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Thinking about the Institutional Dimensions of Climate Change Policy

Most economists tend to neglect the institutional and political dimensions of proposed climate change policies, whereas political scientists, policymakers, and stakeholder groups frequently give primary attention to these considerations. This is demonstrated by my recent podcast conversation with Navroz Dubash, professor at the Centre for Policy Research in New Delhi, and a Coordinating Lead Author of the Sixth Assessment Report of the Intergovernmental Panel on Climate Change. You can listen to our conversation in the latest episode of my podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” Our full conversation is here.

In these podcasts, I converse with leading experts from academia, government, industry, and NGOs. Navroz Dubash fits well within this group, as a respected international expert on the politics of climate change policy and governance, the political economy of energy and water resources, and the regulatory state in the developing world. In addition, he was previously a senior associate at the World Resources Institute and a policy analyst at the Environmental Defense Fund.

In discussing pragmatic frameworks necessary for the implementation of effective climate change policy, Dubash explains why international institutions are absolutely essential.

“Climate change in a sense is now a problem with a clock. We have a ticking clock if you’re going to meet two degrees, and even more so if you meet [the goal of limiting the increase in global temperatures below] 1.5 degrees. It’s not enough for every country to do what they can. We have to be measuring progress against what is determined to be necessary by science. So, we have to have some process through which policies and actions are assessed and evaluated.”

This is where, Dubash says, international institutions and rules have a critical role to play.

“What is the mechanism through which future [emissions reduction] targets translate into current action? There needs to be some kind of interlinking mechanism through which we both decide what target is reasonable, as well as think back to what we have to do today in order to achieve those targets. And if there are obstacles to that action, how we overcome those obstacles? All of those tasks really require institutions,” he says.

I ask Navroz to talk about the differences between China and India, since they are sometimes (incorrectly) lumped together in conversations about climate change. He describes the differences in the context of both countries attempting to reduce their emissions in line with the goals of the Paris Climate Agreement.

“In a sense, China has now over the last 20 years built up its infrastructure to the point where it can start thinking about in a sense what the transition is to a low carbon future. India has actually not built up its infrastructure. And we are an interesting place because our emissions are likely to grow for a while longer in order to meet development needs. Now, the trick is going to be how can India do this with a shallower increase in emissions than China exhibited?,” he says. “To unwind a coal or fossil economy actually will have ripple effects throughout the larger political economy of India. And so that it’s not just the economic costs that matter, but also the transaction costs.”

Navroz Dubash remarks that the long-term potential for climate policy to succeed depends heavily on the internal politics in nations that have voluntarily pledged under the terms of the Paris Agreement to reduce their carbon emissions in coming years.

“I think the positive part of Paris for me was that it essentially recognized that progress on climate change is not going to come because of hectoring or peer pressure at the international level. It’s going to come because national politics in country after country shift, where countries find ways of telling a story about how low carbon futures are good for them economically and can sell that politically to their own people. And Paris basically gave countries space to figure out how to tell that story and make it happen.”

For this and much more, I hope you will listen to my complete conversation with Navroz Dubash, the 31^st episode in the Environmental Insights series, with future episodes scheduled to drop each month. You can find a transcript of our conversation at the website of the Harvard Environmental Economics Program. Previous episodes have featured conversations with:

