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The Warsaw Climate Negotiations, and Reason for Cautious Optimism

The Nineteenth Conference of the Parties (COP-19) of the United Nations Framework Convention on Climate Change (UNFCCC) came to a close in Warsaw, Poland, on Saturday, November 23^rd, after what has become the norm – several all-night sessions culminating in last-minute negotiations that featured diplomatic haggling over subtle changes to the text on which countries were finally willing to agree. The key task of this COP was essentially to pave the way for the negotiations next year at COP-20 in Lima, Peru, as a lead-up to the real target, reaching a new international climate agreement at the 2015 negotiations in Paris to be implemented in 2020, when the second commitment period of the Kyoto Protocol comes to an end. If that was the key objective, then the Warsaw meetings must be judged to be at least a modest success – the baton was not dropped, rather it was passed successfully in this long relay race of negotiations.

Before going further, I would like to acknowledge something else about COP-19 in Warsaw, namely the excellent logistics. Anyone who suffered through the disastrous logistical arrangements for COP-15 in Copenhagen will not take this for granted. Perhaps ironically, in the years I’ve been participating in these annual events, the two best organized conferences (in terms of logistical arrangements) were the two Polish COPs – COP-14 in Poznan in 2008 and COP-19 in Warsaw this year.

As I have written in many previous essays at this blog, the challenges standing in the way of an effective international climate change agreement are numerous and severe. A brief historical account is necessary to explain the significance of what transpired in Warsaw. However, if you’re familiar with international climate policy, particularly the history of these international negotiations, I suggest you skip the next section and move directly to “Issue #1: Making Progress toward a Post-Kyoto Agreement.”

Some Historical Background to Place the Warsaw Talks in Context: the UNFCCC, the Berlin Mandate, the Kyoto Protocol, and the Durban Platform

The U.N. Framework Convention on Climate Change, adopted at the U.N. Conference on Environment and Development (the first “Earth Summit”) in Rio de Janeiro, Brazil, in 1992, contains what was to become a crucial passage: “The Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities. Accordingly, the developed country Parties should take the lead in combating climate change and the adverse effects thereof.” [emphasis added] The countries considered to be “developed country Parties” were listed in an appendix to the 1992 Convention – Annex I.

The phrase – common but differentiated responsibilities – was given a specific interpretation three years after the Earth Summit by the first decision adopted by the first Conference of the Parties (COP-1) of the U.N. Framework Convention, in Berlin, Germany, April 7, 1995 – the all important Berlin Mandate, which interpreted the principle as: (1) launching a process to commit (by 1997) the Annex I countries to quantified greenhouse gas emissions reductions within specified time periods (targets and timetables); and (2) stating unambiguously that the process should “not introduce any new commitments for Parties not included in Annex I.”

Thus, the Berlin Mandate established the dichotomous distinction whereby the Annex I countries were to take on emissions-reductions responsibilities, and the non-Annex I countries were to have no such responsibilities whatsoever. This had wide-ranging and profound consequences, because it became the anchor that prevented real progress in international climate negotiations. With 50 non-Annex I countries coming to have greater per capita income than the poorest of the Annex I countries, the distinction was out of whack within a few years.

But, more important than that, this dichotomous distinction meant that: (a) half of global emissions would be from nations without constraints; (b) the world’s largest emitter – China – would be unconstrained; (c) aggregate compliance costs would be driven up to be four times their cost-effective level, because many opportunities for low-cost emissions abatement in emerging economies were taken off the table; and (d) an institutional structure was perpetuated that made change and progress virtually impossible.

The dichotomous Annex I/non-Annex I distinction remained a central – indeed, the central – feature of international climate negotiations from COP-1 in Berlin in 1995 continuously until COP-15 in 2009, when hints of possible change first appeared. The Copenhagen Accord (2009) and the Cancun Agreements (2010) began a process of blurring the Annex I/non-Annex I distinction. But this blurring was only in the context of the interim pledge-and-review system established at COP-15 in Copenhagen and certified at COP-16 in Cancun, not in the context of an eventual successor to the Kyoto Protocol. Thus, the Berlin Mandate retained its centrality.

