale effect: Increased economic activity raises pollution2. Composition effect: Trade liberalization leads to specialization

→ pollution may increase for exporter of polluting goods and decrease for exporter of relatively pollution - extensively produced goodsfor exporter of relatively pollution extensively produced goods

3. Technique effect: Trade liberalization leads to adoption of cleaner technologies

Reasons: 1. Availability / access2. Increased income leads to a higher valuation of the environment

(better regulatory situation)3. Green consumerism / international awareness (esp. for MNE)4. Esp. for MNE: One-fits-all technology

Net effect a priori undetermined, may differ significantly across countries!


3

b) Trade and factor movements may be influenced by differences ) y yin environmental regulation– “environmental dumping”: Competitive reduction of standards to gain a

titi d (“ t ”)competitive edge (“a rat race”)→ suboptimal environmental policy as it serves two functions (internalization of external effects and trade policy objectives)( p y j )↔ Tinbergen rule

– “pollution haven” hypothesis → dirty industries migrate to low standard countries→ incentive to reduce standards to attract capital→ incentive to reduce standards to attract capital→ suboptimal environmental policy (see above)

– “NIMBY” (not-in-my-backyard) policy set standards excessively high to export environmental problems (esp. trade in hazardous waste)


4

Again:g

Fundamental reasons for inefficiencies:

1. Externality remains (partially) even after environmental 1. Externality remains (partially) even after environmental policy

2. Strategic interaction, and environmental policy serves other goals as well.


5

Is decentralized environmental policy optimal in an integrated p y p gworld?

Illustration:

Ngo Van Long and Horst Siebert (1991), g g ( )Institutional Competition versus ex ante Harmonization: The Case of Environmental Policy, Journal of Institutional and Theoretical Economics, 146: 296-311.


6

The Basic ModelThe Basic ModelTwo open economies, producing a single commodity (perfect substitutes), output denominated by Q and Q* respectively.), p y Q Q p y

Production functions have standard neoclassical properties.p pQ = F (K, L) Q* = F (K*, L*)

Emissions are a function of capital.E = G (K) E* = G (K*)E G (K) E G (K )

with G(0) = 0 G´ > 0 G´´ ≥ 0with G(0) 0, G > 0, G ≥ 0


7

All individuals have the same utility function.yU = U [C – b · D (E)] with U´ > 0, U´´ < 0

b · D (E): Damage from pollution, b: shift parameter for strength of preference for b: shift parameter for strength of preference for

environmental quality

Capital is mobile between both countries, labor is not.


8

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11

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15

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16

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17

Central results of Van Long & Siebert (1991)

1. Coordination of environmental policies is not necessary ifpollution is not transboundary, even though capital ismobile internationally.

2. An increase in environmental standards leads to capitalt l t h hi h b d dexports, lower wages at home, higher wages abroad and

reduces the return to capital. Foreign real income (pollution- adjusted) risesadjusted) rises.

3 If pollution is transboundary policy coordination is3. If pollution is transboundary, policy coordination isnecessary to achieve an efficient outcome.


18

International Environmental CooperationpMore than 170 treaties on

Global Climate Change- Global Climate Change- Stratospheric Ozon Depletion- Desertification and Land Coves Change Deforestationg- Conservation of Biological Diversity- Transboundary Air Pollution- Oceans and Marine Resources- Trade / Industry and the Environment

http://homepages.strath.ac.uk/~hbs96107/Treaties.htm

Treaties negotiated in the UN framework or in regional bilateralTreaties negotiated in the UN framework or in regional, bilateral talks


19

How effective are the treaties?How effective are the treaties?

“T ti t d t dif ti th t ti l d“Treaties tend to codify actions that nations are already taking”

“Wh h b f ff d i i l i“When the numbers of affected countries is very large, treaties can affect very little regardless the number of signatories“

“C ti b h d t t bt i h it i d d t”“Cooperation can be hardest to obtain when it is needed most”True or false?


20

Conditions conducive for effective international cooperation

- Existence of intl. political institution / authority to t t d i i t d f tconstruct, administer, and enforce an agreement

- Output of agreement yields private rather than public dgoods.