Gina McCarthy, former Administrator of the U.S. Environmental Protection Agency
Nick Stern of the London School of Economics discussing his career, British politics, and efforts to combat climate change
Andrei Marcu, founder and executive director of the European Roundtable on Climate Change and Sustainable Transition
Paul Watkinson, Chair of the Subsidiary Body for Scientific and Technological Advice (SBSTA) within the United Nations Framework Convention on Climate Change
Jos Delbeke, professor at the European University Institute in Florence and at the KU Leuven in Belgium, and formerly Director-General of the European Commission’s DG Climate Action
David Keith, professor at Harvard and a leading authority on geoengineering
Joe Aldy, professor of the practice of public policy at Harvard Kennedy School, with considerable experience working on climate change policy issues in the U.S. government
Scott Barrett, professor of natural resource economics at Columbia University, and an authority on infectious disease policy
Rebecca Henderson, John and Natty McArthur University Professor at Harvard University, and founding co-director of the Business and Environment Initiative at Harvard Business School.
Sue Biniaz, who was the lead climate lawyer and a lead climate negotiator for the United States from 1989 until early 2017.
Richard Schmalensee, the Howard W. Johnson Professor of Management, and Professor of Economics Emeritus at the Massachusetts Institute of Technology.
Kelley Kizier, Associate Vice President for International Climate at the Environmental Defense Fund.
David Hone, Chief Climate Change Adviser, Shell International.
Vicky Bailey, 30 years of experience in corporate and government positions in the energy sector.
David Victor, professor of international relations at the University of California, San Diego.
Lisa Friedman, reporter on the climate desk at the The New York Times.
Coral Davenport, who covers energy and environmental policy for The New York Times from Washington.
Spencer Dale, BP Group Chief Economist.
Richard Revesz, professor at the NYU School of Law.
Daniel Esty, Hillhouse Professor of Environment and Law at Yale University.
William Hogan, Raymond Plank Research Professor of Global Energy Policy at Harvard.
Jody Freeman, Archibald Cox Professor of Law at Harvard Law School.
John Graham, Dean Emeritus, Paul O’Neill School of Public and Environmental Affairs, Indiana University.
Gernot Wagner, Clinical Associate Professor at New York University.
John Holdren, Research Professor, Harvard Kennedy School.
Larry Goulder, Shuzo Nishihara Professor of Environmental and Resource Economics, Stanford University.
Suzi Kerr, Chief Economist, Environmental Defense Fund.
Sheila Olmstead, Professor of Public Affairs, LBJ School of Public Affairs, University of Texas, Austin.
Robert Pindyck, Bank of Tokyo-Mitsubishi Professor of Economics and Finance, MIT Sloan School of Management.
Gilbert Metcalf, Professor of Economics, Tufts University.

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.

New Publication on Chinese Climate Change Policy

Readers of this blog need not be reminded that climate change is a global commons problem and therefore necessitates cooperation at the highest jurisdictional level – that is, international cooperation among national governments – if it is to be adequately addressed. This points to the key role for national governments to put in place meaningful public policies, consistent with international cooperation.

But sub-national governments can also significantly advance efforts to mitigate climate change. Provinces and municipalities around the world have indeed undertaken initiatives – sometimes working together across national boundaries – to reduce greenhouse-gas emissions. This includes jurisdictions in the largest-emitting countries – China, the United States, and India – as well as in the European Union.

A New Publication Now Available on the Internet

We – the Harvard Project on Climate Agreements (HPCA) – have just released a new volume that examines sub-national climate-change policy in China. The volume focuses to a considerable degree on carbon-pricing policy in China, including how China’s sub-national (pilot) emissions-trading systems can inform the emerging national carbon-pricing system.

The briefs in this volume – edited by Dr. Robert Stowe and myself – draw on presentations and discussion at a research workshop organized by the HPCA in Beijing on July 18 – 19, 2019. The workshop was hosted and co-sponsored by Tsinghua University’s Institute of Energy, Environment, and Economy, directed by Professor Zhang Xiliang. Workshop participants included 24 researchers and practitioners from China, Australia, Canada, India, Norway, the United Kingdom, and the United States. Chinese participants were based in Guangdong Province, Hubei Province, and Shanghai, as well as Beijing. The agenda and participant list for the workshop are included at the end of the volume.

The volume – and the July 2019 workshop – are part of a larger initiative of the Harvard Project on Climate Agreements examining and comparing sub-national climate-change policy in China, India, the United States, and Canada. The Harvard Project is conducting a similar workshop in New Delhi in the summer of 2020 and will release a volume of briefs on sub-national climate-change policy in India in early 2021.

Overview and Framing

The volume begins with a brief by Zhang Xiliang and Zhou Li that details policies adopted by Chinese provinces and municipalities to address climate change. Ye Qi and Xiaofan Zhao then describe what they see as the most important drivers of climate-change policy in China, providing context for the volume.

Institutional Perspectives

Next, institutional perspectives are provided in four briefs by experts on center-provincial institutional dynamics in China, with applications to climate-change policy. Michael Davidson explores China’s “quasi-federalist” system, and discusses how this system might be leveraged to develop effective institutions for addressing climate change. Gørild Heggelund focuses on China’s national emissions-trading system (ETS).

Tan Xianchun provides a concise yet detailed analysis of China’s administrative systems and procedures for addressing climate change – both carbon pricing and other approaches to reducing emissions, including the results of modeling that estimates the potential impact of a range of “[l]ow-carbon measures and policies” in Chongqing municipality and Guangdong Province.

