Sectoral targets for developing countries: combining 'common but differentiated responsibilities' with 'meaningful participation'

Although a global cap-and-trade system is seen by many researchers as the most cost-efficient solution to reduce greenhouse gas emissions, developing countries governments refuse to enter into such a system in the short term. Hence, many scholars and stakeholders, including the European Commission, have proposed various types of commitments for developing countries that appear less stringent, such as sectoral approaches. In this paper, we assess such a sectoral approach for developing countries. More precisely, we simulate two policy scenarios in which developed countries continue with Kyoto-type absolute commitments, whereas developing countries adopt an emission trading system limited to electricity generation and linked to developed countries' cap-and-trade system. In a first scenario, CO2 allowances are auctioned by the government, which distributes the auctions receipts lump-sum to households. In a second scenario, the auction receipts are used to reduce taxes on, or to give subsidies to, electricity generation. Our quantitative analysis, led with a hybrid general equilibrium model, shows that such options provide almost as much emission reductions as a global cap-and-trade system. Moreover, in the second sectoral scenario, GDP losses in developing countries are much lower than with a global cap-and-trade system and so is the impact on the electricity price.