The need to respond effectively to climate change is one of the greatest challenges of our time, particularly more so in the aftermath of Typhoon Haiyan. While no one typhoon can be directly linked to climate change, rising global temperatures and warming oceans provide the conditions that fuel these kinds of monster storms.

A recent analysis of the economics of climate change in the East Asian countries of People’s Republic of China, Republic of Korea, Japan and Mongolia delivers two clear messages. The first is that despite high outlays associated with climate mitigation and adaptation measures, the costs of doing nothing under a business-as-usual scenario are now even greater. The second is that cooperation amongst countries working in unison delivers far larger benefits than standalone responses. The study also concludes that the best strategy for tackling climate change should include a mix of adaptation and mitigation measures.

East Asia is critically important in the global push to mitigate the rise of carbon emissions At the Copenhagen and Cancun climate conferences, countries in the region made various commitments to reduce emissions by 2030 and beyond. For Japan and South Korea these commitments imply emission reductions of 70 percent-80 percent by 2030 relative to the business-as-usual baseline for 2030.

The study shows that the total cost of achieving these reductions in 2030 may be as high as 4 percent of GDP for Japan and 8 percent for South Korea. In other words, these targets would require an extremely high carbon price in excess of $800 per ton of CO2.

In contrast, the PRC’s goal involves a 58 percent cut in emissions in 2030 relative to the “do nothing” scenario. This implies a carbon price of about $80 per ton of CO2. One reason why the cost of reducing emissions in the PRC is potentially 10 times lower is that there are opportunities to adopt policies and technologies which are economically efficient and reduce emissions from now till 2030. In such cases the marginal cost of lowering CO2 emissions is in fact negative, or zero.

With these numbers in mind, the question is how can the East Asian economies work together to gain maximum benefit from reducing carbon emissions? Establishing a carbon trading arrangement is one obvious way. If the countries were to form a regional emissions pool and trading scheme, the study estimates that the carbon price for the emissions pool in 2030 would be about $100 per ton of CO2 to achieve the same aggregate reduction in emissions in these countries. In effect, Japan and South Korea would share the costs incurred in the PRC to reduce emissions by more than its target, thereby avoiding the much higher cost of reducing domestic emissions by their solo efforts.

The total savings from operating such a regional trading pool is estimated at about $330 billion per year in 2030, or 1.4 percent of the projected total GDP of the countries in East Asia. The benefits would be particularly large in 2030 because of a sharp reduction in emissions between 2020 and 2030, implied by the targets. The estimated savings from regional trading are at least equivalent to 0.4 percent of total estimated GDP from 2020 to 2050.

The benefits of working together can also be enhanced if countries promote joint programs to develop shared technologies and mechanisms for both adaptation and mitigation. The estimates of the costs of reducing emissions are based upon existing and foreseeable technologies, particularly in the energy, transport and industrial sectors.

Looking beyond 2020, it will be essential to develop less costly methods of carbon capture and storage, especially for use with gas, as well as for coal power plants. Similarly, the development of low carbon technologies for transport and industrial production will be critical to achieve emission targets for 2030 and 2050.

The development and rollout of regional cooperation initiatives is hard work and often painfully slow, and poses significant challenges like how to promote the sharing of technologies while still respecting the interests of the intellectual property owners. There are models of cooperation which developed in Europe and the USA that may be a useful starting point

The EU Emissions Trading Scheme has been successful in leveraging investment in low carbon technologies, technology transfer and contributing to the flow of climate finance; as well as building climate policies and market based mechanisms to estimate, monitor, verify and monetize emission reductions. East Asian countries could draw lessons from the ETS and develop a regional scheme that would facilitate efforts to channel resources and address climate-related priorities in the region. At the same time, additional measures like flexible ‘caps’ or safety valves for allocation/auctions, use of a sectoral approach and appropriate setting of initial targets need to be considered.

But ultimately, East Asia will need to find their own ways of working together, while still competing in international markets. There is clear evidence now to show that the economic gains from working in unison are so large that this effort is clearly worthwhile. 

By Stephen Groff & Gordon Hughes

Stephen Groff is vice president at the Asian Development Bank and Gordon Hughes is a professor at the University of Edinburgh. ― Ed.