Figure 8.1. Relative development of carbon emission and production. Source: Report of the Pascal Canfin-Alain Grandjean Commission, June 2015.
The Climate Challenge
WHAT IS AT STAKE IN CLIMATE CHANGE?
Rising sea levels affecting islands and coastal cities, climatic disturbances, heavy rains and extreme droughts, uncertain harvests: we are all aware of the consequences of climate change. The costs will be both economic and geopolitical, leading to migrations and deep resentment on the part of the populations most affected. Unless the international community acts vigorously, climate change may well compromise, in a dramatic and lasting way, the well-being of future generations. Although the precise consequences are still difficult to quantify, the result may well be catastrophic if we fail to act. Whereas specialists agree that an increase of 1.5 to 2 degrees Celsius in average global temperature is the upper limit of what we can reasonably accommodate (implying a likely sea level rise of 80–90 cm), the fifth (2014) evaluation report issued by the Intergovernmental Panel on Climate Change (IPCC) estimates that (on current trends) the average rise will be 2.5 to 7.8 degrees Celsius before the end of the twenty-first century. Our emissions of greenhouse gases (GHGs), such as carbon dioxide and methane,1 have never been as high. The limit of 1.5 to 2 degrees Celsius thus represents an enormous challenge, especially in a context of sustained global population growth and the desire of many lower income countries to achieve the living standards of developed countries.
This challenge is partly summed up in figure 8.1. The graph on the left shows the path of GDP and CO2 emissions from 1960 to 2010; as it indicates, technological progress has led naturally to lower emissions of CO2 per unit of GDP. But this improvement is relatively slow.The graph on the right depicts the likely path of global GDP to 2050, as well as the path for CO2 emissions needed to contain the temperature increase to a virtuous 1.5 to 2.0 degrees Celsius. A comparison of the two graphs shows that the amount of CO2 emitted per unit of GDP must decrease dramatically to reach the environmental objective. Thus, behavior and technology will have to evolve substantially in the next thirty-five years. To succeed, we will have to transform radically the way we consume energy, the way we design, build, and heat our houses, the way we transport people, produce goods and services, and the way we manage our agriculture and forests. To these “climate change mitigation” policies, intended to reduce GHG emissions, we need to add measures to “adapt”—that is, actions to combat the impacts of global warming. Reducing the vulnerability of social and biological systems to climate change might include setting up networks to warn of floods, raising the bridges, protecting wetlands, making changes to agriculture, and migrating.
Figure 8.1. Relative development of carbon emission and production. Source: Report of the Pascal Canfin-Alain Grandjean Commission, June 2015.
Obviously, there is nothing very new in this. Indeed, we have to remember that the international community has warned against the hazards of climate change since at least the Rio Summit of 1992. In particular, the Kyoto Protocol of 1997 was an important step. But its defects, to which we shall return, prevented any significant effort to reduce GHG emissions. The subsequent major meeting, in Copenhagen in 2009,2 was distinguished by its lack of ambition.
Figures 8.2 and 8.3 show other facets of the challenge. The estimates of total emissions3 in figure 8.2 show that while the majority of anthropogenic emissions (that is, those caused by human activity) are due to countries that are now developed, emerging economies will play a central role in future emissions. China provides some forewarning; it is now by far the greatest emitter, even though it still has a long way to go to bring the whole of its population up to developed-world standards of living; India and other emerging and poor countries will follow in terms of living standards, we hope, but they will have a substantial impact on global warming.
Figure 8.2. Emissions by country. LUCF (land-use change and forestry) refers to emissions resulting from the change in allocation of land and forests. Source: World Resources Institute.
Figure 8.3 shows great divergence in environmental performance, measured in emissions per unit of GDP (whether for all emissions or focusing on the energy sector only). It also suggests that opportunities for limiting GHG emissions are not uniformly distributed around the world. Though it is not very virtuous, Europe probably has much less room to maneuver than other regions.
Across the world, nations are content to wait and see. Not only are they making inadequate efforts to reduce the use of carbon in their industries, transport systems, and homes, but new power stations burning coal (the most polluting fossil fuel) to generate electricity, are being installed. Some countries even subsidize fossil fuel energy sources (gas, coal, petroleum), which are responsible for 67 percent of GHG emissions (80 percent of CO2). According to the Organization for Economic Co-operation and Development (OECD),4 141 to 177 billion euros are still spent around the world each year to subsidize these types of energy generation. The subsidies take the form of income tax deductions and reductions in value-added taxes for specific groups and professions (farmers, fishermen, truck drivers, airline companies, low-income households, and so on), plus tax credits for major infrastructure investments. Of course, it is difficult to calculate the net subsidies when taxes on fossil energies are in place (and furthermore are subject to many exemptions). Whatever their exact amount, these subsidies throughout the world reinforce the idea that “national interest” takes priority over the environmental imperative.
How did we get to this point? How can we explain the scant progress made in international negotiations during the past twenty-five years? Can we limit global warming? These are central questions to which this chapter will try to offer some answers.5
REASONS FOR THE STANDSTILL
We can call for dialogue, we can dream of a different world in which economic agents—households, firms, public bodies—change their habits and decide to behave in an environmentally friendly way. We should explain what is at stake, and make people aware of the consequences of our collective behavior. But that still risks not being nearly enough. In reality, this debate has been going on for more than twenty-five years, and has been reported in the media so many times that no one is unaware of it. While most of us are prepared to make small gestures for the environment, we are not willing to give up our cars, pay much more for electricity, restrict our consumption of meat, or moderate our air travel to distant places. And while local sustainable development initiatives are praiseworthy, they will absolutely not be enough by themselves. In reality, we would like everyone else to do these things for us—or rather for our grandchildren. As irresponsible as it may be, our common policy is easy to explain. It is the result of two factors: selfishness with regard to future generations and the free rider problem. In other words, the benefits of reducing climate change remain global and distant in time, while the costs of that reduction are local and immediate.
Every country acts first of all in its own interest, on behalf of its people, while at the same time hoping to benefit from efforts made by other countries. For an economist, climate change is a “tragedy of the commons.” In the long term, most countries would benefit enormously from a reduction in global GHG emissions, because global warming will have large economic, social, and geopolitical effects. The incentive for each individual country to undertake this reduction, however, is negligible. In reality most of the benefit from efforts made by any country to attenuate global warming will go to other countries.
A given country bears 100 percent of the cost of its green policies—for instance, the costs of insulating homes or replacing polluting energy sources like coal with cleaner but more expensive sources. On the other hand, to simplify, if a country represents only 1 percent of the world’s population (and is near average in its exposure to the risks of climate change), it will receive only 1 percent of the benefits of its policy. So its environmental policies will primarily benefit other countries. It’s as if you had to choose between spending one hundred dollars today or to save that amount, all the while knowing that ninety-nine dollars of these savings will be taken away and given to strangers. Moreover, most of the benefits of this policy do not go to individuals who are currently of voting age, but rather to future generations (who have no vote yet).
