New Zealand Archives - An Economic View of the Environment

Insights about Climate Change Policy from Europe, New Zealand, and the USA

Suzi Kerr, the chief economist at the Environmental Defense Fund (EDF) and founder of Motu Economic and Public Policy Research, a think tank in her home country of New Zealand, shares her perspectives on climate change policy in the latest episode of our podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” I hope you can find time to listen to our conversation here.

In these podcasts, I converse with leading experts from academia, government, industry, and NGOs. I’m pleased to say that my long-time colleague and friend (and former student), Suzi Kerr, fits well in this group with her abundant experience in academia and NGOs.

Dr. Kerr was involved in the early design of New Zealand’s successful emissions trading system (ETS), which began in 2008, and is similar in some ways to California’s cap-and-trade system, about which I have written many times at this blog and elsewhere.

“It was the second [ETS] in the world and it’s economy wide. It’s what we call upstream, so it covers…basically all fossil fuels and most other emissions in New Zealand. And one of the highlights I think is that it covers the forestry sector, and New Zealand is still probably the one that covers that most comprehensively. A lot of what we were trying to do was experiment and learn so that others could learn from our experience.”

As Europe prepares to begin implementation in 2023 of its Carbon Border Adjustment Mechanism (CBAM), intended to mitigate carbon leakage and protect competitiveness while remaining in compliance with World Trade Organization (WTO) rules, Kerr expresses her belief that while the CBAM is lower cost to taxpayers and provides advantages over output-based allocation measures, there are many challenges standing in its way.

“The logistical issues of bringing in a CBAM are huge. If we all had carbon pricing, it would be pretty easy, but we don’t. We have a whole mix of policies in different countries. Some have carbon pricing, but [other nations have] other policies. That complexity is huge, and the other issue is equity across countries. Does it really make sense for us to be charging countries who have low policy stringency because they’re very poor?,” she says. “I think it’s critically important that the EU couple any introduction of CBAM with really active support for the poorest countries so that they are supported to have a climate transition rather than expected to do that entirely on their own.”

In the U.S., the Biden Administration has announced its new nationally determined contribution (NDC) under terms of the Paris Agreement, with a pledge to cut greenhouse gas emissions by 50 to 52 percent below 2005 levels by 2030. I ask Suzi Kerr whether this target is achievable, given domestic U.S. politics. She responds that she judges the pledge to be credible, but difficult to achieve.

“The research and the modeling all says it can be done. It’s certainly possible and a lot of it can even be done at very low cost. Whether it will be done is a much more challenging question and that’s where it gets really hard – actually implementing the policies that are effective. Even if you have the political will, that’s a difficult thing,” she remarks. “In general, history teaches us that policies are almost always less effective than we think they’re going to be.”

My complete conversation with Suzi Kerr is the 27^th 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.

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

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.

What to Expect at COP-25 in Madrid

The “Rulebook” for the Paris Agreement puts flesh on the bones of the skeletal 13-page Agreement, and was completed last year at COP-24 in Katowice, Poland, with the exception of one very important part of the Agreement, namely Article 6, which potentially provides for international carbon markets and other forms of cross-border cooperation. Watch for key developments in Madrid!

Key Challenge for Long-Term Success of Paris Agreement

There are two necessary conditions for ultimate success of the Paris Agreement. First, adequate scope of participation. This has been achieved, with meaningful participation from countries representing some 98% of global emissions – or some 85% if the U.S. withdraws in November, 2020 (compared with the 14% of global emissions from countries committed to emissions reductions under the current, second commitment period of the Kyoto Protocol). The other necessary condition is adequate ambition of the individual national contributions. This is where the greatest challenges lie.

The very element of the Paris Agreement that has fostered such broad scope of participation – namely, that the individual national “pledges” (Nationally Determined Contributions or NDCs) are anchored in national circumstances and domestic political realities – implies that individual contributions may not be sufficient, due to the global commons nature of the climate change problem, and the attendant free-rider issues.

So, are there ways to enable and facilitate increased ambition over time? Linkage of regional, national, and sub-national policies can be part of the answer – connections among policy systems that allow emission reduction efforts to be redistributed across systems. Linkage is typically framed as between cap-and-trade systems, but regional, national, and sub-national policies will be highly heterogeneous. More about this below.

