Climate Change and Economic Growth: Production Based versus Consumption Based Evidence on the Decoupling of CO2 Emissions from Economic Growth

Climate Change and Economic Growth: Production Based versus Consumption Based Evidence on the Decoupling of CO2 Emissions from Economic Growth

Mir, G.U.R.

Van Beers, C.P. (mentor)
Storm, S.T.H. (mentor)
Heijnen, P.W. (mentor)

Technology, Policy and Management

Engineering and Policy Analysis

Economics of Technology and Innovation

2015-08-26

Of all the issues the world is facing today, Climate Change is the most threatening. The atmospheric concentration of greenhouse gases has increased significantly after industrial revolution and the vast majority of scientists now agree that most of the observed warming in the Earth’s climate system has been caused by these anthropogenic greenhouse gas emissions. To avoid climate induced global cataclysm in the future, there is consensus in the international community that the global average temperature should not exceed by more than 2OC above pre-industrial levels by the end of this century, whereas it has already increased by 0.8 degrees in the last century and would continue to increase due to climate inertia. The challenge is to reduce the emissions to stay below this temperature limit while making sure that the mitigation costs be kept under control in order to minimize risks to economic growth and prosperity. The research question that has been addressed in this thesis is related to this apparent growth-environment conflict, to check the possibility to stabilize climate without sacrificing wealth. Therefore, the following research question was developed and explored in this thesis: “Is it possible to decouple economic growth from climate change?” The answer to this question would decide the way forward and help in developing a framework for sharing climate responsibility. The concept which holds central importance in policy discussions and which is linked to the notion of decoupling is called Environmental Kuznets Curve (EKC). It hypothesizes that with industrialization environment degrades initially but after a threshold level of income environmental deterioration starts to decline resulting in decoupling of economic growth and environmental pollution. Thus economic growth is imperative to improving the quality of environment, and the same concept is widely applied in climate change. In this thesis, literature review was performed, covering the period from 1992-2015, on EKC which use CO2 emissions as indicator of environmental quality. It was discovered that all the studies use production based CO2 emission inventories to study the relation between economic growth and environmental quality. It is primarily because of the guidelines of IPCC which use territorial definition to calculate emissions for individual countries. This definition completely ignores economic linkages between different economies and may put extra pressure on countries which rely heavily on carbon intensive exports. This is usually the case with developing countries that are mostly specialized in emission intensive industries. Thus, it is less likely for them to participate in global effort to fight climate change and pledge an effort to reduce emissions. Since, this emission accounting framework ignores emissions embodied in trade, it may generate misleading insights on mitigation efforts with in specific geographical area and may also result in carbon leakage. Carbon leakage refers to the phenomena where emission reductions due to domestic mitigation result in an increase in emissions outside the jurisdiction. Thus, it is possible for mostly developed countries, which are Annex I countries and are parties to UNFCCC, to relocate their production to other countries with no domestic mitigation or to keep on consuming carbon intensive products which are imported from such countries. To account for carbon leakage and to consider the impact of trade on national emission accounts, consumption based national inventories have been estimated by adjusting production based emission inventories in many studies. In this study, both production based and consumption based CO2 emission inventories were used to test the relation between economic growth and environment. The data was collected from the environmental accounts of World Input Output Database. They provide CO2 emission accounts of 40 different countries for a period of 15 years (1995-2009). This is a new form of dataset and is compiled using a set of harmonized input output tables and data on energy statistics. Data was used for 39 countries for a period of 13 years, i.e. from 1995-2007. The years 2008 and 2009 were dropped fearing that the economic crisis might influence results of the study. Taiwan was also dropped from the panel of countries due to unavailable data on GDP per capita that was retrieved from World Bank database. The study performed panel data analysis to test the relation between CO2 emissions and economic growth. Estimates were generated for the whole sample and for two sample sub-groups which are Annex I and non- Annex I countries. Annex I countries are mostly industrialized nations that are less vulnerable to the adverse impacts of climate change where as non-Annex I countries are usually developing countries and are more vulnerable to the adverse impacts of climate change and may also rely heavily on fossil fuel production and commerce. The results show a difference between production based and consumption based patterns. In terms of production decoupling was observed for the full sample and for Annex I countries. While in terms of consumption the relation was monotonically increasing inside the sample range. For non-Annex I countries the relation was strictly linear both in terms of production and consumption, showing that they are initial part of a larger EKC. The comparison of studies shows that there is a tendency of carbon leakage due to fragmented architecture of global emission mitigation effort. What appears to be the result of structural change in economy is actually a relocation of production to other regions. In terms of consumption patterns, economies do not change or keep on consuming more than before even if there is some reduction in emissions due to technological improvement and energy efficiency. If one leaves countries to grow completely unchecked then there is a high possibility that the world would soon surpass many climate tipping points beyond which recovery is not possible. This finding pushes the case for reforms in the system to move towards low consumption and low growth developmental models that can save the earth from this humanitarian crisis. Moreover, the importance of consumption based CO2 emissions inventory needs to be recognized in the international community and should be reported alongside production based emission inventories annually because it might help in developing a framework for equitable burden sharing for climate responsibility and ensure larger participation in mitigation effort. The research proposes these recommendations under the assumption that patterns observed in the study are representative of the world’s production and consumption based CO2 emission patterns. Also the study warns that the research be complemented with more information on underlying factors that can cause decoupling and the socio- political history of individual countries along with their relative position on power interest grid in order to properly guide policy discussions.

climate change
economic growth
Environmental Kuznets Curve
decoupling
production
consumption

http://resolver.tudelft.nl/uuid:69640b8a-6bf3-479a-b794-80724af005cb

Student theses

master thesis

(c) 2015 Mir, G.U.R.