Waxman-Markey legislation Archives - Page 9 of 14 - An Economic View of the Environment

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.

Any Hope for Meaningful U.S. Climate Policy? You be the Judge.

The current conventional wisdom – broadly echoed by the news media and the blogosphere – is that comprehensive, economy-wide CO₂ cap-and-trade legislation is dead in the current U.S. Congress, and perhaps for the next several years.

Watch out for conventional wisdoms! They inevitably appear to be the collective judgment of numerous well-informed observers and sources, but frequently they are little more than the massive repetition of a few sample points of opinion across the echo-chamber of the professional news media and the blogosphere.

Keep in mind that the conventional wisdom as recently as June of 2009 had it that – with the Waxman-Markey bill having been passed triumphantly by the House of Representatives – Senate action would follow; the only question raised by many commentators was whether the final legislation could be sent to the President for his signature by the time of the Copenhagen climate talks in December. My, how the conventional wisdom has changed!

But over the past nine months, the politics have not fundamentally changed. In June of 2009, passage of meaningful climate legislation in the Senate was already unlikely, because of the terrible economic recession in which the country found itself, and – of even greater political salience – lingering high rates of unemployment. And with the lack of Republican support for the stimulus bill, the relatively small (partisan) margin by which the House passed Waxman-Markey, the then-upcoming challenges of health care and financial regulatory reform dominating the legislative calendar, and concerns voiced about climate legislation by moderate Senate Democrats, success in the Senate was always a long-shot.

What is the Likely Legislative Outcome?

In addition to ongoing consideration of an economy-wide cap-and-trade system, another possibility now receiving attention is a utility-only cap-and-trade system, which some members of the Congress inexplicably find more attractive than an economy-wide approach. The result of such a system would be much less accomplished (forget about the President’s “conditional commitment” under the Copenhagen Accord), and at much greater cost. This would be equivalent to taking the Northeast’s Regional Greenhouse Gas Initiative (RGGI) as a model for national action. Not a good idea.

Even more likely is that the Congress would develop a so-called energy-only bill, which would – to a large degree – consist of killing the one part of Waxman-Markey worth saving (the comprehensive CO₂ cap-and-trade system), and moving forward with the worst parts of that legislation – the smorgasbord of regulatory initiatives. As I’ve written previously, those additional elements of the legislation are highly problematic. When implemented under the cap-and-trade umbrella, many of those conventional standards and subsidies would have no net greenhouse-gas-reducing benefits, would limit flexibility, and would thereby have the unintended consequence of driving up compliance costs. That’s the soft under‑belly of the House legislation.

Without the cap-and-trade umbrella, that same set of standards and subsidies will accomplish very little, and do so at exceedingly high cost. Take just one example that seems to be popular among politicians – “renewable portfolio standards” (RPS), requirements that all states or all electricity utilities derive some fixed share of their power, say 20%, from renewable sources. Note, for example, that such an approach does not distinguish between coal and natural gas, despite the dramatically different impacts these fuels have on CO₂ emissions (and a host of other environmental outcomes). Furthermore, although an RPS may displace some new coal-fired generation with other types of generation, there is little, if any, effect on the operation of existing coal-fired power plants.

If those other, regulatory parts of the climate legislation are so ineffective and so costly, why are they so popular with politicians? The reason is simple. The costs are hidden. The government simply mandates that electric utilities or manufacturers take particular actions, employing the best technology available. Where’s the cost? Unlike a cap-and-trade system, there’s no analysis and debate about the cost of allowances (and the marginal abatement costs they represent); and unlike a carbon tax, there’s no analysis and no focus on the dollar amount of the tax and the aggregate cost. That is the unfortunate but fundamental political economy behind much of U.S. environmental policy since the first Earth Day in 1970.

What about Court-Ordered Regulation?

