Tag: European Union

What Should We Make of China’s Announcement of a National CO2 Trading System?

On December 19, 2017, the government of China announced that it is commencing development of a nationwide CO2 trading system, that when launched will become the world’s largest carbon trading system, annually covering about 3.5 billion tons of CO2 emissions in China’s electric power sector.  That approaches twice the size of what is currently the world’s largest carbon trading system, the European Union Emissions Trading System, which accounts for about 2 billion tons per year, and is nearly nine times the size of the largest U.S. system, the California AB-32 cap-and-trade system, which covers about 400 million tons of annual emissions.

The ultimate purpose of the newly announced Chinese trading system is to help the country meets its emissions and renewable energy targets which are part of its Nationally Determined Contribution under the Paris Agreement, in particular, peaking its CO2 emissions by 2030, and achieving 20% of the country’s energy supply from renewables.  Note that coal currently accounts for 65% of China’s electricity generation.  Wind and solar capacity have been growing rapidly, but still account for only 4% and 1% of generation, respectively.

The Chinese carbon market will double the share of global CO2 emissions covered by worldwide carbon-pricing systems to almost 25 percent.  For this and other reasons, the December announcement was greeted with excited praise from climate activists (but simultaneously with disregard and skepticism from conservative opponents of climate action).  The most reasonable assessment, however, is between those two extremes, as I explain in this essay.  That said, the December announcement by China of its plan to develop and launch a nationwide CO2 trading system is an important landmark on the long road to addressing the threat of global climate change.

Some Brief History for Context

In 2011, China’s 12th Five-Year Plan (2011-2015) first included a statement about the government’s intention to develop – gradually – a nationwide carbon market.  Subsequently, in 2013 and 2014, seven pilot emissions trading programs were launched in the cities of Beijing, Chongqing, Shanghai, Shenzhen, and Tianjin, plus two provincial systems in Guangdong and Hubei.  In total, these covered some 3,000 sources, with total annual CO2 emissions of 1.4 billion tons.  The designs of the systems were intentionally varied, to facilitate learning, and allowance prices ranged from $3 to $10 per ton of CO2.

Then, in the lead-up to the Paris climate negotiations, on September 25, 2015, President Xi Jinping met at the White House with U.S. President Barack Obama, and announced that China would launch its nationwide CO2 trading system in 2017, presumably covering electricity, iron and steel, chemicals, cement, and paper production.

The announcement last month was the culmination of this brief history, as China seeks to move ahead with its “pledges” under the Paris Agreement, at the same time as the Trump administration in the United States intends to withdraw altogether from the Agreement (in November, 2020, the soonest that such withdrawal can take place under the rules of the Agreement).

What’s Known about the Chinese Carbon Trading System

China’s December announcement that it is commencing development of a nationwide CO2 trading system, beginning with the electric power sector only, provided few details.  Apparently, the system is intended to eventually include electricity, building materials, iron and steel, non-ferrous metal processing, petroleum refining, chemicals, pulp and paper, and aviation, but will start with the electricity sector alone.  Like most operating systems in the world, it will regulate only CO2, not other greenhouse gases (GHGs), which in China’s case means potentially addressing more than 80% of its total GHG emissions.

The system will not be a cap-and-trade system per se (unlike the CO2 trading systems in Europe and California, for example), because there will not be an administratively set mass-based cap of some quantity of emissions.  Rather, the trading system will be rate-based, meaning that it will be in terms of emissions per unit of electricity output.  This is also called a tradable performance standard, whereby the government sets a performance standard (a benchmark emissions rate per unit of output), sources receive permits (allowances) based on their electricity output and their benchmark, and sources are allowed to trade.  Such tradable performance standards have been used previously in a variety of contexts, including the U.S. EPA leaded gasoline phasedown in the 1990s, U.S. Corporate Average Fuel Economy (CAFE) standards to regulate motor-vehicle fuel efficiency, the Obama Administration’s Renewable Fuel Standard, and California’s Low Carbon Fuel Standard.

