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An invited paper by the Recipient of the 2014 USAEE's Adelman-Frankel Award

From Rio to Kyoto to Paris:

Hopes and Realities for Global Warming Policy

 

 
Joel Darmstadter
Senior Fellow,
Resources for the Future,
(Washington, DC)

 

In Nov. 2015, delegates from around the world will assemble in Paris to debate and draft a comprehensive global agreement on policies, effective 2020, to spare humanity the distress and risks of climate change and global warming.  Inevitably, a key element of such an agreement would mean focusing on society’s continued and major dependence on fossil energy, whose greenhouse gas emissions a preponderant segment of the scientific community considers the underlying cause of the climatic threat.[1]  Yet, when judged by historic trends and unfulfilled goals, the path ahead seems problematic.

To be sure, international efforts to confront environmental challenges in general and climatic change in particular go back over 40 years.  The 1972 UN Conference on the Human Environment in Stockholm was the first and – in terms of the range of issues addressed – broadest of such multi-country gatherings.  But succeeding meetings quickly acquired landmark status of their own.  Case in point:  the 1984 Geneva meeting of the World Commission on Environment and Development (or “Brundtland Commission”) whose wide-ranging areas of concern resulted in the 1987 study Our Common Future.

But climate change as the singular focus of the world’s attention has a somewhat shorter history.  Joint international efforts to deal specifically with the prospect of global warming date from the early 1990s – initially, with the UN General Assembly’s start of a negotiating process leading to the UN Framework Convention on Climate Change (UNFCCC)  and its adoption at the 1992 UN Conference on Environment and Development at Rio.[2]  It is under the UNFCCC umbrella that, over the ensuing 22 years, a succession of agreements adopted by UNFCCC’s Conference of Parties (COP) has produced a number of greenhouse-gas-limiting resolutions – some ratified as treaties by member governments; others, accepted merely as non-binding, aspirational commitments.  Among the more notable 20 COPs held to date, there was the The Kyoto Protocol of 1997 (COP3), which obliged treaty-ratifying industrial countries to reduce greenhouse gas emissions by an average of seven percent below 1990 levels by the 2008-2012 period; and the 2009 Copenhagen Accord (Copenhagen), which sought, but failed, to agree on binding emission reductions beyond the 2012 expiration of the Kyoto initial commitment period.  Copenhagen also included an acknowledgment of the need for expanded financial resources from developed to developing nations, enabling the latter to address emission reduction; but that goal achieved only limited success.

 

Facing Up to Emission-Reduction Requirements and Prospects

Virtually concurrent with the UNFCCC’s near-quarter century existence, the Intergovernmental Panel on Climate Change (IPCC), launched in 1988 under the auspices of the World Meteorological Organization (WMO) and the UN Environment Program (UNEP), has, more broadly than the UNFCCC, focused on the scientific underpinnings of climate change, its potential impacts, and alternative options for both adaptation to and mitigation of greenhouse warming.  It is in its analysis of mitigation possibilities that Working Group III of IPCC’s recently-issued fifth assessment comes closest to the issues most directly engaging the efforts of the UNFCC.

With this highly abbreviated background account helping set the stage for the upcoming Paris negotiations, keep in mind that, collectively, the Kyoto Protocol and surrounding milestones were envisaged as ways to move the world into progressively more carbon-friendly territory.  Let’s take brief stock at the extent to which that goal can be described as successful.  The tabulation below recaps, in global and otherwise highly aggregative terms, the 20-year record of economy-energy-CO2 interconnections:

 

 Average Annual Rates of Change (%)[3]

 

GDP

Energy

CO2

1990-2000

2.9

1.4

0.9

2000-2010

2.6

2.4

2.6

2010-2013

3.4

1.4

2.0

 

The numbers reveal a trend which, in terms of an arguably global imperative of “de-carbonization,” is at best modest – particularly given the succession of international efforts toward progress in that direction.  Of the dual goals of a less energy-intensive global economy and one weaned off fossil fuels, only the former shows distinct progress.  As an indirect, but exceedingly important, reflection of that course of events, one need only glance at what, in the final analysis, is a crucial precursor to global warming: the changing level of atmospheric CO2 concentrations.  From a level of around 350 parts per million (ppm) in 1990, that indicator has risen uninterruptedly to a present reading of approximately 395 and one almost certain to reach 400 by 2015 – paradoxically coinciding with the Paris COP at which some 200 countries of the world face the urgent task of charting a post-Kyoto greenhouse-gas policy regime designed to break that seemingly inexorable advance in concentrations.

