GLOBAL CARBON ABATEMENT EQUILIBRIA: A REASSESSMENT Sigit Pria Perdana GradDip App.Ec, M.Ec (ANU) This thesis is presented for the degree of Doctor Philosophy The University of Western Australia Business School Economic Discipline 2018 i ABSTRACT Preventing global warming has been the focus of international agreements that include the Kyoto Protocol and the more recent climate convention on COP Paris 21. Opposition in some regions and slow implementation progress in others suggests the importance of evaluating strategic interaction between countries over global mitigation policy. This thesis offers three related studies that are associated with countries’ strategic decisions to deal with carbon abatement policy. In the first, the focus is on the strategic interactions amongst region over carbon abatement policy implementation. These determine whether the equilibria exist that will allow the implementation by a critical mass and the ultimate sharing of the costs and the benefits of carbon abatement at the global level. In this first study, these issues are examined with the focus on the traditional fossil fuels. An integrated assessment model is developed to enumerate the costs of abatement and their international distribution. These are then integrated with the estimation of the benefits from mitigation, due to moderate global surface temperature changes, based on a meta-analysis that links carbon concentration with region-specific measures of economic welfare. Multiplayer normal form games are then constructed, equilibria from which reveal that the US and China would be net gainers from unilateral implementation in 2015 net present value terms, while the dominant strategy for all other regions is to free ride. Moreover, it is shown that net economic gains to the three large economies of China, the US and Europe would be further bolstered by universal adoption, which could be induced by affordable side payments. Yet the revealed downside is that net gains to all regions are negative for at least two decades, rendering commitment to abatement politically difficult. The second study integrates the clean energy technology into the global analysis. While these energy sources have been minor contributors up to the base period of this thesis, the very recent growth in their use has been extra ordinary and it is clear that they will affect both the climate and the strategic issue determining the carbon abatement policy implementation. This study examines strategic interaction between regions and the resulting global equilibria when the productivity of renewable energy technologies is growing. The integrated assessment model is therefore extended to ii incorporate renewable energy, leading to significant deviations from the global equilibria calculated earlier. Global emissions are significantly reduced, discouraging further commitment to carbon abatement policy. Strong productivity growth in renewable energy causes region such as Europe, which previously been advantaged by carbon abatement policy in other regions, to lose economic competitiveness so it makes European non-cooperation more likely. Finally, in the third study, the domestic economic effects of carbon abatement policy are examined for a key member of the smaller group of countries that prior studies had suggested would free ride, leaving the larger regions to bear the cost of the global agreement. While this outcome is shown in the thesis to apply to all regions other than the US, China and Europe, some are comparatively significant carbon emitters. The case in point considered here is that of Indonesia. The focus is on implications of Indonesian and global abatement policy on the Indonesian economy. Indonesia’s importance stems from its level of development that engenders a strong drive to complete the electrification of the country, combined with its abundant and cheaply accessible coal resources. Emissions from clearing are also a critical matter in Indonesia, though these are not considered in this thesis. Continued rapid economic expansion will see very substantial growth in Indonesian emissions by global standards. Indonesian policy alternatives considered are the unilateral implementation of carbon pricing and the acceleration of renewables development via either subsidy or regulation and underwriting. Carbon pricing yields strong early emission reductions, but significantly retards Indonesia’s overall economic performance. The impact on its economic structure is mixed, but the effect on the electricity sector is detrimental and substantial. On the other hand, renewables development alternatives deliver reduced early emission reductions but build to very strong results by 2050. Indeed, strong productivity growth in the renewables sector brings positive spill-overs to the domestic economy. The results suggest that Indonesia’s best strategy to reduce its regional emissions and support global mitigation actions is the encouragement of frontier energy technologies and the fostering of new growth based on clean energy. iii THESIS DECLARATION I, Sigit Perdana, certify that: This thesis has been substantially accomplished during enrolment in the degree. This thesis does not contain material which has been accepted for the award of any other degree or diploma in my name, in any university or other tertiary institution. No part of this work will, in the future, be used in a submission in my name, for any other degree or diploma in any university or other tertiary institution without the prior approval of The University of Western Australia and where applicable, any partner institution responsible for the joint-award of this degree. This thesis does not contain any material previously published or written by another person, except where due reference has been made in the text. The work(s) are not in any way a violation or infringement of any copyright, trademark, patent, or other rights whatsoever of any person. This thesis contains published work and/or work prepared for publication, some of which has been co-authored. Signature: Date: 15 November 2018 iv ACKNOWLEGEMENT I would like to thank Winthrop Professor Rodney Tyers for his excellent supervision, encouragement and continuous support to my study. It is such a blessing to have him as my supervisor, and I cannot thank enough for his tremendous help and patience in directing my research and supervising my work. His knowledge and professional experience are outstanding and inspirational. And his lead to the high standard has extraordinarily improved not only my research skills but also all general aspects of my life. He is my guru, and it has been a great honour to be one of his students. Some parts of the thesis were presented in seminars at UWA, the 2017 Annual CGE Workshop of Centre of Policy Study, and the 2018 Australian Conference of Economist. They were also presented in the international conference i.e. the 5th IAEE Asian Conference in Perth, the 40th IAEE International Conference in Singapore, and the 21st GTAP conference on Global Economic analysis in Cartagena, Colombia. And for this, I would like to thank the participants for the comments and suggestions. In revising chapter 2 of the thesis, in which has been submitted to the Energy Journal, I have been benefited from the feedback from Prof. Richard S.J Tol of the University of Sussex. I gratefully acknowledge the Indonesian Endowment Fund for Education for my being the sponsorship of my study. Being an Indonesian, I am so proud of my country's educational support system for the youths. As Nelson Mandela said, education is the most powerful weapon which we can use to change the world. I believe that giving this chance, Indonesian scholars could define the future of the world and make it better. I also want to thank Prof. Alla Golub from Purdue University for her valuable advice in my early stages of my Ph.D. and Dr. Michael Jerie from the Victoria University for technical advice and support since I was trained until I made my modification of the model. My special thanks to Dr. Ishita Chatterjee, Dr. Bei Li and Dr. Luciana Fiorini of UWA Business School and all my friends, in particular, Ezmiralda Mellisa, Mayang Sunyoto, Harsha Paravithana, Troy Barry, Thomas Favory, Jill Trinh, Xing Shi, James Ma, Qing Li, , Kelly Neill, Akbar Riznaldi and Noor Mohammad for their encouragement and help over my years. v Finally, I want to thank my parents and my family, especially my mama who never stop praying for me. And also to my beloved bapak in heaven, my dedication is to respect and to honour you. And to the all that I cannot mention by name, I hope that my hard work, my love, and my friendship will mean a lot rather than a name- checked. Terima Kasih. vi TABLE OF CONTENTS ABSTRACT ................................................................................................................................ i THESIS DECLARATION....................................................................................................... iii ACKNOWLEGEMENT ........................................................................................................... iv LIST OF TABLES .................................................................................................................... ix LIST OF FIGURES .................................................................................................................. xi AUTHORSHIP DECLARATION: CO-AUTHORED PUBLICATIONS ........................... xiii CHAPTER 1 INTRODUCTION: CLIMATE TARGETS AND STRATEGIC INTERACTION