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Why Cancun Trumped Copenhagen

As we begin the year 2011, a look back at 2010 confirms that the greatest environmental achievement of the past year was the success that was achieved at the Sixteenth Conference of the Parties (COP-16) of the United Nations Framework Convention on Climate Change (UNFCCC) in Cancun, Mexico, in early December. I wrote about this in some detail in my December 13^th essay, “What Happened (and Why): An Assessment of the Cancun Agreements.”

The challenges awaiting delegates later this year (December, 2011) at COP-17 in Durban, South Africa, will be tremendous, particularly in regard to trying to negotiate the massive divide that exists between most Annex I countries and virtually all non-Annex I countries on the fate of a second (post-2012) commitment period for the Kyoto Protocol.

However, on this first day of 2011, it may be helpful to reflect again on the recent success in Cancun, and ask – in particular – why it occurred, because understanding that could provide some valuable lessons for the organizers and hosts of COP-17 in Durban. This was the question I addressed in a brief December 20^th Op-Ed in The Christian Science Monitor, and so rather than attempting to summarize or expand it, I simply reproduce it below.

The Christian Science Monitor

Why Cancun trumped Copenhagen: Warmer relations on rising temperatures

By Robert N. Stavins
December 20, 2010

Boston —

After the modest results of the climate change talks in Copenhagen a little more than a year ago, expectations were low for the follow-up negotiations in Cancun last month. Gloom-and-doom predictions dominated.

But a funny thing happened on the way to that much-anticipated failure: During two intense weeks of discussions in the Mexican resort that wrapped up at 3 AM on Dec. 12, the world’s governments quietly achieved consensus on a set of substantive steps forward. And equally important, the participants showed encouraging signs of learning to navigate through the unproductive squabbling between developed and developing countries that derailed the Copenhagen talks.

Unprecedented first steps

The tangible advances were noteworthy: The Cancun Agreements set emissions mitigation targets for some 80 countries, including all the major economies. That means that the world’s largest emitters, among them China, the United States, the European Union, India, and Brazil, have now signed up for targets and actions to reduce emissions by 2020.

The participating countries also agreed – for the first time in an official United Nations accord – to keep temperature increases below a global average of 2 degrees Celsius. Yes, that goal is no more stringent than the one set out in Copenhagen, but this time, the participating nations formally accepted the goals; a year earlier, they merely “noted” them, without adopting the accord.

Other provisions establish a “Green Climate Fund” to finance steps to limit and adapt to climate change, and designate the World Bank as interim trustee, over the objections of many developing countries. And new initiatives will protect tropical forests, and find ways to transfer clean energy technology to poorer countries.

The Cancun Agreements on their own are clearly not sufficient to keep temperature increases below 2 degrees Celsius, but they are a valuable step forward in the difficult process of constructing a sound foundation for meaningful, long-term global action.

Small steps vs. global accords

The progress was as much about changing the mindset of how to tackle climate disruption. Significantly, the Cancun agreement blurs the distinction between industrialized and developing countries – a vital step to break through the rich-poor divide that has held up progress for years. The 1997 Kyoto Protocol assigned emission targets only to the 40 countries thought to be part of the industrialized world, which left the more than 140 nations of the developing world without any commitments. But today, more than 50 of those so-called developing countries have higher per capita income than the poorest of the countries with emission-reduction responsibilities under Kyoto.

Implicitly, the process in Cancun also recognizes that smaller, practical steps – some of which are occurring outside the United Nations climate process – are going to be more easily achievable, and thus more effective, than holding out for some overarching thunderclap in a global accord.

The parallel processes of multilateral discussions on climate change policy, including the G20 meetings and the Major Economies Forum, have been useful. For the first time at Cancun, the UN Framework Convention on Climate Change, under the new leadership of Executive Secretary Christiana Figueres, offered a positive and pragmatic approach toward embracing these parallel processes.