The dimensions of that challenge emerge starkly from a 2013 analysis by the International Energy Agency in its World Energy Outlook (WEO).  In that report, the Agency considered three alternative 20-year scenarios the least “acceptable” of which would see energy use and its fossil share closely track recent trends. (It is labeled “current policies,” but, to all intents and purposes, might as well be denoted as “lethal.”) The volume of CO2 emissions would rise from the 33 billion metric tons/year recorded most recently to 43 billion tons by 2035.  A minimally acceptable level of emissions in 2035 (labeled a “new policies” case) was estimated at around 37 billion tons and necessitate a host of new technological and policy initiatives in both the global energy supply and consumption profile.  But IEA’s boldest break with the past is embodied in a “450 ppm” case – one that would reduce CO2 emissions from the present 33-or-so billion tons to something like 22 billion tons.  Importantly, the 450 ppm figure is judged by the scientific community as a concentration marker that would preclude global warming from breaching more than a 2­o Celsius rise in global temperature during this century.

IEA’s WEO embraces only broad policy guidelines – especially as these apply to the 450 ppm target.  As an institution beholden to a large and diverse constituency of sovereign states, it can only go so far in that direction.  A similar constraint inhibits the articulation of explicit policy directions by the IPCC, which, in its recently released fifth assessment, analyzed the tractability of a world growth path meeting the 450 ppm limit for the rest of this century.  To be sure, long-term models embodying a range of economic, technological, and demographic assumptions deserve critical scrutiny.  It is nevertheless instructive to note the IPCC’s widely-publicized mid-range finding that the global economic penalty imposed by that CO2 constraint would only lower world GDP some four percent below an otherwise prevailing level in the year 2100.[4]   At the same time, it is necessary to promptly observe that that mid-range IPCC scenario assumes a single worldwide carbon price (about which see more below) and an immediate start on mitigation practices.  We should also note that such metrics as aggregate world GDP subsume, but do not explicitly quantify specifics about differential national trends and impacts that are of major importance in defining policy goals and strategies around which politically-sensitive delegates from widely divergent countries can coalesce. As they seek to craft an effective and viable post-Kyoto global-warming policy framework, it is with that factor in mind that negotiators in Paris will not have the luxury of timorousness in setting about their task.  The rest of this write-up considers the most consequential decisions they are likely to face in that regard.

 

Carbon Tax as a Critical Mitigation Tool

Once Paris negotiators reach understanding on a time-path for a significantly reduced volume of global CO2 emissions – whether precisely targeting the IEA’s 450 ppm concentration target or some alternative marker – the options, around which, I believe, most experts concur, are severely limited.  They basically revolve around two choices.  By far the most widely preferred is a worldwide price (or, equivalently, tax) on CO2 emissions, designed to severely limit emissions from, and induce substitution for, fossil-energy combustion.  A substantially inferior route to deterrence is through a cap-and-trade system embracing a market for emission-permit transactions.

The determination and specification of the “appropriate” level, and economic consequences of, an initial global carbon tax are matters that are far from unanimous.  That said, there is at least in sight a convergence toward both the amount of such a tax and the effects of its imposition in terms of the 450 ppm target.  As pointed out in Appendix 1, a tax of around $45 per ton of CO2, leveled in 2020 – derived from a considerable effort of research and deliberations during the past five years – is a common starting point in policy discussions.  To put that number in perspective, it implies that a coal-generated electricity price of around 10 cents per kilowatt hour would rise by 10-15 percent.  But for present purposes – in which we are content to merely lay out the policy dilemmas confronting next year’s Paris delegates – numerical exactitude matters less than policy-making issues.

