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An equitable redistribution of unburnable carbon

Steve Pye, Sian Bradley, Nick Hughes, James Price, Daniel Welsby, and Paul Ekins (2020)

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This paper responds to the gap in supply-side literature on quantitative analyses of equitable phase out of carbon.  

Noting the importance of equity considerations in meeting Paris Agreement targets, the paper uses the TIAM-UCL model to contrast a cost-optimal distribution of fossil fuel production with an equitable distribution of fossil fuel production. The equity considerations are related to a country’s level of development under the Human Development Index (HDI) and their accrued benefit from past production. The redistribution modelling device used to set up an illustrative equity-based scenario is a carbon tax on fossil fuel production applied differently across regions (covers 16 regions). Very high HDI countries have high carbon-based taxes, high HDI countries a lower tax, and low-medium HDI countries (LMHD) are exempted from the tax. The TIAM-UCL model used represents the global energy system and simulates the evolution of the system over time to meet future energy service demands driven by least-cost abatement.  

The paper offers three key insights. First, smaller, less established producers from low LMHD regions will compete with large incumbent producers as the size of the market reduces along with falling prices. This indicates the benefits of redistribution may be limited. Second, significant disincentives are needed to redistribute fossil fuel production away from established very high and high HDI countries and towards LMHD regions. Third, the equitable redistribution scenario increases the overall costs of the system when compared with the cost-optimal scenario. The same levels of fossil fuel production are more costly because of higher-cost resources being extracted (requiring more infrastructure investment and higher operational costs). The benefits for LMHD producers are costly for consumers in importer countries, including those in the LMHD group. Cost savings are also unequally distributed across LMHD regions. Thus, HDI-based equitable redistribution of fossil fuel production could disadvantage LMHD countries. Equitable redistribution of fossil fuel production may increase the exposure of LMHD regions to carbon risks and transition delays. Furthermore, translating fossil fuel flows and revenues into sustainable development is not straightforward (as the literature on the resource curse attests).  

Still, the paper finds that meaningful engagement with equity principles can help inform supply-side policy in the very high HDI countries. It notes equity considerations still have a critical role to play, advocating for continued engagement such as financial and technical support from advanced economies, and supply-side commitments from them to demonstrate leadership in fossil fuel phase-out. Carefully and strategically designed supply-side policies could level the playing field for producer countries, by ensuring least-cost reserves meet remaining fossil fuel demand. It advocates for development assistance where production is established to ensure diversification of domestic energy and economic development. 

The paper can be used to support an argument for supply-side measures particularly in very high HDI countries. It can also be used to challenge proposed fossil fuel projects in LMHD regions that are being justified on the basis of equitable distribution, as the paper indicates that redistribution may not yield all of the benefits some claim.  

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