Fixing the past (and future)

The Kyoto Protocol, which essentially expires at the end of 2012, is fundamentally flawed, especially in dividing the world into competing economic camps. At Cancun, it was encouraging to hear fewer people holding out for a commitment to another phase of the Kyoto Protocol. It was politically impossible to spike the idea of extending the Kyoto agreement entirely, but at least it was punted to the next gathering in Durban, South Africa, a year from now. Otherwise, the Cancun meeting could have collapsed amid acrimony and recriminations.

Usefully, the Cancun Agreements recognize directly and explicitly two key principles:

1) All countries must recognize their historic emissions (read, the industrialized world); and

2) All countries are responsible for their future emissions (think of those with fast-growing emerging economies).

This also helps move beyond the old Kyoto divide.

A better dialogue

An essential goal in Cancun was for the parties to maintain sensible expectations and develop effective plans. That they met this challenge owes in good measure to the careful and methodical planning by the Mexican government, and to the tremendous skill of Mexican Foreign Minister Patricia Espinosa in presiding over the talks.

For example, at a critical moment she took note of objections from Bolivia and a few other leftist states, and then ruled that the support of the 193 other countries meant that consensus had been achieved and the Cancun Agreements had been adopted. She pointed out that “consensus does not mean unanimity.” Compare that with Copenhagen, where the Danish prime minister allowed objections by five small countries to derail the talks.

Mexico’s adept leadership also made sure smaller countries were able to contribute fully and join any meetings they wanted, avoiding the sense of exclusivity that alienated some parties in Copenhagen. That’s a sign that Mexico is one of the key “bridging states” that have credibility in both worlds. Another is South Korea. They will need to play key roles going forward.

It’s also vital to note that China and the United States set a civil, productive tone, in contrast to the Copenhagen finger-pointing. From the sidelines in Cancun, I can vouch for the tremendous increase in openness of members of the Chinese delegation.

The acceptance of the Cancun Agreements suggests that the international community may now recognize that incremental steps in the right direction are better than acrimonious debates over unachievable targets.

Defining Success for Climate Negotiations in Cancun

International climate negotiations will continue in Cancun, Mexico, during the first two weeks of December, 2010. These will be the Sixteenth Conference of the Parties (COP-16) of the United Nations Framework Convention on Climate Change (UNFCCC). The key challenge is to continue the process of constructing a sound foundation for meaningful, long-term global action, not necessarily some notion of immediate, highly-visible triumph. Some of the gloom-and-doom predictions we’ve been hearing about these upcoming negotiations are therefore misguided, because they are based upon unreasonable – and fundamentally inappropriate – expectations (despite the fact that expectations have been lowered dramatically since COP-15 in Copenhagen last year).

Keeping Our Eyes on the Prize

Why do I say that the best goal for the Cancun climate talks is to make real progress on a sound foundation for meaningful, long-term global action, not some notion of immediate triumph? This is because of some basic scientific and economic realities.

First, the focus of scientists (and policy makers) should be on stabilizing concentrations at acceptable levels by 2050 and beyond, because it is the accumulated stock of greenhouse gas emissions — not the flow of emissions in any year — that are linked with climate consequences.

Second, the cost-effective path for stabilizing concentrations involves a gradual ramp-up in target severity, to avoid rendering large parts of the capital stock prematurely obsolete.

Third, massive technological change is the key to the needed transition from reliance on carbon-intensive fossil fuels to more climate-friendly energy sources. Long-term price signals (most likely from government policies) will be needed to inspire such technological change.

Fourth and finally, the creation of long-lasting international institutions is central to addressing this global challenge.

For all of these reasons, international climate negotiations will be an ongoing process, not a single task with a clear end-point. Indeed, they may well proceed much as international trade talks have done, that is, with progress over many years, building the institutions (the GATT, the WTO), but moving forward in fits and starts, at times seeming to move backward, but making meaningful progress in the long term.

So, the bottom-line is that a sensible goal for the international negotiations in Cancun is progress on a sound foundation for meaningful long-term action, not some notion of immediate “success.”