Then, in December, 2011, at COP-17 in Durban, South Africa, the Durban Platform for Enhanced Action was adopted. Under some interpretations, it essentially eliminates the Annex I/non-Annex I (or industrialized/developing country) distinction. In the Durban Platform, the delegates decided to reach an agreement by 2015 that will be applicable to all countries by 2020.

Rather than adopting the Annex I/non-Annex I (or industrialized/developing country) distinction, the Durban Platform focuses instead on the pledge to create a system of greenhouse gas reductions including all Parties (what matters, really, is all key countries) by 2015 that will come into force by 2020. Nowhere in the text of the decision were phrases such as “Annex I,” “common but differentiated responsibilities,” “distributional equity,” “historical responsibility,” all of which had long since become code words for targets for the richest countries and blank checks for all others.

By replacing the Berlin Mandate, the Durban Platform opened an important window. National delegations from around the world took on the challenging task to identify a new international climate policy architecture that is consistent with the process, pathway, and principles laid out in the Durban Platform, namely to find a way to include all (key) countries (such as the 20 largest national and regional economies that together account for upwards of 80% of global carbon dioxide emissions) in a structure that brings about meaningful emissions reductions within an appropriate timetable at acceptable cost, while remaining within the overall framework provided by the UNFCCC, including the celebrated principle of common but differentiated responsibilities.

Issue #1: Making Progress toward a Post-Kyoto Agreement

In Warsaw, the negotiators were tasked under the Durban Platform track (the so-called “ADP” track) to develop a work plan of substantive topics and a related calendar that will lead to the development of the text of an agreement of a new comprehensive policy architecture that can be discussed at COP-20 in Lima one year from now and then subject to final consideration and adoption a year after that at COP-21 in Paris. This they did, and in the process they identified six components for the new architecture: mitigation, adaptation, finance, technology development and transfer, capacity-building, and transparency of action and support. Some of these are more necessary than others, but it was this package that generated agreement in Warsaw.

The actual agreement in Warsaw could only be achieved through carefully negotiated text. The delegates’ obligation is to eventually adopt “a protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties…” In truth, the phrase “under the Convention” is not necessary, because any decision by the UNFCCC is under the Convention, and therefore it is the case that any agreement produced under the Durban Platform is still subject to the UNFCCC principle of “common but differentiated responsibilities.” But the large emerging economies tend to view the phrase “under the Convention” as supporting the dichotomous distinction of, on the one hand, commitments for Annex I (industrialized) countries to reduce emissions, and, on the other hand, no obligations for non-Annex I (developing) countries, who would take actions only voluntarily and only with financial assistance from the Annex I countries. The same set of large emerging economies insisted that if they were to be included in the agreement, then the word “commitments” must be replaced by “contributions.”

It is looking increasingly likely that the 2015 agreement will take the form of a hybrid architecture, combining: (1) a bottom-up system of national commitments (sorry, national contributions) that arise from – or are at least consistent with – national policies and goals; plus (2) top-down, centralized management of oversight, guidance, and coordination, with an eye to increasing ambition over time. At the Harvard Project on Climate Agreements, we outlined such a hybrid international climate policy architecture four years ago (“A Portfolio of Domestic Commitments: Implementing Common but Differentiated Responsibilities”), and we explored it further just last month in a new report (“Identifying Options for a New International Climate Regime Arising from the Durban Platform for Enhanced Action”). In Warsaw, we co-hosted and participated in two sessions that explored these ideas in considerable detail (you can learn more about that here; we will soon place all of the slide decks from those sessions at the Harvard Project web site).

Issue #2: Loss and Damage

As I predicted at the conclusion of last year’s climate negotiations (COP-18) in Doha, Qatar, the issue that held the greatest potential for blowing up this year’s talks in Warsaw was the topic of “loss and damage,” which the delegates agreed to put on the agenda for discussion this year at COP-19. The phrase “loss and damage” is typically understood to refer to the range of damages and loss associated with climate change impacts in developing countries that are particularly vulnerable to the adverse effects of climate change. Discussions about potential international policy in this realm frequently bring up thoughts about who should pay for such loss and damages, presumably those most responsible for climate change.