The universal imposition of a carbon tax has, for some time, been strongly urged by William Nordhaus.  Even four years before his admired 2013 book, Climate Casino, made the argument more pointedly. He observed that “for a global public good like reducing CO2 emissions, achieving a high level of participation is a critical feature of an efficient policy.”  And more recently:  “…this problem cannot be solved if rich countries act alone.  Meeting an ambitious temperature target will require that countries representing virtually all emissions participate.”[5] Still, and almost inescapably, some developing nations may – for a variety of motives – resist facing a burden that fails to treat them more leniently than advanced nations.[6] A few writers go further, accepting the notion that any given country – driven by its particular benefit-cost mindset – may elect to forego climatic policies altogether, judging economic development aspirations as superior national goals.  While I regard such a position as an outlier among the range of alternative policy considerations, its skillful exposition by a pair of highly respected scholars seems worth including.  (See Appendix 2.)   In whatever way that contentious issue is handled at the Paris deliberations, the adoption of a carbon tax as the optimal instrument for emission reduction can’t be lightly abandoned.  Substantially lessening the impact of a carbon tax through compensating reduction of other taxes or recycling carbon-tax revenues through targeted public expenditures (e.g., for non-fossil energy development) are just two ways of meeting that goal.  All in all, it must be underscored – most recently in analysis conducted as part of the IPCC’s fifth assessment, already cited – that, globally, the estimated macroeconomic impacts of a carefully designed carbon-tax regime are extremely modest, notwithstanding some need for transfer payments to cushion the equity burden.

But what if a universal carbon tax proves unacceptable as the single most applicable vehicle for long-term greenhouse gas mitigation?  Considered as a tool embracing all or most of the world, a cap-and-trade alternative to a carbon tax has, as suggested earlier, to be viewed as a distinctly inferior policy option.  At such a wide geographic scale, implementation, enforcement, monitoring and – most likely – the need for recurrent permit-supply and price review and adjustment could create enormous bureaucratic complexity.  To be sure, a carbon tax initially set at $45/ton would not be immutable either.  But issues surrounding revision would, almost surely, be vastly less complicated.

Even if Paris negotiators go so far as to consider the inherent virtues of a universal carbon tax as an optimal feature of a fresh start on global greenhouse gas remediation, will they be prepared to engage in the kind of nuts-and-bolts debate and compromise outcome that a major new policy direction requires?  Are there in sight workable arrangements whereby a single, ubiquitously-applied carbon tax could be made to co-exist with side-payments designed to spread burden-sharing?  Have major powers – led by the U.S. – signaled a determination to strenuously push for such an end-game? The present essay sidesteps the political crystal-ball grazing that such a set of conjectures requires.  That said, let me at least throw out some dampening observations.  And here, I can do no better than draw on a not-very-widely reported speech in Britain in 2013 by Todd Stern, the State Department’s Special Envoy for Climate Change in which he hints of such a stock-taking course in the case of the U.S.[7]

 

Diminished Expectations?  Bottom-Up and Adaptation Options

Noting that the “most important drivers of climate change are countries acting at home….” Stern proceeds to emphasize that, for the new agreement to be “ambitious, effective, and durable,” it must be “sensitive to the needs and constraints of parties with a wide range of national circumstances and capabilities….”  To ensure that a forthcoming agreement retains a large measure of flexibility, and speaking on behalf of the U.S., he indicates support for “a structure of nationally determined mitigation commitments, which allow countries to ‘self-differentiate’ by determining the right kind and level of commitment, consistent with their own circumstances and capabilities.”  It is an approach “that shields developing countries from climate requirements they fear could constrain their capacity to grow, develop, and alleviate poverty.”  In one important respect, Stern – unsurprisingly – stops short of translating these conceptual shifts into affordability.  Here, his thoughts are terse and unambiguous: There is no question about the financial requirements for countries “working to build-low carbon economies and…seeking to build resilience and to adapt to climate impacts.”  Then the shoe drops, in the form of hard reality: “no step change in overall levels of public funding from developed countries is likely to come anytime soon.”  If that judgment becomes a firm resolve, the issue of affordability looms as a distinct threat to a successful conference.   