- A large portion of the nation – specific benefits come f th ti f ti i ti t ifrom the actions of participating countries.

- Small number of countries- Costs of bargaining are small- Cultural similarity of negotiating parties


21

- Concentration of interests among the adversely affected g yparties

- Leadership by one important nation eade s p by o e po ta t at o- Small degree of uncertainty about costs and benefits

Self enforcing agreement- Self-enforcing agreement- Linked benefits

C ti l ti hi b t ti- Continuous relationship between parties- Short-run implementation cost is low- Large share of benefits occur now or in the near future


22

Game theoretic foundationsGame theoretic foundations

• Two player games– Prisoner’s dilemma– Chicken game

Assurance game– Assurance game• Multi player games

– payoff as a function of no. of participating countries

– incentive to participate


23

Transboundary pollutionAbatement expenditures give benefits to both / all affected

countries → prisoner‘s dilemma game

Y’s strategy

X’s strategy

Strategy 1 Strategy 2

X s strategy

Strategy 1 a, a b, c

Strategy 2 c, b d, d

Figure 10.1 Two player binary choice games.


24

Y’ P ll AbY’s strategyX’s strategy

Pollute Abate

Pollute 0, 0 5, -2

Abate -2, 5 3, 3Abate 2, 5 3, 3

Figure 10.2 A two-player pollution abatement game.

Non-cooperative game theory:Dominant strategy for each player: polluteDominant strategy for each player: pollute→ Nash equilibrium is inefficient.


25

Y’s strategyX’s strategy

Defect (Pollute)

Cooperate(Abate)

Defect(Pollute) 2, 2 4, 1

Cooperate (Abate) 1, 4 3, 3

Figure 10.3 The two-player pollution abatement Prisoners’ Dilemma game: ordinal form.


26

Cooperative agreementp g→ both players abate

maximizes joint welfare→ yet: no Nash equilibrium

→ incentive to defect.

Binding agreement? Enforcement?→ credible penalty?→ credible penalty?→ verifiable actions?→ Issue linkage?→ Issue linkage?→ self-enforcing agreement?

t d ? (f lk th )Prof. Dr. G. Schulze;

environmental economics27

→ repeated game? (folk theorem)

Y’s strategy Pollute Abate

chicken game

Y s strategy

X’s strategy

Pollute Abate

Pollute -4, -4 5, -2

Abate -2, 5 3, 3

Figure 10.4 A two-player Chicken game.

Non-cooperative:

No dominant strategyCooperative outcome:

No dominant strategy

Two Nash equilibria

I d i d

-both abate (max. joint welfare)

-not stable→ Indetermined outcome

possible solution → sequential game,


28credible commitment to pollute!

Figure 10.5 Extensive form of sequential Chicken game.

Y’s Pollute

(-4, -4)

AbatePollute

choice

PolluteAbate

X’s choice

(5, -2)

(-2, 5)

Abate(3,3)

B k d i d iBackward induction

X chooses to polluteSome abatement, some


29(first mover advantage)

,free riding will occur

Assurance game : models a threshold effect

C f ib i 8Cost of contributing: 8

Benefit accrues only if both parties contribute, benefit 12

B’s strategy

A’s strategy

Do notContribute

Contribute

A s strategy

Do not contribute 0, 0 0, -8

C t ib t 8 0 4 4Contribute -8, 0 4, 4

Figure 10.6 A two-player Assurance game.

non-cooperative: cooperative:no dominant strategy

two Nash equilibria,Coordination, both contribute


30inferior + superior self-enforcing

PD with multiple players11 playersCost of abatement: 7 Benefit to all: 5 (for each country that abates)

# of abating nations other than i____

0 1 2 3 4 5 6 7 8 9 10___

Nation i pollutes 0 5 10 15 20 25 30 35 40 45 50Nation i abates -2 3 8 13 18 23 28 33 38 43 48

individually rational: pollute! → for all (11) countries!→ for all (11) countries!payoff 0 instead of 48Two players solution carries over to the n – player game.