Since climate change is a function not of current emissions, but of concentrations, responsibility for damages is presumably correlated with cumulative emissions. Hence, the industrialized countries, in particular, the United States, worry that negotiations on “loss and damage” would soon raise the specter of unlimited legal liability.

The link is less direct than one might think, however. First, there is the global commons nature of the problem, meaning that climate change cannot be linked to emissions from a specific country. Second, there is the highly stochastic link from climate change to changes in weather patterns, so that no specific weather incident – whether Superstorm Sandy in New York, Hurricane Katrina in New Orleans, or Typhoon Haiyan in the Philippines – can be deterministically linked with global climate change. These two scientific realities mean that moving from “loss and damage” to legal liability would be a long and perilous road.

But this is a very important issue in the climate negotiations for many developing countries, in particular, for the small island states that are most at risk. Hence, it should not be surprising that this area of discussion – in some ways only a sideshow of the primary talks on reducing emissions and the risk of climate change – almost caused the talks to collapse.

In the end, the delegates agreed to finesse the topic by creating the Warsaw International Mechanism for Loss and Damage, which does not mention liability or promise compensation, but rather states that this is a topic to be discussed further at future meetings, and under the general topic of adaptation to climate change.

Issue #3: Finance

Those are two – the Durban Platform, and Loss and Damage – of three major issues that were considered in Warsaw. The third was “finance,” that is, the question of when and how the industrialized countries will meet the commitment they made at COP-15 in Copenhagen in 2009 to begin delivering $100 billion per year of financial assistance to developing countries in 2020 to help with mitigation and adaptation. Not surprisingly, there was little or no progress on that front. More about this in a future essay. For now ….

The Path Ahead – Any Reason for Optimism?

Given my description above of the debates and “resolution” regarding the major issues, is there any cause for optimism regarding the path ahead. Regular readers of this blog will know that I tend to see the half-full glass (or one-tenth full glass) of water, and in this case I think there really is cause for cautious optimism regarding the path ahead.

This is based upon a singular reality – the growing convergence of interests between the two most important countries in the world when it comes to climate change and international policy to address it, namely, China and the United States.

First of all, the annual carbon dioxide (CO₂) and greenhouse gas (GHG) emissions of these two countries have already converged. Whereas U.S. CO₂ emissions in 1990 were almost twice the level of Chinese emissions, by 2006 China had overtaken the United States. We are the world’s two largest emitters.

Second, as I explained above, cumulative emissions are particularly important, because they are what cause climate change. Any discussion of distributional equity in the climate realm inevitably turns to considerations of historic responsibility. Looking at the period 1850-2010, the United States led the pack, accounting for nearly 19% of cumulative global emissions of GHGs, with the European Union in second place with 17%, and China third, accounting for about 12% of global cumulative emissions. But that is changing rapidly, because of the fact that emissions are flat to declining throughout the industrialized world, but increasingly rapidly in the large emerging economies, in particular, China. Depending upon the relative rates of economic growth of China and the United States, as well as many other factors, China may top all countries in cumulative emissions within 10 to 20 years from now.

Third, China and the United States both have historically high reliance on coal for generating electricity. At a time at which U.S. dependence on coal is decreasing (due to increased supplies of unconventional natural gas and hence lower gas prices ), China continues to rely on coal, but is very concerned about this, partly because of localized health impacts of particulates and other pollutants. Importantly, both countries have very large shale gas reserves. U.S. output (and use for electricity generation) has been increasing rapidly, bringing down CO₂ emissions, whereas Chinese exploitation and output has been constrained by available infrastructure (i.e., lack of pipelines, but that will change).

Fourth, in both countries, sub-national climate policies – cap-and-trade systems – are moving forward. In the case of the China, seven pilot CO₂ cap-and-trade regimes at the local level are under development, while in the United States, California’s ambitious AB-32 cap-and-trade system continues to make progress.

Fifth and finally, there is the reality of global geopolitics. If the twentieth century was the American Century, then many observers, including leaders in China, anticipate (or hope) that the twenty-first century will be the Chinese Century. And, as I was quoted by David Jolly in the New York Times as saying, “If it’s your century, you don’t obstruct, you lead.”

