COP29 has just concluded, with an agreement about the global community’s response to climate change. Going forward, the success of the agreement can be gauged using two amounts: $200 and $1.3 trillion. These amounts tell us that although the world’s nations made some progress at COP29, there is reason to believe that it is far from sufficient.
The COP29 final agreement includes two major elements. The first involves a global framework for countries to trade carbon offsets with each other. The second involves an annual finance agreement whereby developed countries contribute $300 billion annually to developing countries to address climate challenges.
Assessing the COP29 agreement needs to be done in context, for example by relating it to integrated assessment models that combine climate science and economic activity. When carbon is priced at its social cost, the global temperature rise will be capped at or near 2 degrees Celsius during this century. Based on analysis using IAMs, the $200 mentioned above refers to what the market price of carbon needs to be in order to reflect its social cost. The $1.3 trillion refers to what the developed nations’ contribution needs to be in order that developing nations’ abatement expenditures be consistent with the price of carbon reflecting its social cost.
The best known IAM was developed by Novel laureate William Nordhaus, a Yale economist. His model portrays how emissions from economic activity impact the climate and generate future damages. Beginning in the 1990s, Nordhaus used his model to estimate what a sensible global response to climate change would entail, relative to a business-as-usual trajectory. The U.S. government eventually adopted some of the key outputs produced by his model.
In 2007, Sir Nicholas Stern, from the London School of Economics, challenged some of the input values that Nordhaus was using. Stern suggested that Nordhaus’ recommended climate policies were too weak, and provided an alternative that was much stronger. Nordhaus’ and Stern’s analyses can be viewed as bracketing cases.
Despite disagreement about input values, the two economists agree about the importance of achieving a global price for carbon emissions. In this regard, the COP29 negotiations did produce an agreement for using a market mechanism to trade carbon offsets. This was a step in the right direction, and it took almost a decade of haggling to reach this point, beginning with the Paris agreement reached in 2015 at COP21.
While the direction is right, the next question becomes at what price? IAMs provide important outputs for the time trajectories associated with the global price of carbon, especially price. The Nordhaus case estimates a current carbon price in the region of $50 per metric ton. The Stern case estimates a price in the region of $300. These values are model-based. In the last few years, both Nordhaus and Stern have revised their estimates towards each other. Currently, the U.S. government uses an estimate in the region of $200, a figure consistent with mainstream IAM models.
There are national and regional markets for carbon offsets in place today. Notably, prices vary across these markets. In the compliance market, for offsets required by law, prices can range from $8 (in South Korea) to $75 (in the European Union), all well below $200.
Offset prices need to be high enough to induce people to abate their carbon emissions. If the price is too low, the incentive to abate is low. The offset market component of the COP29 agreement will only make a big enough difference if the prices on that market are sufficiently high, much higher than they currently are on national and regional markets.
It remains to be seen whether the new offset markets will generate prices in line with the social cost of carbon.
As for the second number, $1.3 trillion, this was developing nations’ goal in negotiating at COP29 with developed nations. The actual outcome, $300 billion, proved to be a big disappointment.
The Nordhaus and Stern cases provide insight into what constitutes a sensible contribution amount. The Nordhaus case features annual global abatement costs of $160 trillion in 2025, doubling to $320 over ten years. The Stern case features annual global abatement costs of $3.9 trillion in 2025, increasing to $6.9 trillion over ten years. The Nordhaus case features global carbon emissions peaking around 2050, and reaching net zero after 2100. The Stern case features global carbon emissions reaching net zero around 2050. Given the goal of reaching net zero by mid-century, in order to constrain the increase in temperature to at most 2 degrees Celsius, the Stern case appears to be the more relevant.
The developing world currently consumes about half of the world’s energy. Developing nations’ energy demand has essentially doubled during the last 15 years. Moreover, during the next 15 years this energy demand is forecast to grow by 30 percent, with developing nations’ demand exceeding 50 percent of global demand.
Half of $3.9 trillion is $1.95 trillion, in the region of the $1.3 million goal. If developing nations are to engage in abatement policies consistent with the achievement of net zero by mid-century, they will need about $1.95 trillion to get the job done. If they lack the resources, then it simply will not happen.
It remains to be seen whether the new market structure prices carbon near it social cost of $200, and whether developing nations can find $1.95 trillion to cover the cost of abatement. If not, then in hindsight COP29 will be judged to have failed to produce an outcome to contain global temperatures below 2 degrees Celsius.