Consequently, countries do not internalize the benefits of policies to reduce emissions: these policies remain inadequate, emissions remain high, and climate change accelerates. The free rider problem leads to the tragedy of the commons. This tragedy is exemplified by many case studies in other domains. For example, when several livestock farmers share a common pasture, the result is usually overgrazing. Each farmer wants to profit from having an extra cow, without considering that his profit creates a loss for the other farmers whose animals will have less grass to eat. In the same way, hunters and fishermen do not internalize the cost to others of increasing their yield. Overfishing and overhunting, frequent subjects of international disputes, have in the past contributed to the extinction of many species ranging from the dodo, Mauritius’s emblematic bird, to the bears in the Pyrenees and the buffalo on the Great Plains of North America. The evolutionary biologist Jared Diamond has shown how the deforestation of Easter Island led to the collapse of a whole civilization.6 We find other examples of the tragedy of the commons in air and water pollution, traffic jams, and international security.
Elinor Ostrom, a political scientist who won the Nobel Prize for economics in 2009, has shown how small, stable communities can, under certain conditions, manage their common local resources without falling victim to this tragedy. This is thanks to informal mechanisms of incentives and sanctions.7 These informal methods of limiting the free rider problem are obviously not applicable to climate change, because in this case the stakeholders are the seven billion individuals who live on our planet, plus their descendants. Finding a solution to the problem of global externalities is complex, because there is no supranational authority able to implement and enforce the standard approach for managing a common good by internalizing external costs (often used at the national level and explained below), as recommended by economic theory.
… Is AGGRAVATED BY THE PROBLEM OF “CARBON LEAKAGE”
The problem of “carbon leakage” may further discourage any country or region that wanted to adopt a unilateral strategy of alleviation. Taxing carbon emissions imposes additional costs on national industries and undermines their ability to compete if these industries emit large quantities of GHGs and are exposed to international competition. In any given country, a carbon tax high enough to contribute effectively to the battle against climate change would thus lead some companies to relocate their production facilities abroad—to regions of the world where they could pollute more cheaply. If they did not do this, they would lose their markets (domestic or export) to companies located in countries more lenient about emissions. Consequently, a unilateral policy shifts production to less responsible countries, which leads, de facto, to a simple redistribution of production and wealth without any significant environmental benefit.
Similarly, “virtuous” countries that increase by taxation the domestic price of gasoline or fuel oil to reduce the demand for them tend to cause the worldwide price of fossil fuels to fall, which in turn leads to an increase in the demand in other countries for fossil energies and therefore in GHG emissions elsewhere. The phenomenon of carbon leakage thus reduces the net climatic benefit of the efforts made in this domain.
The “Clean Development Mechanism” (CDM) set up in Kyoto in 1997 provides another example of the risk of “leakage.” This mechanism gives credits to companies in countries where carbon emissions are penalized (for example, European countries) whenever the companies carry out projects to reduce emissions in other countries (such as Indonesia) that are not subject to these constraints. The company’s effort is measured by the yardstick of the price on existing carbon markets—de facto, the market for tradable emissions permits in Europe (which explains, by the way, why the CDM was halted by the fall of prices on this market, a subject to which I shall return). At the time, my first reaction was positive. This mechanism creates aid for much-needed economic development, as well as a way to evaluate projects consistently with other climate change policies: a price for carbon equal to what a Western company has to pay for its emissions (the argument for the consistency with carbon permits is that the emission of a ton of carbon has the same environmental impact no matter who emits it, or where).
But I realized that my heuristic thinking was mistaken, as was that of the negotiators of the Kyoto agreement. On reflection, the CDM is not as virtuous as it seems. For one thing, it is complex to administer (to obtain carbon credits, you have to show that the project is “additional,” that is, that there would not have been a reduction in pollution in the absence of the CDM program, which is logical but involves an unobserved counterfactual).8 For another thing, it probably often has only a small net environmental impact: for example, a project to preserve a forest somewhere in the world leads to deforestation elsewhere because of supply and demand in the market for lumber or soybeans, which created the deforestation in the first place. In this example, the virtuous choice to preserve this one forest increases the price of lumber or soybeans, encouraging deforestation in other parts of the world.
This problem of leakage provides further proof that only a global accord can resolve the climate question: countries that do not penalize carbon emissions pollute a great deal, not only producing goods for their own consumption, but also for export to more virtuous countries. This has caused some observers to argue on empirical grounds that the Kyoto Protocol has not led to lower emissions, even though some countries have introduced carbon pricing.9
… AND BY INCENTIVES TO DELAY REFORMS
Finally, the free rider phenomenon has been aggravated by the common belief that countries that do less today will obtain more in future negotiations. Both theory and experience with other pollutants suggest that the stronger a country’s reliance on carbon-based fuels today, the better its bargaining position will be to demand compensation for joining in a global agreement tomorrow. In fact, since the role of carbon fuels in their economies is so great, they are less motivated to sign an agreement, and the international community will find itself obliged to grant them larger transfers (either financial or in free negotiable emissions permits) to convince them to join in the agreement. This is exactly what happened within the United States when a sharp reduction in acid rain pollutants (SO2 [sulfur dioxide] and NOx [nitrogen oxides]) was negotiated in the 1980s. The highly polluting Midwestern states opposed such a policy and ended up being brought on board in the 1990 law10 by generous allocations of free tradable emission rights. A sad reality, but one to reckon with.
MODEST PROGRESS, ALL THE SAME …
For all that, we mustn’t conclude that no progress has been made.
Tradable emissions permits. Markets for tradable emissions permits already exist in Europe (since 2005), the United States, China, Japan, South Korea, and many other countries (more than forty in all), regions, and even cities.11 A market of this kind is one way to make economic agents responsible for their GHG emissions. The principle is the following: the public authority sets a ceiling for the amount of pollution it is prepared to tolerate; in the case of climate change, this is set at a global level and is the maximum number of tons of CO2 we can still emit without warming the planet by more than 1.5 to 2 degrees Celsius (this quantity is sometimes called the “CO2 budget”). Then the authority issues a corresponding number of permits, which are called “tradable emission rights” (or sometimes, pejoratively, “rights to pollute”). Any economic agent—an electricity producer for instance—must then be able to present, at the end of the year, permits that correspond to its emissions during the year. If it does not have enough permits, it will be forced to buy additional ones at the market price on the permits market or else pay a penalty (in principle, this will be far higher than the market price). If it has excess permits, it can resell the surplus at the market price. Thus, carbon emissions cost the same for everyone. The possibility of buying and selling these permits explains why in international negotiations this approach is often called “cap and trade.”
Carbon tax. Other countries have chosen a carbon tax, imposed by the government for each ton of CO2 emitted. Sweden has pursued the most ambitious policy by establishing in 1991 a carbon tax of 100 euros per ton of CO212 for households (though with many exemptions for businesses, to avoid the problem of leakage discussed above). In 2015, France adopted a carbon tax on fossil fuels of 14.5 euros per ton of CO2.13 Outside Europe, there are a few modest carbon taxes, for example in Japan and in Mexico.