Conclusion

There was no fundamental setback in Warsaw to the stream of work that needs to be accomplished in Lima in 2014 in preparation for an agreement to be reached in Paris in 2015 under the Durban Platform for Enhanced Action. This, combined with the reality of increasing convergence of Chinese and U.S. perspectives and interests, leaves me cautiously optimistic (or perhaps, just hopeful) about the path ahead.

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You can view and listen to an assessment of the Warsaw negotiations in a discussion in which I participated on the PBS NewsHour on November 27^th, moderated by Judy Woodruff.

For other summaries and analyses of Warsaw’s COP-19 climate conference, I recommend:

Carraro, Carlo. “COP19: Between Weak Commitments and Tiny Successes.” International Center for Climate Governance. November 27, 2013.

Center for Climate and Energy Solutions. “Outcomes of the U.N. Climate Change Conference in Warsaw.” November, 2013.

Stowe, Robert. “COP-19: Different Strokes?”The Energy Collective, November 27, 2013.

While International Climate Negotiations Continue, the World’s Ninth Largest Economy Takes an Important Step Forward

A little more than two weeks ago, while some 195 nations prepared to meet in Doha, Qatar, for the Eighteenth Conference of the Parties (COP-18) of the United Nations Framework Convention on Climate Change (UNFCCC) in an ongoing effort to hammer out a durable scheme of effective international cooperation, the ninth largest economy in the world took an important step forward to achieve its own ambitious greenhouse gas reduction goals. I’m referring to the CO₂ cap-and-trade allowance auction held by the State of California (which ranks just below Brazil and just above India in the size of its economy) on November 14, 2012.

The Design

Under the California auction design (a single-round, sealed-bid, uniform price auction), all allowances are sold at the same price, no matter what the specific bid submitted. This is done by awarding the first allowances to the highest bidder, then the next highest bidder, and so on until all allowances (or bids) are exhausted. The bid for the last allowance becomes the price of all allowances sold in the auction. The auction had two parts: a current auction of 2013 vintage allowances, and advance auction of 2015 vintage allowances.

The Results

Just a few days after the auction, the California Air Resources Board released the results. In brief, they were as follows:

All 23,126,110 (metric tons of) allowances for 2013 emissions were sold, with the number of qualified bids exceeding the number available by about 6 percent.

These 2013 vintage allowances sold for $10.09, just above the auction’s reserve price of $10.00. (Note, however, that the bids ranged from $10 to over $90, with a median bid of about $13 and a mean bid of nearly $14.)

Some 97% of the allowances were bought by compliance entities, as opposed to investors of various kinds.

The advance auction of 2015 allowances produced significantly different results, with only 14% of available allowances sold, at the auction reserve price of $10.00. (The bids ranged from $10 to about $17, with median and mean bids of about $11.)

Those are the results, but what do they mean? Here’s my view of the implications.

The Implications

First of all, the fact that the auction ran smoothly and compliance entities and others put their money down is one important step in establishing the program’s credibility and operational success.

Second, given that all 2013 vintage allowances sold and there was significant demand above the clearing price (mean prices were $13.75 per MT), the cap is clearly binding.

Third, the expected marginal abatement cost (accounting for market uncertainty and regulatory risk) is roughly at the reservation price of $10/ton (fairly close to the current price in the European Union Emissions Trading System, it so happens).

On the one hand, it is very good news that the allowance price is as low as it is, because this is indicative of the market’s prediction of what the marginal cost of abatement will be. Lower cost is good news for the California economy. Of course, low prices mean smaller funds raised by the auction ($233 million raised by the 2013 auction, and $56 million by the 2015 auction). However, given that the fundamental purpose of the auction is to cap emissions through the cap-and-trade system, not to raise revenues for the state, this doesn’t appear to be bad news either.

But there is some “bad news” in these low allowance prices, and in the 2015 results. First, the 2015 results may indicate that there is significant “regulatory risk” that is lowering prices firms are willing to pay for allowances. Such regulatory risk could arise from concerns that state legislators will back-pedal on the program, or that legal challenges to certain rules (for example, reshuffling requirements or regulation of out-of-state electricity) or Federal policy action in Washington will reduce allowance demand.