One objective of using this approach is to insulate – or at least cushion – the (electricity) sector and the larger economy from “carbon market shock.”  By regulating the emissions rate (per unit of product output), rather than emissions per se, the rate-based approach may help mitigate the political worry about constraining economic growth, but does so by essentially rewarding (subsidizing) higher levels of output.  This relative inefficiency of China’s rate-based system, compared with a mass-based cap-and-trade approach is highlighted in a new paper by Lawrence Goulder (Stanford University) and Richard Morgenstern (Resources for the Future) and one by William Pizer (Duke University)and Xiliang Zhang (Tsinghua University).  (There is a parallel impact and concern – in cap-and-trade systems – with an output-based updating allocation, which can address competitiveness impacts but also introduces inefficiencies by subsidizing dirty production.  This mechanism – which affects only energy-intensive and trade-exposed industries – was proposed in the Waxman-Markey climate legislation and is employed in California’s system.)

The rate-based approach is intended to have a smaller impact on marginal production costs than the mass-based cap-and-trade approach, and thereby is likely to have a smaller impact on the price of products (whether electricity or manufactured goods).  This is the motivation for using this approach in an output-based updating allocation, as described above, and it carries with it the parallel disadvantage of insulating consumers from (some of) the social costs of their consumption decisions.  The problem is exacerbated in the case of China’s evolving system because the performance standards (emission benchmarks) are set not only by sector, but by various categories of electricity production within the sector.  As some categories are, in effect, subsidized by other categories, the cost-effectiveness of the overall system declines.  There is a lack of incentive for the carbon market to move energy consumption from coal to natural gas, for example, because of the multi-benchmark approach.

Finally, it appears that allowances will be allocated without charge, at least in the early stages of the program, which has been typical of emissions trading systems in other parts of the world, and may lessen political resistance while also sacrificing potential efficiency gains associated with auctioning allowances and recycling revenues.

What’s Unknown about the Chinese Carbon Trading System

Among the key design elements that are unknown as of now (at least to me) are the following:

(1)        What will the total allocation of allowances initially be and how will it change (presumably decrease) over time?  Apparently the overall “cap” will be set by adding up the expected emissions of compliance entities, based on their historical emissions.  Then, allocations will be reduced, presumably based on technology performance benchmarks.

(2)        When will trading commence?

(3)        What share of allowances will be distributed for free, and how many – if any – will be auctioned (and how will any auctions operate)?

(4)        What provisions will there be for monitoring and enforcement, and will there be fines or other penalties for non-compliance?

(5)        How will the system interact with other Chinese climate policies?  This is an important question, because so-called “complementary policies” that seek to regulate sources under the cap of a cap-and-trade system can lead to perverse outcomes, as in the European Union and California.

(6)        What is the time-path for expanding the scope of the system to include more sectors, and what sectors will be added?

(7)        When and how, if at all, will China seek to link its system with carbon-pricing and other climate policies in other parts of the world?

Given all of these open questions plus the limited sectoral scope of the announced system, it is reasonable to ask:  what should we make of all this?

How Significant was the Chinese Announcement?

The announcement, despite all the caveats, was a significant step along the road of climate change policy developments, because the Chinese system will eventually be very important, because of its magnitude and because of the importance of China in CO2 emissions and climate change policy.  However, the announcement was not a launch per se, but a statement about a forthcoming launch.

More broadly, the announcement and the eventual launch of the system will have significant effects on other governments around the world – regional, national, and sub-national.  Some will be encouraged to launch or maintain their own carbon trading systems, and to increase the ambition of their systems.  Why do I say this?

A frequently stated fear of adopting climate policies, including carbon pricing, is the competitiveness effects of those policies, due to emission, economic, and employment leakage.  This is more a political issue than a real economic one, but it is nevertheless important.  Since the greatest fear in this realm is that domestic factories will relocate to China, that concern will be greatly reduced – or at least it should be – when and if China has put in place a serious climate policy, whether through carbon markets or otherwise.

