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A Key Moment for California Climate Policy

The past year has been a crucial time in international climate negotiations. In December, 2015, in Paris, negotiators established an agreement on the next round of targets and actions to succeed the Kyoto Protocol, which was signed in 1997 and will effectively close down in 2020. In Paris, negotiators set up a new and meaningful agreement for multinational action through individual country “Intended Nationally Determined Contributions” (INDCs). The Paris round was crucial, because it expanded the coalition of contributions from countries responsible for 14% of global emissions under Kyoto (Europe and New Zealand) to 187 countries responsible for 96% of emissions under the Paris Agreement.

California’s Role in Global Climate Change Policy

California sent a delegation to the Paris talks. While not officially a party to the negotiations, California government officials attended to show support for broad and meaningful action. For many years, spurring action beyond California’s borders has been the key rationale for developing a California-based climate policy. This began with Assembly Bill 32 (AB 32), the Global Warming Solutions Act of 2006. Initially, the focus was on encouraging action within the United States, including federal legislation, state-level actions, and multi-state compacts, but subsequent domestic action turned out to be much less than originally anticipated. As a result, California’s focus shifted to the international domain.

This is a good time to consider how the State can best demonstrate leadership on this global stage. Action by all key countries, including the large emerging economies – China, India, Brazil, Korea, and South Africa – will be necessary to meaningfully address the climate problem. Significant multinational contributions will be necessary to avoid having California’s aggressive in-state actions be for naught. Absent such multilateral action, ambitious California policies do little or nothing to address the real problem.

But California can play a very important role by showing leadership – in two key ways. One is to demonstrate a commitment to meaningful reductions in (greenhouse gas) GHG emissions. In this regard, California has more than met the bar, with policies that are as aggressive as – if not more aggressive than – those of most countries.

The other way is to show leadership regarding how reductions of GHG emissions can best be accomplished – that is, in regard to progressive policy design. California has a sophisticated GHG cap-and-trade system in place, which while not perfect, has many excellent design elements. Countries around the world are now planning or implementing cap-and-trade systems, including in Europe, China, and Korea. These countries are carefully watching decisions made in California, with particular attention to the design and implementation of its cap-and-trade system. California’s system, possibly with a few improvements, could eventually be a model for even larger systems in other countries.

Can California Provide a Good Model of Progressive Policy?

Unfortunately, California’s climate policy has not relied heavily on its cap-and-trade system to achieve state targets. Furthermore, rather than increasing reliance on this innovative market-based climate policy over time, recent proposals have doubled-down on the use of less efficient conventional policies to achieve GHG reductions. While some of these so-called “complementary policies” can be valuable under particular circumstances, they can also create severe problems.

One example of this is the attempt to employ aggressive sector-based targets through technology-driven policies, such as the Low Carbon Fuels Standard (LCFS). In the presence of a binding cap-and-trade regime, the LCFS has the perverse effect of relocating carbon dioxide (CO₂) emissions to other sectors but not reducing net emissions, while driving up statewide abatement costs, and suppressing allowance prices in the cap-and-trade market, thereby reducing incentives for technological change. That is bad news all around. These perverse outcomes render such policies of little interest or value to other regions of the world.

The magnitude of the economic distortion is illustrated by the fact that allowances in the California cap-and-trade market have recently been trading in the range of $12 to $13 per ton of CO₂, while LCFS credits have traded this summer for about $80 per ton of CO₂.

While reduction in transportation sector GHG emissions is clearly an important long-run objective of an effective climate policy, if the approach taken to achieving such reductions is unnecessarily costly, it will be of little use to most of the world, which has much less financial wealth than California and the United States, and will therefore be much less inclined to follow the lead on such costly policies.

The Path Ahead

With China now the largest emitter in the world, and India and other large developing countries not very far behind, California policies that achieve emission reductions through excessively costly means will fail to encourage other countries to follow, or even recognize, California’s leadership. On the other hand, by increasing reliance on its progressive market-based system, California can succeed at home and be influential around the world.

Can the WTO Take a Lesson from the Paris Climate Playbook?

As readers will know from my previous entry at this blog (“Paris Agreement — A Good Foundation for Meaningful Progress”, December 12, 2015), I was busy with presentations and meetings during the 21^st Conference of the Parties (COP-21) of the United Nations Framework Convention on Climate Change (UNFCCC) in Paris last December. However, I did have time to reflect on the process that was leading to the then-emerging Paris Agreement, including a series of discussions with my Harvard colleague – Professor Robert Lawrence, a leading international trade economist –who was back in Cambridge.

