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Will the Paris Agreement Help or Hinder Cooperation among Nations?

I just returned from Florence, Italy, where I participated in the Second Carbon Market Workshop, organized by the European Commission, and hosted by the European University Institute. This workshop, which brought together government representatives from around the world (with a sprinkling of academics and NGO representatives to add some spice to the discussion), was convened to examine how regional, national, and sub-national jurisdictions can cooperate in ways that could increase the effectiveness and/or reduce the costs of their respective climate change policies. One of my tasks at the workshop was to make a brief dinner speech. Jos Delbeke, the long-time, legendary Director-General of Climate Action for the Commission, asked me to talk about how the Paris Agreement might help or hinder practical climate policy cooperation around the world. I drew extensively upon my research with Michael Mehling and Gilbert Metcalf. Here is the gist of what I said in my dinner speech.

Some Paris Agreement Fundamentals

The hybrid design of the Paris Agreement was key to its successful enactment in 2015 and its coming into force in November, 2016. The hybrid design to which I refer is the combination of top-down (centralized) and bottom-up (decentralized) elements. The top-down elements include, for example, the requirement that countries state their national contributions every five years, a schedule which is binding under international law for those jurisdictions that have ratified the Agreement. The key bottom-up element is the set of individual Nationally Determined Contributions (or NDCs) themselves, which are not part of the Paris Agreement itself, but rather are listed in a separate Registry. These are not binding under international law, but rather are left to the domestic authority of the respective countries.

This dual structure led to the achievement of one of two necessary conditions for ultimate success of the Paris Agreement, namely adequate scope of participation, which now includes countries accounting for 97% of global emissions, compared with the 14% that are covered by the current, second commitment period of the Kyoto Protocol.

But adequate scope of participation is only one of two necessary conditions; the other is adequate collective ambition. Unfortunately, the fundamentally voluntary nature of the NDCs – which is precisely what facilitated the exceptionally broad scope of participation – works against adequate ambition to address this global commons phenomenon, which is plagued by free rider problems.

The Challenge for Climate Negotiators

This raises the key overall challenge that faced the negotiators in Bonn in May and will face them in Katowice, Poland, in December (at the Twenty-Fourth Conference of the Parties of the United Nations Framework Convention on Climate Change): What can they do, when writing rules to put flesh onto the skeletal Paris Agreement, to encourage countries to increase their ambition over time? That’s where carbon markets and cooperation among jurisdictions potentially come in.

International Cooperation under the Paris Agreement

Largely because cooperation among jurisdictions — including through carbon markets — can lower abatement costs, such cooperation may be essential for the ultimate success of the Agreement. This cooperation might take the form of international linkage, where by “linkage,” I mean connections among policy systems that allow emissions reduction efforts to be redistributed among those systems.

Such linkage is typically framed as between cap-and-trade systems, but regional, national, and sub-national policies are and will be highly heterogeneous, including not only cap-and-trade, but offset systems, carbon taxes, performance standards, and technology standards. Note that we already see this sort of heterogeneity within the European Union’s own set of climate change policies, as well as within California’s suite of climate initiatives.

The good news is that linkage among highly heterogeneous policies is eminently feasible, as I have written about previously in this blog, drawing on my research with Michael Mehling (MIT) and Gib Metcalf (Tufts University). The even better news is that one part of the Paris Agreement provides a potential home for such international cooperation, linkage, and carbon markets – Article 6. (If you are interested in the details, I recommend a recent report from the Asian Development Bank, “Decoding Article 6 of the Paris Agreement.”)

The Promise and Problems of Article 6

In the negotiations that led up to the 2015 Paris climate talks, it was by no means clear what role — if any — market mechanisms would play in the Paris Agreement. In the negotiations, the European Union, Brazil, and other countries played crucial roles in generating the compromise that became Article 6 of the Agreement.

That compromise resulted in text that — to put it kindly — is very much subject to interpretation. Now, as Benito Müller, Kelley Kizzier, and their colleagues have observed, intentional vagueness and ambiguity of text can be quite helpful in achieving a negotiated compromise, but such vagueness is decidedly not helpful when it comes to making an agreement operational.

This compromised home for markets emerged in Article 6 despite the entrenched opposition of a small set of vocal countries — including some Latin American socialist economies (the so-called ALBA coalition) — who wanted nothing of the kind to appear in the Paris Agreement. They succeeded in keeping the word “market” out the Paris Agreement, but the concept and the potential reality is very much there! (Ironically, at their insistence, the phrase “non-market” does appear in the Agreement.)