Don’t Sacrifice Valuable Long-Term Achievements for Minor Short-Term Gains

It might be relatively easy, but actually quite unfortunate, for countries to achieve what some people might define as “success” in Cancun: a signed international agreement, followed by glowing press releases. I say it would be unfortunate, because such an agreement could only be the Kyoto Protocol on steroids: more stringent targets for the original list of industrialized countries (Annex I) and no meaningful commitments by the key rapidly-growing emerging economies, such as China, India, Brazil, Korea, Mexico, and South Africa.

Such an agreement could — in principle — be signed, but it would not reduce global emissions, and it would not be ratified by the U.S. Senate (just like Kyoto). Hence, there would be no real progress on climate change.

What Would Constitute Real Progress in Cancun?

If it’s not reasonable to expect that a comprehensive post-Kyoto policy architecture will be identified and enacted in Cancun, what would constitute real progress?

1. Embracing Parallel Processes

A significant step forward would be for the UNFCCC to embrace the parallel processes that are carrying out multilateral discussions (and in some cases, negotiations) on climate change policy: the Major Economies Forum or MEF (a multilateral venue for discussions – but not negotiations – outside of the UNFCCC, initiated under a different name by the George W. Bush administration in the United States, and continued under a new name by the Obama administration, for the purpose of bringing together the most important emitting countries for candid and constructive discussion and debate); the G20 (periodic meetings of the finance ministers – and sometimes heads of government – of the twenty largest economies in the world); and various other multilateral and bilateral organizations and discussions.

By the way, the MEF includes Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, South Africa, the United Kingdom, and the United States. The membership of the G20 is the same as the membership of the MEF, plus Argentina, Saudi Arabia, and Turkey.

The previous leadership of the UNFCCC seemed to view the MEF, the G20, and most other non-UNFCCC forums as competition – indeed, as a threat. Fortunately, the UNFCCC’s new leadership under Executive Secretary Christiana Figueres (appointed by UN Secretary-General Ban Ki-moon in May of this year) has displayed a considerably more positive and pragmatic attitude toward these parallel processes.

2. Consolidating Negotiations Tracks

There are now three major, parallel processes operative: first, the UNFCCC’s KP track (negotiating national targets for a possible second commitment period – post-2012 – for the Kyoto Protocol); second, the LCA track (the UNFCCC’s negotiation track for Long-term Cooperative Action, that is, a future international agreement of undefined nature); and third, the Copenhagen Accord, negotiated and noted at COP-15 in Copenhagen, Denmark, in December, 2009. Consolidating these three tracks into two tracks (or better yet, one track) would be another significant step forward.

One way this could happen would be for the LCA negotiations to take as their point of departure the existing Copenhagen Accord, which itself marked an important step forward by blurring for the first time (although not eliminating) the unproductive and utterly obsolete distinction in the Kyoto Protocol between Annex I and non-Annex I countries. (Note that more than 50 non-Annex I countries now have greater per capita income than the poorest of the Annex I countries.)

In particular, the UNFCCC principle of “common but differentiated responsibilities” could be made meaningful through the dual principles that: all countries recognize their historic emissions (read, the industrialized world); and all countries are responsible for their future emissions (think of those rapidly-growing emerging economies).

This would represent a great leap beyond what has become the “QWERTY keyboard” (that is, unproductive path dependence) of international climate policy: the distinction in the Kyoto Protocol between the small set of Annex I countries with quantitative targets, and the majority of countries in the world with no responsibilities. Various policy architectures could subsequently build on these dual principles and make them operational, beginning to bridge the massive political divide which exists between the industrialized and the developing world.

At the Harvard Project on Climate Agreements — a multi-national initiative with some 35 research projects in Australia, China, Europe, India, Japan, and the United States — we have developed a variety of architectural proposals that could make these dual principles operational. (See, for example: “Global Climate Policy Architecture and Political Feasibility: Specific Formulas and Emission Targets to Attain 460 PPM CO2 Concentrations” by Valentina Bosetti and Jeffrey Frankel; and “Three Key Elements of Post-2012 International Climate Policy Architecture” by Sheila M. Olmstead and Robert N. Stavins.)

3. Productive Steps in Narrow, Focused Agreements, such as REDD+

A third area of success at the Cancun negotiations could be realized by some productive steps with specific, narrow agreements, such as on REDD+ (Reduced Deforestation and Forest Degradation, plus enhancement of forest carbon stocks). Other areas where talks are moving forward, although somewhat more slowly, are finance and technology.