Merits and Concerns regarding Linkage

Linkage facilitates significant compliance cost savings by allowing firms to take advantage of lower cost abatement opportunities in other jurisdictions. According to one recent study, costs could – in theory – be reduced to 25% of what they otherwise would be! Also, linkage means improved functioning of markets by reducing market power and price volatility, and there are political benefits to linking parties as a sign of momentum when political jurisdictions band together. Another advantage is administrative economies of scale. Finally and very importantly, linkage allows for the UNFCCC’s key equity principle of “common but differentiated responsibilities and respective capabilities” (CBDR) to be achieved without sacrificing cost-effectiveness.

There are also some legitimate concerns about policy linkage. First, there are distributional impacts, both in the form of redistribution within jurisdictions, and redistribution across jurisdictions. Such impacts are politically problematic. There is also the automatic propagation of some design elements, in particular, the cost-containment elements of banking and price collars which propagate from one linked system to another. For that matter, weak design in one jurisdiction affects prices and quality in all linked jurisdictions. And price shocks can propagate through linked jurisdictions. Finally, there is decreased autonomy, as rules are set jointly by all linked parties.

Linkage and the Paris Agreement

There are three distinct but closely related levels of relevant policy action. First, national (or regional) governments can establish emission-reduction policies, including carbon taxes, cap-and-trade systems, and performance standards. Second, these jurisdictions can link their policy instruments through mutual recognition of permits, allowances, or credits via bilateral agreements. This allows trade of these units across international borders, which facilitates lower-cost achievement of the aggregate target. But such transfers of emission reduction responsibilities and actions need to be correctly counted toward compliance with respective NDCs under the Paris Agreement. This is where Article 6 comes in!

In particular, Article 6.2 provides for Internationally Transferred Mitigation Outcomes (ITMOs) and Corresponding Adjustments, which together can function as the international accounting mechanism to correctly reflect a multiplicity of international private-sector exchanges (under various international linkages).

In other words, I view ITMOs as units of accounting for Corresponding Adjustments, not as a medium of exchange for government-government purchase and sale. Otherwise, Article 6.2 would become equivalent to the Kyoto Protocol’s Article 17 (international emissions trading), and will fail as that did, because governments are not cost-minimizing agents, and lack requisite information even if they were (Hahn & Stavins, “What Has the Kyoto Protocol Wrought? The Real Architecture of International Tradeable Permit Markets,” 1999).

Is Heterogeneity a Challenge for Linkage?

Yes, it can be. There are three major categories of heterogeneity that can pose challenges to effective international policy linkage under the Paris Agreement. First, there are heterogeneous policy instruments: cap-and-trade; tradable performance standards; emission reduction credits (offsets); taxes; and performance standards. Second, there are heterogeneous jurisdictions and geographic scope: regional, national, and sub-national; and status under the Paris Agreement (Party and non-Party). Third, the NDC targets themselves area highly heterogeneous: hard (mass-based) emissions caps; relative mass-based emissions caps (relative to BAU); rate-based emissions caps (per unit of economic activity or per unit of output); and non-emissions caps, such as some degree of penetration of renewable energy sources. Also, there are differences in base year, target year, sectors, GHGs, estimated global warming potential, and conditionality.

Is Linkage Among Such Heterogeneous Policies Feasible or Wise?

With Michael Mehling (MIT) and Gilbert Metcalf (Tufts University), I have carried out research on heterogeneous linkage and the Paris Agreement (“Linking Climate Policies to Advance Global Mitigation.” Science 359, 2018). Among our major findings is the following. Most features of heterogeneity do not present insurmountable obstacles to linkage, but some present real challenges, and indicate the need for specific accounting guidance to avoid double-counting. Article 6.2 provides an obvious home for this accounting guidance (Schneider, Duan, Stavins, Kizzier, Broekhoff, Jotzo, Winkler, Lazarus, Howard, and Hood. “Double counting and the Paris Agreement rulebook.” Science 366, 2019).

The Outlook for Heterogeneous Linkage under Article 6.2 of the Paris Agreement

The negotiators in Madrid have an opportunity to define clear and consistent guidance for accounting for emissions transfers under Article 6.2. A robust accounting framework can foster successful linkages of climate policies across jurisdictions. But if guidance extends much beyond basic accounting rules – such as implicit taxes on cooperation via what have been termed “share of proceeds” and “net global emission reduction” – then restrictive requirements will impede effective linkage, and thereby drive up compliance costs. True to the spirit of the Paris Agreement, less may be more!