In any event, provision for markets and international cooperation is implicit in Article 6.2, which allows for cooperative approaches involving Internationally Transferred Mitigation Outcomes (or ITMOs), which are vague and without definition, but can function as an international accounting mechanism for international trades, exchanges, and cooperation. And Article 6.4 establishes a more centralized mechanism to contribute to emissions mitigation and support sustainable development, essentially as a successor to the Clean Development Mechanism (and may soon come to be called the “Sustainable Development Mechanism” or SDM).

Advantages and Concerns about Cooperation and Linkage

Despite the opposition I mentioned, most parties to the Paris Agreement are supportive of cooperative approaches (and more than half explicitly mentioned carbon markets in their respective NDCs).

This may be because of six important advantages of such cooperation: first, cost savings by allowing firms to take advantage of lower cost abatement opportunities in other jurisdictions; second, reducing market power of individual firms by enlarging the market’s scope, and reducing total price volatility by thickening markets; third, political benefits to Parties, by providing a sign of “momentum” as jurisdictions band together, possibly influencing other parties to participate; fourth, administrative economies of scale through knowledge sharing in design and operations, as well as shared administrative and oversight costs; fifth reducing leakage and competitiveness impacts by harmonizing the shadow price of carbon across jurisdictions; and sixth, allowing for the achievement of the UNFCCC’s critical principle of “Common but Differentiated Responsibilities” without sacrificing cost-effectiveness.

There are also real concerns about linkage: first, distributional impacts within and across linked jurisdictions; second, automatic propagation of certain design elements, in particular, cost-containment elements (banking, borrowing, and price collars); and third, decreased national autonomy.

Back to the Article 6 Negotiations and International Policy Linkage

Article 6 can be a home both to linkage of the sort we usually talk about, as well as “soft linkage,” such as an agreement — explicit or implicit — to harmonize carbon prices either at some level or within overlapping bands.

Thinking about the UNFCCC negotiations taking place now, most types of heterogeneity – of policy instruments, level of political jurisdiction, and nature of NDC targets – do not present insurmountable obstacles to linkage, but some do present real challenges, and indicate the need for specific guidance as the rulebook of the Paris Agreement is written.

Unfortunately, some countries want the Article 6 guidance to go beyond fundamental issues of accounting and environmental integrity to broader matters of environmental ambition, which properly belong in other parts of the Paris Agreement. Whereas, accounting provisions to avoid double-counting of NDC actions through ITMOs surely belong in the Article 6 rulebook, some countries have proposed, for example, that all ITMO exchanges themselves must actually reduce net emissions.

This sounds very much like the U.S. Environmental Protection Agency’s 20% rule in its 1970’s Emissions Trading Program, which required that net emissions fall by 20% with each trade. This was a tax and an inhibition on trading, and the result was that virtually no trading occurred. This reminds me of a corrupted version of George Santayana’s admonition that those who do not learn from history are doomed to repeat it. Instead we have, “I’ve learned from my mistakes, and I can repeat them exactly the same again.”

The general problem is that if the guidance extends much beyond basic accounting rules, then restrictive requirements could actually impede effective cooperation. True to the nature and spirit of the Paris Agreement, less can be more!

UNFCCC Update from Bonn

I closed my dinner comments in Florence with a brief update on the negotiations that concluded the previous week in Bonn. The two weeks of meetings of the Article 6 group were reported to be much tougher than they had been previously, yet the progress on the Article 6 work is actually ahead of that of groups focused on other parts of the Paris Agreement. Although positions on Article 6 are hardening, there is no clear blocking party or coalition (unlike in the work on some of the other parts of the Agreement). There may be less resistance to agreement simply because participation in Article 6 instruments would ultimately be voluntary.

The Path Ahead

So, as the negotiations proceed, a combination of common accounting rules and an absence of restrictive conditions can accelerate linkage, allow for broader and deeper climate policy cooperation, facilitate the emergence of a robust global carbon market, and – most important – increase the latitude of the Parties to the Paris Agreement to scale up the ambition of their long-term contributions to global greenhouse gas emission reductions.

Whether that will come to pass, we simply do not know as of now. As usual, only time will tell.

Placing U.S. Government Views on Climate Change into Historical Context

In this year of 2018, the Europe Union, China, India, Brazil, Korea, Canada, and other countries are negotiating the details for implementation of the Paris Agreement, and are developing domestic policies to achieve their respective Nationally Determined Contributions under the Agreement. At the same time, the United States – under the leadership of President Donald Trump – has announced its intention to withdraw from the Paris Agreement as soon as permitted (November, 2020), and has taken significant steps to immediately roll back domestic climate change policies put in place by the Obama administration. This may be a good time to place this quite deviant U.S. government behavior into historical context.