China is moving slowly and cautiously, which is wise.  Not long ago, they were considering launching a system that would initially cover 7,000 companies in several sectors, but the 2017 announcement is of a system that covers 1,700 companies in the electricity sector alone.  Of course, it is still important, given that the electricity sector (with its large coal and natural gas plants) accounts for fully a third of China’s CO2 emissions.

During the next two years, the Chinese government – apparently through its National Development and Reform Commission (NDRC), which will administer the trading system – will begin by developing systems for data reporting, registration, & trading – gathering and verifying plant-level emissions data.  This will facilitate the establishment of baselines for allocations of allowances.  Beyond this, a wide range of rules will need to be established.  Following some tests, the actual spot market may launch in 2020 (the same year the Paris Climate Agreement essentially replaces the Kyoto Protocol).

The Path Ahead

As inevitably seems to be the case, the best assessment of this new policy lies somewhere between the extremes.  The December announcement by China was neither as exciting as some of the applause from climate activists might suggest, nor was the announcement as meaningless as conservatives have claimed.

Rather, cautious optimism seems to be in order.  China is serious about climate change, and is thinking long-term.  The country appears to be methodically working to develop a meaningful carbon trading system.  What is important now is developing a robust system that can be effective, expanded in scope, and gradually made more stringent.  Among the greatest challenges will be achieving the cooperation of the provincial governments, not to mention the compliance of the regulated entities.

Development of the system has begun, with the real launch of trading likely to take place in 2020, which is a key year for Chinese climate policy for other reasons, as well.  In that year, China will release its next Five-Year Plan, and it will submit its updated Nationally Determined Contribution to the UNFCCC under the Paris Agreement.  What will the United States be doing that year?  Not much, just electing a President!

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Learning from Thirty Years of Experience with Cap-and-Trade Systems

“Those who do not remember the past are condemned to repeat it.”

The implication of this famous line (often misquoted as “those who do not learn history are doomed to repeat it”) from philosopher George Santayana’s 1905 book, The Life of Reason, Volume I – Reason in Common Sense, is that we are wise to learn from our mistakes.  This is undoubtedly true, as is the parallel recommendation that we are wise to learn from our successes.

Background

China is expected to launch later this year the world’s largest (CO2) emissions trading system; the European Union is in the process of extending and strengthening its CO2 cap-and-trade system; California has just extended and strengthened its CO2 cap-and-trade system; and earlier this week, nine New England and Middle Atlantic U.S. states announced their plan to extend and strengthen the Regional Greenhouse Gas Initiative.  With such developments in place and on the horizon, this is an important time to think carefully and critically about the history of cap-and-trade, and identify lessons that can be learned from three decades of prior experiences – both successes and failures.

That is precisely what Richard Schmalensee (Howard W. Johnson Professor of Economics and Management, Emeritus, at the Massachusetts Institute of Technology, and Dean Emeritus of the MIT Sloan School of Management) and I sought to do in an article which recently appeared in the Review of Environmental Economics and Policy (REEP) (“Lessons Learned from Three Decades of Experience with Cap and Trade,” Review of Environmental Economics and Policy, volume 11, issue 1, Winter 2017, pp. 59-79).  I encourage you to read the full article, which – in keeping with the style of the Review of Environmental Economics and Policy – is brief and broadly accessible.

In the hope that you may be stimulated to read the full article, in today’s blog essay I draw on the article to provide the historical context of our analysis, and to review some of our conclusions (for the actual analysis of individual cap-and-trade systems, and the justifications for our conclusions, you will need to see the article).

The Historical Context

Thirty years ago, many environmental advocates argued that government allocation of rights to emit pollution legitimized environmental degradation, while others questioned the feasibility of such an approach.  At the time, virtually all pollution regulations took a command-and-control approach, specifying the type of pollution-control equipment to be used or setting uniform limits on emission levels or rates.

