|The Global Greenhouse Regime. Who Pays? (UNU, 1993, 382 p.)|
|Part I Measuring responsibility|
|4 Who pays (to solve the problem and how much)?|
Indices of allocation: a brief review
Equity and efficiency
Kirk R Smith, Joel Swisher and Dilip R Ahuja
Those advocating creation of an international programme to address global warming from greenhouse gas (GUI) emissions are required to face, among other tasks, five categories of questions (Smith et al. 1991):
1 Is there adequate theoretical and observational evidence of significant potential harm if nothing is done?
2 If so, could a feasible programme of greenhouse remediation accomplish sufficient benefits to be justified?
- 2a What part of this programme is best devoted to reduction of GG emissions or to increases in GG sinks (natural or anthropogenic processes that absorb GGs from the atmosphere)?
- 2b What part of this programme is best devoted to reduction of human vulnerability to global warming through, for example, accelerated economic growth of certain kinds in countries with large poor populations?
3 If so, is there a rational and politically acceptable way of establishing priorities among potential remediation projects?
4 If so, is there a rational and politically acceptable way of allocating the costs for these projects?
5 If so, what kind of international institutional mechanisms are needed to facilitate the financing and implementation of such projects?
Although there is by no means universal agreement, many observers believe that the answers to questions 1 and 2 are likely to be in the affirmative, that is, there could be significant risk without action and significant reduction of risk with action. In any case, it is not our purpose to address these issues directly. Rather, we focus on the last three questions, with particular emphasis on 3 and 4, the means to decide both what needs to be done and who will pay.
The most common approach to question 3 (what should be done) in both international negotiations and unilateral declarations has been uniform cuts. Several European nations, for example, have proposed to unilaterally cut their own emissions by 5-25 per cent. Alternatively, with nearly the same result, it may be proposed to limit emissions to those of a particular year, 1990, for example, in some of the UNCED discussions. These approaches are similar to that followed in the original Montreal Protocol where the signatory nations agreed to cut production of selected compounds to 50 per cent by a specified time. A uniform cut in greenhouse gases was proposed by a number of European countries at the UNCED meeting, but not accepted by the USA and Japan. There are major problems with this (two political and one economic):
By grandfathering currently inefficient emissions, uniform emissions reductions may seem to penalize those countries, like Japan, that have been able to develop economies that already emit less per unit of economic output.
Equal reductions based on current emissions would be clearly unacceptable to developing countries as it would not allow the growth required to meet their development needs.
Uniform cuts, by ignoring that the marginal costs of reductions may be quite different among countries, are likely to lead to substantial economic inefficiencies, that is, to be unnecessarily expensive.
Alternatives to uniform cuts that consider both equity and efficiency are described in the next two chapters. Here, our focus is on question 4: who should pay?
Several investigators have attempted to allocate the global carbon budget based on exogenous considerations of the maximum acceptable warming or its rate of increase (for example, Krause et al. 1992), world averages (Mukherjee 1992), economic optimization models (Michaelis 1992), or other factors (Gurney 1991)
Dividing emissions rights equally among countries, coupled with the ability to sell or lease those rights, is the simplest scheme, yet fraught with inequities because it does not link emissions to human beings or activities. Thus it has few, if any, proponents. Another straightforward basis for allocating rights is land area (Welting 1989). Since 1950, national boundaries have not changed much (leaving aside the national break-ups of the early 1990s). Its stability as a measure, the ease of measurement, the avoidance of monitoring and verification difficulties are what recommend it. (Cheating is difficult.) There was a time, according to Grubb (1989), when the United States was arguing informally in international fore that its continental land mass necessitated enormous energy expenditures in having to move goods and people. Ultimately, with the possible exceptions of those countries with large wastelands (for example, Mongolia), land area is a measure of natural resources. Using it as an index to allocate emissions rights, however, favours large but sparsely populated nations (for example, Australia) and discriminates against small densely populated nations (for example, Japan).
If it is accepted that every person has an equal right to atmospheric resources - the ultimate global commons - then the most obvious and equitable basis is to distribute emissions permits in proportion to national populations (Feiveson et al. 1988; Agarwal and Narain 1991). If rights in subsequent years continue to be proportional to contemporaneous populations, however, a perverse incentive for population growth may be created. For this reason, and to make his scheme more palatable to industrialized countries, Grubb (1989) has suggested that allocations be based on adult populations. This would have the effect of reducing net transfers from countries with rectangular age distributions to developing countries with pyramidal age structures, but could be seen as discrimination against children. Depending on the definition of 'adult,' it would provide a 15-21 year delay between births and receiving the allotment, and thus reduce the pro-natalist incentive.