With the exception of the Swedish tax,14 all these schemes set a price for carbon that is much lower than the price that would make it possible to remain below the 1.5 to 2 degrees Celsius limit. The carbon tax counterpart to an amount of tradable emissions permits equal to the CO2 budget consists of setting a tax equal to what is called the “social cost of carbon”—that is, the price that will generate enough effort on the part of economic agents to put us back on track to limit global warming to 1.5 to 2 degrees Celsius. Carbon taxes are almost always significantly lower than this social cost. To mention just one estimate, the key report intended to guide the French carbon policy15 estimated that carbon’s social cost (that is, the price level that, were it applied worldwide, would make it possible to remain in conformity with the IPPC’s recommendations) would be 45 euros per ton of CO2 in 2010, 100 euros in 2030, and between 150 euros and 350 euros in 2050.16 But today the price of carbon on the European or American market is between 5 and 10 euros, and in many countries it is zero.
Why do countries take unilateral action? Any action in favor of the climate is surprising if one considers that, as always in geopolitics, national interest comes first. Why would a country sacrifice itself in the name of humanity’s well-being? First, if there is a “sacrifice,” it is tiny: current measures remain modest and will not be enough to avert a climate catastrophe. Second, it may not be a sacrifice if the countries concerned gain other benefits from an environmental policy. Green choices can help reduce emissions of local pollutants—that is, pollutants that mainly affect the country itself. For instance, coal-fired power plants simultaneously emit CO2 (a GHG), SO2, and NOx. The last two are local pollutants responsible for acid rain and for fine particulates that are believed to have serious health effects. Improving the energy efficiency of coal plants benefits the country, independent of any climate change consideration. In the same way, the replacement of lignite (“brown coal,” which is particularly polluting) with natural gas and petroleum in Europe after the Second World War was a spectacular public health and environmental advance, one of whose notable effects was to eliminate smog in London. But again, the choice had nothing to do with the fight against climate change, which anyway was not a public issue at that time; instead it was dictated by local imperatives. Similarly, some countries could encourage citizens to eat less red meat, not to fight emissions of methane (a GHG), but rather to reduce cardiovascular disease. These “cobenefits” create an incentive—very inadequate but an incentive all the same—to reduce emissions.
Finally, the partial internalization of CO2 emissions on the part of large countries such as China (which has almost 20 percent of the world population and is very vulnerable to climate change), the desire to appease an environmentally concerned public opinion, and to avoid international pressures are factors that may lead to action—even in the absence of a binding international agreement. Countries are therefore likely to take some unilateral measures even if concerned solely with their national interest. Actions to reduce the carbon content of production do not necessarily signal awareness of the impact of emissions on the rest of the world. These unilateral measures are called “zero ambition” measures.17 “Zero ambition” refers to the level of commitment that a country would choose solely to limit the direct effects of pollution on the country itself. In other words, it is the level the country would have chosen in the absence of any international negotiation. These measures are insufficient to keep global warming under control.
… BUT SOMETIMES AT A HIGH COST
In addition to tradable emissions permits and carbon taxes, many countries use a variety of “command and control” approaches (which I will come back to). Some of these measures are too expensive given their limited effectiveness in reducing global warming. While well-meaning, establishing nonquantified environmental standards or requiring public authorities to choose renewable energy sources often leads to a lack of consistency that substantially increases the cost of reducing emissions. States sometimes spend as much as a thousand dollars per ton of carbon avoided (this used to be the case particularly in Germany, a country that does not have a lot of sunshine but installed first-generation solar power systems) when other measures to reduce emissions would cost just ten dollars per ton. This is a policy described as green by the vast majority of observers, but it is not: for the same cost, emissions could have been reduced by one hundred tons rather than a single ton! I shall return to this question when considering economic efficiency as an environmental imperative.
NEGOTIATIONS THAT FALL SHORT OF THE STAKES INVOLVED
FROM THE KYOTO PROTOCOL …
In the Kyoto Protocol of 1997, which went into effect in 2005, the signatory countries agreed to reduce their emissions of GHGs. The so-called “Annex B parties” (mainly developed countries) promised to reduce emissions by 2012 by an average of 5 percent compared to 1990 levels and to set up a system of tradable emissions permits. Though full of good intentions, it was certainly not ambitious enough, and its implementation was marred by serious conceptual problems. At the time they signed it, the participants in the Kyoto Protocol produced more than 65 percent of total worldwide GHG emissions. By 2012, the protocol covered less than 15 percent of worldwide emissions, given the United States’ failure to ratify the protocol and the withdrawal of Canada, Russia, and Japan. Canada, for example, confronted by the prospect of its oil shale deposits windfall, quickly realized that it would need to buy emissions permits to honor its Kyoto commitments.18 It preferred to withdraw from the protocol rather than pay. The United States Senate insisted that there be no free riders (targeting China in particular) before it would ratify the protocol. Even though, given the analysis above, the need for a global agreement is incontrovertible, the move was largely motivated by domestic politics: the US Senate was reluctant to act in the face of a public that was skeptical about climate change, and did not want to reduce its heavy consumption of carbon (see table 8.1).
Table 8.1. National Emissions per Inhabitant
Country |
Tons of CO2 per inhabitant |
Uganda |
0.11 |
Republic of the Congo |
0.53 |
India |
1.70 |
Brazil |
2.23 |
World |
4.98 |
France |
5.19 |
China |
6.71 |
Germany |
8.92 |
Japan |
9.29 |
Russian Federation |
12.650 |
United States |
17.020 |
Qatar |
43.890 |
Source: World Bank.
The main attempt to establish carbon pricing under the Kyoto Protocol, the European Union’s Emission Trading Scheme (EU ETS), also failed. The economic problems created by the 2008 financial crisis and then the Eurozone crisis, and the rapid deployment of renewable energy (particularly in Germany) both reduced demand for emissions permits, which led to an excess supply of permits in relation to demand.19 Without any compensating reduction in the supply of permits, the price of a ton of CO2 fell from its historic high of thirty euros to a price that fluctuated between five and ten euros, too low to have a significant impact on efforts to reduce emissions. It was so low that it even allowed electricity producers to replace gas with coal, which emits twice as much carbon per kilowatt hour, not to mention fine particulates. It is estimated that a price of about thirty euros for a ton of CO2 would make gas-fired power plants more competitive than coal-fired ones. Engie (a French multinational energy company) even closed three gas-fired plants because of competition from coal-fired plants, which currently pollute almost without penalty. In contrast, the UK’s imposition of a minimum carbon tax—around twenty pounds in the last two years (to be added to the price of carbon in the European emission system, about five euros currently)—had a dramatic impact on the use of coal, which quickly tumbled from 30 percent to less than 10 percent of the UK energy mix. The substitution of gas for coal brought about an important reduction in UK GHG emissions.20
Some see the fall of carbon prices on the emissions permits market as the market’s failure. In reality the failure results from an implicit political decision not to be the only region in the world to adhere to the commitments made in Kyoto. Rather than adjusting the number of permits downward to reflect the economic situation, Europe chose to let the price fall and align itself with the even less ambitious climate policies pursued elsewhere in the world. This is the tragedy of the commons in action.