Today, it is widely recognized – at least among students of economics – that because emission reduction costs can vary greatly, the aggregate abatement costs under command-and-control approaches can be much higher than under market-based approaches, which establish a price on emissions – either directly through taxes or indirectly through a market for tradable emissions rights established under a cap-and-trade policy.  Because market-based approaches tend to equate marginal abatement costs rather than emissions levels or rates across sources, they can achieve aggregate pollution-control targets at minimum cost.

In the REEP article, Dick Schmalensee and I examined the design and performance of seven of the most prominent emissions trading systems that have been implemented over the past 30 years in order to identify key lessons for future applications.  We focused on systems that have been important environmentally and/or economically, and whose performance has been well documented.  We excluded emission-reduction-credit (offset) systems, which offer credits for emissions reductions from some counterfactual baseline, because while emissions can generally be measured directly, emissions reductions are unobservable and often ill-defined.

The seven emissions trading systems we examined were:

  • the U.S. Environmental Protection Agency’s (EPA’s) phasedown of leaded gasoline in the 1980s;
  • the U.S. sulfur dioxide (SO2) allowance trading program under the Clean Air Act Amendments of 1990;
  • the Regional Clean Air Incentives Market (RECLAIM) in southern California;
  • the trading of nitrogen oxides (NOX) in the eastern United States;
  • the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States;
  • California’s cap-and-trade system under Assembly Bill 32; and
  • the European Union (EU) Emissions Trading System (ETS).

All of these programs except the first are textbook cap-and-trade systems.

In the article, we reviewed the design, performance, and lessons learned from each of the seven systems (and briefly discussed several other cap-and-trade systems).  In this blog essay, however, I turn immediately to our summary of key lessons.

Lessons from Thirty Years of Experience

Overall, we found that cap-and-trade systems, if well designed and appropriately implemented, can achieve their core objective of meeting targeted emissions reductions cost-effectively.  This is not something that was taken for granted in the past, and is still not accepted in some quarters.  That said, the devil is in the details, and design as well as the economic environment in which systems are implemented are very important.  Moreover, as with any policy instrument, there is no guarantee of success.  Based on the numerous specific lessons we identified in our analysis, several design and implementation features of cap-and-trade programs appear critical to their performance.

Key Features for System Design and Implementation

First, it is important not to require prior approval of trades.  In contrast to early U.S. experience with emissions offset systems, transactions costs can be low enough to permit considerable efficiency-enhancing trade if prior approval of trades is not required.

Second, it is clear from both theory and experience that a robust market requires a cap that is significantly below BAU emissions.

Third, to avoid unnecessary price volatility, it is important for final rules (including those for allowance allocation) to be established and accurate data supplied well before commencement of a system’s first compliance period.

Fourth, high levels of compliance in a downstream system can be achieved by ensuring there is accurate emissions monitoring combined with significant penalties for non-compliance.

Fifth, provisions for allowance banking have proven to very important for achieving maximum gains from trade, and the absence of banking provisions can lead to price spikes and collapses.

Sixth, price collars are important.  A changing economy can reduce emissions below a cap, rendering it non-binding, or a growing economy can increase emissions and drive allowance prices to excessive levels.  Price collars reduce price volatility by combining an auction price floor with an allowance reserve.  The resulting hybrid systems will generally have lower costs (as more stable prices facilitate investment planning) at the expense of less certain emissions reductions.

Finally, economy-wide systems are feasible, although downstream, sectoral programs have been more commonly employed.

Political Considerations that Affect Cap-and-Trade Design

Experiences with cap-and-trade also indicate the importance of political considerations for the design of cap-and-trade programs.

First, because of the potentially large distributional impacts involved, the allocation of allowances has inevitably been a major political issue.  Free allowance allocation has proven to help build political support. Under many circumstances, the equilibrium allowance distribution, and hence the aggregate abatement costs of a cap-and-trade system, are independent of the initial allowance allocation (Montgomery 1972; Hahn and Stavins 2012).  This means that the allowance allocation decision can be used to build political support and address equity issues without concern about impacts on overall cost-effectiveness.