31

p y p y g

Multiplayer Prisoner’s dilemma gameMultiplayer Prisoner s dilemma game


32

More generallyNB N t b fit if t b tNBA: Net benefit if country abatesNBP: Net benefit if country pollutes

NBP = a + bK K: # of other countries that abateNBA = c + dK in total N identical countries

previous example:a = 0 b = 5 c = -7 d = 5a = 0, b = 5, c = -7, d = 5

considera = 12, b = 3, c = -7 , d = 7

number of abating nations other than i0 1 2 3 4 5 6 7 8 9

Nation i pollutes 12 15 18 21 24 27 30 33 36 39Nation i pollutes 12 15 18 21 24 27 30 33 36 39 Nation i abates 0 7 14 21 28 35 42 49 56 63


33

Figure 10.8 The payoffs to one country from abating and from not abating as the number of other countries abating varies: alternative set of parameter values.

60

70

40

50

20

30

10

20

NBP

NBA

00 1 2 3 4 5 6 7 8 9

Treshold effect

Two stable equilibria: No country cooperates

All countries cooperate(Nash equilibria)


34

All countries cooperate(Nash equilibria)

Third example:a = 0, b = 5, c = 3, d =3self-enforcing agreement with 3 signatories and 7 non –i isignatories

number of abating nations other than i0 1 2 3 4 5 6 7 8 9

Nation i pollutes 0 5 10 15 20 25 30 35 40 45 Nation i abates 6 9 12 15 18 21 24 27 30 33

- less than complete cooperation- Payoff to each non-cooperating country is higher (15) than that of ayo to eac o coope at g cou t y s g e ( 5) t a t at o

each cooperating country (12)


35

Figure 10.9 The payoffs to one country from abating and from not abating as the number of other countries abating varies: third set of parameter values (a = 0, b =5, c = 3 and d = 3).

50

40

45

25

30

35

15

20

NBP

NBA

0

5

10


36

00 1 2 3 4 5 6 7 8 9

Participation in abatement: None

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all some

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38

Figure 10.10 A comparison of the non-cooperative and full cooperative solutions to an i t l bli d blenvironmental public good problem.

MB

MCi Zn: non-cooperation abatement of country i

MBi

EZC: cooperative abatement ofE abatement of country i

ZZN ZC

E : Efficiency gain from full cooperation


39

Self-enforcing agreement

• Renegotiation proof→ no incentive to renegotiate

• Payoff structure must prevent cheating / defecting

• Penalties to countries other than i should not be a disincentive to country i

• Penalties to country i should not encourage country i to irenegotiate


40

Factors contributing to a higher degree of cooperation

• Role of commitment

• Transfers / side payments

• Reciprocity

• Linkages

• Repeated games (folk theorem)


41

Stratospheric Ozone DepletionF ti f lFunction of ozone layer:• Absorption of infrared radiation: greenhouse effect

f• Absorption of ultraviolet radiation

Increased UV radiation:• Increased skin cancer • Possible effects: deterioration of human immune system,Possible effects: deterioration of human immune system,

damage of marine plankton

Anthropogenic cause: Emission of chorofluorocarbon (CFC):Anthropogenic cause: Emission of chorofluorocarbon (CFC): – aerosol propellants, – cushioning foamcushioning foam,– refrigerative materials, – cleaning foams

• halonsProf. Dr. G. Schulze;

environmental economics42

Time table:1985 h l i l d t t d• 1985: hole in ozone layer detected

• 1985: Vienna convention (in force: 1988)F k– Framework

– Ratified by 197 countries

• 1987: Montreal Protocol (in force 1989)• 1987: Montreal Protocol (in force 1989)– Ratified by 197 states– Reduction in zone-depleting substancesp g– Phasing out of CFCs– Freezing hydrochlorofluorocarbons (HCFCs) 2013, reduction

t i 2015staring 2015– HFC have replaced CFCs and HCFCs, yet are “super-

greenhouse gases”g g

• London Protocol 1990: complete phasing out of halonsand CFC by 2000


43

Reasons for success: F d i t t (1986 USSR US J t• Few dominant actors (1986: USSR, US, Japan account for 46% of CFC emissions)Benefits exceed costs by far for participating countries• Benefits exceed costs by far for participating countries– Private benefits– Substitutes readily availableSubstitutes readily available