It could also arise from this being the first auction, bringing about reluctance to put a lot of money down before seeing any results. Significant uncertainty over abatement costs could also have been a factor. In these regards, it will be interesting to see whether bidding is much different at the second auction next year.

An Ongoing Concern

Other factors driving down demand for allowances and the auction price are the emission reductions that have already been achieved or are expected to be achieved by so-called “complementary programs,” such as energy efficiency programs, renewable portfolio standards, and low-carbon fuel standards. You might think this is good news, but it’s not. Why?

These “complimentary programs” exist under the cap of the cap-and-trade system. Hence, there are two possible outcomes from this situation. On the one hand, these additional programs can be irrelevant in terms of CO2 emissions; that is, their emission reductions would be achieved anyway by the cap-and-trade system on its own, which – remember – allocates the abatement burden cost-effectively across sectors and sources. Or, on the other hand, these programs could achieve greater emissions reductions in some sector or by some sources than the cap-and-trade regime would have done on its own. But, by doing this, the effect is simply to free up allowances for other sources and/or other sectors through the trading mechanism.

On the margin, nothing is accomplished in terms of additional CO₂ emissions reductions; rather the emissions are simply relocated. And, because under such circumstances marginal abatement costs are no longer equated, the allocation of the reductions is no longer cost-effective, that is, aggregate costs are driven up. As I recently wrote, this is precisely what has happened in the European Union Emissions Trading System. (By the way, for a more favorable view of the role of the complimentary measures under the California cap-and-trade scheme, see this essay by Dallas Burtraw and Clayton Munnings.)

So, this specific “bad news” about perverse policy interactions is not a problem of the cap-and-trade system per se, any more than it is in the European system. Rather, the problem is with adding well-intentioned “complimentary programs” under the coverage of a cap-and-trade (or any “quantity-based averaging”) system. Unfortunately, it is misguided public policy, at least from the perspective of this environmental economist.

Economics of the Environment

The Sixth Edition of Economics of the Environment: Selected Readings has just been published by W. W. Norton & Company of New York and London. Through five previous editions, Economics of the Environment has served as a valuable supplement to environmental economics texts and as a stand-alone book of original readings in the field of environmental economics. Nearly seven years have passed since the previous edition of this volume was published, and it is now more than three decades since the first edition appeared, edited by Robert and Nancy Dorfman. The Sixth Edition continues this tradition.

Motivation and Audience

Environmental economics continues to evolve from its origins as an obscure application of welfare economics to a prominent field in its own right, which combines elements from public finance, industrial organization, microeconomic theory, and many other areas of economics. The number of articles on the environment appearing in mainstream economics periodicals continues to increase, and more and more economics journals are dedicated exclusively to environmental and resource topics.

There has also been a proliferation of environmental economics textbooks for college courses. Many are excellent, but none can be expected to provide direct access to timely and original contributions by the field’s leading scholars. As most teachers of economics recognize, it is valuable to supplement the structure and rigor of a text with original readings from the literature.

Scope and Style

With that in mind, this new edition of Economics of the Environment consists of thirty-four chapters that instructors will find to be of great value as a complement to their chosen text and their lectures. The scope is comprehensive, and the list of authors is a veritable “who’s who” of environmental economics, including: Joseph Aldy, Kenneth Arrow, Trudy Cameron, Ronald Coase, Maureen Cropper, Peter Diamond, George Eads, Jeffrey Frankel, Rick Freeman, Don Fullerton, Lawrence Goulder, John Graham, Robert Hahn, Michael Hanemann, Jerry Hausman, Steven Kelman, Nathaniel Keohane, Alan Krupnick, Lester Lave, John Livernois, Eric Maskin, Leonardo Maugeri, Gilbert Metcalf, Richard Newell, Roger Noll, William Nordhaus, Wallace Oates, Sheila Olmstead, Elinor Ostrom, Karen Palmer, Ian Parry, Carl Pasurka, Robert Pindyck, William Pizer, Michael Porter, Paul Portney, Forest Reinhardt, Richard Revesz, Milton Russell, Michael Sandel, Richard Schmalensee, Steven Shavell, Jason Shogren, Kerry Smith, Robert Solow, Nicholas Stern, Laura Taylor, Richard Vietor, and myself.

