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

As I write this, I’m on board a flight from Seoul, South Korea, to San Francisco, California, on my way home to Boston, having spent the week of Harvard spring break meeting with senior government officials, academics, and leaders of civil society in Tokyo and Seoul on behalf of the Harvard Project on International Climate Agreements. Reflecting on these meetings in Asia and recalling meetings I’ve previously had in Brussels and Washington, some important opportunities and ironies about national and international climate policy come to mind.

Opportunities

The 15^th Conference of the Parties (COP-15) of the United Nations Framework Convention on Climate Change (UNFCCC), which met in Copenhagen, Denmark, in December, 2009, produced two significant outcomes. The key substantive outcome, of course, was the Copenhagen Accord, about which I’ve written in detail in a previous blog post. The key institutional outcome was speculation that the UNFCCC may not be the best venue going forward for productive negotiations on climate change. (This is also a topic about which I’ve recently written at this blog.)

These dual outcomes of the Copenhagen conference point to the special importance of two key nations in international climate policy developments this year. I’m not referring to China and the United States (despite the fact that they are, of course, the world’s two leading emitters of carbon dioxide). Rather, I am referring to Korea and Mexico. Why?

First, these two nations are unique in being both long-time members (Korea since 1996, Mexico since 1994) of the Organization of Economic Cooperation and Development (OECD) and members of the group of non-Annex I countries under the Kyoto Protocol, which have no direct commitments under that international agreement. The OECD comes as close as anything to defining the set of industrialized nations of the developed world. Thus, Korea and Mexico have their feet planted firmly both in the developed world and the developing world (a fact that is readily apparent on even brief visits to these nations). This gives Korea and Mexico remarkable credibility with the two key blocks in international climate negotiations. That, on its own, would be of considerable importance, but there is another reality that makes this of even greater significance (and opportunity) in this year of 2010.

Coming out of Copenhagen, many participants in the international climate negotiations (as well as informed observers), noted that the UNFCCC has real limitations as the sole venue for future climate negotiations: too many countries – 192, excessively stringent requirements for agreement – unanimity, and a distinct tendency to polarize debates between developed and developing countries. Two other, potentially supplementary venues stand out as promising: the Major Economies Forum (MEF) and the G20.

The MEF, which has hosted productive discussions among 17 key countries and regions that together account for nearly 90 percent of global carbon dioxide (CO₂) emissions, may be somewhat limited by the fact that is was created by and is chaired by the United States, a nation with constrained credibility on climate issues among some countries, particularly in the developing world. The G20, which brings together twenty of the world’s largest economies, focuses on economic as well as other global issues and consists of almost the same set of nations as the MEF, likewise accounting for about 90 percent of global emissions. The G20 could thus be an exceptionally promising supplementary venue for meaningful and realistic climate discussions. And in November of this year, the G20 will be hosted by Korea, when it convenes in Seoul. This gives the Korean government a special role in setting the agenda for the discussions and presiding at the sessions.

The G20 meetings in Seoul will come just two weeks before the Sixteenth Conference of the Parties of the UNFCCC, which will take place in Cancún, Mexico. Thus, the Mexican government is also in a key position this year, because it will hold the Presidency of COP-16.

Add to this the fact that both Korea and Mexico have been particularly creative in their domestic climate policy initiatives and international proposals over the past year. Harvard Kennedy School Professor Jeffrey Frankel notes at his blog — Views on the Economy and the World — that Korea and Mexico were particularly ambitious with their submissions to the Copenhagen Accord, when comparing the submissions of all countries in terms of 2020 emissions targets relative to business-as-usual, controlling for per capita income.

Together, Korea and Mexico, share credibility in the developing and developed worlds, and likewise share unique international legitimacy as the hosts and presidents of the G20 and COP-16 in 2010. This is why these two countries have a remarkable opportunity this year to provide leadership of the international community, and make real progress on negotiations to address the threat of global climate change. Those are the opportunities. Now, let me turn to the ironies that have come to the fore.

Ironies

More than a decade ago, it was the United States, as the leader of the so-called “Umbrella Group,” that successfully fought for the inclusion in the Kyoto Protocol – over the objections of the European Union – of three “flexibility mechanisms” to bring down the costs of meeting the Protocol’s objectives: joint implementation (Article 4), a global emissions reduction credit system, the Clean Development Mechanism (the CDM, Article 12), and emissions trading among countries (Article 17). Ironically, once the George W. Bush administration officially pulled the United States out of the Kyoto Protocol process, it was the European Union that implemented the world’s first CO₂ emissions trading program, the European Union Emission Trading Scheme (EU ETS).

Beyond this, the United States was a pioneer with the use of national cap-and-trade systems, including lead trading in the 1980s and the SO₂ allowance trading program beginning in 1995 under the Clean Air Act Amendments of 1990. In addition, despite its lack of ratification of the Kyoto Protocol, the U.S. government very early on began to give serious consideration to the development of an economy-wide cap-and-trade system for CO₂ with the McCain-Lieberman legislation in the U.S. Senate (followed later by the Lieberman-Warner bill). More recently, of course, the U.S. House of Representatives passed the Waxman-Markey bill in June of 2009, including a significant economy-wide cap-and-trade system.