Thus, over the past twenty years, Europeans have sometimes believed that their (limited) commitment to reduce GHG emissions would lead other countries to follow their example. Unsurprisingly, this hasn’t happened. Sadly, the Kyoto Protocol was a failure, and its own architecture doomed it. Because of the free rider problem, made worse by carbon leakage, only a global solution will work.
… TO THE SUBSEQUENT LACK OF AMBITION: VOLUNTARY COMMITMENTS
The Kyoto Protocol was full of good intentions, but that did not prevent countries from free riding. We can say the same of the non-binding promises made in Copenhagen, but for a different reason. The initial objective of the Copenhagen conference in December 2009 was to devise a new Kyoto Protocol with a higher number of signatories. In practice, however, the conference resulted in a profoundly different project: a “pledge and review” process. The United Nations has since merely rubber-stamped, without imposing any real constraints, the informal commitments of the countries that signed up, the INDCs (Intended Nationally Determined Contributions). This new mechanism of voluntary commitments was ratified by the United Nations Climate Change Conference, which took place in Paris in December 2015. The strategy of voluntary commitments has several significant defects, and is an inadequate response to the climate change challenge.
Greenwashing. Since the costs of reducing emissions vary from one signatory to another, it is impossible to gauge the ambition of the INDCs.21 In reality, the system has created strong incentives to engage in “greenwashing”—appearing to be much more environmentally conscious than one actually is. This in turn makes measuring and evaluating the actual contributions more complex.
In a completely predictable way, countries choose advantageous baselines: 2005 for the United States (when shale gas became available after 2005, it reduced US GHG emissions as it was substituted for coal), or 1990 for Germany (the point at which it inherited polluting power plants in East Germany, and so found it relatively easy to reduce emissions while creating large local cobenefits). By taking years of high pollution as points of reference, countries artificially inflated the ambition of the objectives they set for themselves. The lack of comparability has been exacerbated because each commitment has its own time horizon and metric (some use peak emissions, others the reduction of emission per capita or relative to the GNP, and so on). Furthermore, some promises are contingent: in Japan, a country that uses a lot of coal, the commitments are contingent on the restoration of nuclear energy, and in many emerging or underdeveloped countries, on receiving “sufficient” foreign subsidies. In short, the INDC commitments have been a potluck to which each country brought what suited it best.
Still free riders. The INDC commitments, even if they are credible, remain voluntary, and the free riding problem is therefore inevitable. As Joseph Stiglitz pointed out, “In no other area has voluntary action succeeded as a solution to the problem of the undersupply of a public good.”22
In some ways, the mechanism of voluntary commitments resembles an income tax system in which each household would freely choose the level of its fiscal contribution. Many observers therefore fear that the current INDCs are merely “zero ambition” agreements.
The (non)credibility of promises. Promises only persuade those who listen to them. In reality, they are not credible without formal commitments. Experience with donations for humanitarian causes (in particular for health care) has not been encouraging. This noncommitment will strengthen the temptation of signatories not to keep to their pledges, in particular if they suspect that others will do the same.
EVALUATING COP 21
The latest major international meeting, the United Nations Climate Change Conference held in Paris in December 2015 (COP 21) was supposed to lead to an efficient, fair, and credible agreement. Mission accomplished? The negotiations were complex to conduct, because governments were not prepared to make binding commitments. The agreement reached displayed a great deal of ambition: the objective to be attained is now “far below 2 degrees Celsius,” instead of the previous “up to 2 degrees Celsius” goal, and the world is not supposed to produce any net GHG emissions after 2050. In addition, after 2020 the funds dedicated to developing countries will exceed the one hundred billion dollars a year that had been agreed to in Copenhagen in 2009.
The diagnostic of the parties to COP 21 was correct. It recognized that the current rate of emissions is very dangerous, and that we therefore need strong action and new technologies to protect the environment. It admitted that we must reach a negative level of emissions after 2050 (the absorption of carbon by “carbon sinks” must exceed emissions by then). Poor countries would be helped. The parties also called for the creation of a system for monitoring pollution (albeit with a two-tier system, with a separate treatment for emerging countries like China—which by itself emits more than the United States and Europe combined). Even if this diagnostic was already partly embodied in the 1992 United Nations Framework Convention on Climate Change (UNFCCC), it was good that all the countries agreed to confirm that it was the correct diagnosis. On the other hand, the promises made in Paris were far from adequate; and so far as concrete measures are concerned, little progress has been made.
In terms of effectiveness in combating climate change, carbon pricing, although favored by a large majority of economists and many decision makers, was a red flag for Venezuela and Saudi Arabia—the latter even going so far as to ask for compensation if the price of oil dropped as a result of the agreement. The negotiators buried carbon pricing in the face of general indifference. As for the question of fairness, the developed countries promised an overall transfer to poorer countries, but did not specify their own individual contributions. Collective promises are never kept, since no one feels responsible for fulfilling them (the free rider problem in action again). The transfers would have been more credible if the developed countries’ individual contributions had been specified. Doubts were also raised as to whether the promised transfers to poorer countries would constitute additional funds, and not just earmark existing aid to environmental projects, or be loans to be later repaid, or constitute a pledge on uncertain future revenues.
In addition, the agreement avoided making countries’ commitments to reduce their emissions binding; and even so the countries’ pledges fell short of what is needed to reach the 2050 cumulative emissions target. The negotiations on transparency also failed. It is difficult to understand why the global South should not be subject to the same process of monitoring, notification, and verification as the global North. The rich countries have a duty to be generous, to be sure, but not to close their eyes. This asymmetry in treatment gives rich countries a ready-made excuse for not keeping their promises in the future. Finally, the idea—unanimously applauded—that a more virtuous path would be followed by revising the protocol every five years ignored what economists call the “ratchet effect”: are we really sure that a country will put itself in a better future negotiating position if it cheerfully fulfills its promises today, instead of dragging its feet? We always expect more from the best student.
The COP 21 agreement was an unequivocal diplomatic success—the 196 delegations approved it unanimously—but this consensus was achieved by yielding to various demands (as we have seen regarding the price of carbon) and thus at the price of a lack of (real, not claimed) ambition. A simple test of the truth of this reduction to the lowest common denominator is that while all heads of state went home celebrating the agreement, none of them informed their compatriots that they now had to quickly roll up their sleeves and get to work, because the era of cheap pollution was over for the country.23
In the meantime, new coal projects are still undertaken (for example in South Africa, where investments are sometimes financed by countries like China that have cut back on coal projects at home). Europe keeps using German and Polish coal instead of using more gas in the transition to renewable energy sources. The United States, which has almost by accident reduced its GHG emissions by using inexpensive shale gas, continues to export coal, of which it has an excess. With the election of Donald Trump, it now also has an administration supportive of the coal industry and officially skeptical about the reality of climate change. On June 1, 2017, Donald Trump announced his decision to withdraw from the Paris climate accord. In the future, other countries might fail to abide by their promises in a more discrete way, by letting their pollution slip without formally denouncing the accord.