An alternate incentive for population stabilization could be built into the scheme by pegging the allotment to the entire population in a recent year and not increase future allotments. Compared to an index based on adult population, this would seem to represent less discrimination against children in the first years of an international protocol and no more discrimination in later years.
Arguing that any index based on per capita emissions alone would require unacceptably huge reductions in industrial countries (up to 75 per cent) or entail massive transfer payments to developing countries, Wirth and Lashof (1990) have proposed apportionment based half on per capita and half on per GDP, all the quantities being for the current or a recent year.
Similarly a multiplicative index could be structured that is directly proportional to emissions and inversely proportional to both GDP and population, the ratio being integrated over time. It is not clear, however, if GDP should find a place in an index for allocation, since countries would have already benefited from that economic activity.
In this book, we are coming to these issues from a somewhat different direction. Rather than decide on what the ideal allocation of emissions ought to be, we first seek ways that the present and historical patterns of emissions can be used in international negotiations to determine who should pay for any needed mitigation efforts and then, in later chapters, ways that the best mitigation efforts can be chosen. Thus, rather than concerning ourselves directly with allocation, we address accountability. In the long run, of course, consistent application of accountability should lead to a desired allocation by the simple process of nations attempting to reduce their accountability, a sort of 'invisible hand'. In the interim, however, rather than putting an onus on those countries that have exceeded their allocations, a focus on accountability simply asks that nations should accept responsibility for the emissions they have made, no matter how small or large. The result can be the same, but the moral implications are different.
To make practical the concept of individual rights over time, in this book, we link accountability at any one time to the amount of atmospheric assimilative capacity that has been 'borrowed' from the natural environment, individuals' natural debt as presented in Chapter 2 (Smith 1989b, 1991). The borrowed capacity at any one time is the greenhouse gases remaining in the atmosphere from past emissions (above natural levels). This is less than what was actually emitted, since various natural and human-influenced sinks have absorbed the different gases in amounts depending on the time since emissions. The longer ago the gases were released, the less remains today. We argue that an appropriate indicator of international accountability is the amount of assimilative capacity borrowed to date, the natural debt.
It may be easier to find a point of international agreement on mitigation costs by separating the negotiating criteria, and the indices to measure them, according to the two general questions that we have set out to address (numbers 3 and 4 above). Using this approach, we can consider the competing goals of equity and efficiency, while maintaining a rational (but still negotiable) basis for assigning obligations at the national level.
We categorize the basic negotiating criteria in terms of the following questions:
To determine the best projects (question 3) these questions must be addressed:
- What are the goals (globally, and who should do what)?
- What are the best opportunities (who can do what)?
To determine who will pay (question 4) these questions must be addressed:
- Where are the resources available (who can pay)?
- Who has responsibility for the problem (who should pay)?
These four questions are organized in Figure 4.1. The 'Who can ...' questions in the left column are addressed by criteria that can be measured according to physical and financial quantities, and the 'Who should ...' questions in the right column are addressed by criteria that, while they can be quantified, must involve a large degree of value judgement. The 'Pay for . . .' questions in the top row involve equity criteria, based on past and present activities, while the 'Do this . . .' questions in the bottom row involve efficiency criteria, based on present and proposed future action.
Figure 4.1 Typology and indices for allocating greenhouse gas emission reductions
In Figure 4.1, the intersection of the rows and columns form four cells that contain the four criteria just defined. The ovals represent information flows that measure the corresponding criterion. For example, marginal cost is a measure of emissions reductions opportunities. The rectangles indicate allocation processes that would be needed to reconcile different criteria: resources and responsibility through international negotiation; and opportunities and goals through international trade or transfers.
The starting point of a negotiating process is the global goal for emissions reductions, based on a perceived common vulnerability to climate change. This goal may be the result of any combination of scientific, economic, and political considerations (questions 1 and 2, above). Once the general goal is set, each country's share of the responsibility for causing the problem can be determined, based on its past and present contribution to the source of the problem, namely carbon dioxide and other greenhouse gas emissions.
Responsibility is a useful but incomplete measure of a country's accountability for financing emissions reductions, however. A negotiated solution must also consider a country's available resources with which to pay. The overall obligation to pay (OTP), thus, addresses two issues, one ethical and one practical. The ethical issue is that those countries that have contributed most to the problem (and benefited thereby) should have some obligation to pay for its amelioration. The practical consideration is simply that a solution to the problem is more likely if those countries that have greater resources are willing to pay relatively more of the total cost.