Whether “best-available-control technology standards” are crafted by the Congress or put in place by the Environmental Protection Agency (EPA) under the court-ordered mandate stemming from the Supreme Court decision in Massachusetts v. EPA and the Obama administration’s subsequent “endangerment finding,” such an approach will be relatively ineffective and terribly costly for what is accomplished. The EPA route would essentially apply the mechanisms of the Clean Air Act, intended for localized, “criteria air pollutants,” to CO₂, resulting in ineffective and costly regulations.

The White House (and most member of Congress) recognize that this is an inappropriate way to address climate change, but they seem determined to go forward, claiming that this threat will force the hand of Congress to do something more sensible instead. Unfortunately, this is akin to my telling you that if you don’t do what I want, I will shoot myself in the foot – not a very credible or intelligent threat. What I am referring to is that costly Clean Air Act regulation of CO₂ will play into the hands of right-wing opponents of climate action, creating a poster-child of excessive regulatory intervention that will bring about a backlash against sensible climate policies. EPA claims that there will be no such excessive regulatory actions, because it will exempt small sources through a so-called “tailoring rule.” But legal scholars have noted that the tailoring rule stands on questionable legal grounds and could be invalidated by the courts. In this regard, note that the first lawsuits to stop EPA from exempting small sources are coming from groups on the right, not the left.

Perhaps Senator Murkowski’s proposed joint resolution (H.J. Res. 66), introduced on January 21, 2010, disapproving (stopping) EPA’s regulatory action under the endangerment finding could save the Administration. The conventional wisdom is that Senator Murkowski’s resolution has no political future, but with a bi-partisan list of 40 co-sponsors, that’s a total of 41 votes (more than the current total of 40 “Yes” and “Probably Yes” votes in the Senate for serious climate legislation, according to Environment and Energy Daily). And remember that the disapproval resolution requires only 51, not 60 votes in the Senate, under the rules of the enabling statute, the Congressional Review Act of 1996 (signed by President Clinton, and part of the Republican “Contract with America”). Of course, House action, not to mention signature by President Obama, would also be required for the resolution to take effect. But a positive vote in the Senate will send a strong political message.

So Is There No Hope for Good Climate Policy?

Here is where it gets interesting, because as much as the current political environment in Washington may seem increasingly unreceptive to an economy-wide cap-and-trade system or some other meaningful and sensible climate policy, there is one promising approach that could actually benefit from the national political climate.

In these pages, I have expressed support for cap-and-trade mechanisms to address climate change, including the system embodied in the Waxman-Markey legislation that emerged from the House in June of last year. Although that approach is scientifically sound, economically sensible, and may still turn out to be politically acceptable, there’s a modified version of cap-and-trade that could be much more attractive in this era of rampant expressions of populism, coming both from the right (“no new taxes”) and the left (“bash the corporations”). Neither of those views, of course, is consistent with sound economic thinking on the environment, but it’s nevertheless possible to recognize their national appeal and build upon them.

This could be done with a simple upstream cap-and-trade system in which all of the needed allowances are sold (auctioned) – not given freely – to fossil-fuel producers and importers, and a very large share – say 75% – of the revenue is rebated directly to American households through monthly checks in a progressive scheme through which all individuals receive identical payments.

Such an approach could appeal to the populist sentiments that are increasingly dominating political discourse and judgments in this mid-term election year. Such a system – which would have direct and visible positive financial consequences (i.e., rebate checks larger than energy price increases) for 80% of American households – might not only not be difficult for politicians to support, but it might actually be difficult for politicians to oppose!

Importantly, even though this is a specific type of cap-and-trade design (which has been known, studied, and proposed for decades), for better political optics, it should be called something else. How about “cap-and-dividend?”

A CLEAR Answer?

What I’ve described bears a close resemblance to the “Carbon Limits and Energy for America’s Renewal (CLEAR) Act,” sponsored by Senators Maria Cantwell (D-Washington) and Susan Collins (R-Maine). So, the politics of their proposal looks appealing, and the substance of it looks promising – a simple upstream cap-and-trade system (called something else), with 100% of the allowances auctioned (with a “price collar” on allowance prices to reduce cost uncertainty), 75% of the revenue refunded to all legal U.S. residents, each month, on an equal per capita basis as non-taxable income, the other 25% of the revenue dedicated to specified purposes, including “transition assistance,” and some built-in measures of protection for particularly energy-intensive, trade-sensitive sectors (not unlike Waxman-Markey).

