An equitable redistribution of unburnable carbon

The urgent need for a rapid phase-out of fossil fuels to achieve a well-below 2°C world is widely acknowledged. The implications of this phase-out, particularly for fossil fuel-producing countries, are a subject of growing research. A key tension arises between pathways that minimize costs and those that prioritize equitable distribution of remaining production. This paper addresses this tension by using modeling to explore the consequences of redistributing remaining fossil fuel production towards developing countries. The existing literature highlights the cost-optimal approach, which often leads to significant ‘unburnable’ reserves concentrated in certain regions, creating winners and losers. This approach is criticized for neglecting the political and economic realities of fossil fuel production and, crucially, equity considerations. Developing countries argue that developed nations have historically benefited from fossil fuel exploitation, raising questions of fairness in restricting future production. Equity in climate policy has been primarily addressed in terms of consumption (emissions at the point of use), while production equity remains largely untouched, partly due to concerns about potential claims for compensation by producer countries. However, recent interest in supply-side policies aimed at curbing production at its source has brought the issue of production equity to the forefront. This paper contributes by quantitatively assessing the economic implications of an equitable approach to managed fossil fuel decline, bridging the gap between existing qualitative arguments and empirical analysis.

Existing literature on the equitable transition away from fossil fuels highlights several key aspects. Studies by McGlade and Ekins (2015) analyzed global fossil fuel production under a 2°C scenario, demonstrating that cost-optimal allocation results in substantial unburnable reserves and unequal distribution across regions. This cost-optimal approach is criticized for ignoring equity concerns, prompting calls for a more equitable distribution of remaining production opportunities. The UNFCCC process, including the Paris Agreement, acknowledges the principle of common but differentiated responsibilities. However, equity considerations have largely focused on consumption-based emissions, while production-based equity has received less attention. This is partly due to concerns about potential claims for loss and damage from producer countries. Supply-side policy options, including economic instruments (subsidy removal, taxation, tradable production allowances) and regulatory measures (exploration restrictions), have been proposed to curb fossil fuel production. Researchers such as Caney (2016) and Kartha et al. (2016) emphasize that policies leading to stranded assets in some countries and not others create equity challenges, arguing that higher-income countries should lead in production reductions. The opportunity cost incurred by developing countries foregoing fossil fuel production, including potential revenue, fuel supply, and employment, is a key argument in these discussions. However, the literature lacks quantitative analyses of the implications of an equitable managed decline, particularly the trade-offs between equity and economic efficiency.

This study utilizes the TIMES Integrated Assessment Model at University College London (TIAM-UCL) to analyze the implications of equitable redistribution of fossil fuel production. TIAM-UCL models the global energy system, encompassing primary energy sources, conversion processes, transportation, distribution, and energy demand across various sectors. The model incorporates a regional representation (16 regions) allowing for detailed characterization of energy sectors and trade flows. The model accounts for upstream emissions associated with fossil fuel extraction and includes a climate module calibrated to the MAGICC simple climate model. This ensures consistency with specified temperature targets (1.75°C and 2°C). The model also captures negative emissions from bioenergy with carbon capture and storage (BECCS). Future energy service demands are based on Shared Socioeconomic Pathway 2 (SSP2), with sensitivity analysis using SSP1 demands. The model determines optimal energy sector investments based on cost-effectiveness, resource potential, technology availability, and policy constraints (emissions reduction targets). To simulate an equitable redistribution, a carbon tax on fossil fuel production is implemented. Two equity criteria are used: current development level (Human Development Index or HDI) and historical benefits from fossil fuel production. The HDI categorizes regions into three groups (low-medium, high, very high), while historical benefits are based on cumulative rents from 1970 to 2017. Two tax trajectories are defined for high and low tax variants for regions in the higher development/benefit groups. Regions in the lower development/benefit groups are exempt. The model is run under cost-optimal and equitable redistribution scenarios under both 1.75°C and 2°C temperature targets. The comparison between these scenarios reveals the implications of redistribution for both producers and consumers of fossil fuels. The model incorporates resource categorization (conventional vs unconventional), enabling it to capture production costs across different resource types and their varying environmental impacts. This detailed approach enables a comprehensive assessment of the economic and environmental implications of equitable redistribution.