• USA as driving factor• Carrots and sticks:Carrots and sticks:

– payments to LDCs to ease intro of CFC-substitutes and – trade ban for products containing ozone-depleting substances


44

Global climate change

Figure 9.13 Estimate of the Earth’s annual and global mean energy balanceOver the long term, the amount of incoming solar radiation absorbed by the Earth and atmosphere is balanced by the Earth and atmosphere releasing the same amount of outgoing longwave radiation. About half of the incoming solar radiation is absorbed by the Earth’s surface. This energy is transferred to the atmosphere by warming the air in contact with the surface (thermals), by evapotranspiration and by longwaveradiation that is absorbed by clouds and greenhouse gases. The atmosphere in turn radiates longwave energy back to Earth as well as out to space. Source: FAQ 1.1, Figure 1. http://www.ipcc.ch/pdf/assessment-report/ar4/wg1/ar4-wg1-faqs.pdf.

• Intergovernmental Panel on Climate Change (IPCC): reviews and assesses four assessment reportsreviews and assesses , four assessment reports

Greenhouse gases (GHG)• Greenhouse gases (GHG)– Water vapour– CO2CO2– Methane– Chlorofluorcarbons (CFC), halons, NOX and ozone emissions

• Uncertainty– Quantification of relationships (ecological, meterological,

economic: integrated assessment necessary)– Climate feedback mechanisms: ice-albedo feedback (ice meltsClimate feedback mechanisms: ice albedo feedback (ice melts,

reveals darker surface which absorbs more solar heat)


47

How would GHG emissions and atmospheric concentrations

change over the coming centurychange over the coming century and beyond if no additional

controls were imposed?

• Climate change driven by concentration of GHGP t d f t i i• Past and future emissions

• Carbon sinksf→ forecasts on population rates, economic growth, technological progress, energy efficiency, land use (esp. deforestation)deforestation)

Four scenarios on IPCC Special report on emissionFour scenarios on IPCC Special report on emission scenarios (SRES), include no additional climate policies

Post SRES scenariosPost SRES scenarios


49

Four SRES families:Four SRES families:


50

Figure 9.14 Global GHG emissions (in GtCO2-eq per year) in the absence of additional climate policiesadditional climate policiesThe figure shows six illustrative SRES marker scenarios (coloured lines) and 80th percentile range of recent scenarios published since SRES (post-SRES) (gray shaded area). Dashed lines show the full range of post- SRES scenarios. The emissions include CO2, CH4, N2O and F-gases.Source: Figure 3.1, IPCC AR4 Synthesis Report, available online at: http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr.pdf

How will climate change over the coming century andthe coming century and

beyond?y

Figure 9.15 Multi model averages and assessed ranges for surface warmingshaded areas ± 1 std dev.

All scenarios predict temperature increases far beyond historical experiences.For many scenarios GHG concentrations have not been stabilized by 2100

Damages (cf. Table 9.6 in Perman et al. 2011, p. 315)Ri i l l• Rise in sea level

• Decline in biodiversityf f• Acidification of the ocean

• Reduced crop yields• Moderately increased timber productivity• Erosion of coasts• Floodings, endangers of settlements, cities• Malnutrition, increased diarrhea• Heat waves, storms, droughts, floods: diseases, death,

damages


54

Entry points for emissions reduction With

NNY

YN

NE

EN

NMM

WithM: emissionsN: populationY: Output

Reformulated:

NYNEN Y: OutputE: energy use

em i iNyye

emM m: emission per person

e: energy per persony: output per person

Emissions fall, if: • Emission intensity of energy production m/e falls (energy mix)• Energy intensity e/y of output falls (structural change,

technological improvements)P it i f ll ( )• Per capita income falls (not desirable)

• Population declines (not any time soon) Cf. p. 327 for details


55

Options available for mitigating GHG atmospheric concentrations

There are two ways to move towards a goal of reducing theThere are two ways to move towards a goal of reducing the rate of growth of atmospheric greenhouse-gas concentrations:co ce a o s

• Increase the capacity of sinks that sequester carbonIncrease the capacity of sinks that sequester carbon dioxide and other greenhouse gases from the atmosphere.