That’s the good news. The bad news, however, is that the proposal needs to be changed before it can promise to be not only politically attractive, but economically and environmentally sensible. In particular, as it is currently structured, only producers and importers of fossil fuels can buy the carbon allowances. In an up-stream system – an approach I have endorsed for years – it is producers and importers that are subject to compliance, that is, must eventually hold the allowances. That’s fine. But there is no sound reason to exclude other entities from participating in the auction markets; and doing so will greatly reduce market liquidity.

Furthermore, the Senators’ proposal says that holders of carbon allowances are actually prohibited from creating, selling, purchasing, or trading carbon derivatives, thereby tremendously reducing the efficiency of the market and needlessly driving up costs. While no doubt borne out of a well-intentioned desire to protect consumers (remembering the recent impacts of mortgage-backed securities on financial markets), the Senators’ approach is akin to responding to a tragic airplane crash by concluding that the best way to protect consumers from air disasters in the future is simply to ban flying.

Less important structurally, but most important environmentally, an analysis by the World Resources Institute (which I have not validated) indicates that the caps – as currently set – would not bring about emissions reductions by 2020 that would even come close to the President’s announced goal of 17% reductions (equivalent to the Waxman-Markey targets), as submitted by the United States under the Copenhagen Accord.

But these and other problems with the CLEAR proposal can – in principle – be addressed while maintaining its basic structure and political attraction.

An Economic Perspective

It is interesting to note that many – perhaps most – economists have long favored the variant of cap-and-trade whereby allowances are auctioned and the auction revenue is used to cut distortionary taxes (on capital and/or labor), thereby reducing the net social cost of the policy. Cap-and-Dividend moves in another direction. This system (which was introduced several years ago in the “Sky Trust” proposal) has some merits compared with the economist’s favorite approach of tax cuts, namely that the Cap-and-Dividend scheme addresses some of the distributional issues that would be raised by using the auction revenue to fund tax cuts (which could favor higher income households). On the other hand, it eliminates the efficiency (cost-effectiveness) gains associated with the tax-cut approach. In fact, Stanford’s Larry Goulder has estimated that the tax-and-dividend approach would cost 40% more than an approach of combining an auction of allowances with ideal income tax rate cuts. (By “ideal,” I mean focusing on tax cuts that would lead to the lowest net cost.)

In general, there are sound reasons to seek to compensate consumers for the energy price increases that will be brought about by a cap-and-trade system, or any meaningful climate change policy. But it is important not to insulate consumers from those price increases, as diluting the price signal reduces the effectiveness and drives up the cost of the overall policy. Thus, “compensation” as in Cap-and-Dividend is fine, but “insulation” is not.

The most politically salient question with the Waxman-Markey approach of freely allocating a significant portion of the allowances to the private sector is how to distribute (that is, who gets) those allowances which are freely allocated. In this regard, contrary to much of the hand-wringing in the press, the deal-making that took place in the House and may still take place in the Senate for shares of free allowances is an example of the useful and important mechanism through which a cap-and-trade system provides the means for a political constituency of support and action to be assembled without reducing the policy’s effectiveness or driving up its cost.

The ultimate political question seems to be whether there is greater (geographic and sectoral) political support for the Waxman-Markey (H.R. 2454) approach of substantial free allocations and targeted use of auction revenue, or if there is greater (populist) political support for the full auction combined with lump-sum rebate which characterizes the “cap-and-dividend” approach. Alas, the textbook economics preference — full auction combined with cuts of distortionary taxes — appears to be a political, if not academic, orphan.