The articles are timely, with more than 90 percent published since 1990, and half since 2005. There are two completely new sections of the book, “Economics of Natural Resources” and “Corporate Social Responsibility,” and all of the chapters in the section on global climate change are new to the sixth edition.

In order to make the readings in Economics of the Environment accessible to students at all levels, one criterion I use in the selection process is that articles should not only be original and well written — and meet the highest standards of economic scholarship — but also be non-technical in their presentations. Hence, readers will find virtually no formal mathematics in any of the book’s 34 chapters throughout its 733 pages.

The Path Ahead

Environmental economics is a rapidly evolving field. Not only do new theoretical models and improved empirical methods appear on a regular basis, but entirely new areas of investigation open up when the natural sciences indicate new concerns or the policy world turns to new issues. Therefore, this book remains a work in progress. I owe a great debt to the teachers and students of previous editions who have sent their comments and suggestions for revisions. Looking to future editions, I invite all readers — whether teachers, students, or practitioners — to send me any thoughts or suggestions for improvement.

In the meantime, if you’re interested finding out more about the book, immediately below is a chapter-by-chapter summary of the book. Alternatively, you can check out the W. W. Norton or Amazon web sites.

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Appendix: A Summary of Economics of the Environment, Sixth Edition

Part I of the volume provides an overview of the field and a review of its foundations. Don Fullerton and I start things off with a brief essay about how economists think about the environment (Nature 1998). This is followed by the classic treatment of social costs and bargaining by Ronald Coase (Journal of Law and Economics 1960), and a new article by Jason Shogren and Laura Taylor on the important, emerging field of behavioral environmental economics (Review of Environmental Economics and Policy 2008).

The Costs of Environmental Protection

Part II examines the costs of environmental protection, which might seem to be without controversy or current analytical interest. This is not, however, the case. This section begins with a survey article by Carl Pasurka that reviews the theory and empirical evidence on the relationship between environmental regulation and so-called “competitiveness” (Review of Environmental Economics and Policy 2008).

A somewhat revisionist view is provided by Michael Porter and Class van der Linde, who suggest that the conventional approach to thinking about the costs of environmental protection is fundamentally flawed (Journal of Economic Perspectives 1995). Karen Palmer, Wallace Oates, and Paul Portney provide a careful response (Journal of Economic Perspectives 1995).

The Benefits of Environmental Protection

In Part III, the focus turns to the other side of the analytic ledger — the benefits of environmental protection. This is an area that has been even more contentious — both in the policy world and among scholars. Here the core question is whether and how environmental amenities can be valued in economic terms for analytical purposes.

The book features a provocative debate on the stated-preference method known as “contingent valuation.” Paul Portney outlines the structure and importance of the debate, Michael Hanemann makes the affirmative case, and Peter Diamond and Jerry Hausman provide the critique (all three articles are from the Journal of Economic Perspectives 1994).

In the final article in Part III, the book turns to a concept that is both very important in assessments of the benefits of environmental regulations and is also very widely misunderstood — the value of a statistical life. In an insightful essay, Trudy Cameron seeks to set the record straight (Review of Environmental Economics and Policy 2010).

There are two principal policy questions that need to be addressed in the environmental realm: how much environmental protection is desirable; and how should that degree of environmental protection be achieved. The first of these questions is addressed in Part IV and the second in Part V.

The Goals of Environmental Policy: Economic Efficiency and Benefit-Cost Analysis

In an introductory essay, Kenneth Arrow, Maureen Cropper, George Eads, Robert Hahn, Lester Lave, Roger Noll, Paul Portney, Milton Russell, Richard Schmalensee, Kerry Smith, and I ask whether there is a role for benefit-cost analysis to play in environmental, health, and safety regulation (Science 1996).

Then, Lawrence Goulder and I focus on an ingredient of benefit-cost analysis that non-economists seem to find particularly confusing, or even troubling — intertemporal discounting (Nature 2002). Next, Robert Pindyck examines a subject of fundamental importance — the role of uncertainty in environmental economics (Review of Environmental Economics and Policy 2007). Steven Kelman provides an ethically-based critique of benefit-cost analysis, which is followed by a set of responses (Regulation 1981).