• Decrease emissions of greenhouse gases below business as usual (thereby reducing GHG inflows to the atmosphere).

The costs of attaining GHG emissions or atmospheric concentration targets: key resultsatmospheric concentration targets: key results

1 The cost of stabilizing GHG concentrations increases as the1. The cost of stabilizing GHG concentrations increases as the GHG concentration target declines.

2. Cost of achieving any given target increases the higher the Cost o ac e g a y g e ta get c eases t e g e t ebaseline (i.e. uncontrolled) emissions.

3. The cost of achieving any given target varies with the date at which targets are to be met, but does so in quite complex ways. It is not possible to say in general whether fast or early control measures are more cost-effective than slow or latecontrol measures are more cost effective than slow or late controls.

The costs of attaining GHG emissions or gatmospheric concentration targets: key results

4. There is some scope for GHG emissions reductions at zero or negative net social cost. The magnitude of this is uncertain. It depends primarily on the size of three kinds of opportunities :– overcoming market imperfections (and so reducing avoidable

inefficiencies);inefficiencies);– ancillary or joint benefits of GHG abatement (such as reductions

in traffic congestion);– double dividend effects .

The costs of attaining GHG emissions or gatmospheric concentration targets: key results

5. Abatement costs will be lower, the more cost-efficiently that abatement is obtained. This implies several things:– Costs will be lower for strategies that focus on all GHGs– Costs will be lower for strategies that focus on all sectors, rather than just one sector– The more ‘complete’ is the abatement effort in terms of countries involved, the lower will be

overall control costs.

This is just another implication of the equi-marginal cost principle, and it also is necessary to minimize problems of carbon (or other GHG) leakage

• uniform global GHG taxes or set of freely tradeable net emissions licenses g y

6. Climate-change decision-making is essentially a sequential process under uncertainty. The value of new information is likely to be very high, and so there are important quasi-option values that should be considered.

Figure 9.16 Global GHG emissions for 2000 and projected baseline emissions for 2030 and 2100 from IPCC SRES and the post-SRES literature The figure provides the emissions from the six illustrative SRES scenarios. It also provides the frequency distribution of the emissions in the post-SRES scenarios (5th, 25th, median, 75th, 95th percentile), as covered in Chapter 3. F-gases cover HFCs, PFCs and SF6.Source: IPCC WG III Report (2007c)

Numerical estimates of mitigationNumerical estimates of mitigation potential and mitigation costs

Short- to medium-term GHGShort to medium term GHG mitigation: estimated mitigation

t f th i d t 2030costs for the period to 2030

Long term GHG mitigation forLong-term GHG mitigation, for stabilised GHG concentrations:

estimated mitigation costs for the period after 2050period after 2050

Figure 9 17 Emissions pathways of mitigation scenarios for alternative groups ofFigure 9.17 Emissions pathways of mitigation scenarios for alternative groups of stabilisation targetsSource: Figure 3.17, WG III Full report, page 199. Based on Nakicenovic et al. (2006) and Hanaoka et al. (2006)

Figure 9.17 (alt version)

Nordhaus DICE-2007 modelNordhaus DICE 2007 model

• An intertemporal optimisation model of climate change• An intertemporal optimisation model of climate change policy.

• Objective function in DICE-2007 is to maximize the• Objective function in DICE-2007 is to maximize the present value of global consumption net of damages of global warming and abatement g g

• Model allows identifying emissions abatement choices (the policy instruments) that maximise the NPV of global consumption over horizons of up to 200 years.

• Optimal policy yields improvements of 3 trillion US$ (1012$) i 0 1 % f di d ld i(1012$), i.e. 0.15% of discounted world income, over BAU.

R lt f DICE 2007 i l tiTable 9.11 Results of DICE-2007 simulations

(2005 U.S. dollars per ton of carbon)

Th l l f b i ( t ) th h ti f i iti tiFigure 9.18 The level of carbon prices (or taxes) through time for various mitigation strategies

• Zero-carbon backstop technology available? At what price?