By having a separate indicator for each of the top two boxes of Figure 4.1 (resources and responsibility), therefore, international negotiations can proceed in an orderly way to trade one against the other to obtain the politically optimum mixture that becomes the obligation to pay.
Once the obligations to pay for each nation are determined, they can be compared with the international distribution of opportunities for emissions reductions. Clearly, it should not be expected that the opportunities will be distributed among countries in the same way as obligations. Some countries will have a relatively high concentration of opportunities, while others will have relatively large obligations to pay for emissions reductions. The resolution of these differences will be taken up in later chapters.
As there are several concerns that need to be addressed in any scheme to determine obligations, the primacy given to such criteria as simplicity, equity, efficiency, the perceived ease of reaching agreements, etc., leads to different indices for obligation. Yet, it seems to us that it is preferable, and perhaps easier to obtain agreements as well, if the indices for different objectives are kept separate (and reconciled later in the negotiating process) than to assert that they are indicators of something that they do not measure.
We thus divide the question of 'Who pays?' in Figure 4.1 into two parts: (I) the 'ability to pay', which is indicated by present wealth and is completely separate from greenhouse gas emissions, and (21 a 'responsibility' index, based on cumulative per capita emissions. These address the respective subquestions 'Who can pay?' end 'who should pay?' of Figure 4.1.
Ability to pay (ATP)
In spite of its well-known difficulties, gross national or domestic product (GNP or GDP) is accepted widely as an index of national economic resources. GDP is the basic determinant of a country's contribution to the UN system, for example. With certain modifications, the international fund set up under the Montreal Protocol (Table 4.1) also relies on the UN scale to calculate a country's contribution to be used for technology transfer and financial assistance to signatory developing countries to use safer substitutes for CFCs. As seen in Table 4.1, however, by comparison, the contributions to the Global Environment Facility have come more from Western Europe and a few of the larger developing countries.
There are a few methodological problems with international comparisons of GNP statistics, arising from the presence of large informal sectors in some economies, the vagaries of fluctuating exchange rates, and from the differences in purchasing power. To some degree, adjustments can be made to correct these problems, for example in the development of purchasing power parity statistics (Summers and Heston 1988).
There is one drawback to using GNP, even if corrected for purchasing power, as an index of payments into a fund for the mitigation of the climatechange problem. This is that no allowance is made for 'disposable national income', so that poor countries like Indonesia and rich ones like Sweden would be expected to make similar contributions because their population ratio happens to be approximately equal to the inverse of their ratio of per capita GNP. To determine a country's ability to pay (ATP), it seems obvious that some measure of wealth based on per capita income is required.
One way to define an ability to pay would be to subtract from the GNP, some threshold of 'basic need.' In the case of the global fund set up under the amendments to the Montreal Protocol, countries that emit less than 300 grams of CFC-equivalent per capita per year are exempted from contributing. In a similar fashion, the Global Environment Facility uses a cut-off of $4,000 per capita for determining certain categories of contributions and recipients. Another such cut-off that could be used, for example, would be one of the 'poverty fine' estimates discussed in the World Development Report (World Bank 1990). The original precedent is the UN scale of assessments set up in 1946, which subtracts a threshold income (originally $1,000 per capita, more recently set to $2,200), before calculating dues (UN 1989)
Table 4.1 Relative and total contributions to the Global Environment Facility, the Montreal Protocol and the two combined
|India||0.47||0||0 4||0 37|
|TOTAL (%)||1 00||1 00||1 00||94.2|
|Total (million US$)||1212||127||1338||2147|
Listed for each nation are the percentages of the global totals as of mid-1992. The nations are divided into income classes, and their total contributions are ranked within each class. Shown in the last column are 1989-91 assessments for dues to the United Nations. Data from UN (1989), NZMERT (1990), UNEP (1992), and World Bank (1992). 0 = zero; 0.0 = very small.
a The present maximum UN contribution is set at 25 per cent, although it
started at 40 per cent in
1946. Otherwise the US contribution would be higher than the 25 per cent shown here. The original floor was set at 0.04 per cent, but in 1973 was set to 0.01 per cent (UN 1989).
b Not a full UN member.
c This total is divided as follows Russian Republic = 86 per cent; Ukraine = 11 per cent;
Belarus = 3 per cent.