The modeling results reveal three key insights regarding equitable redistribution: 1. **Declining Market:** Redistribution occurs within a shrinking fossil fuel market, with the decline accelerating under stricter climate policies. Smaller producers from low-medium human development (LMHD) regions will compete with larger established producers in a contracting market, limiting the benefits of redistribution. For instance, under the 1.75°C pathways, reductions in gas, oil, and coal production by 2060 are projected to be 59-62%, 59-62%, and 87%, respectively, relative to current levels. The continued production of oil and gas relies on rapid coal consumption declines and the availability of BECCS to offset CO2 emissions. Sensitivity analyses using lower energy demands (SSP1) indicate even lower fossil fuel production and smaller shares for LMHD regions. 2. **Large Disincentives:** Substantial economic disincentives (carbon taxes) are needed to shift production towards LMHD regions. Even in a shrinking market, it's challenging to move away from cost-effective allocation. Under the 1.75°C scenarios, significant production share gains for LMHD regions in gas production are only observed after 2040, requiring substantial tax rates (e.g., $188-375/tCO2 in 2050). Similar patterns are observed for oil production, although the increases in production are not substantial. 3. **Increased System Costs:** Shifting from a cost-optimal approach to equitable redistribution raises overall system costs. The benefits for LMHD producers are outweighed by the increased costs for HHD and VHHD regions. This highlights a tension between production and consumption equity. Higher production costs resulting from redistribution may inadvertently harm the intended beneficiaries. This outcome is illustrated in scenarios based on the accrued benefit approach, which shows that the low-benefit group, despite increased production, experiences higher domestic energy system costs due to consumption of higher-cost fossil fuel.

The findings suggest that the potential benefits of an equitable redistribution of fossil fuel supply might be overstated. The strong disincentives, long timeframes for reallocation, market uncertainties, and increased global energy system costs indicate that an equitable redistribution may not yield the anticipated benefits and could even disadvantage import-dependent LMHD countries. Operationalizing an equitable distribution of producer rights presents significant practical challenges. Both HDI- and historical benefit-based approaches in the model demonstrate potential controversies or unintended consequences. This calls into question the efficacy of solely focusing on equitable redistribution of production. The assumption that developing countries inherently forego significant benefits by not exploiting fossil fuel reserves also requires careful consideration. The analysis highlights the importance of considering alternatives to fossil fuel-based development and the need to assess the net benefits (accounting for increased costs) rather than simply focusing on potential revenue from fossil fuels. Developing countries face significant constraints in accessing and utilizing fossil fuel resources, often requiring foreign investment and partnerships. The analysis also reveals that the decline of commodity trade costs for LMHD regions could be insignificant compared to the cost reductions achieved by renewable energy technologies.

This study shows that while equitable principles are vital in the transition, a simple redistribution of fossil fuel production might not yield significant benefits for developing countries. The economic disincentives, market dynamics, and increased system costs necessitate a more nuanced approach. Instead of focusing solely on redistribution, policy should prioritize supply-side policies such as eliminating subsidies and promoting least-cost pathways for production in developed countries. Development assistance and international cooperation are key to supporting developing countries in diversifying their economies, accelerating their energy transitions, and mitigating upstream emissions. Future research should explore more sophisticated models that incorporate more nuanced factors in the equity considerations.

The model relies on several assumptions that might influence the results, including projections of future energy demands (SSP2 and SSP1), the availability of BECCS technology, and the responsiveness of fossil fuel markets to carbon taxes. The specific redistribution mechanism (carbon tax) could be refined in future studies, as could the equity criteria. The model also simplifies complex geopolitical and social factors that could significantly affect fossil fuel production decisions.