But need that be the outcome?  One can imagine that there are creative, albeit transitional, means of providing international support for greenhouse gas mitigation in poor countries that deserve to be kept in sight in the run-up to Paris.  For example, limited subsidization to ensure fiscal neutrality in countries contemplating imposition of a carbon tax may at least deserve discussion.  Efforts – say, through technological assistance – to narrow the cost spread between carbon-intensive and non- or low-carbon energy deserve attention. 

If nonetheless Stern’s reflections point to retrenchment at an overarching global scale – and even if such retrenchment was arguably adverse to the genuine needs of mankind, might there be second- or third-best outcomes that deserve consideration? After all, what applies at the global level need not create nearly the degree of operational complexity at regional scales, where experience with both cap-and-trade systems and other initiatives has, by now, grown significantly.  True, the 28-member EU trading scheme has encountered teething problems as, in the context of broad economic turmoil, a dramatic fall in emission-permit prices greatly dampened the incentive for fossil-energy retrenchment.  What next year’s Paris negotiators need to consider is envisaging effective operation of a concurrent series of cap-and-trade systems with enough aggregate heft to at least begin closing in on global CO2 reduction imperatives.  Part of such deliberations would entail focusing on the extent to which non-trading groups of countries could – whether by dint of moral hazard or other neutralizing acts – measurably undermine the efficacy of the otherwise set of tenable trading blocs.

Realistically, but without relish, my own sense on that score is that, absent an unprecedented degree of unanimity at Paris, quantitatively meaningful abatement as well as adaptation successes may depend importantly on steps taken at less-than-global levels of implementation.  Indeed, that realization may already be evident in policies signaled or pursued in the past few years.

Take the impressive and exceedingly important third U.S. National Climate Assessment, issued by the U.S. Global Change Research Program in May of this year.[8] The study is almost solely concerned with sectors of the U.S. economy – agriculture, water resources, coastal infrastructure, forests, ecosystems, human health, and more – threatened by the impacts of climate change.  These impacts are in large measure the consequences of global greenhouse gas emissions but, significantly, the study seems to take worst-case CO2 scenarios as the given within which there is little choice but to begin turning to adaptive and defensive strategies.

This is not to slight national and sub-national mitigation initiatives, both in the U.S. and abroad, that, independent of concurrent adaptation efforts, serve to keep emission-reduction imperatives very much in focus.  Regional cap-and-trade systems, selective imposition of carbon taxes, required use of renewables, and energy-efficiency standards may all generate a momentum towards widening acceptance of climate-friendly energy policies when negotiators assemble in Paris.  But such a dynamic isn’t assured when measured against the enormity of the needed emission-reduction targets indicated at the outset of this paper.   Reliance on a largely fragmented bottom-up process may prove to have limited efficacy in this larger scheme of things.   

We are left, then, with the overarching question of whether, and with what broad consequences, there is a realistic prospect of achieving something close to the needed degree of global greenhouse gas mitigation through initiatives undertaken at only selected regional, national, and local levels of implementation.  Have things come down to citing, as “positive” developments, British Columbia’s or Boulder, Colorado’s carbon tax and its ongoing consideration by the Minnesota state legislature?  Or the Regional Greenhouse Gas Initiative (RGGI) in the US Northeast?  Or Quebec’s introduction (in 2013) of a still-evolving cap-and-trade system?  Can such examples be judged to have a momentum that, sooner or later, spill over into a quantitatively significant momentum around the world?  Or, however admirable, are they for now a too anecdotal and isolated number of cases to justify such a generalization?  Even policies that seemed firm can falter: the Governor of New Jersey has considered withdrawing the state from RGGI.  California’s cap-and-trade regime would lack robustness with continuing exclusion of the transport sector.

I believe one would need to be bullish not to sense that hope for widespread progress on the global climate front has instead steered mostly to selected targets of opportunity and piecemeal overall progress.  My references, a moment ago, to Todd Stern’s voiced expression of such a retreat and the administration’s impact-oriented climate strategy analysis – more concerned with adaptation imperatives than the unabated and concurrent pursuit of mitigation strategies – seem to me to be important exhibits in such evidence.