What Hath Copenhagen Wrought? A Preliminary Assessment of the Copenhagen Accord

After years of preparation, the Fifteenth Conference of the Parties (COP-15) of the United Nations Framework Convention on Climate Change (UNFCCC) commenced on December 7^th, 2009, and adjourned some two weeks later on December 19^th after a raucous all-night session. The original purpose of the conference had been to complete negotiations on a new international agreement on climate change to come into force when the Kyoto Protocol’s first commitment period comes to an end in 2012. But for at least the past six months, it had become clear to virtually all participants that such a goal was out of reach — and the COP-15 objective was publically downgraded in mid-November to a non-binding agreement by heads of state at a meeting in Singapore of the Asia-Pacific Economic Conference.

I begin by describing what were reasonable expectations going into the Copenhagen negotiations and appropriate definitions of success for COP-15, and then turn to the unprecedented process which unfolded over the final 36 hours of the conference. Next, I describe the fundamental architecture of the sole product that emerged – the Copenhagen Accord – and describe its key provisions, with an assessment of each component. I close with an examination of the major pending issues and the available procedural routes ahead.

Sensible Expectations and Definitions of Success for Copenhagen

There was much hand-wringing in the months leading up to COP-15 about how difficult the negotiations had become. I saw this as something of “A Silver Lining in the Climate Talks Cloud,” because the difficulty was largely a consequence of key countries of the world taking very seriously the task of expanding the coalition of the willing.

Going into Copenhagen, the challenge was very great, largely because of fundamental economic (and hence political) realities, as I explained in a previous post, “Chaos and Uncertainty in Copenhagen?” Given legitimate concerns about issues of efficiency, on the one hand, and distributional equity, on the other hand, it was not surprising that the industrialized countries (particularly the United States) insisted that China and other key emerging economies participate in a future agreement in meaningful and transparent ways, nor that the developing countries insisted that the industrialized countries foot much of the bill.

The key question was whether the negotiators in Copenhagen could identify a policy architecture that is both reasonably cost-effective and sufficiently equitable to generate support from the key countries of the world, and thus do something truly meaningful about the long-term path of global greenhouse gas emissions. There were (and are) some promising paths forward, as we have documented in the Harvard Project on International Climate Agreements, and as we examine in a pair of current books (Post-Kyoto International Climate Policy: Summary for Policymakers; and Post-Kyoto International Climate Policy: Implementing Architectures for Agreement).

At the final hour in Copenhagen, the leaders of a small number of key countries worked creatively together to identify a politically feasible path forward. I have previously argued (“Defining Success for Climate Negotiations in Copenhagen”) that the best goal for the Copenhagen climate talks was to make progress on a sound foundation for meaningful, long-term global action, not some notion of immediate, numerical triumph. That has essentially been accomplished with the “Copenhagen Accord,” despite its flaws and despite overt challenges from five of some 193 countries represented (Bolivia, Cuba, Nicaragua, Sudan, and Venezuela).

An Unprecedented Process

Before turning to the substance of the Copenhagen Accord, it is worthwhile taking note of the quite remarkable process that led up to its “last-minute” creation. From all reports, the talks were completely deadlocked when U.S. President Barack Obama arrived on the scene at 8:00 am on Friday, December 18^th, the scheduled final day of the conference. Through a series of bilateral and eventually multilateral meetings of President Obama with Chinese Premier Wen Jiabao, Indian Prime Minister Manmohan Singh, Brazilian President Luiz Inacio Lula da Silva, and South African President Jacob Zuma, a document gradually emerged which was to become the Copenhagen Accord.

It is virtually unprecedented in international negotiations for heads of government (or heads of state) to be directly engaged in, let alone lead, negotiations, but that is what transpired in Copenhagen. Although the outcome is less than many people had hoped for, and is less than some people may have expected when the Copenhagen conference commenced, it is surely better – much better – than what most people anticipated just three days earlier, when the talks were hopelessly deadlocked.