Of course, free allowance allocation eliminates the opportunity to cut overall social costs by auctioning allowances and using the proceeds to cut distortionary taxes.  On the other hand, experience has shown that political pressures exist to use auction revenue not to cut such taxes, but to fund new or existing environmental programs.  Indeed, cap-and-trade allowance auctions can and have generated very significant revenue for governments.

Second, the possibility of emissions leakage and adverse competitiveness impacts has been a prominent political concern in the design of cap-and-trade systems.  Virtually any meaningful environmental policy will increase production costs and thus could raise these concerns, but this issue has been more prominent in the case of cap-and-trade instruments.  In practice, leakage from cap-and-trade systems can range from non-existent to potentially quite serious.  It is most likely to be significant for programs of limited geographic scope, particularly in the power sector because of interconnected electricity markets.  Attempts to reduce leakage and competitiveness threats through free allocation of allowances do not per se address the problem, but an output-based updating allocation can do so.

Third, although carbon pricing (through cap-and-trade or taxes) may be necessary to address climate change, it is surely not sufficient.  In some cases, abatement costs can be reduced through the use of complementary policies that address other market failures, but the types of “complementary policies” that have emerged from political processes have instead addressed emissions under the cap, thereby relocating rather than reducing emissions, driving up abatement costs, and suppressing allowance prices.

Identifying New Applications

Cap-and-trade systems are now being seriously considered for a wide range of environmental problems.  Past experience can offer some guidance as to when this approach is most likely to be successful.

First, the greater the differences in the cost of abating pollution across sources, the greater the likely cost savings from a market-based system – whether cap-and-trade or tax — relative to conventional regulation (Newell and Stavins 2003).  For example, it was clear early on that SO2 abatement cost heterogeneity was great, because of differences in ages of plants and their proximity to sources of low-sulfur coal (Carlson et al. 2000).

Second, the greater the degree of mixing of pollutants in the receiving airshed (or watershed), the more attractive a market-based system, because when there is a high degree of mixing, local hot spots are not a concern, and the focus can thus be on cost-effective achievement of aggregate emissions reductions.  Most cap-and-trade systems have been based on either the reality or the assumption of uniform mixing of pollutants. However, even without uniform mixing, well-designed cap-and-trade systems can be effective, as illustrated by the two-zone trading system under RECLAIM, at the cost of greater complexity.

Third and finally, since Weitzman’s (1974) seminal analysis of the effects of cost uncertainty on the relative efficiency of price versus quantity instruments, it has been well known that in the presence of cost uncertainty, the relative efficiency of these two types of instruments depends on the pattern of costs and benefits.  Subsequent literature has identified additional relevant considerations (Stavins 1996; Newell and Pizer 2003).  Perhaps more importantly, theory (Roberts and Spence 1976) and experience have shown that there are efficiency advantages of hybrid systems that combine price and quantity instruments in the presence of uncertainty.

Implications for Climate Change Policy

Two highly relevant lessons from thirty years of experience with cap-and-trade systems stand out.  First, cap-and-trade has proven itself to be environmentally effective and economically cost-effective relative to traditional command and control approaches. Moreover, less flexible systems would not have led to the technological change that appears to have been induced by market-based instruments (Schmalensee and Stavins 2013) or the induced process innovations that have resulted (Doucet and Strauss 1994).

Second, and equally important, the performance of cap-and-trade systems depends on how well they are designed.  In particular, it is important to reduce unnecessary price volatility, and hybrid designs can offer an attractive option if some variability of emissions can be tolerated, since substantial price volatility generally raises costs.

All of this suggests that cap-and-trade merits serious consideration when regions, nations, or sub-national jurisdictions are developing policies to reduce greenhouse gas (GHG) emissions.  And, indeed, this has happened.  However, because any meaningful climate policy will have significant impacts on economic activity in many sectors and regions, proposals for such policies have often triggered significant opposition.