He and I realized that negotiators in a very different realm – international trade – could benefit from observing the progress that was being made in the international climate policy realm in Paris. This led to a co-authored op-ed that appeared in the Boston Globe on December 7, 2015 (“What the WTO Can Learn from the Paris Climate Talks”).

For many years, climate negotiators have looked longingly at how the World Trade Organization (WTO) was able to negotiate effective international agreements. But ironically, the Paris climate talks and the WTO negotiations, which were set to take place the following week in Nairobi, lead to the opposite conclusion. Trade negotiators can now emulate the progress made in the climate change agreements by moving away from a simplistic division between developed and developing countries.

For years, global climate change policy was hobbled by this division. Readers of this blog will be familiar with this issue. In the Kyoto Protocol, only developed countries committed to emissions reductions. Developing countries had no obligations. The stark demarcation made meaningful progress impossible, partly because the growth in emissions since the Protocol came into force in 2005 has been entirely in the large developing countries. Even if developed countries were to eliminate their CO₂ emissions completely, the world cannot reduce the pace of climate change unless countries such as China, India, Brazil, Korea, South Africa, Mexico, and Indonesia take meaningful action.

The WTO negotiations, launched in 2001 in Doha, have remained at an impasse because of similar problems. They are tied up because nearly all the obligations assumed by WTO members depend upon whether they claim to be developed or developing. And since countries are allowed to self-designate, countries such as Singapore, South Korea, and the Gulf oil states seek to be treated the same as Ghana, Zambia, and Pakistan.

When developing countries accounted for a relatively small share of world trade, it was easy to grant all of them special treatment. But it has become impossible for developed countries to agree to additional liberalization without meaningful market-opening concessions by the large emerging economies, which will account for the majority of world trade growth in the future. Even though some have already liberalized unilaterally, many of these countries avoid making concessions at the WTO by claiming treatment as developing nations.

In the climate arena, the big break came in Durban, South Africa, in 2011, when countries agreed to achieve an outcome that was applicable to all parties. In Paris, the countries of the world adopted the Paris Agreement, which includes: bottom-up elements in the form of Intended Nationally Determined Contributions (INDCs) – national targets and actions that arise from domestic policies and circumstances; and top-down elements for oversight, guidance, and coordination. Now all countries are involved in protecting the climate system “on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities.”

Whereas the current commitment period of the Kyoto Protocol covers countries (Europe and New Zealand) that account for no more than 14 percent of global emissions (and zero percent of global emissions growth), INDCs submitted for the Paris agreement cover 186 countries, representing 96 percent of global emissions. This dramatic, path-breaking expansion of the scope of participation is the key reason for optimism about the Paris Agreement.

In the trade sphere, a similarly nuanced approach with differentiated responsibilities that reflect different capabilities could be adopted by the WTO. Instead of all countries having to subscribe as either developed or developing countries, the WTO could finally move beyond the North-South divide that is embodied in almost every draft proposed in the current Doha round.

The climate talks have shown that simplistic classifications of countries are a prescription for impasse. Robert Lawrence and I concluded that unless the WTO learns this lesson, it may become increasingly irrelevant, as coalitions of the willing turn to regional agreements to make what progress they can on international trade liberalization.

Paris Agreement — A Good Foundation for Meaningful Progress

The Paris Agreement, a truly landmark climate accord, which was gaveled through today, December 12, 2015, at 7:26 pm (Paris time) at the Twenty-First Conference of the Parties (COP-21), checks all the boxes in my five-point scorecard for a potentially effective Paris Agreement, described in my November 17^th blog essay, Paris Can Be a Key Step. The Agreement provides a broad foundation for meaningful progress on climate change, and represents a dramatic departure from the Kyoto Protocol and the past 20 years of climate negotiations.

Essential Background

Anyone who has read this blog over the past several years, or – even more so — my academic writing over the past twenty years on international climate change policy architecture, knows that I have viewed the dichotomous distinction between Annex I and non-Annex I countries as the major stumbling block to progress. That distinction was first introduced in the climate negotiations at COP-1 in Berlin in 1995. That was, in my view, an unfortunate and narrow interpretation of the sound equity principle in the United Nations Framework Convention on Climate Change (UNFCCC, 1992) – “common but differentiated responsibilities and respective capabilities.” It was codified two years later in the Kyoto Protocol.