Over the past nine months, however, the very phrase, “cap-and-trade,” has evolved from being politically correct in Washington to nothing less than politically anathema. (How and why this happened is a topic for a future essay at this blog.) The great irony is that just when cap-and-trade has been under such vociferous attack in Washington, countries throughout the world are embracing this instrument, recognizing its great potential to address climate change cost-effectively and equitably.

In addition to the EU ETS, already in force, Australia is primed to put its cap-and-trade system in place, as is New Zealand. And just a few days before I arrived in Tokyo, the Japanese cabinet announced that the government will move forward with a cap-and-trade system (in contrast with Japan’s previously proposed sectoral approach). And, not to be outdone, Korea is considering the use of cap-and-trade as an element of its own domestic climate policy.

This irony is striking. Of course, it could be reduced or eliminated if Senators Kerry, Graham, and Lieberman can use their much-anticipated new climate proposal to pull victory from the jaws of anticipated defeat. Only time will tell.

Defining Success for Climate Negotiations in Copenhagen

The fact that President Obama has decided to attend the United Nations climate change negotiations in Copenhagen at the end of the two-week meetings on December 18th, rather than during the previous week on his way to Oslo to receive the Nobel Peace Prize, is important, because it increases – in my mind – the likelihood of a significant outcome from the negotiations. However, my reasoning – as I explained in a blog post for the Financial Times – is not what most people may think. It is a matter of what is called “endogeneity” in economics, that is, there is causality in both directions. That’s a bit cryptic, so let me explain.

[Before I proceed, I should explain that I have agreed to blog periodically from Copenhagen for the Financial Times, analyzing some of the issues before the negotiators in response to questions from the Financial Times‘ editors and reporters. Those posts can be viewed at the Financial Times energy-source web site.]

Although it is true that President Obama’s presence on the concluding day of the negotiations (when – taking Kyoto in 1997 as an example – some of the key deals are finally struck) can have some influence, it is even more true that this decision by the White House signals that the Administration has reason to believe that there will be a visibly successful outcome of the Copenhagen talks.

His initial decision to visit the negotiations the previous week would have shielded the President – to a considerable degree — from any embarrassment and bad publicity if the negotiations were to fall apart. (The President does not need to fly back from Copenhagen a second time having failed on his mission; his attempt to bring the Olympic games to Chicago is still fresh in the minds of the international press.)

Therefore, the fact that the White House has decided to send the President to Copenhagen for the final day, where he will assemble with some 90 other world leaders, and participate in closing statements (not to mention photo opportunities), indicates that the Administration is relatively confident that the talks will not collapse in a logjam of disagreement between the industrialized world and the developing countries, but rather that there will be a successful outcome.

The key outstanding question is whether the outcome will be one that provides a sound foundation for meaningful, long-term global action, not simply some notion of immediate, albeit highly visible triumph. This is a subject on which I wrote in the Boston Globe (“A Silver Lining in the Climate Talks Cloud”) on Sunday, December 6, 2009, and it is my major focus here.

The gloom and doom predictions we’ve been hearing about the global climate negotiations taking place in Copenhagen this week and next are fundamentally misguided. The picture is much brighter than it might seem for this international conference aimed at coming up with a successor for the Kyoto Protocol, which essentially sunsets in 2012.

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

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

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

Third, long-term technological change is the key to the needed transition from reliance on carbon-intensive fossil fuels to more climate-friendly energy sources.

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

Indeed, it would be easy, but unfortunate, for countries to achieve what some people wish to define as “success” in Copenhagen: a signed international agreement, glowing press releases, and related photo opportunities for national leaders. Such an agreement could only be the Kyoto Protocol on steroids: more stringent targets for the industrialized countries and no meaningful commitments by the key rapidly-growing emerging economies of China, India, Brazil, Korea, Mexico, and South Africa (let alone by the numerous developing countries of the world).

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

If it’s not reasonable to expect that a comprehensive post-Kyoto policy architecture will be identified in Copenhagen, what would constitute real progress? One important step forward would be a constructive joint-communiqué from major countries (just seventeen industrialized and emerging economies account for about 90% of annual emissions).

Such a joint-communiqué could lay out key progressive principles to underlie a future climate agreement, such as making the United Nations notion of “common but differentiated responsibilities” meaningful through a the dual principles that: all countries recognize their historic emissions (read, the industrialized world); and all countries are responsible for their future emissions (think of those rapidly-growing emerging economies).

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

In addition, a mid-term agreement could be reached on an approach involving an international portfolio of domestic commitments, whereby each nation would commit and register to abide by its domestic climate commitments, whether those are in the form of laws and regulations or multi-year development plans. Support for such an approach has been voiced by a remarkably diverse set of countries, including Australia, India, and the United States.

The key question is not what this approach would accomplish in the short-term, but whether it would put the world in a better position two, five, and ten years from now in regard to a long-term path of action.