The Copenhagen Accord – Its Fundamental Architecture

The fundamental architecture of the Copenhagen Accord is one we recently analyzed in the Harvard Project on International Climate Agreements in “A Portfolio of Domestic Commitments: Implementing Common but Differentiated Responsibilities,” and about which I blogged at the end of November (Approaching Copenhagen with a Portfolio of Domestic Commitments). Essentially, under such an approach each nation commits and registers to abide by its domestic climate commitments, whether those are in the form of laws and regulations or multi-year development plans. This is essentially the “schedule approach” introduced by the Australian government in spring 2009.

After its release, President Obama characterized the new Accord as “an important first step” at his press conference shortly before returning to Washington. I would prefer to amend that characterization to call the Accord a potentially very important third step. Step One was the UN Earth Summit in Rio de Janeiro in 1992, which produced the U.N. Framework Convention on Climate Change. Step Two was the Kyoto Protocol, signed in Japan in 1997. But what many policy wonks (myself included), not to mention the United States Senate, immediately recognized was the absence from the Kyoto Protocol of involvement in truly meaningful ways of the key, rapidly-growing developing countries, a small set of important nations that are now better termed “emerging economies” – China, India, Brazil, South Africa, Mexico, and Korea. This was a primary deficiency of Step Two, as well as the lack of serious attention to the long-term path of emissions (as opposed to the five-year time horizon of Kyoto).

The Copenhagen Accord establishes a framework for addressing both deficiencies, and thereby can be characterized as a potentially very important third step – expanding the coalition of the willing and extending the time-frame of action. With this step, all of the seventeen countries of the Major Economies Forum– which together account for some 90% of global emissions – are agreeing to participate. Nevertheless, let’s be honest about the difference between the outcome of the 1997 negotiations in Kyoto (a detailed 20-page legal document, the Kyoto Protocol) and the outcome of the 2009 negotiations in Copenhagen (a general 3-page political statement, the Copenhagen Accord). Still, it remains true that the COP-15 negotiations were “saved from utter collapse” by the creation and acceptance of the Copenhagen Accord.

The Copenhagen Accord – Key Provisions and Preliminary Assessment

It is unquestionably the case that the Accord represents the best agreement that could be achieved in Copenhagen, given the political forces at play. Indeed, were it not for the spirited – and as I suggested above, quite remarkable – direct intervention by President Obama, together with the other key national leaders, there would have been no real outcome from the Copenhagen negotiations. That said, let’s take a critical look at the Accord, item by item. The key provisions (as I interpret them, with my own numbering, not that of the Accord) are these:

1. The signatories validate their will to “urgently combat climate change in accordance with the principle of common but differentiated responsibilities and respective capabilities.” The signatories agree that deep cuts in global emissions are required to hold global temperature increases to 2 degrees Centigrade, and commit to take actions to meet this objective, “consistent with science and on the basis of equity.”

Assessment: Although the Accord notes the importance of the frequently-discussed 2 degrees Centigrade target, it does not spell out actions that will achieve it. The Accord also notes the importance of the principle of “common but differentiated responsibilities,” which is of great importance to developing countries.

2. Action and cooperation on adaptation is urgently required, particularly in the least developed countries, small island developing states, and Africa. Developed countries commit to provide financial resources to support adaptation measures in developing countries.

Assessment: Recognizing the importance of adaptation and providing financial resources to support it in developing countries is an important departure from Kyoto. Targeting the funds to the “least developed countries” is sensible.

3. Annex I Parties of the Kyoto Protocol (the 1997 list of the industrialized countries and the emerging market economies of Central and Eastern Europe) commit to implement mitigation actions (specified in Appendix I), and Non-Annex I Parties (the developing world, as defined in the Kyoto Protocol) also commit to implement mitigation actions (specified in Appendix II), all of which will be submitted to the UNFCCC Secretariat by January 31, 2010.

Assessment: These appendices (“schedules”) of domestic mitigation targets, actions, and policies are the heart of the Portfolio approach, as I described above. This is where the action is.