At the same time, and in spite of this perceptible shift to regional and adaptive strategies, it would border on lunacy to shrug off the findings of major research attesting to the global affordability of the required emission reductions.  I referred earlier to macroeconomic analysis by Working Group III of the IPCC’s fifth assessment report pointing precisely to the feasibility of achieving precisely that dual outcome.  But without political will and recognition of shared – as well as sensitivity to conflicting—values, the cool-headed analysis of macroeconomic experts can carry us only so far.

A final thought.  In emphasizing the emission-reduction agenda confronting next year’s Paris negotiators obliged to chart a post-Kyoto global-warming policy regime, I have only in passing touched on the concurrent – but increasingly urgent – attention that needs to be accorded to those looming impacts whose remediation or avoidance it is too late to benefit from a new climate protocol.  The iconic example of South Pacific island chains that face inundation and, very likely, abandonment, may soon be followed by threatened social and economic upheaval in other parts of the world.  It’s not clear to what extent such simmering threats and challenges  will engage the 2015 negotiators.  What is clear is that the global-warming dilemma, whatever its manifold dimensions, and however near or distant its manifestation, poses a challenge of such far-reaching scope and complexity that the luxury of biding time has ceased to be an option.

 


 

Appendix 1.

The Social Cost of Carbon

The social cost of carbon (SCC) is a monetary estimate of the external (i.e., non-market) costs imposed worldwide from a ton of CO2 (or CO2-equivalent) emission.  The cost reflects, among numerous other things, damages related to sea-level rise, more frequent storms, and impaired agricultural activity associated with higher temperatures. Summed worldwide, each country’s weight corresponding to its respective exposure to one or more of such damages.  These effects will vary over time but the SCC is an attempt to account for long-term effects of each ton.  This is done by discounting future costs in order to arrive at their present-value equivalent.

The SCC is important because of the need to make efficient choices about carbon mitigation policy.  If the last ton of CO2 avoids damages by, say, $40 but the costs to reduce that ton of emissions are only $30, we know that net benefits of the policy can be increased by reducing even more CO2, and will continue to do so until the rising marginal costs of mitigation equal the estimated constant or falling marginal benefits, in terms of damages avoided. 

From the perspective of public policy to address climate change, the SCC can serve as the basis for the calculation of a carbon tax needed to efficiently mitigate climate-related damages.

A federal inter-agency Task Force Working group in 2013 published estimates of the SCC which revised upward estimates Task Force estimates of two years earlier.  More recently, the US EPA made slight additional revisions, shown below.  (EPA’s estimates – expressed in 2011 prices – have here been recalculated in terms of 2013 dollars.)[9] 

 

Social Cost Per Ton of CO2 Emitted – 2015-2050 at Different Discount Rates ($)

Year

5%

3%

2.5%

2015

12

40

63

2020

13

47

70

2030

18

57

83

2040

23

67

95

2050

29

78

107

 

As each of the three tabular column shows, a stream of damage costs in which long-term future impacts are discounted  heavily (5% per year) produces a present-day equivalent cost that is relatively low ($29); an only modestly discounted future (2.5%) produces a high present value ($107).  Probably the most common practice is to select the mid-range rate of 3% and apply it to an SCC as of the year 2020.  That points to a cost of around $47 per ton of damages incurred and the basis of an offsetting carbon tax of the same order of magnitude.

 


 

Appendix 2.

A Global Perspective on the Social Cost of Carbon [10]

Even though it is the global concentration of greenhouse gases -- irrespective of the geographic origin of emissions – that drives concern over climate change, there is no denying the differential cost burden that may face one or another CO2-emitting country.  Equity is therefore a potentially major negotiating dilemma as nations in different stages of development confront the burden of reducing their respective contribution to worldwide emissions.  Take the United States and India, with the latter’s GDP per capita less than nine percent that of the former.  Actually, the two economies’ carbon intensity (that is, carbon emissions relative to GDP) is about the same.  But clearly, Americans, on average, have a lot more discretionary income to devote to the cost of reducing emissions than average Indians, pressed by the burden of health, housing, education, food, and innumerable other preempted necessities within a limited budget.