4. Maintaining Sensible Expectations and Developing Effective Plans

Finally, it is important to go into the Cancun meetings with sensible expectations and thereby effective plans. Again, negotiations in this domain are an ongoing process, not a single task with a clear end-point. The most sensible goal for Cancun is progress on a sound foundation for meaningful long-term action, not some notion of immediate triumph. The key question is not what Cancun accomplishes in the short-term, but whether it helps put the world in a better position five, ten, and twenty years from now in regard to an effective long-term path of action to address the threat of global climate change.

Further Reading

A number of previous essays I have written and posted at this blog will be of interest to those who wishe to follow developments at the Sixteenth Conference of the Parties of the UN Framework Convention on Climate Change in Cancun. Here are links, in chronological order:

Three Pillars of a New Climate Pact

Can Countries Cut Carbon Emissions Without Hurting Economic Growth?

Approaching Copenhagen with a Portfolio of Domestic Commitments

Defining Success for Climate Negotiations in Copenhagen

Only Private Sector Can Meet Finance Demands of Developing Countries

Chaos and Uncertainty in Copenhagen?

What Hath Copenhagen Wrought? A Preliminary Assessment of the Copenhagen Accord

Another Copenhagen Outcome: Serious Questions About the Best Institutional Path Forward

Opportunities and Ironies: Climate Policy in Tokyo, Seoul, Brussels, and Washington

Both Are Necessary, But Neither is Sufficient: Carbon-Pricing and Technology R&D Initiatives in a Meaningful National Climate Policy

For many years, there has been a great deal of discussion about carbon-pricing – whether carbon taxes or cap-and-trade – as an essential part of a meaningful national climate policy. It has long been recognized that although carbon-pricing will be necessary, it will not be sufficient. Economists and other policy analysts have noted that policies intended to foster climate-friendly technology research and development (R&D) will also be necessary, but likewise will not be sufficient on their own.

Some recent studies and press accounts, which I reference below, have identified these two approaches to addressing CO₂ emissions as substitutes, rather than complements. That is fundamentally inconsistent with decades of research, and so my purpose in this essay is to set the record straight.

Carbon Pricing: Necessary But Not Sufficient

First of all, why is there so much talk among policy analysts and policy makers – not simply among academics – about carbon‑pricing as the core of a meaningful strategy to reduce CO₂ emissions? Why, in fact, is this approach so overwhelmingly favored by the analytical community? The answer is simple and surprisingly pragmatic.

First, there is no other feasible approach that can provide meaningful emissions reductions, such as the 80 percent reduction in national CO₂ emissions by 2050 that was part of the legislation passed by the U.S. House of Representatives and proposed in the Senate and part of the Obama administration’s conditional pledge under the Copenhagen Accord. Because of the ubiquity and diversity of energy use in a modern economy, conventional regulatory approaches –standards of various kinds – simply cannot do the job. Only carbon pricing – either in the form of carbon taxes or cap-and-trade – can significantly tilt in a climate-friendly direction the millions of decentralized decisions that are made in our economy every day.

Second, carbon-pricing is the least costly approach in the short term, because abatement costs are exceptionally heterogeneous across sources. Only carbon-pricing provides strong incentives that push all sources to control at the same marginal abatement cost, thereby achieving a given aggregate target at the lowest possible cost.

Third, it is the least costly approach in the long term, because it provides incentives for carbon-friendly technological change, which brings down costs over time.

For these reasons, carbon-pricing is a necessary component of a truly meaningful national climate policy. [I’ve written about this in many previous blog posts, including on June 23, 2010, “The Real Options for U.S. Climate Policy.”] However, although it is a necessary policy component, carbon-pricing is not sufficient on its own. This is because there are other market failures that dilute the impacts of price signals on decision makers.