One argument for using such a cut-off is that countries below this level require all the resources they have to bring their populations up to a minimum acceptable income. A rationale related directly to climate change is that countries below this limit are more vulnerable to the effects of adverse climate change and should devote most of their resources to reduce this vulnerability, which will have great advantages even if global warming does not occur in the period of concern.
Many would argue, however, that the poverty line is not a sufficiently high goal, and yet it is difficult to define some other income level as an acceptable minimum. Here, we take the somewhat different approach of choosing an income that seems to be capable of achieving a minimum 'qualify of life' based on the past ability of countries to achieve adequate levels of infant mortality, life expectancy, and literacy. These are combined in the Physical Quality of Life Index (PQLI) developed by Morris (1979)
Thus, we choose as a cut-off, income which is the average income of nations with a Physical Quality of Life Index of 80-90. This represents the approximate inflection point in the relationship of PQLI and GNP, or purchasing power parity (PPP) (see Figure 4.2). Below this point, small increases in income often lead to large increases in PQLI, while above it, large increases in GNP only produce modest increases in PQLl.
The second column of Table 4.2 shows this index calculated with two indicators of income: GNP and GDP corrected for PPP. The table shows that the US ATP changes by only 10 per cent (from 37 to 40) if income is corrected for PPP, but that other countries' ATP can change dramatically. The USSR ATP, for example, changes from 18 to 12 per cent (of the world total), while that of Mexico increases by a factor of 18 and Romania goes down by almost a factor of five.'
It is widely, although by no means universally, held that, to paraphrase Lord Keynes, economic growth by itself is only a means to certain ends. In other words, after an agreeable quality of life has been thereby achieved, society should consider placing its emphasis elsewhere. More explicitly, after reaching some, admittedly difficult-to-define, level of adequate physical well-being (ethical criterion), individuals should no longer expect special assistance by the broader society to help them develop further economically. This philosophy also is consistent with the physical reality inherent in a finite world; that is, there should be incentives to use finite physical resources in ways that lead to quicker achievement of these minimum levels by humanity at large (efficiency criterion).
One aspect of this approach that has not been well explored is what it implies for the measures of efficiency (indices) that should be used to judge various human activities. Rather than indicators such as income or energy use, which are usually open-ended, it implies the use of thresholds or indicators that actually have fixed ranges, that is, have a maximum corresponding to achievement of the level of adequacy, as already incorporated in the UN scale, for example.
It is thus no accident that our indices both for ability to pay (ATP) and for responsibility contain indicators with thresholds and that ATP is also based on an indicator with finite extent, PQLI. This means that as 100 per cent is neared, the indicator gives little credit for further advancement. Incentive then shifts to promotion of other objectives. If, on the other hand, an open-ended measure such as income is used, an extra 10 per cent looks to be as good for the rich as for the poor, no matter how rich the rich might become.
Implicit in the use of PQLI, therefore, is acceptance that the objective of development assistance and policy should be an improvement in the quality of life. It has long been recognized, however, that there exists a strong positive relationship between GNP (GDP, PPP) and many measures of quality of life, such as PQLI. As a result, it has been argued that PQLI tells us nothing new and should be rejected as an indicator. There are two counter-arguments: First, although there is a strong overall correlation, the GNP to PQLI ratios are quite different for different countries, an important consideration when assigning international responsibilities and costs. Second, it sends the quite different message that simple increases in per capita income should not be taken as ends in themselves, but as means to improve the quality of life.
Although the index proposed here includes a measure of historical responsibility (based on past greenhouse gas emissions), it counts for only half of the total obligation. The other half is based on current income. Thus, the obligations of countries that have economic problems, such as those in Eastern Europe and the former USSR, will be adjusted accordingly. In addition, only emissions since 1950 are counted, a concession to the political and practical difficulties of determining responsibility previous to the modern era. Combining both indicators also takes into account circumstances in which past emissions may be high, but current income low (for example, Eastern Europe), or vice versa (for example, Norway, which has been blessed with substantial hydropower).
We have now looked separately at indices of both responsibility and resources to determine the relative obligation for the costs of a global programme. Ways to combine the two together would be determined by direct negotiation in international fore, although the simplest combination is presented here as a start. What this chapter does is derive a way of measuring where the world is today, in terms of the present distribution of wealth and greenhouse responsibilities. Before we can judge the distribution of payments for greenhouse remediation projects, however, we need indicators of where the best projects are and where the world ought to be heading (the Who Can? and Who Should? questions of the bottom line on Figure 4.1). This is the task of the next chapters.
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