Providing the final institutional perspective, Christine Wong discusses how the implementation and enforcement of environmental policy in China have evolved over the last decade. She finds that although the central government places greater emphasis on environmental policy than in the past and has provided considerable financial support for implementation and enforcement, renewed financial constraints in a period of low economic growth may prompt sub-national officials to favor carbon pricing over more traditional top-down policy approaches.

Emissions Trading Systems in China: Lessons for National Policy Design from the Pilots

Three contributors examine lessons for national policy design from experience with the pilot ETSs. Shaozhou Qi assesses the performance of the seven pilot ETSs. Tian Qi provides insights based on his study of Hubei’s pilot ETS, focusing on allowance allocation, as well as the closely-related topics of auction design and market-stability measures. Zeng Xuelan examines a range of GHG emissions-reduction policies in Guangdong Province, noting that Guangdong’s pilot ETS has been its “main mechanism for reducing provincial emissions.”

Zeng also notes the possibility of the central government terminating Guangdong’s ETS after lessons have been incorporated into the national carbon-pricing system.

The fate of the pilot ETSs more broadly is the subject of Valerie Karplus’s brief. She discusses three scenarios: “(1) coexistence, that is, maintaining separate sub-national trading systems alongside the national system; (2) partial integration, which would mean allowing credits from one system to be used in other systems; and (3) full integration, which would involve subsuming the seven sub-national pilots under a single national ETS.” Karplus discusses the tradeoffs among these options and then suggests an approach to strengthening the pilot ETSs that is somewhat independent of the path chosen.

Designing and Implementing China’s National ETS

Four briefs focus on the development of the national carbon-pricing system, though in each case with some reference to the sub-national pilots. Pu Wang identifies a set of important challenges to the implementation of the national system, concluding in part – as did Heggelund – that “institutional capacity related to the carbon market needs to be significantly enhanced at all levels, from the central government to the local level.”

We Libo discusses the results of a modeling initiative that explores sub-national distributional impacts of various trading-intensity and allowance-allocation scenarios. Zhang Jianyu presents ten policy recommendations for the implementation of the national system. Among these, he suggests that the pilot ETSs can continue to play a useful role after the national system is implemented, and that the central government should continue to support the pilots.

Finally, Fei Teng examines the important relationship between the power sector in China and the performance of the national carbon-pricing system. The power sector is highly regulated, though the central government is pursuing market-oriented reforms. Teng presents three options for passing through higher electricity costs resulting from carbon-pricing to electricity consumers, with one option including trading in generation rights.

Comparative Perspectives on Sub-National Policy

The final section of the volume includes three briefs providing cross-national comparative context on sub-national climate-change policy.

Radhika Khosla writes on India, Robert Stavins on the United States, and Katie Sullivan and Ellen Lourie on Canada.

Final Thoughts

Each of the seventeen briefs in the volume begins with several key points, and the seventeen sets of key points are compiled immediately following an introduction. We hope that this structure renders the insights, research results, and analysis contained in the briefs more readily accessible.

The Harvard Project on Climate Agreements is grateful to the Harvard Global Institute, which provides generous support for the initiative of which this volume and the July 2019 workshop in Beijing are part. We are also grateful for our ongoing collaboration with Professor Zhang Xiliang and his colleagues – a collaboration that has yielded insights that we hope prove useful to researchers and policy makers working to address the problem of climate change.

COP-25 Disappointment Should Not Be Due to Lack of Aspirations for Future Ambition, But to Lack of Support for Global Carbon Markets

On December 18^th, The Conversation (“academic rigor, journalistic flair”) – published my brief essay (“The Madrid climate conference’s real failure was not getting a broad deal on global carbon markets”), and today – in this blog post – I wish to share a slightly edited version with you (without the excellent graphics included in the original article).

The Reality Behind the Press Coverage

Press accounts of the Madrid climate conference that adjourned on Dec. 15 are calling it a failure in the face of inspirational calls from youth activists and others for greater ambition. But based on my 25 years following and analyzing this process together with scholars and government officials from around the world, I believe the reality is more complicated.

True, this round of climate talks did not produce an aspirational statement calling for greater ambition in the next round of national pledges. In my view, that’s not actually very significant in terms of its real effects, even though organizations such as Greenpeace and Extinction Rebellion framed this as the key task for this meeting.

On the other hand, the talks failed to reach one of their key stated goals: writing meaningful rules to help facilitate global carbon markets. As an economist, I see this as a real disappointment – although not the fatal failure some portray it to be.