In the United States, the failure of cap-and-trade climate policy in the Congress in 2010 was essentially collateral damage from a much larger political war that decimated the ranks of both moderate Republicans and moderate Democrats.  Nevertheless, political support for using cap-and-trade systems to reduce GHG emissions has emerged in many other parts of the world.  In fact, in the negotiations leading up to the Paris climate conference in 2015, many parties endorsed key roles for carbon markets, and broad agreement emerged concerning the value of linking those markets (codified in Article 6 of the Paris Agreement).

It is certainly possible that three decades of high receptivity to cap-and-trade in the United States, Europe, and other parts of the world will turn out to have been only a relatively brief departure from a long-term trend of reliance on command and control environmental regulation.  However, in light of the generally positive experience with cap-and-trade, there is reason for optimism that the tarnishing of cap-and-trade in US political debates will itself turn out to be a temporary departure from a long-term trend of increasing reliance on market-based environmental policy instruments.  Only time will tell.

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Trump’s Paris Withdrawal: The Nail in the Coffin of U.S. Global Leadership?

The announcement on June 1st by U.S. President Donald Trump that he will withdraw the United States from the Paris Climate Agreement was, in my view, misguided; and the justifications Mr. Trump provided were misleading, and to some degree, untruthful.  In this essay, I seek to explain why I believe that withdrawing from the Paris Agreement will be damaging both to the United States and the world.  Sadly, Trump’s withdrawal announcement gave the impression that the President has little understanding of the nature of the Agreement, the process for withdrawal, or the implications of withdrawal for the United States, let alone for the world.  Rather, Mr. Trump appears to be channeling talking points from his chief strategist, Stephen K. Bannon, and his supporters among Alt-Right nationalists, isolationists, and anti-globalists.

Some Context

Let’s start with a few numbers. The United States accounts for about 14% of global greenhouse gas emissions, with China the largest emitter at 30%, followed by the European Union (10%) and India (7%). But climate change is a function of atmospheric concentrations, and when looking at cumulative emissions since 1850, the United States is first with 29% of the total, then the European Union (EU) with 27%, and then Russia and China with 8% each.  With Trump’s announced withdrawal, the United States will join Syria and Nicaragua as the only countries among 195 that are not Parties of the Paris Agreement.

Global Implications of U.S. Withdrawal from the Paris Agreement

With the United States out of the Paris Agreement, it loses the ability to pressure other countries, such as the large emerging economies, to do more.  Worse yet, the announced departure may encourage some countries to do less than they had planned.  In the worst possible outcome, the U.S. announcement might eventually even lead to the broad Paris coalition unraveling.  However, initial indications from the EU, China, India, and other key Parties to the Agreement is that they will maintain their targets, and some may even make them more aggressive because of President Trump’s short-sighted action.  Only time will tell.

What Does President Trump’s Announcement Actually Mean?

In several ways, the President’s announcement was both confused and confusing.  The President stated that the country “will withdraw from the Paris climate accord but begin negotiations to re-enter either the Paris accord or an entirely new transaction on terms that are fair to the United States.  We are getting out. But we will start to negotiate, and we will see if we can make a deal that’s fair. And if we can, that’s great.”

First, the notion of re-negotiating the Paris Agreement is a non-starter.  Within hours of the President’s announcement, the idea of renegotiation was rebuked by French President Emmanuel Macron, German Chancellor Angela Merkel, Italian Premier Paolo Gentiloni, British Prime Minister Theresa May, and Canadian Prime Minister Justin Trudeau, among many other world leaders.

Second, what could Mr. Trump even mean by his assertions of the deal’s “unfairness” to the United States, and what should we to make of his statement that such unfairness could be addressed through renegotiation?  According the Paris Agreement’s own provisions, there is a required three-year delay from November, 2016 (when the Agreement came into force) before any Party (country) can even begin the process of withdrawing, and then there is another year of delay before that process is completed.  So, what the President actually announced – in effect – was the U.S. government’s intention to begin the process of withdrawing some two and a half years from now, and to complete that withdrawal process in November, 2020.