Technology R&D Policies: Also Necessary, Also Not Sufficient

The most important of these “other market failures” is the public good nature of information. Companies carrying out research and development (R&D) incur the full costs of their efforts, but they do not capture the full benefits. This is because even with a perfectly-enforced system of intellectual property rights (such as patents), there are tremendous spillover benefits to other firms. Decades of economic research – much of it by my former colleague and co-author, Professor Adam Jaffe, now Dean of Arts and Sciences at Brandeis University – has analyzed with empirical (econometric) analysis the remarkable degree to which inventions and innovations by one firm provide valuable information that leads to new inventions and innovations by other firms.

So, firms pay the costs of their R&D, but do not reap all the benefits. The existence of this positive externality of firms’ R&D – or put differently, the public-good nature of the information generated by R&D – means that the private sector will carry out less than the “efficient” amount of R&D of new climate-friendly technologies in response to given carbon prices. Hence, other public policies are needed to address this “R&D market failure.”

New path-breaking technologies will be needed to address climate change, and public support for private-sector or public-sector R&D will be crucial to meet this need. But, at the same time, to address the climate-change market failure itself (that is, the externality associated with greenhouse gas emissions), carbon pricing will be necessary, for all of the reasons I gave above. This is an application of an important and fundamental principle in economics: two market failures require the use of two policy instruments.

Empirical analyses have repeatedly verified this crucial point – that combining carbon-pricing with R&D support is more cost-effective than adopting either approach alone. Included in this set of studies are the following: Carolyn Fischer (Resources for the Future) and Richard Newell (U.S. Energy Information Administration, on leave from Duke University), “Environmental and Technology Policies for Climate Mitigation”; Stephen Schneider (late of Stanford University) and Lawrence Goulder (Stanford University), “Achieving Low-Cost Emissions Targets”; and Daren Acemoglu (MIT), Philippe Aghion, Leonardo Bursztyn, and David Hemous (Harvard University), “The Environment and Directed Technical Change.”

Complements, Not Substitutes

An interesting, recent column, “Next Step on Policy for Climate,” by David Leonhardt in the New York Times (October 13, 2010, p. B1) might give some people the mistaken impression that technology policies are an adequate, even sensible substitute for carbon-pricing. That was not the intended message of the column. In fact, Leonhardt – perhaps the leading economic journalist writing today in the United States – indicates clearly in his column that he is skeptical of the notion of thinking of technology subsidies as an adequate substitute for carbon-pricing (in particular, cap-and-trade). And in a follow-up post at the New York Times’ Economix, he makes clear that “these two policies are not mutually exclusive.”

Nevertheless, Leonhardt’s original column (which included a very nice profile of my colleague, Professor Michael Greenstone of MIT) focused attention on a recent report – a report that could give the false impression that technology policies would be a sensible substitute for serious carbon-pricing. The report in question – “Post-Partisan Power” – received significant coverage, primarily because of its sponsorship: a combination of a prominent Republican-oriented Washington think tank, the American Enterprise Institute (AEI), and an equally prominent Democratic-oriented Washington think tank, the Brooking Institution (and a third partner, the Breakthrough Institute, a California-based environmental think tank).

The report may well garner some bi-partisan political support, because it promises a free lunch of painless, win-win solutions, a promise that will resonate with many elected officials. Indeed, the report’s sub-title is “how a limited and direct approach to energy innovation can deliver clean, cheap energy, economic productivity, and national prosperity.” What’s not to like? And the authors are presumably smart and politically shrewd. I know that’s the case with the AEI author, Steven Hayward, who I debated last year in the pages of the Wall Street Journal.

To its credit, the report lays out a menu of policies intended to stimulate carbon-friendly technological change, ranging from $500 million of Federal government funding of K-12 curriculum development and teacher training to $25 billion annually of direct Federal funding of energy innovation.

For the reasons I explained above (the “R&D market failure” and the “carbon emissions externality”), both direct technology R&D policies and serious carbon-pricing are necessary, but neither is sufficient on its own. Unfortunately, this new report – and some of the press coverage surrounding it – makes the claim that such direct government funding of technology innovation is a sufficient and sensible substitute for meaningful carbon-pricing. That claim is both unfortunate and wrong, as it is supported neither by sound reasoning nor empirical research, as I have described above.