All things considered, the newspaper the Guardian summed it up adequately on the day the Paris accord was signed (December 12, 2015): “By comparison to what it could have been, it’s a miracle. By comparison to what it should have been, it’s a disaster.”
MAKING EVERYONE ACCOUNTABLE FOR GHG EMISSIONS
The heart of the climate change challenge lies in the fact that economic agents are not internalizing the damage they cause to others when they emit GHGs. To resolve this free rider problem, economists have long proposed forcing economic agents to internalize the negative externalities of their CO2 emissions. This is “the polluter pays” principle.
To achieve this, the price of carbon would have to be set at a level compatible with the goal of limiting the global temperature rise to 1.5 to 2 degrees Celsius, and all emitters would be compelled to pay the established price: given that all CO2 molecules produce the same marginal damage, no matter who emits them, or where or how they are emitted, the price of any ton of CO2 must be the same. Imposing a uniform price for carbon on all economic agents throughout the world would guarantee the implementation of any mitigating policies whose cost was lower than the price of carbon.
POLICIES THAT ARE NOT ALWAYS AS GREEN AS THEY SEEM …
A uniform price for carbon would thus guarantee that the reduction of emissions necessary to achieve the global objectives for atmospheric CO2 would occur, and would minimize the overall cost of the efforts made to achieve it.
Environmental regulation, however, is often not based on economic instruments such as a tax or a cap-and-trade system, but on “command and control”: such top-down measures include emissions limits differentiated according to the source of the emissions, mandated uniform reductions in pollution, subsidies and taxes that are not related to the actual pollution, standards differentiated simply by the age of the equipment involved, and the setting of industrial and technological standards and norms (to be clear, I am not opposed to standards; my qualm rather is that they often do not embody a cost-benefit analysis).24
These top-down policies create big differences in the implicit price of carbon for different types of emissions, and they increase the cost society has to pay for environmental policies. This is easily explained: take two companies, each of which emits two tons of carbon, and assume that we want to cut their total combined pollution in half, from four tons to two tons. Let’s suppose that the first company has a cleanup cost of $1,000 per ton, while the second company’s cost is $10 per ton. A “fair” policy might consist of requiring each company to reduce its pollution by half, thus “equitably” distributing the efforts made, and generating a total cleanup cost of $1,010. Obviously, efficiency requires that the second company should eliminate its two tons of emissions at a total cost of $20, and that the first should not do anything; thus saving society $1,010 − $20 = $990 (that is, 98% of the cost) in comparison with the top-down policy.
The economic approach, which involves setting a price for carbon in some way, makes this saving possible: with a ton of CO2 priced at, for example, fifty dollars, the first company will not spend one thousand dollars to eliminate a ton of carbon, but rather will pay one hundred dollars to keep emitting the same amount. The second company will stop polluting altogether. Overall, the result would be a savings of $990 to society. And “fairness” and “efficiency” are not necessarily opposed: the savings achieved by moving to a carbon price would make it possible to compensate in part the losers (the tax revenue of $100 can be used as an offset for the $120 loss, while the top-down approach generated no revenue to compensate the $1,010 cost), provided that this compensation takes the form of a one-off transfer (not linked to its future choices regarding pollution).
The enthusiasm for top-down approaches originates in governments’ desire to appear to be doing something to tackle climate change. Patchy but expensive initiatives that are visible to voters but concealed from consumers (because they are included in feed-in tariffs imposed on electric utilities or in the price of goods and services) are politically less costly than a carbon tax, which is very visible to those who have to pay it. Subsidies are always more popular than taxation, even if, in the end, someone has to pick up the bill for them. This is another example of how economic policy gets distorted by what is visible and what is not so visible.
It has been empirically verified, however, that top-down policies increase the cost of environmental policies considerably. To judge from experience with other pollutants, introducing a single carbon price might reduce the cost of cutting pollution by at least half in comparison with top-down approaches discriminating between sectors or agents.25
Western countries have made a few attempts to reduce GHG emissions, notably by directly subsidizing green technologies: high feed-in prices paid by the electrical grid for electricity produced by solar panels or wind turbines, bonus or penalty schemes favoring low-emission cars, subsidies for the biofuel industry, and so on. For every program set up, we can estimate an implicit carbon price, that is, the social cost of the program per ton of CO2 saved. In the electricity sector, the OECD’s estimates range from zero (or even less)26 to eight hundred euros. In the trucking sector, the implicit price of carbon may be as high as one thousand euros, in particular if the trucks use biofuels. The variation in the carbon prices implied by policy measures is another demonstration of why the top-down approach is ineffective. Similarly, any global climate agreement that would not apply everywhere would be just as ineffective, because the price of carbon would be zero in the countries that didn’t sign and, ultimately, very high in the countries that did.
The justification for subsidizing renewable energy sources is the “learning curve”—that is, the idea that costs decrease as companies gain experience in production. In general, this learning effect is always difficult to predict and is often oversold by lobbyists for producers seeking subsidies. But it has been important in the case of renewable energy. Dubai (a sunny country to be certain) signed a contract in 2016 for a large solar power installation at thirty dollars per megawatt hour, a price that would have been inconceivable even a short time ago. This learning curve, if it is established and can therefore be a benchmark for subsidizing, also implies that subsidies must decrease over time, because the learning effect is particularly significant when the technology is new (we refer to chapter 6 for a discussion of industrial policy).27
As we have seen, in the battle against climate change, it is crucial to avoid discrimination among actors. Every agreement whose implementation requires excessive mitigation expenditures will ultimately be abandoned under pressure from voters or lobbies. The green imperative will only be respected if the economic imperative is also respected. Both require a global approach and a pricing mechanism. Economic instruments (whether a tax or a market) are thus not inimical to an environmental policy. On the contrary, they are a necessary condition for one.
THE ECONOMIC APPROACH
Most economists recommend establishing a global price for carbon. Although they differ on the exact way to implement it, this debate is secondary in comparison with the abandonment of the principle that there should be a single carbon price. Many NGOs and think tanks28 and policymakers are on the same wavelength.29 For example, Christine Lagarde (the general director of the IMF) and Jim Yong Kim (president of the World Bank) declared together in Lima, on October 8, 2015:
The transition to a cleaner future will require both government action and the right incentives for the private sector. At the center should be a strong public policy that puts a price on carbon pollution. Placing a higher price on carbon-based fuels, electricity, and industrial activities will create incentives for the use of cleaner fuels, save energy, and promote a shift to greener investments. Measures such as carbon taxes and fees, emissions-trading programs and other pricing mechanisms, and removal of inefficient subsidies can give businesses and households the certainty and predictability they need to make long-term investments in climate-smart development.30
The same carbon price for all countries, economic sectors, and agents: Is that too simple a policy? Perhaps. Up to this point, governments have clearly preferred to make things complicated.