Thus, the announcement was equivalent to stating that the U.S. will remain a Party to the Agreement for virtually the entire term of this administration (which it will).  The administration could – in theory – submit a revised Nationally Determined Contribution (NDC) that is consistent with what the country can accomplish in emissions reductions (possibly a 15-19% reduction by 2025 compared with 2005, according to a recent Rhodium Group analysis, instead of the Obama NDC of a 26-28% decline), consistent with the broad rollback of Obama-era climate regulations that President Trump has initiated.  The country-specific NDC is the key element that can be thought of as affecting “fairness” of the U.S. role under the Paris Agreement, because it is only through the self-determined, voluntary, country-specific NDCs that any national targets or actions are specified.

Given that the Administration had already begun the process of unraveling Obama-era climate regulations (that were to be used achieve the Obama NDC), the announced withdrawal from the Paris Agreement has no additional effects on U.S. emissions mitigation actions.  Hence, it is fundamentally dishonest to claim as a justification for the withdrawal that this will reduce costs for the U.S. and save jobs.

Beyond the national targets and actions specified by the U.S. NDC, there is one other aspect of pledged action under the Paris Agreement that could be considered to affect fairness, and that is the set of pledges of financial contributions to the Green Climate Fund, to which industrialized countries have voluntarily pledged $10 billion since 2013 to help low-income countries reduce their GHG emissions and adapt to the effects of climate change.  If the U.S. were to fulfill its original $3 billion commitment to the Fund, this would amount to $9.41 per capita, ranking 11th among country pledges, starting with Sweden’s at $59.31 per person.  However, the President had previously announced that no funds will be going to the GCF (beyond the $1 billion already delivered during the Obama administration).  That makes the per capita U.S. contribution a bit more than $3 per capita, ranking close to the bottom of the list, only above South Korea’s pledge of about $2 per capita.  So, with this financial element, as well as with regard to domestic emissions mitigation actions, withdrawal from the Paris Agreement can have no real effects on the “fairness” of the U.S. role.

The Paris Agreement Was the Answer to U.S. Prayers

The very structure of the Paris Agreement itself was and is the answer to U.S. prayers, going back to the bipartisan Byrd-Hagel Resolution of 1997, in which the U.S. Senate – in a 95-0 vote – said that it would not ratify an international climate agreement that did not include the large emerging economies (China, India, Brazil, South Africa, Mexico, and Korea).  After more than 20 years of negotiations, an important breakthrough came with the signing of the Paris Agreement, which increased the scope of participation from countries accounting for just 14% of global emissions (under the current, second commitment period of the Kyoto Protocol) to countries accounting for 97% under the Paris Agreement.

Furthermore, in addition to including all countries, the Paris Agreement answered a second key U.S. demand by granting all countries the right to determine their own targets and their own paths of action (through their respective NDCs).

And the third of three U.S. wishes was also granted by the Paris Agreement by providing for transparency around how countries report their emissions and demonstrate progress toward their respective targets.

Thus, the Paris Agreement was truly the answer to bipartisan U.S. prayers going back at least twenty years, and was eminently “fair” to the United States.  What, then, can renegotiation possibly accomplish that would make this President happy?  Perhaps one option would be to rename precisely the same agreement the “Mar-a-Lago Accord” (or simply the “Trump Agreement”)!  That might change this President’s mind.

A Rebuke to Countries around the World … and to U.S. Businesses

Mr. Trump’s decision is a remarkable rebuke to countries and heads-of-state around the world, as well as corporate leaders in the United States, and some key senior officials in the Administration, including Secretary of State Rex Tillerson.  However, the announcement does attempt to fulfill the President’s campaign pledge to “cancel” the Agreement that he claimed would “destroy American jobs.”