Where to Begin?

This blog is dedicated to an economic view of the environment, and my essays here typically feature analyses of existing or proposed policies, with a look to the future, particularly in the realm of global climate change. Today, however, I take a look back, with an examination of the early history of deliberations in the U.S. government about climate change.

Of course, the history of climate change science goes back at least to Svante Arrhenius, the Nobel Prize-winning Swedish physicist and chemist, who in 1896 calculated how increased concentrations of atmospheric carbon dioxide (CO₂) would increase the Earth’s temperature through the greenhouse effect, a finding that was picked up many years later by Guy Stewart Callendar, Charles David Keeling, Roger Revelle, and others. But my focus is not on the history of the science, but on a very specific dimension of the policy history, namely the history of discussions within the U.S. government regarding climate change and potential policy responses.

Some might think that the starting point would be the 1988 Congressional hearings – led by U.S. Senators Timothy Wirth and Albert Gore – which the New York Times covered in a long article. That was during the last year of the Reagan administration, but the story really begins more than two decades earlier – in 1965.

Before going further, I want to give credit to two people who have written about this – David Hone, Chief Climate Change Advisor for Shell, and Jairam Ramesh, formerly chief negotiator for India at the conferences of the United Nations Framework Convention on Climate Change (UNFCCC).

President Lyndon Johnson’s Science Advisory Committee, 1965

More than fifty years ago, on November 5, 1965, President Lyndon Johnson released a report authored by the Environmental Pollution Panel of the President’s Science Advisory Committee, pictured here.

Remarkably, the report included a 23-page discussion of the climatic effects of increased concentrations of atmospheric carbon dioxide (CO₂), due to the combustion of fossil fuels, and – interestingly enough – concluded with a proposal for research on a specific approach to responding, namely with what is now called “geoengineering.” Below is the table of contents of that section of the report – on “Atmospheric Carbon Dioxide,” and you can read that section of the report here.

In his introduction to the report, President Johnson emphasized that “we will need increased basic research in a variety of specific areas,” and then went on to state: “We must give highest priority of all to increasing the numbers and quality of the scientists and engineers working on problems related to the control and management of pollution.” What a contrast with the anti-science approach of the current resident of the White House!

A Striking Nixon White House Memorandum – 1969

Daniel Patrick Moynihan – surely one of the leading public intellectuals of the twentieth century – was a Harvard professor (1966-1969, 1971-1973 ), advisor to President Richard Nixon (1969-1970), U.S. Ambassador to India (1973-1975), U.S. Ambassador to the United Nations (1975-1976), and U.S. Senator (1977-2001). On September 17^th, 1969, while he was working in the White House, Moynihan sent a memorandum to John Ehrlichman, then a key Presidential assistant (who subsequently served 18 months in federal prison for his role in the Watergate conspiracy). The original memorandum is in the Nixon Library, but you can also read it immediately below. It is well worth reading!

Historical Context and the Path Ahead

From the perspective of 2018, as we enter the second year of the Trump administration, it may – or may not – be comforting to recognize that scientific and even policy attention by the White House to climate change goes back more than five decades, to the administration of Lyndon Johnson. Since then, there have surely been ups and downs – through the administrations of Presidents Ford, Carter, Reagan, Bush (I), Clinton, Bush (II), and Obama, but the current administration is an outlier in its utter disdain for sound science and related hostility to sensible public policy (in this and other domains).

The list of Presidential administrations above should remind us that whether a single four-year term or the maximum eight years, administrations are relatively short-lived when judged in historical context. And they tend to swing back and forth between the two political parties.

All of which reminds me of a true story. In November, 2016, just days after the U.S. Presidential election, I was in Marrakech, Morocco, for the annual U.N. climate negotiations. I was speaking on a panel assembled by the government of China in their Pavilion. Those who preceded me voiced their dismay about the election and their very low expectations for the climate change policy that would likely be forthcoming from Donald Trump and his administration-to-be.

Our moderator from the Chinese government then introduced me to speak, and as I listened with headphones to the simultaneous translation, I heard him say, “And now Harvard’s Professor Stavins will bring us some good news from the United States.” I was dumbfounded. What could I possibly say? I walked to the lectern, sipped some water, took a deep breath, and said to the audience, “When you get to be my age, you recognize that four years is not a long time!”

That will have to suffice as an “optimistic” conclusion to today’s essay.

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.