So, a combination of sensible common accounting rules and absence of restrictive criteria and conditions can accelerate linkage, allow for broader and deeper climate policy cooperation, and – most important – thereby increase the latitude of Parties to scale up the ambition of their NDCs.

Only time – and the work of the delegates in Madrid – will tell.

The Harvard Project on Climate Agreements at COP-25

Along with my Harvard colleagues, Joseph Aldy, Robert Stowe, and Jason Chapman, I will be at the Twenty-Fifth Conference of the Parties (COP-25) of the United Nations Framework Convention on Climate Change (UNFCCC) in Madrid, Spain, leading our delegation from the Harvard Project on Climate Agreements (HPCA), December 8-11, 2019.

In addition to holding a series of bilateral meetings with various national delegations, I will participate in at least four events. Two of these are panel sessions organized by HPCA, while the two others are panel sessions organized by national delegations. Our team will be at COP-25 during the week of December 8-12, 2019. COP-25 attendees who wish to meet with the Harvard Project during the conference should send an email Jason Chapman, Project Manager (jason_chapman@hks.harvard.edu).

Four Events in Brief

Reducing Greenhouse Gas Emissions through Carbon Pricing: Recent Research, Analysis, and Experience
Robert Stavins, Moderator and Panelist; Joseph Aldy, Panelist; Hosted by Harvard Project on Climate Agreements, Enel Foundation, and Tsinghua University Global Climate Change Institute; Monday, December 9, 2019; 11:30 am – 1:00 pm; Location: Side Event Room 3

The Seventh Global Climate Change Think Tank Forum: The Latest Developments in Climate Change Economics
Robert Stavins, Presenter; Hosted by China National Center for Climate Change Strategy and International Cooperation; Tuesday, December 10, 2019; 6:00 pm – 7:30 pm; Location: China Pavilion

Realizing the Potential of Article 6 of the Paris Agreement
Robert Stavins, Moderator and Panelist; Joseph Aldy, Panelist; Hosted by the Harvard Project on Climate Agreements; Wednesday, December 11, 2019; 12:30 pm – 2:00 pm; Location: Pavilion of the International Emissions Trading Association (IETA)

Enhancing Capacity of Developing Countries to Address Climate Change: Issues and Opportunities
Robert Stavins, Keynote Speaker; Hosted by Korea University, Green Asia, Center for Climate and Sustainable Development Law and Policy, Global Green Growth Institute, UNDP Seoul Policy Centre, UN Office for Sustainable Development; Wednesday, December 11, 2019; 3:00 pm – 4:30 pm; Location: Korea Pavilion

Two Harvard Project Events in Detail

Reducing Greenhouse Gas Emissions through Carbon Pricing: Recent Research, Analysis, and Experience

Monday, 9 December, 2019; 11:30am – 1:00pm, Location: Side Event Room 3

Speakers will present recent research and analysis of carbon-pricing policy to reduce greenhouse-gas emissions. The panel will give some attention to experience and prospects in South America and to China’s emerging national system. A new research paper by Robert Stavins on the relative merits of cap and trade and carbon taxes will provide a basis for much of the discussion.

Speakers: Joseph Aldy, Harvard University; Simone Mori, Enel; Raffaele Mauro Petriccione, Director General of DG Climate Action in the European Commission; Robert Stavins, Harvard University; Zhang Xiliang, Tsinghua University; government representatives to be invited.

Realizing the Potential of Article 6

Wednesday, 11 December 2019; 12:30pm – 2:00pm; Location: Pavilion of the International Emissions Trading Association (IETA)

Panelists will discuss the potential of Article 6 to decrease mitigation costs and incentivize increased ambition. They will review the status of the negotiations on the Article 6 rulebook, including issues remaining to be resolved at that point in the COP – including potentially, ongoing discussion about double counting (environmental integrity) and the Article 6 – Article 13 interface (applications of the enhanced transparency framework to Article 6 transfers).

Panelists: Joseph Aldy, Harvard Kennedy School; Kay Harrison, Ministry of Foreign Affairs and Trade, New Zealand; Kelley Kizzier, Environmental Defense Fund; Andrei Marcu, European Roundtable on Climate and Sustainable Transition; Robert Stavins, Harvard Kennedy School

The Path Ahead

After COP-25, I will post an essay at this blog assessing the progress (or lack thereof) made in Madrid – on Article 6, as well as other elements and issues.

In the meantime, if you will be at COP-25, and would like to meet with the Harvard Project on Climate Agreements, please contact Jason Chapman (jason_chapman@hks.harvard.edu).