Two economic instruments make coherent carbon pricing feasible: a carbon tax and tradable emissions permits. Among other things, we will look at whether these strategies can enable decisions about climate policy to be devolved to individual countries. Indeed we might prefer to grant freedom to national policymakers, even if we know that they might not choose the least expensive ways to reduce emissions. Consider the example of countries that have a limited ability to collect and redistribute through taxation. Let’s suppose that some of these countries favor a low carbon price for cement to promote the construction of housing for the poor; they might then want to deviate from the rule of one price. There are two arguments in favor of letting each country decide. First, it leaves governments space to convince the public. Second, other countries are interested only in the total amount of CO2 emitted by the country in question, not the way it was emitted.
To succeed, the two alternative strategies depend on an international agreement that covers global emissions sufficiently, using an “I will if you will” approach. Both require implementation, monitoring, and verification (more generally, the precondition for any effective action to reduce emissions would be to establish credible and transparent mechanisms to measure their emissions). Economists do not agree on the choice between a carbon tax and tradable emissions permits, but in my opinion, and in that of most economists, either approach is clearly more effective than the current system of voluntary commitments.
OPTION 1: A WORLDWIDE CARBON TAX
With a carbon tax, every country would agree on a minimum price for its GHG emissions, for example fifty euros per ton of CO2, and each would collect the corresponding revenues in its own territory. All countries would then have the same price for GHG emissions.31 For example, countries could agree on a universal minimum carbon tax, limiting the subsidiarity in national policies (except for the ability to impose an even higher tax, an option that would be unlikely to be exercised if the minimum tax were high enough). A more sophisticated mechanism,32 in which countries would agree on an average carbon price, would enable subsidiarity. The price of carbon would then be the ratio of the receipts of this levy divided by the volume of the country’s emissions. The price would be equal to the carbon tax if only a carbon tax were used; but more generally, the price could emerge from a range of policies: a carbon tax, tax credits and penalties imposed on cars based on their CO2 emissions, etc.).
Verification of Countries’ Compliance to a Carbon Price
For various reasons, the carbon tax approach and its variants raise the problem of how to verify that countries are complying with the international agreement.
Collection. At present, countries (except for Sweden) hardly tax carbon or make their citizens and businesses pay for their emissions, because—even though the public finances would benefit—most of the environmental gains would go to third countries. Whatever international accord is signed, this incentive would live on. So even if verifying domestic households’ and businesses’ emissions were to cost nothing (which is not the case), the authorities might nonetheless be tempted to turn a blind eye to some polluters or underestimate their emissions, thus saving the country the economic and social cost of the measures to protect the environment. This opportunistic behavior on the part of individual states in the name of national interest is hard to avert. To understand better the difficulties inherent in following up and monitoring, look no further than the ineffective collection of taxes in Greece, concerning which Greece’s creditors abroad and the Greek government have different incentives.33 To sum up: the institution of a uniform carbon price is vulnerable to free riding incentives associated with the local-costs-and-global-benefits nature of green policies. Put differently, for it to function properly, a uniform carbon price must be accompanied by a very strict system of international monitoring at the local level, which is rather unrealistic.
Offsetting measures. An agreement on an international carbon tax can fail to be implemented if countries nullify the impact of the tax by means of compensatory transfers; for example, a country can introduce a carbon tax on fossil fuel energy and reduce other taxes (or increase subsidies) by the same amount on these forms of energy, cancelling out the impact of the carbon tax.34
Actions without an explicit carbon price. The carbon tax approach requires finding a conversion rate to evaluate policies that have an impact on climate change but which do not have their own explicit price, such as publicly funded green R&D, standards for residential35 or highway construction, agricultural policy, or forestation and reforestation programs. It may also be necessary to determine the conversion rates specific to each country. Construction standards, for example, have a different impact on GHG emissions depending on the climate. Similarly, new forests may increase, rather than reduce, GHG emissions in (high albedo36) areas of the far north or south in which trees would cover snow.
OPTION 2: TRADABLE EMISSIONS PERMITS
The classic mechanism to make economic agents face the same price for polluting is tradeable emissions permits. The international agreement would define a total global emissions target and allocate a corresponding volume of permits, either free of charge or via auction. Agents who pollute more than their permits allow must buy the extra on the market. Others, who pollute less than their quota, can sell their excess permits. The cost of pollution for everyone is the market price, whether the initial allocation was free of charge or not: additional emissions deprive the virtuous company of the sale of their permits and penalize a polluting company by an amount equal to the purchase price of the additional permits.
The international agreement would cap future CO2 emissions and thus define a predetermined number (the “cap”) of emissions permits available to be traded globally. Tradable permits guarantee all countries a uniform carbon price, generated by mutually advantageous exchanges on the carbon market. The price of transferring emissions permits between states would not be determined by agreeing on a carbon price, but rather by supply and demand in this market. The scheme might begin with an initial allocation of permits between countries to ensure compensation, with the twin aims of fairness and encouraging all countries to participate.
Are private households, who do not trade in permit markets, nonetheless incentivized by the carbon price? The answer is that they are indirectly affected, as the carbon price affects the price of goods and services. As far as their energy consumption is concerned, one could apply a carbon tax as long its level was consistent with the price paid on the permits market by companies producing commodities such as electricity and cement under the system of negotiable permits. Otherwise we could follow President Obama, who applied a system of tradable rights to gas refineries and importers. These companies then pass their “carbon price signal” through to consumers.
The emblematic example of the battle against one type of pollution—sulfur dioxide (SO2) and nitrogen oxides (NOx), which are responsible for acid rain—originated in a law passed with bipartisan support in the United States in 1990. The law mandated a reduction in emissions from twenty million tons to about ten million tons by 1995. Each year, permits are issued with a horizon of thirty years, so at any point in time there is a thirty-year visibility for the price of permits; such a visibility facilitates the planning of investments. An ambitious environmental goal was therefore realized thanks to a market in tradable permits37 and strict adherence to the commitments set out in the law.
Several lessons can be drawn from this experience. A single carbon price can work, even when it is not possible to treat all agents the same way. The states in the American Midwest—which, with their coal-fired electrical plants, are major polluters—vigorously resisted the 1990 law and were finally granted free permits. The market price nevertheless encouraged them to greatly reduce their pollution, which they did. Moreover, the time horizon is crucial. Economic agents (enterprises, households, administrations, states) will choose equipment that does not emit GHGs only if they anticipate a sufficiently high future carbon price. Similarly, companies will make the effort necessary to develop new, nonpolluting generations of technology only if they have an economic interest in doing so. In short, success is more likely today when we reduce uncertainty about the price of carbon tomorrow.
Should we be concerned about the evolution and possible future excesses of carbon finance? Will it lead to speculation and social harm? On the one hand, speculating on the price of carbon does not matter as long as those doing so are using their own money. On the other hand, if a bank or an energy company in the energy sector used the financial markets to take risky positions instead of using them to hedge risks (that is, to protect itself against future price changes), that is a problem because the possible losses would harm the bank’s depositors or electricity consumers—and probably the taxpayer if the state ends up bailing out a failing bank or energy company. Here we are in the realm of everyday prudential regulation. The government must supervise financial market positions taken by regulated enterprises and banks, and must make sure that they insure against risks rather than increasing them. These enterprises and banks must also be forced to trade permits and their derivatives on organized markets with clearing houses so that regulators can monitor them properly. Transparent markets make positions much clearer than over-the-counter arrangements, which proved to be so toxic during the 2008 financial crisis.38
MANAGING UNCERTAINTY
Whatever solution is adopted to combat climate change, policies will need to adjust: there is still uncertainty in climate science, in technology (with regard to the speed at which cheap, low-carbon energy sources will be developed), in the economics of mitigation (with respect to the cost of reducing carbon emissions), in the social acceptability of adaptation, and in political science (regarding countries’ will to reach a sincere agreement and observe it).