It is unfortunate (but was probably politically necessary) that the Accord maintains the distinction of Annex I versus non-Annex I countries from the Kyoto Protocol. I have characterized this distinction in the Kyoto Protocol as the “QWERTY keyboard” (unproductive path dependence) of international climate policy, because it has been the greatest impediment to developing a meaningful international arrangement. It is because of the presence of this distinction that developing countries have insisted on a continuation of the Kyoto Protocol for a second (post-2012) commitment period.

Note that even if the Annex I list was appropriate in 1997, it surely no longer is: more than 60 non-Annex I countries now have greater per capita income than the poorest of the Annex I countries.

An important improvement would be to employ a formulaic mechanism that takes a variety of factors into account, including per capita income, to determine the stringency of ambition, targets, or actions for individual countries, rather than the dichotomous distinction of having targets or not (“Global Climate Policy Architecture and Political Feasibility: Specific Formulas and Emission Targets to Attain 460 PPM CO2 Concentrations”).

If a continuous spectrum with all countries listed in the same table is not politically feasible, then a mechanism is needed for countries to transition from one list to the other. Korea and Mexico joined the OECD six months after Kyoto, but they remain off the Annex I list.

4. Emissions reductions for the Annex I parties will be measured, reported, and verified according to guidelines (to be established), which will be rigorous and transparent, whereas mitigation actions taken by non-Annex I parties will be subject to domestic measurement, reporting, and verification (MRV) reported through national communications, with international consultation and analysis.

Assessment: There was a great deal of attention to this issue in Copenhagen, with all members of the U.S. delegation talking about the importance of “transparency.” The compromise seems acceptable: developing countries employ domestic measurement, reporting, and verification, but it is subject to “international consultation and analysis.”

Interestingly, the Accord is silent on the issue of “international competitiveness” and the possible use of border adjustments (border taxes or import allowance requirements in national cap-and-trade systems). This is a controversial point, since inclusion of such mechanisms is important in domestic U.S. politics, but is anathema to China, India, and other developing countries.

5. Least developed countries and small island developing states may undertake actions voluntarily and on the basis of support (from other countries). Such actions will be subject to international measurement, reporting, and verification.

Assessment: This is the third element of the national schedules, reserved for the poorest developing countries (which contribute only trivially to greenhouse gas emissions), and it seems acceptable, although a graduation mechanism would again be desirable. Interestingly, if their actions are funded by developed countries, then those actions are subject to the most stringent MRV. So-called technology transfer mechanisms are included in this context.

6. The parties will establish positive incentives to stimulate financial resources from developed countries to help reduce emissions from deforestation and degradation.

Assessment: This is a potentially important change, as the lack of meaningful attention to retarding deforestation was a significant deficiency of the Kyoto Protocol. We have investigated appropriate mechanisms in the Harvard Project on International Climate Agreements (“International Forest Carbon Sequestration in a Post-Kyoto Agreement”).

7. The parties agree to pursue opportunities to use markets to achieve cost-effective mitigation actions.

Assessment: As we have documented in the Harvard Project (“Linkage of Tradable Permit Systems in International Climate Policy Architecture”), it is very important that future international agreements facilitate or at least not discourage voluntary linkage of national and multi-national cap-and-trade systems. Needless to say, this provision in the Accord – like virtually all of the provisions – will require specific details to make it operational.

8. Predictable and adequate funding will be provided to developing countries for emissions mitigation, reduction of deforestation, and adaptation. There is a collective commitment from developed countries “approaching” $30 billion for the period 2010-2012, “balanced between adaptation and mitigation,” with adaptation funding being prioritized for the most vulnerable developing countries.

Assessment: To whatever degree the funding for mitigation is of government-government form (expanded foreign aid), legitimate concerns exist about both the feasibility of marshalling the necessary amounts and the efficiency of its use. The private sector needs to be employed, as I have previously argued (“Only Private Sector Can Meet Finance Needs of Developing Countries”).

9. The developed countries commit to a goal of jointly mobilizing $100 billion annually by 2020 from sources both public and private.

