Redistribution of incremental cost

In this section, I take the estimates of incremental cost developed in chapter 5 and redistribute between regions those costs that are 'excess' to their obligation-to-pay. As there are three incremental cost cases, so there are three calculations of redistribution of cost that follow.

Redistribution of high incremental cost

At the high abatement cost curve, the present value of the total cost is estimated at $5.6 trillion. The South's incremental cost, therefore, should be reduced to only 7 per cent of this global cost or $390 billion, or by 58 per cent of its unadjusted incremental cost. The difference - $529 billion - is treated as the responsibility of the North and is transferred to the latter's account which increases from 2.9 to 3.5 trillion dollars as a result.

This transfer - an annuity of $34 billion over the 30 year scenario period boosts the North's payment from 58 to 63 per cent of the global total (still short of its strict obligation-to-pay of 73 per cent). The residual difference between this distribution of global cost and that implied by the obligation-to pay indice now lies between the North and the East (and is not addressed further here). The latter incurs an incremental cost of $1.7 trillion, that is, about 9 per cent more than its obligation-to-pay. Thus, another transfer, this time from the North to the East, may be justified.

Expressed as an annuity of thirty annual payments that are equivalent to the total present values and adjusted for the North-South transfer, the bill at high abatement cost is $229 billion per year in the North, $108 billion in the East, and $25 billion in the South, for a global annual cost of $362 billion (rounded to $363 billion in box on page 151). The annual cost in billions of dollars redistributed by the obligation-to-pay indice is displayed in the box above and Figure 6.2.

Redistribution of medium incremental cost

In Case 3, the application of the obligation-to-pay indice results in the North's cost increasing from $104 billion (or 16 per cent of the total) to $605 billion (or 82 per cent of the total) due to the transfer of $442 billion from the South to its account.

In Figure 6.2, I show the resulting overall distribution of annual cost in billions of dollars. The North pays an annual bill of $39 billion (of which $29 billion is a transfer to cover the costs of the South not covered by the South's own obligation to pay). The East is responsible for about $5 billion per year while the South is responsible for about $3 billion per year of the global annual total of $48 billion.

Distributed cost, Cases 1 and 3

I. Redistribution of cost, high cost curve, case1

Definition: Incremental Cost 1, using Nordhaus marginal cost curve and net present value of incremental cost to each area adjusted to account for South's excess of cost above its obligation-to-pay between 1995-2025, in $billion/year

Global Cost, total nett present value (NPV)a = 5577 billion
South's obligation-to-pay = 7% of global cost = 390 billion (NPV)

South's obligation-to-pay as % of South's total abatement and coastal protection cost= 42%

North-to-South transfer to cover the difference between South's obligation-to pay and its total cost = 529 billion (NPV)

North-to-South transfer expressed as an annuity = 34 billion/year
NPV of cost, adjusted for transfer according to obligation-to-pay

II. Redistribution of cost, medium cost curve in south, case 3

Definition: Incremental Cost 3, using this study's estimated abatement cost curve in South, and US National Academy of Science cost curve for North and East, in net present value of incremental cost to each area adjusted to account for South's excess of cost above its obligation-to-pay between 1995-2025, in $billion/year

Global Cost, total nett present value (NPV)^a = 739 billion
South's obligation-to-pay = 7% of global cost = 52 billion (NPV)

South's obligation-to-pay as % of South's total abatement and coastal protection cost=10%

North-to-South Transfer to cover the difference between South's obligation-to pay and its total cost=442 billion (NPV)

North-to-South Transfer expressed as on annuity = 29 billion/year
NPV of cost, adjusted for transfer according to obligation-to-pay

III. % obligation-to-pay based on historic emissions and ability to pay

North East South Global
73 21 7 100 (% of total)

^a From box on page 132
Source: Box on page 132 and text

Redistribution of low incremental cost

As I stated in Chapter 5, Case 2 provides no economic grounds for a transfer to the South. Expressed as an annuity, therefore, the North pays $10.6 billion per year in this scenario; the East $5.4 billion per year; and the South gains from a negative annual cost of $62 billion per year (see box, page 133 and Figure 5.13). On this basis, the North would not transfer additional resources to the South for the simple reason that the South should abate to the extent projected out of economic self-interest, without regard for the climate per se.

This result implies that developing countries can reap the advantage of being latecomers to industrialization. Rather than waiting for long-lived capital stocks to turn over, they may be able to install modern, resource saving technologies as they industrialize.

Conversely, the notion of enormous savings being reaped in many developing countries is incredible when juxtaposed against their evident inability to reduce the enormous waste in their existing economies, let alone massively abate their future emissions. Even if these low and negative cost technological opportunities exist, most developing countries are unable to finance the front end investments needed to tap the potential. Admittedly, the obligation-to-pay index does not provide an economic rationale for a transfer from the rich to the poor under these assumptions. Equally, only the rich states can provide the substantial concessional financing needed in the developing countries.

Developing countries face not only an absolute scarcity of investment resources with which to respond to climate change. They will also incur costs from intersectoral adjustment, trade impacts, human resource development, institutional change, and highly priced information, all of which will inhibit their ability to increase their energy efficiency. Overcoming these barriers to abatement will impose costs that are not reflected in the low abatement cost curve used in this case.

How much financing might be needed to meet these challenges so that the developing countries reduce their emissions as described in Chapter 5? The simple answer is that no one knows. One study states that developing countries need to redirect at least 2 per cent of their gross domestic products or about $58 billion in 1989 - toward human development priorities such as education, health care, and social services that are integral to sustainable development. At the June 1992 Earth Summit, UN officials estimated the cost of implementing a global sustainable development strategy as about $600 billion per year, of which about $125 billion must be financed externally in the form of technical and economic assistance. Only a portion of these costs would be attributable to carbon abatement activities; but not much abatement may be achieved unless such broad based development occurs.

The reader can imagine the size of this daunting task by supposing that within about three decades, all developing countries must have the same proportion of scientists and technicians in their population as do the rich countries today - arguably a prerequisite of realizing substantial carbon abatement. To do so, the developing countries would have to increase their number of scientists and technicians at 10 per cent per year, from today's 36.7 million to about 579 million in 2025. This growth in human resources would demand tens, perhaps hundreds of billions of dollars of investment in education and training each year.

In Chapter 14, I return to these issues that take us well beyond a technological approach to determining requisite transfers from the rich to the poor states. These difficulties also reveal the limits of a method that fuses a moral argument with a technological and economic approach to determining who should pay for a greenhouse gas regime. The obligation-to-pay method supplies some minimum estimates of the possible transfers but it may not be applicable in all cases and almost certainly must be supplemented with other approaches on pragmatic and political grounds.