Two eminent legal scholars – Eric Posner and Cass Sunstein – addressed the equity question in a wide-ranging article six years ago.[11]  The essence of their argument is that, as calibrated by a global social cost of carbon (SCC – see Appendix 1), significant greenhouse gas “reductions would likely impose especially large costs on the United States, and recent projections suggest that the United States is not among the nations most at risk from climate change.”  This prompts the authors to question what would be served if the United States “were to reduce its greenhouse gas emissions beyond the point that is justified by its own self-interest, simply because the United States is wealthy, and because the nations most at risk from climate change are poor.”  Posner and Sunstein do not question the desirability of the haves of the world assisting the have-nots in their aspirations for economic progress.  But rather than tie such assistance to greenhouse gas reductions, they contend that it “would be much better to give cash payments directly to people who are now poor.”  Whether or not Posner and Sunstein, writing today, would stand by their judgment of six years ago, I believe the argument for moving forcefully on climate-mitigation steps warrants a considerably more nuanced perspective on the assistance question.  That would include questioning the tractability of applying a country-specific benefit-cost calculus to guide participation in global emission reduction

Indeed, acceptance of a “distributive justice” element has, arguably and for some time, been a recognized component of an international climate agreement, no matter how ragged negotiations over such as agreement have frequently been and how few multi-country accords have actually been forged.  The Kyoto Protocol, adopted in 1997, recognized the problem by imposing binding emission obligations on only 37 of 192 nations participating in its drafting – a weakness that exposed multiple problems (e.g., moral hazard, leakage, additionality) which a successor accord would need to take into account rather than capitulate to a position that views any inclusive climate treaty as inherently untenable.

 


 

[1] Although several greenhouse gases are implicated in climate change, the dominant by far is carbon dioxide and it is the one primarily considered in this essay.

[2] For views on climate and other environmental and natural resource challenges on the eve of the Rio conference, see Joel Darmstadter, ed., Global Development and the Environment: Perspectives on Sustainability (Washington: Resources for the Future, 1992).  The climate chapter by Peter Morrisette and Norman Rosenberg is, for its time, an unusually strong argument for the concurrent pursuit of both emission mitigation and adaptation imperatives – the latter, with particular emphasis on drought and water resource management.

[3] Derived from data in International Energy Agency, World Energy Outlook 2013; BP, Statistical Review of World Energy 2014; and U.S. Energy Information Administration,International Energy Outlook 2013.  Estimates for 2013 are tentative.

[4] See Intergovernmental Panel on Climate Change (IPCC), Fifth Assessment Report, Working Group III, Summary for Policymakers, Table SPM 2.

[5] The first quoted passage is from his article “The Impact of Treaty Nonparticipation on the Costs of Slowing Global Warming,” Energy Journal, Vol. 30, Special Issue 2, 2009;  the second, from The Climate Casino: Risk, Uncertainty, and Economics for a Warming World,” (New Haven: Yale, 2013), p. 252.

[6] Even the “advanced” label can conceal disunity: Australian Prime Minister Tony Abbott, having successfully achieved repeal of the country’s $23 (Australian)/ton carbon tax, has urged other countries – particularly Canada – to reject carbon taxes, which he views as a route to “clobber the economy.”  Ottawa Citizen, June 9, 2014, “Stephen Harper and Australia’s Tony Abbott won’t let climate policies kill jobs.”  <ottawacitizen.com/news/national/stephen-harper-and-australias-tony-abbott-wont-let-climate-policies-kill-jobs>

[7] U.S. Department of State, “The Shape of a New International Climate Agreement,” Remarks by Todd D. Stern, Royal Institute of International Affairs (Chatham House), London, Oct. 22, 2013.

[8] U.S. Global Change Research Program, U.S. National Climate Assessment, May 2014.

[9] EPA, “Fact Sheet: The Social Cost of Carbon,” Nov. 2013.

[10] Adapted from “A Global Perspective on the Social Cost of Carbon,” by Joel Darmstadter and Jan Mares, a blog posted at Common-Resources/Resources for the Future, Oct. 4, 2013.

[11] Eric A. Posner and Cass R. Sunstein, “Climate Change Justice,” The Georgetown Law Journal, Vol. 96:1565, 2008.  For a more concise and popular treatment of the subject, see the authors’ “Mitigating Climate Change:  Who Pays?  Who Benefits?"  Regulation 31, no. 1, Spring 2008.

 


 

 
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