Again, many of the individual technology policy recommendations offered by the AEI-Brookings-BI report are worthy of serious consideration (as a complement, not a substitute for an economy-wide carbon-pricing policy). But the specifics – indeed, much of the meat – are missing. “Reform the nation’s morass of energy subsidies” – yes, but exactly which subsidies (all of which have important political constituencies behind them) will be eliminated? “Recognize the potential for nuclear power” – yes, and both the House and Senate carbon-pricing schemes would have provided tremendous incentives for nuclear power investment.

Overall, there should be concern about how all of this will be funded. Where will the $25 billion per year come from? The report appropriately states that this should not come from general revenues, and thus add to the Federal debt. “Phasing out current subsidies for wind, solar, ethanol, and fossil fuels” could be meritorious on its own, but how much does this generate, and does it even pass a political laugh-test? Interestingly, beyond this, despite considerable rhetoric about moving beyond debates about carbon-pricing, the report recommends that in order to avoid adding to the Federal debt, it would be necessary to impose new taxes, including increased royalties for oil and gas extraction, a tax on imported oil, a tax on electricity sales, and a “very small carbon price” (presumably from a modest carbon tax or unambitious cap-and-trade system).

The actual numbers would be helpful, and the political feasibility remains a serious question. The political challenges that emerged in the effort to pass cap-and-trade climate legislation will not magically disappear if there’s an attempt to induce Congress to approve $25 billion in funding. As Tom Friedman noted on October 12^th in the New York Times, Congress has not come close to fully funding the outstanding requests for about $4 billion for ARPA-E (energy) research.

More broadly, despite the attraction of the AEI-Brookings-BI proposal as a potential complement to carbon-pricing (and I am serious that the proposal is of value in that context), one has to be very careful about comparing proposed new policies in idealized form (for example, precisely the right subsidies eliminated and precisely the right new subsidies introduced) with real policies with all their warts (for example, the cap-and-trade bill that was passed by the House last year). Making such comparisons can lead to flawed analysis and misleading results.

This is not a new issue. Robert Hahn and I wrote about this generic problem nearly 20 years ago in an article (“Economic Incentives for Environmental Protection: Integrating Theory and Practice”) which appeared the American Economic Review Papers and Proceedings (May 1992). At the time, our concern was that this mistake was being made not by the opponents but by the supporters of cap-and-trade and other (then essentially untested) market-based instruments. We worried that “many analysts use highly stylized benchmarks for comparison that ignore likely political realities,” and suggested that an appropriate “comparison would be between actual command-and-control policies and either actual trading [cap-and-trade] programs … or a reasonably constrained theoretical … program.”

Likewise today, when carrying out comparisons of policy alternatives, it is fine to compare two theoretical, idealized alternatives, or to compare two real-world policies, but it is problematic and usually misleading to compare a theoretical, idealized policy of one type with a real-world example of another type of policy.

The Bottom Line

Carbon-pricing – whether carbon taxes or cap-and-trade – will be an essential part of any truly meaningful national climate policy. Likewise, to address the “R&D market failure,” direct technology innovation policies will also be required. Both are necessary. Neither is sufficient. These are complements, not substitutes.

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Postscript: Four years ago, the U.S. Congressional Budget Office (CBO) — widely recognized for its non-partisan, first-rate research — produced a study on the same topic as the AEI-Brookings-BI report, but did so with rigor and without ideology. The CBO report — Evaluating the Role of Prices and R&D in Reducing Carbon Dioxide Emissions (September 2006) — was prepared by Dr. Terry Dinan, a long-time, respected CBO economist, and was peer reviewed by an impressive set of academic and other experts. Sadly, the CBO paper received little press coverage, despite its high quality and its relevance. For anyone interested in the topic of this post, particularly those who disagree with my theme, I hope you will read the CBO report.

Also, a reader of this blog post sent me a paper by David Hart and Kadri Kallas (from MIT’s Energy Innovation working paper series) that examines “Alignment and Misalignment of Technology Push and Regulatory Pull.” It’s worth reading in the context of combining carbon pricing and technology R&D policies.