69

Safe minimum standard (precautionary) approaches

large ncertainties in climate change modelling re climate• large uncertainties, in climate change modelling re climate change damages: mitigation policy should be based on a precautionary principleprecautionary principle.

• ‘safe’ threshold level of allowable climate change must be imposed as a constraint on admissible policy choices.p p y

• Support for a safe minimum standard approach has grown: – non-linearities and discontinuities in the dose-response function

linking temperature change to induced damages– positive feedbacks in the linkage between GHG concentration

rates and temperature responses are increasingly likely:rates and temperature responses are increasingly likely: the climate sensitivity coefficients rise endogenously.

Figure 9.19 Equilibrium global mean temperature increase above pre-industrial (°C)

as a function of GHG concentrationSource: Figure SPM.8: WGIII SPM. The data are drawn from AR4 WGI, Chapter 10.8

The Kyoto ProtocolThe Kyoto Protocol

1992 ‘Earth Summit’: Framework Convention on Climate• 1992 Earth Summit’: Framework Convention on Climate Change (FCCC) was adopted, requiring signatories to conduct national inventories of GHG emissions and toconduct national inventories of GHG emissions and to submit action plans for controlling emissions.

• By 1995, parties to the FCCC had established two significant principles: – emissions reductions would initially only be required of

industrialized countriesthose countries would need to reduce emissions to below 1990– those countries would need to reduce emissions to below 1990 levels.

The Kyoto ProtocolThe Kyoto Protocol

Kyoto Protocol 1997: first agreement to set country• Kyoto Protocol 1997: first agreement to set country-specific GHG emissions limits and a timetable

• To come into force and be binding on all signatories, the Protocol would need to be ratified by at least 55

t i ibl f t l t 55% f 1990 COcountries, responsible for at least 55% of 1990 CO2 emissions

• key objective: cut combined emissions of five principal GHGs from industrialized countries by 5% relative to 1990 l l b th i d 2008 20121990 levels by the period 2008–2012.

• The Protocol did not set any binding commitments on y gdeveloping countries.

The Kyoto Protocol’s flexibility mechanismsThe Kyoto Protocol s flexibility mechanisms• generate incentives for control to take place where abatement costs

are lowest (cost efficiency)are lowest (cost efficiency)– Emissions Trading: Allows emissions trading among Annex 1

countries; countries in which emissions are below their allowed t t ll ‘ dit ’ t th ti hi h dd th ttargets may sell ‘credits’ to other nations, which can add these to their allowed targets.

– Banking: Emissions targets do not have to be met every year, only g g y y yon average over the period 2008–2012. Emissions reductions above Kyoto targets attained in 2008–2012 can be banked for credit in the following control period.credit in the following control period.

– Joint Implementation: JI allows for bilateral bargains among Annex 1 countries, whereby one country can obtain ‘EmissionsAnnex 1 countries, whereby one country can obtain Emissions Reduction Units’ for undertaking in another country projects that reduce net emissions, provided that the reduction is additional to what would have taken place anywaywhat would have taken place anyway.

– Clean Development Mechanism: By funding projects that reduce emissions in developing countries, Annex 1 countries can gain emissions credits to offset against their abatement obligations. Effectively, the CDM generalizes the JI provision to a global basis. The CDM applies to sequestration schemes (such as forestry programs) as well as emissions reductions.


75

The Kyoto Protocol’s flexibility mechanisms (Continued)

• Problems: validation of project additionality• Problems: validation of project additionality.

• Kyoto’s flexibility mechanisms appear to offer very large prospects of y y pp y g p preductions in overall emissions abatement costs. Studies carried out during the 1990s found median marginal abatement costs in developed economies to be of the order of $200 per tonne of carbondeveloped economies to be of the order of $200 per tonne of carbon.

• Barrett (1998) argued that with emissions being uncontrolled in the non-Annex 1 countries, marginal abatement costs there are effectively zero.

• On this basis, he suggests that cost savings from the Clean Development Mechanism alone could be of the order of $200/tC at the

imargin.


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Documents

8. Sitzung International Issues 39765471