The Kyoto Protocol, which has been the primary international agreement to reduce the greenhouse-gas emissions that cause global climate change, included mandatory emissions-reduction obligations only for developed countries. Developing countries had no emissions-reduction commitments. The dichotomous distinction between the developed and developing countries in the Kyoto Protocol has made progress on climate change impossible, because growth in emissions since the Protocol came into force in 2005 is entirely in the large developing countries—China, India, Brazil, Korea, South Africa, Mexico, and Indonesia. The big break came at the annual UNFCCC negotiating session in Durban, South Africa in 2011, where a decision was adopted by member countries to “develop [by December 2015, in Paris] a protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties.” This “Durban Platform for Enhanced Action” broke with the Kyoto Protocol and signaled a new opening for innovative thinking (which we, at the Harvard Project on Climate Agreements, took to heart).

The Paris Agreement is a Departure from the Past

Today, in Paris, representatives of 195 countries adopted a new hybrid international climate policy architecture that includes: bottom-up elements in the form of “Intended Nationally Determined Contributions” (INDCs), which are national targets and actions that arise from national policies; and top-down elements for oversight, guidance, and coordination. Now, all countries will be involved in taking actions to reduce emissions.

Remarkably, 186 of the 195 members of the UNFCCC submitted INDCs by the end of the Paris talks, representing some 96% of global emissions. Contrast that with the Kyoto Protocol, which now covers countries (Europe and New Zealand) accounting for no more than 14% of global emissions (and 0% of global emissions growth).

This broad scope of participation under the new Paris Agreement is a necessary condition for meaningful action, but, of course, it is not a sufficient condition. Also required is adequate ambition of the individual contributions. But this is only the first step with this new approach. The INDCs will be assessed and revised every five years, with their collective ambition ratcheted up over time. That said, even this initial set of contributions could cut anticipated temperature increases this century to about 3.5 degrees Centigrade, more than the frequently-discussed aspirational goal of limiting temperature increases to 2 degrees C (or the new aspirational target from Paris of 1.5 degrees C), but much less than the 5-6 degrees C increase that would be expected without this action. (An amendment to the Montreal Protocol to address hydrofluorocarbons (HFCs) is likely to shave an addition 0.5 C of warming.)

The problem has not been solved, and it will not be for years to come, but the new approach brought about by the Paris Agreement can be a key step toward reducing the threat of global climate change.

The new climate agreement, despite being path-breaking and the result of what Coral Davenport writing in The New York Times rightly called “an extraordinary effort at international diplomacy,” is only a foundation for moving forward, but it is a sufficiently broad and sensible foundation to make increased ambition over time feasible for the first time. Whether the Agreement is truly successful, whether this foundation for progress is effectively exploited over the years ahead by the Parties to the Agreement, is something we will know only ten, twenty, or more years from now.

What is key in the Agreement is the following: the centrality of the INDC structure (through which 186 countries representing 96% of global emissions have made submissions); the most balanced transparency requirements ever promulgated; provision for heterogeneous linkage, including international carbon markets (through “internationally transferred mitigation outcomes” – ITMOs); explicit clarification in a decision that agreement on “loss and damage” does not provide a basis for liability of compensation; and 5-year periods for stocktaking and improvement of the INDCs.

The Key Elements of the Paris Agreement

Here are some of the highlights of what stands out to me in the Paris Agreement.

Article 2 of the Agreement reaffirms the goal of limiting the global average temperature increase above the pre-industrial level to 2 degrees C, and adds 1.5 degrees C as something even more aspirational. In my opinion, these aspirational goals – which come not from science (although endorsed by most scientists) nor economics, and may not even be feasible – are much less important than the critical components of the agreement: the scope of participation through the INDC structure, and the mechanisms for implementation (see below).

Article 3 makes it clear that the INDC structure is central and universal for all parties, although Article 4 blurs this a bit with references to the circumstances of developing country Parties. But throughout the Agreement, it is abundantly clear that the firewall from the 1995 Berlin Mandate has finally been breached. In addition, five-year periods for the submission of revised INDCs (and global stocktaking of the impact of the Paris Agreement) are included in Article 14. The first stocktaking review will be in 2018, with the start date for new INDCs set for 2020.

Article 4 importantly describes transparency requirements (domestic monitoring, reporting, and verification). This is crucial, and represents a striking compromise between the U.S. and Europe, on the one hand, and China and India, on the other hand. All countries must eventually face the same monitoring and reporting requirements, regardless of their status as developed or developing.

Article 6 provides for international policy linkage, and is thereby exceptionally important for the successful exploitation of the foundation provided by the Paris Agreement. The necessary language for heterogeneous international policy linkage (not only international carbon markets, but international linkage of other national policy instruments) is included. I have written about this key issue many times over the past ten years. It can bring down compliance costs greatly, and thereby facilitate greater ambition over time. (See our paper on this from the Harvard Project on Climate Agreements: “Facilitating Linkage of Heterogeneous Regional, National, and Sub-National Climate Policies Through a Future International Agreement” By Daniel Bodansky, Seth Hoedl, Gilbert E. Metcalf and Robert N. Stavins, November 2014.) The Paris Agreement accomplishes this through provision for “internationally transferred mitigation outcomes.” With this provision, we have a new climate policy acronym – ITMOs – about which I suspect I will be writing in the future.

