SkyShares: Modelling the Economic Implications of a Future Global Emissions Budget

The SkyShares model enables users to relate a target limit for temperature change to a global emissions ceiling; to allocate this emissions budget across countries using different policy rules; and then uses estimated marginal abatement costs to calculate the costs faced by each country of decarbonising to meet its emissions budget, with the costs for each country depending in part on whether and how much carbon trading is allowed. It therefore allows policy-makers to explore a range of different policy scenarios.

This paper uses the SkyShares model to explore one such scenario in detail. We look at the consequences of an agreement to stabilise climate change at 2 degrees Celsius; with convergence to equal per capita allocations of emissions by 2030; and to allow global emissions trading.

We find that high income countries would face relatively low costs of 0.56% of GDP in 2025 and 1.45% in 2030, rising to 2.97% by 2050. Low income countries would gain substantially, because of their low per capita emissions. Ethiopia, for example, could increase GDP by a quarter in 2025 by selling unused emissions rights. Net financial flows LICs would total approximately $153 billion a year in 2025. This would therefore represent a major new source of finance for development and for delivering the Sustainable Development Goals. The costs to developed countries of reducing carbon emissions to fit within their emissions budget would be substantially higher in the absence of carbon trading.

We conclude that this scenario offers three attractive characteristics: environmental security, because the global carbon budget is set at a level which keeps global warming below 2 degrees; economic efficiency, because carbon trading allows the reductions to be made for least overall cost; and global social justice, because emission rights are allocated equally to all people. It is the most affordable approach for developed countries, while providing significant new sources of development finance to tackle poverty in the developing world.

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