Assessment: It is important that the Accord notes that the funds can come from either public or private sources. Governments can — through the right domestic and international policy arrangements — provide key incentives for the private sector to provide the needed finance through foreign direct investments for emissions mitigation (clearly a role exists for government assistance for adaptation). For example, if the cap-and-trade systems which are emerging throughout the industrialized world as the favored domestic approach to reducing CO₂ and other greenhouse gas emissions are linked together through the existing, common emission-reduction-credit system, namely the Clean Development Mechanism (CDM), then powerful incentives can be created for carbon-friendly private investment in the developing world.

Clearly the CDM, as it currently stands, cannot live up to this promise, but with appropriate reforms there is significant potential. Of course, problems of limited additionality will inevitably remain. Therefore, what is needed is for the key emerging economies to take on meaningful emission targets themselves (even if equivalent to business as usual in the short term), and then participate directly in international cap-and-trade, not government-government trading as envisioned in Article 17 of the Kyoto Protocol (which will not work), but firm-firm trading through linked national and multi-national cap-and-trade systems.

Such private finance stands a much greater chance than government aid of being efficiently employed, that is, targeted to reducing emissions, rather than spent by poor nations on other (possibly meritorious) purposes.

10. Evaluation of the Accord’s implementation is to be completed by 2015, including consideration of strengthening the long-term goal as the science indicates.

Assessment: Depending upon when the Accord is implemented, completing an assessment by 2015 might or might not be reasonable. A provision to strengthen the long-term goals of the Accord may be sensible, but it would seem that the provision should provide more generally that the long-term goal should be “adjusted as the science indicates,” so as not to pre-judge what future scientific research may reveal.

11. In the official version of the Accord released by the UNFCCC, Appendix I (quantified 2020 economy-wide emissions targets for Annex I countries) and Appendix II (nationally appropriate mitigation actions of developing country parties) are left blank, to be completed by January 30, 2010.

Assessment: It is unfortunate that no numbers or other specifics were included in the two appendices, because many of the various parties have previously made public statements regarding commitments, plans, or expectations that would actually have provided considerable information. Some specificity of the tables – both numerical pledges from Annex I countries and “voluntary pledges” from developing countries — would have better demonstrated the compelling substance of the Accord, and would thereby have given the agreement greater credibility, at least in news media reports.

The Way Forward

Many details regarding these elements of the Accord as well as other unspecified issues remain on the table, and will presumably be examined and negotiated if nations move forward with the Copenhagen Accord and the basic architecture it promulgates. We are already at work on many of these issues in the Harvard Project on International Climate Agreements, including:

· metrics for evaluating commitments

· climate policy review mechanisms

· compliance mechanisms

· afforestation and deforestation mechanisms

· facilitating international market linkage

· fostering technology transfer

· methods of negotiating and updating climate agreements

· methods of providing incentives for developing country participation

· methods of carbon finance

· making an international climate agreement consistent with international trade rules

Whether the next step in international deliberations should be under the auspices of the UNFCCC or a smaller deliberative body, such as the Major Economies Forum (MEF), is an important question. Given the necessity of achieving consensus (that is, unanimity) in United Nations processes and the open hostility of a small set of nations, bilateral and multilateral discussions, including via the MEF, could be an increasingly attractive route, at least over the short term. (Such questions about preferred institutional venues for international climate negotiations and action constitute an important topic on which we are focusing research in early 2010 in the Harvard Project on International Climate Agreements, and about which I will write in future posts.)

The climate change policy process is best viewed as a marathon, not a sprint. The Copenhagen Accord – depending upon details yet to be worked out – could well turn out to be a sound foundation for a Portfolio of Domestic Commitments, which could be an effective bridge to a longer-term arrangement among the countries of the world. We may look back upon Copenhagen as an important moment – both because global leaders took the reins of the procedures and brought the negotiations to a fruitful conclusion, and because the foundation was laid for a broad-based coalition of the willing to address effectively the threat of global climate change. Only time will tell.

Epilogue

After I completed writing this blog post, I came across a superb essay on the same topic by David Doniger, Policy Director of the NRDC Climate Center in Washington, D.C. It deserves to be read (and distributed).