There is considerable discussion of “finance” in Article 9, but the numbers do not appear in the Agreement, only in the accompanying Decision, where item 54 states that by 2025, the Parties will revisit the total quantity of funding, using the current $100 billion target as a “floor.”

Finally, the Agreement’s Article 8 on Loss and Damage was necessary from the point of view of the most vulnerable countries, but the most contentious issue is settled in Decision 52, where the Parties agree that this “does not involve or provide a basis for any liability of compensation.” That decision was absolutely essential from the perspective of the largest emitters.

Anticipated Impacts of the Paris Agreement

Before I turn to my assessment of the Agreement, I should comment briefly on a topic that seems to be of considerable interest to many people (based on the questions I received from the press during my 10 days in Paris), namely what effect will the Agreement have on business, what signals will it send to the private sector?

My answer is that impacts on businesses will come largely not directly from the Paris Agreement, but from the policy actions that the various Parties undertake domestically in their respective jurisdictions to comply with the Paris Agreement. I am again referring to the 186 countries which submitted Intended Nationally Determined Contributions – INDCs – under the Agreement.

So, in the case of the United States, for example, those policies that will enable the country to achieve its submitted INDC are: the Clean Power Plan (which will accelerate the shift in many states from coal to natural gas for electricity generation, as well as provide incentives in some states for renewable electricity generation); CAFE (motor vehicle fuel efficiency) standards increasing over time (as already enacted by Congress); appliance efficiency standards moving up over time (as also already enacted by Congress); California’s very aggressive climate policy (AB-32); and the northeast states’ Regional Greenhouse Gas Initiative.

These various policies are credible, and they will send price signals that affect business decisions (but not across the board nor with ideal efficiency, as would a national carbon tax or a national carbon cap-and-trade system). In terms of impacts on specific companies, impacts will continue to vary greatly. But a useful generalization is that a major effect of most climate policies is to raise energy costs, which tends to be good news for producers of energy-consuming durable goods (for example, the Boeing Company) and bad news for consumers of those same energy-consuming durable goods (for example, United Airlines).

An Assessment with my Paris Scorecard

Lastly, here is my November 17^th scorecard and my assessment of the five key elements I said would constitute a successful 21^st Conference of the Parties:

Include approximately 90% of global emissions in the set of INDCs that are submitted and part of the Paris Agreement (compared with 14% in the current commitment period of the Kyoto Protocol). This was obviously achieved, with total coverage reaching 96% of global emissions.

Establish credible reporting and transparency requirements. This was achieved, through long negotiations between China and India, on the one hand, and Europe and the United States, on the other.

Move forward with finance for climate adaptation (and mitigation) B the famous $100 billion commitment. This was achieved.

Agree to return to negotiations periodically, such as every 5 years, to revisit the ambition and structure of the INDCs. This was achieved.

Put aside unproductive disagreements, such as on so-called “loss and damage,” which appears to rich countries like unlimited liability for bad weather events in developing countries, and the insistence by some parties that the INDCs themselves be binding under international law. This would have required Senate ratification of the Agreement in the United States, which would have meant that the United States would not be a party to the Agreement. There was success on both of these.

Final Words

So, my fundamental assessment of the Paris climate talks is that they were a great success. Unfortunately, as I have said before, some advocates and some members of the press will likely characterize the outcome as a “failure,” because the 2 degree C target has not been achieved immediately.

Let me conclude where I started. The Paris Agreement provides an important new foundation for meaningful progress on climate change, and represents a dramatic departure from the past 20 years of international climate negotiations. Of course, the problem has not been solved, and it will not be for many years to come. But the new approach brought about by the Paris Agreement can be a key step toward reducing the threat of global climate change. In truth, only time will tell.

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As many of you know, over a period of ten days, we (the Harvard Project on Climate Agreements) were hard at work at COP-21 in Paris. I made a dozen presentations and we held bilateral meetings on a daily basis with national negotiating teams and and others. You will find videos, photos, and numerous stories about our activities in Paris at our Tumblr page. Thanks are due to the entire team who were with me in Paris – Robert Stowe, executive director, Jason Chapman, program manager, and Doug Gavel, director of media relations — as well as Bryan Galcik, communications coordinator, back in Cambridge.