Consistent with this portfolio approach, President Obama recently announced that the United States would put a target on the table in Copenhagen to reduce emissions 17 percent below 2005 levels by 2020 (in line with climate legislation in the U.S. Congress). In response, China announced that it would reduce its carbon intensity (emissions per unit of economic activity) 40 percent below 2005 levels over the same period of time. Subsequently, India announced similar targets. Given these countries rapid rates of economic growth, the announced targets won’t cut emissions in absolute terms, but they are promising starting points for negotiations.

So, despite the multitude of negative pronouncements about the slow pace of international climate negotiations, there are positive developments and promising paths forward. It is fortunate that a few key nations, including the United States, appear to be more interested in real progress than symbolic action.

Three Pillars of a New Climate Pact

THE climate change summit at the United Nations on Tuesday, September 22nd, is aimed to build momentum for the 15th Conference of the Parties to the UN Framework Convention on Climate Change in Copenhagen in December, where nations will continue negotiations on a successor to the 1997 Kyoto Protocol, which expires in 2012. Later this week, the G20 finance ministers will meet in Pittsburgh, Pennsylvania, where international climate policy will be high on the agenda.

In the midst of this, Professor Sheila Olmstead of Yale University and I wrote an opinion piece which appeared as an op-ed in The Boston Globe on Sunday, September 20th. (See the original here, with the artwork; and/or for a detailed description of our proposal, see our discussion paper for the Harvard Project on International Climate Agreements.)

In the op-ed, we argued that to be successful, any feasible successor agreement must contain three essential elements: meaningful involvement by a broad set of key industrialized and developing nations; an emphasis on an extended time path of emissions targets; and inclusion of policy approaches that work through the market, rather than against it.

Consider the need for broad participation. Industrialized countries have emitted most of the stock of man-made carbon dioxide in our atmosphere, so shouldn’t they reduce emissions before developing countries are asked to contribute? While this seems to make sense, here are four reasons why the new climate agreement must engage all major emitting countries – both industrialized and developing.

First, emissions from developing countries are significant and growing rapidly. China surpassed the United States as the world’s largest CO2 emitter in 2006, and developing countries may account for more than half of global emissions within the next decade. Second, developing countries provide the best opportunities for low-cost emissions reduction; their participation could dramatically reduce total costs. Third, the United States and several other industrialized countries may not commit to significant emissions reductions without developing country participation. Fourth, if developing countries are excluded, up to one-third of carbon emissions reductions by participating countries may migrate to non-participating economies through international trade, reducing environmental gains and pushing developing nations onto more carbon-intensive growth paths (so-called “carbon leakage’’).

How can developing countries participate in an international effort to reduce emissions without incurring costs that derail their economic development? Their emissions targets could start at business-as-usual levels, becoming more stringent over time as countries become wealthier. If such “growth targets’’ were combined with an international emission trading program, developing countries could fully participate without incurring prohibitive costs (or even any costs in the short term). (For a very insightful analysis of such growth targets, please see Harvard Professor Jeffrey Frankel‘s discussion paper for the Harvard Project on International Climate Agreements.)

The second pillar of a successful post-2012 climate policy is an emphasis on the long run. Greenhouse gases remain in the atmosphere for decades to centuries, and major technological change is needed to bring down the costs of reducing CO2 emissions. The economically efficient solution will involve firm but moderate short-term targets to avoid rendering large parts of the capital stock prematurely obsolete, and flexible but more stringent long-term targets.

Third, a post-2012 global climate policy must work through the market rather than against it. To keep costs down in the short term and bring them down even lower in the long term through technological change, market-based policy instruments must be embraced as the chief means of reducing emissions. One market-based approach, known as cap-and-trade, is emerging as the preferred approach for reducing carbon emissions among industrialized countries.

Under cap-and-trade, sources with low control costs may take on added reductions, allowing them to sell excess permits to sources with high control costs. The European Union’s Emission Trading Scheme, established under the Kyoto Protocol, is the world’s largest cap-and-trade system. In June, the US federal government took a significant step toward establishing a national cap-and-trade policy to reduce CO2 emissions, with the passage in the House of Representatives of the American Clean Energy and Security Act (about which I have written in many previous posts at this blog). Other industrialized countries are instituting or planning national CO2 cap-and-trade systems, including Australia, Canada, Japan, and New Zealand.

Linking such cap-and-trade systems under a new international climate treaty would bring cost savings from increasing the market’s scope, greater liquidity, reduced price volatility, lessened market power, and reduced carbon leakage. Cap-and-trade systems can be linked directly, which requires harmonization, or indirectly by linking with a common emissions-reduction credit system; indeed, this is what appears to be emerging even before a new agreement is forged. Kyoto’s Clean Development Mechanism allows parties in wealthy countries to purchase emissions-reduction credits in developing countries by investing in emissions-reduction projects. These credits can be used to meet emissions commitments within the EU-ETS, and other systems are likely to accept them as well.

Countries meeting in New York and Pittsburgh this week, and in Copenhagen in December, should consider these three essential elements as they negotiate a new climate agreement. A new international climate agreement missing any of these three pillars may be too costly, and provide too little benefit, to represent a meaningful attempt to address the threat of global climate change.