Part IV concludes with an up-to-date essay by John Graham on the critical role of the U.S. Office of Management and Budget in federal regulatory impact analysis (Review of Environmental Economics and Policy 2008).

The Means of Environmental Policy: Cost Effectiveness and Market-Based Instruments

Part V examines the policy instruments — the means — that can be employed to achieve environmental targets or goals. This is an area where economists have made their greatest inroads of influence in the policy world, with tremendous changes having taken place over the past twenty years in the reception given by politicians and policy makers to so-called market-based or economic-incentive instruments for environmental protection.

Lawrence Goulder and Ian Parry start things off with a broad-ranging essay on instrument choice in environmental policy (Review of Environmental Economics and Policy 2008). Following this, I examine lessons that can be learned from the innovative sulfur dioxide allowance trading program, set up by the Clean Air Act Amendments of 1990 (Journal of Economic Perspectives 1998). Finally, Michael Sandel provides a critique of market-based instruments, with responses offered by Eric Maskin, Steven Shavell, and others (New York Times 1997).

Economics of Natural Resources

Part VI consists of three essays on a new topic for this book — the economics of natural resources. First, John Livernois examines the empirical significance of a central tenet in natural resource economics, namely the Hotelling Rule — the proposition that under conditions of efficiency, the scarcity rent (price minus marginal extraction cost) of natural resources will rise over time at the rate of interest (Review of Environmental Economics and Policy 2009).

Essays by Leonardo Maugeri (Review of Environmental Economics and Policy 2009) and Sheila Olmstead (Review of Environmental Economics and Policy 2010), respectively, examine two particularly important resources: petroleum and water.

The next four sections of the book treat some timely and important topics and problems.

Corporate Social Responsibility and the Environment

Part VII examines corporate social responsibility and the environment, discussion of which has too often been characterized by more heat than light. Forest Reinhardt, Richard Vietor, and I provide an overview of this realm from the perspective of economics, examining the notion of firms voluntarily sacrificing profits in the social interest. In a second essay, Paul Portney provides a valuable empirical perspective (both are from the Review of Environmental Economics and Policy 2008).

Global Climate Change

Part VIII is dedicated to investigations of economic dimensions of global climate change, which may in the long term prove to be the most significant environmental problem that has arisen, both in terms of its potential damages and in terms of the costs of addressing it. First, a broad overview of the topic is provided in a survey article by Joseph Aldy, Alan Krupnick, Richard Newell, Ian Parry, and William Pizer (Journal of Economic Literature 2010).

Next, William Nordhaus critiques the well-known Stern Review on the Economics of Climate Change, and Nicholas Stern and Chris Taylor respond (both are from Science 2007). In the final essay in this section, Gilbert Metcalf examines market-based policy instruments that can be used to address greenhouse gas emissions (Journal of Economic Perspectives 2009).

Sustainability, the Commons, and Globalization

Part IX begins with Robert Solow’s economic perspective on the concept of sustainability. This is followed by Elinor Ostrom’s development of a general framework for analyzing sustainability (Science 2009), and my own historical view of economic analysis of problems associated with open-access resources (American Economic Review 2011). Then, Jeffrey Frankel draws on diverse sources of empirical evidence to examine whether globalization is good or bad for the environment (Council on Foreign Relations 2004).

Economics and Environmental Policy Making

The final section of the book, Part X, departs from the normative concerns of much of the volume to examine some interesting and important questions of political economy. It turns out that an economic perspective can provide useful insights into questions that might at first seem to be fundamentally political.

Nathaniel Keohane, Richard Revesz, and I utilize an economic framework to ask why our political system has produced the particular set of environmental policy instruments it has (Harvard Environmental Law Review 1998). Myrick Freeman reflects on the benefits that U.S. environmental policies have brought about since the first Earth Day in 1970 (Journal of Economic Perspectives 2002). Lastly, Robert Hahn addresses the question that many of the articles in this volume raise: what impact has economics actually had on environmental policy (Journal of Environmental Economics and Management 2000)?