Given this uncertainty, we will need to adjust the number of permits or the carbon tax to account for new developments (for example, climate change may be faster than predicted, or the worldwide rate of growth might subside, as under the secular stagnation hypothesis). The ability to make such adjustments could jeopardize the credibility of countries’ long-term commitment to reducing GHGs, but there are solutions.39 In Europe, a market mechanism to stabilize the price of tradable emissions permits will finally go into effect in 2021. In addition, allowing participants to use permits at later dates makes it possible to smooth price changes: if, for example, the participants foresee future price increases, it will be in their interest to hoard permits. This smooths the price, which rises today and falls tomorrow in comparison with a policy in which hoarding for future use is prohibited.40
MAKING COUNTRIES ACCOUNTABLE
It is technologically easier for the international community to monitor CO2 emissions by country rather than to measure them at a more local level. It therefore makes sense to make countries responsible for their national GHG emissions. A nation’s anthropogenic CO2 emissions can be calculated through carbon accounting. Satellites can see carbon sinks connected with forests and agriculture. Experimental programs by NASA and ESA (the European Space Agency) to measure global CO2 emissions on the scale of each nation look promising in the long term.41 As is the case for current cap and trade mechanisms, the countries that have a shortage of permits at the end of the year would buy additional permits, whereas countries that have a surplus of permits would be able either to sell them or save them for future use.
INEQUALITY AND THE PRICING OF CARBON
The question of inequality arises both within and across countries.
On the domestic level, it is sometimes objected that taxing carbon will be hard on the poor. Putting a price on carbon reduces the purchasing power of households, including the poorest ones, and this might be an obstacle to implementing the policy. This is true, but it should not block the environmental objective. There must be an appropriate policy tool associated with each separate policy objective, and it is important to avoid trying to achieve many objectives with one lever (such as a carbon price). So far as inequality is concerned, the state should use income tax as much as possible to redistribute income, while at the same time pursuing a suitable environmental policy. Environmental policy should not be diverted from its primary objective in order to address (legitimate) concerns about inequality. Refraining from pricing carbon to tackle inequality would be unwise. Similar reasoning would lead us for instance to price electricity at one-tenth of its cost (hello to open windows with the radiators on, and outdoor swimming pools heated year round; farewell to insulated buildings). It would also encourage tobacco use by getting rid of high taxes on (and perhaps even subsidizing) tobacco on the ground that poor people smoke a lot. Crazy examples? Maybe, but this reasoning is often applied to carbon pricing.
The same principle applies internationally, where it is better to organize lump-sum transfers to poor countries rather than trying to adopt inefficient, and thus not very credible, policies. As Pope Francis said in his encyclical Laudato si’:
Its [climate change’s] worst impact will probably be felt by developing countries in coming decades. Many of the poor live in areas particularly affected by phenomena related to warming, and their means of subsistence are largely dependent on natural reserves and ecosystem services such as agriculture, fishing and forestry. They have no other financial activities or resources which can enable them to adapt to climate change or to face natural disasters, and their access to social services and protection is very limited.
Poor and emerging countries rightly point out that rich countries have financed their industrialization by polluting the planet, and that they want to achieve a comparable standard of living. Figure 8.4 and table 8.1 demonstrate the magnitude of the challenge. To simplify, we can refer to the principle of “a common but differentiated responsibility”: the responsibility incumbent on developed countries now, and in the future on emerging countries, that will account for a large proportion of emissions, as indicated by figure 8.4. This has led some people to argue for a “fair because differentiated” approach: a high carbon price for developed countries and a low one for emerging and developing countries.
Figure 8.4. Total Co2 emissions since 1850: the distortion of historical responsibilities. Source: Chair of climate economics, founded on the World Resources Institute’s CAIT database.
But … a high carbon price in developed countries would have only a limited effect because they would offshore production to countries with low-cost carbon (not to mention the risk that national parliaments would exit the agreement, as happened after Kyoto). And even ignoring leakages, no matter what efforts were made by the developed countries, the objective of limiting the temperature increase to 1.5 to 2 degrees Celsius will never be reached if poor and emerging countries do not limit their GHG emissions in the future. It is impossible to exonerate lower-income countries. In twenty years, China will have emitted as much carbon dioxide as the United States has since the industrial revolution.
So what can we do? Emerging countries have to subject their citizens and enterprises to a substantial carbon price (ideally, the same price as elsewhere in the world). The question of equality should be addressed by financial transfers from rich countries to poor countries. The Copenhagen Protocol agreed on such aid, a principle reaffirmed by the COP 21 in Paris.
To sum up, international inequality raises the question of how the burden of coping with climate change is to be shared. The principle of common but differentiated responsibility reflects the idea that rich countries are generally those that have historically contributed the most to the accumulation of GHGs in the atmosphere. This observation should certainly not lead us, however, to abandon the principle of a single price, as happened in the Kyoto Protocol of 1997. In that agreement, low income countries were not subject to any price on carbon. This derailed the agreement because the US Senate would not ratify it. We should not repeat the errors made in Kyoto.
Finally, is it fair that the pollution caused, in China for example, by the production of goods exported to the United States and Europe be counted as Chinese pollution, and be covered by the system of permits to which all countries, including China, would be subject? The answer is that Chinese firms that emit GHGs when they produce exported goods will pass the price of carbon through to American and European importers so that rich country consumers will pay for the pollution their consumption induces. International trade does not alter the principle that payment should be collected where emissions are produced.
THE GREEN CLIMATE FUND AND THE OBJECTIVE OF ONE HUNDRED BILLION DOLLARS A YEAR
Up to now, negotiations to settle the question of compensation for poor countries to gain their participation in the collective effort have failed. The 2009 Copenhagen summit promised an annual transfer of one hundred million dollars to poor countries.42 In October 2015, the OECD43 announced that commitments to contribute toward the goal had reached sixty-two billion dollars, a figure far higher than expected. On closer inspection, NGOs and the potential recipient countries expressed reservations about the accuracy of the data. Some of the commitments were loans, not donations. Moreover, a substantial fraction came from multilateral aid agencies (the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development) or from bilateral development agencies; since these agencies had no increase in their budgets, the question was whether this aid was additional. Was it really new aid benefiting developing countries, or just existing aid relabeled “green”?44
As in other domains (humanitarian aid after a natural catastrophe, or public health aid for the least advanced countries), national parliaments are reluctant to vote much money for developing countries.45 Even an effective program like the Global Alliance for Vaccines and Immunization (GAVI)—which has a much smaller budget—got off the ground only thanks to a large financial commitment made by the Bill and Melinda Gates Foundation. At international conferences, politicians have a habit of promising financial contributions—but, once the conference is over, they reduce or reverse their pledges. Unfortunately, it is probable that free riding will endanger the progress of the Green Climate Fund.