But dropping out of Paris will have no meaningful employment impacts.  Again, Trump had already launched the process of undoing domestic climate regulations from the Obama administration.  Also, the much-talked-about coal jobs are not coming back.  The losses that have taken place over decades are due to increased productivity (technological change) in the coal sector, and more recently, market competition from low-priced natural gas for electricity generation, not environmental regulations — and certainly not CO2 regulations that had never been implemented.

Support for Trump to keep the United States in the Paris Agreement was broad-based within U.S. private industry – from electricity generators such as PG&E and National Grid, to oil companies such as Chevron, ConocoPhillips, Exxon-Mobil, BP, and Shell (the last two having large operations within the U.S.), and a very long list of manufacturers, including giant firms such as General Motors and General Electric.  Even some of the largest coal producers, such as Arch Coal, Cloud Peak Energy, and Peabody Energy, told the President about their support for the U.S. remaining in the Agreement. This broad support was due to a simple reality – leaders of successful businesses make decisions not on the basis of ideology, but based on available evidence.

Damages to U.S. International Relations

The potential damages to U.S. international relations are grave, but should we be surprised?  After all, this is the same President who withdrew from the Trans-Pacific Partnership days after inauguration, thereby handing over to China economic leadership in Asia; and the same President who just last month dismissed and diminished NATO and insulted our key European allies, thereby granting Russian President Vladimir Putin one of his greatest wishes.  Former Mexican President Vincente Fox may have summed it up best with the shocking assessment that “the United States has stopped being the leader of the free world.”

At a time when the U.S. wants and needs cooperation from a large and diverse set of countries around the world on matters of national security, trade, and a host of other issues, it is counter-productive in the extreme to willingly become an international pariah on global climate change, but that is what President Trump has accomplished.

Defining U.S. Climate Policy Geographically, Rather than by Federal Government Action

Of course, this is not the end of all climate change policy action in the United States.  Climate policies in California, Oregon, Washington, and the Northeast will remain in place, and quite possibly be strengthened. And more than half of all states have renewable energy policies; just since Election Day, the Republican governors of Illinois and Michigan have signed legislation aimed at increasing solar and wind generation. At the federal level, important tax credits for wind and solar power will likely continue to receive bipartisan support in the U.S. Congress.

But it is highly unlikely – in the absence of a significant economic recession – that those policies (plus others from cities across the country) will be sufficient to achieve the climate targets that made up the Obama administration’s anticipated contribution (NDC) under the Paris Agreement.

Trump’s Core and a Sad Bottom Line

For President Trump’s core supporters, the move was probably perceived in very positive terms.  As Cary Coglianese, a professor of law and political science at the University of Pennsylvania, has said, “For Trump supporters it looks like he’s delivering on a campaign promise — it looks like he’s standing up for Americans against the rest of the world.”  The opposition to Paris among Trump’s electoral core (and a considerable share of Congressional Republicans) seems to be linked with their admiration for his “America First” battle cry, which builds on nostalgia for an earlier (and whiter) America with its long-gone manufacturing-based economy, plus doses of xenophobia, hostility to immigration, fear of globalism, and opposition to multilateral agreements of any kind.

The President’s announcement of withdrawing from the Paris Climate Agreement will indeed appeal to his core constituency, and thereby may help galvanize his base, and that may be the central White House objective at this time when the administration is facing grave questions and challenges from Congressional hearings and Justice Department investigations. As Ban Ki-moon, former Secretary-General of the United Nations, and I wrote in April in The Boston Globe, “reducing emissions will not be cheap or easy, but the greatest obstacles are political.”

The announcement by President Trump that he will withdraw the United States from the Paris Climate Agreement was based neither on real science nor sound economics.  Rather, it was confused, misguided, and – in some ways – dishonest.  Sadly, that makes it consistent with much of this President’s behavior – in a variety of policy realms – during the campaign and since he assumed office.

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