Tackling the free-rider problem

Here’s some context to explain why international cooperation is essential to tackle climate change. Regardless of where they’re emitted, greenhouse gases mix in the atmosphere. That’s different from other air pollutants, which can affect localities or large areas, but not the entire world.

This means that any jurisdiction that reduces its emissions incurs all of the costs of doing so, but receives only a share of the global benefits. Everyone has an incentive to free-ride, relying on others to cut emissions while taking minimal steps themselves.

Recognizing this problem, nations adopted the United Nations Framework Convention on Climate Change at the Rio Earth Summit in 1992. As with many other international treaties, member countries agreed to hold regular meetings to devise rules for achieving the goals set out in the agreement. That’s how the Conference of Parties, or COP, process was launched.

Why climate change is a wicked problem

If the pace of progress at these meetings seems slow, keep in mind three factors that make their task enormously challenging.

First, every nation has an incentive to exploit the atmosphere and rely on other countries to cut emissions.

Second, making reductions costs money up front – but since carbon dioxide emissions remain in the atmosphere and warm the Earth for up to a century, many of the benefits of cutting emissions accrue much later.

Third, the costs of cutting emissions fall on particular sectors – notably, fossil fuel interests – that have a strong monetary incentive to fight back. But the benefits are broadly distributed across the general public. Some people care passionately about this issue, while others give it little thought.

At the COP-1 meeting in 1995 in Berlin, members decided that some of the wealthiest countries would commit to targets and timetables for emission reductions, but there would be no commitments for other countries. Two years later, nations adopted the Kyoto Protocol, which set quantitative targets only for Annex I (largely wealthy) countries.

That wasn’t a broad enough foundation to solve the climate challenge. Annex I countries alone could not reduce global emissions, since the most significant growth was coming from large emerging economies – China, India, Brazil, Korea, South Africa, Mexico and Indonesia – that were not part of the Annex I group.

Everybody in

At negotiations in 2009 in Copenhagen and 2010 in Cancun, distinctions between wealthy and developing countries began to blur. This culminated in an agreement at Durban, South Africa, in 2011 that all countries would come under the same legal framework in a post-Kyoto agreement, to be completed in 2015 in Paris.

The Paris Agreement provided a promising, fresh approach. It proposed a bottom-up strategy in which all 195 participating countries would specify their own targets, consistent with their national circumstances and domestic political realities.

This convinced many more nations to sign up. Countries that joined the Paris Agreement represented 97% of global greenhouse gas emissions, compared to 14% currently under the Kyoto Protocol. But it also gave every country an incentive to minimize its own actions while benefiting from other nations’ reductions.

Growing carbon markets

Are there ways to persuade nations to increase their commitments over time? One key strategy is linking national policies, so that emitters can buy and sell carbon emissions allowances or credits across borders.

For example, California and Quebec have linked their emissions trading systems. On Jan. 1, 2020, the European Union and Switzerland will do likewise.

Note, however, that such linking need not be restricted to pairs of cap-and-trade systems. Rather, heterogeneous linkage among cap-and-trade, carbon taxes and performance standards is perfectly feasible.

Expanding carbon markets in this way lowers costs, enabling countries to be more ambitious. One recent study estimates that linkage could, in theory, reduce compliance costs by 75%.

But for such systems to be meaningful, each country’s steps must be correctly counted toward its national target under the Paris Agreement. This is where Article 6 of the Paris Agreement comes in. Writing the rules for this article was the primary task for negotiators in Madrid (28 other articles were completed at the 2018 COP in Katowice, Poland).

Unfortunately, Brazil, Australia and a few other countries insisted on adopting accounting loopholes that made it impossible to reach agreement in Madrid on Article 6. Negotiators had an opportunity to define clear and consistent guidance for accounting for emissions transfers but failed to close a deal.

But if they had adopted guidance that extended much beyond basic accounting rules, as some countries wanted, the result could have been restrictive requirements that would actually impede effective linkage. This would have made it more expensive, not less, for nations to achieve their Paris targets. As Teresa Ribera, Minister for the Ecological Transition of Spain, observed at COP-25, “No deal is better than a bad deal” on carbon markets and Article 6.

The baton for completing Article 6 has been passed to COP-26 in Glasgow in November 2020. In the meantime, without agreement on an overall set of rules, countries may develop their own rules for international linkages that can foster high-integrity carbon markets, as California, Quebec, the European Union and Switzerland already have. If negotiators can keep their eyes on the prize and resist being diverted by demands from activists and interest groups, I believe real success is still possible.