Of course, in negotiations involving 195 countries it is difficult to agree on who is to benefit and who is to pay and how much. Each country will want to have its say and will slow down negotiations by asking to pay a little less or to receive a little more. It will probably be necessary to negotiate rough formulas based on a few country parameters (income, population, present and foreseeable pollution, sensitivity to global warming, for example) rather than trying to determine the contributions country by country. This will be difficult, but will be more realistic than an across-the-board negotiation.46
THE CREDIBILITY OF AN INTERNATIONAL AGREEMENT
An effective international agreement would create a coalition within which all countries and regions would apply the uniform carbon price to their respective territories. According to the principle of subsidiarity (the devolution of decision making to the lowest practical level), each country would then be free to devise its own carbon policy, by creating a carbon tax, a tradable emissions permits mechanism, or a hybrid system, for example. The free rider problem would be a challenge to the stability of this grand coalition: Could we count on the agreement being respected? It is a complex problem, but a solution is not out of reach.
Government debt is an instructive analogy. Sanctions against a country in default are limited (fortunately, gunboat diplomacy is no longer an option), which has led to concerns about whether countries are willing to repay debt. The same goes for climate change. Even if a good agreement were reached, there would be limited means to enforce it. The public debate about international climate negotiations usually ignores this reality. That said, we have to pin our hopes on a binding agreement, a genuine treaty, and not an agreement based only on promises. No matter how limited the possibility of international sanctions in the event of nonpayment of government debt, most countries do usually repay. More generally, the Westphalian tradition (that is of treaties between nation states being largely observed) gives us a nonnegligible chance of achieving it.
Naming and shaming is a good, feasible tactic, but—as we have seen in the case of the Kyoto commitments—it may remain largely toothless. Countries will always find excuses for not fulfilling their commitments: citing other measures (such as green research and development), recession, insufficient efforts made by others, a change of government, safeguarding jobs. There is no perfect solution to the problem of enforcing an international agreement, but we have at least two tools.
First, countries value free trade; the WTO might consider that the nonrespect of an international climate agreement is equivalent to environmental dumping, and impose sanctions on those grounds. In the same spirit, punitive taxes on imports could be used to penalize countries who do not participate. This would encourage hesitant countries to join the agreement and would make it more likely that a global coalition for the climate could be stable. Clearly the nature of the sanctions could not be decided by countries individually—they would quickly seize the opportunity to set up protectionist measures that would not necessarily have much connection with environmental reality.
Second, a climate agreement should be binding on a country’s future governments, like sovereign debt. The IMF could be a stakeholder in this policy. For example, in the case of a tradable emissions permits system, a shortage of permits at the end of the year would increase the national debt, and the conversion rate would be the current market price. Naturally, I am aware of the risk of collateral damage that could result from choosing to connect a climate policy with international institutions that are working decently well. But what is the alternative? Supporters of non-binding agreements hope that goodwill will be enough to limit GHG emissions. If they are right, then incentive measures initiated through collaboration with other international institutions will suffice, a fortiori, without any collateral damage to these institutions.
IN CONCLUSION: PUTTING NEGOTIATIONS BACK ON TRACK
Despite the accumulation of scientific evidence that human actions play an important role in climate change, international action has been disappointing. The Kyoto Protocol failed to create an international coalition for a carbon price in proportion to its social cost. It was also a perfect illustration of the instability of international agreements that do not take the free rider problem seriously. Every international agreement must satisfy three criteria: economic efficiency, incentives to respect commitments, and fairness. Efficiency is possible only if all countries apply the same carbon price. Adequate incentives require penalties for free riders. Fairness, a concept defined differently by each stakeholder, should be achieved through lump-sum transfers. The strategy of voluntary commitments to reduce emissions is another example of a wait-and-see attitude from key countries—that is, a strategy of postponing a binding commitment on emissions to a later date.
However, this chapter should not fail to mention reasons for optimism. First, public awareness of the problem has grown in recent years, even if the economic crisis put environmental considerations on the back burner for a while. In addition, more than forty countries, including some of the most important ones (the United States, China, Europe) have created tradable emissions permit markets. Although they have generous ceilings and very low carbon prices as a result, they demonstrate a commitment to use a rational policy to fight climate change. Local carbon markets may someday connect to form a more coherent and efficient global market, even if the question of “exchange rates” will be a thorny one.47 Finally, the sharp decline in the price of solar energy allows us to glimpse economic solutions to the problem of emissions in African and other developing and emerging countries. But all this will not be enough to attain our goals. So how can we build on these dynamics?
Although it is important to maintain a global dialogue, the UN process has shown predictable limits. Negotiations between 195 nations are incredibly complex. We need to create a “coalition for the climate” that brings together, from the outset, the major polluters, present and future. I don’t know whether this should be the G20 or a more restricted group: in 2012, the five biggest polluters—Europe, the United States, China, Russia, and India—represented 65 percent of worldwide emissions (28 percent for China and 15 percent for the United States). The members of this coalition could agree to pay for each ton of carbon emitted. At first, no attempt would be made to involve the 195 countries in the global negotiation, but they would be urged to join in. The members of the coalition would put pressure on the WTO, and countries that refused to enter the coalition would be taxed at borders. The WTO would be a stakeholder on the basis that nonparticipants are guilty of environmental dumping; to avoid undue protectionism by individual countries, it would contribute to the definition of punitive import duties.
The answer to the question, “What can we do?” is simple: get back on the path of common sense.
1. The first priority of future negotiations ought to be an agreement in principle to establish a universal carbon price compatible with the objective of no more than a 1.5 to 2 degrees Celsius increase in average global temperatures. Proposals seeking carbon prices differentiated on the basis of country not only open a Pandora’s box, they are above all not good for the environment, because the future growth of emissions will come from emerging and poorer countries. Underpricing carbon in these countries will not limit warming to a 1.5 to 2 degrees increase. This is so all the more because high prices for carbon in developed countries will encourage the offshoring of production facilities that emit GHGs to countries with low carbon prices, thus nullifying the efforts made in wealthy countries.
2. We also have to reach an agreement on an independent monitoring infrastructure to measure and supervise emissions in signatory countries, with an agreed governance mechanism.
3. Finally, and still in the spirit of returning to fundamentals, let us confront head-on the question of equity. This is a major issue, but any negotiation must face it, and burying it in the middle of discussions devoted to other subjects does not make the task any easier. There must be a negotiating mechanism that, after the acceptance of a single price for carbon, focuses on this question. Today, it is pointless to try to obtain ambitious promises for green funds from developed countries without that leading in turn to a mechanism capable of achieving climate objectives. Green financial assistance could take the form either of financial transfers or, if there is a world market for emissions permits, of a generous allocation of permits to developing countries.
There is no other way forward.
