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.


Reflections on Economics and Policy Making in the Environmental Domain

This past week, I was privileged to participate in a workshop, “Climate Science in a Time of Political Disruption,” sponsored by the Harvard Program on Science, Technology and Society.  The workshop began with a keynote address by former U.S. Environmental Protection Agency Administrator Gina McCarthy, now Professor of Practice at the Harvard T. H. Chan School of Public Health.  Following Gina McCarthy’s down-to-earth but quite inspiring remarks (with her usual Yankee humor adding spice to the proceedings), the others on the panel were asked to comment on the topic at hand.  The panelists included Joe Goffman, Executive Director of the Environmental Law Program at Harvard Law School; Peter Huybers, Professor of Earth and Planetary Sciences; Sheila Jasanoff, Pforzheimer Professor of Science and Technology Studies at the Harvard Kennedy School; Lucas Stanczyk, Assistant Professor of Philosophy; and myself.

Given the subject of the workshop, most of the panelists focused their comments on the current political scene and the current U.S. administration’s apparent disdain for climate science.  I took a broader, somewhat historical view, and as the only economist on the panel, I commented on the relationship of economic research to policy making.  I did this via reflections on experiences I’ve had over the past three decades.  I tried to make three points:  first, economic research results can be used as a light bulb or a rock, and either can be effective; second, it is important to move quickly when windows of opportunity open in the policy world to implement research ideas; and third, politics matter, and should not be ignored.

  1. Research Results Can be Used as a Light Bulb or a Rock

I cannot speak for the natural sciences, but it is clearly the case that economic evidence can be used either as a “light bulb” – to illuminate an issue and possibly persuade policy makers of the wisdom of a particular course of action – or as a “rock,” that is, as ammunition to support a policy maker’s predisposed position.  Is this cynical?  I think not, because such economic ammunition can help win a policy battle.  I was just reminded by Paul Krugman in his New York Times column of a somewhat less charitable metaphor, where he characterized some politicians as using economists “the way a drunkard uses a lamppost:  for support, not illumination.”

Related to this reality was a session I chaired in 2001 at the annual meetings of the American Economic Association – a roundtable of former chairs and members of the U.S. Council of Economic Advisers (CEA), including George Eads (Charles River Associates), the late William Niskanen (then of the Cato Institute), William Nordhaus (Yale University), and Joseph Stiglitz (Columbia University).  A repeated theme from this set of economists was the reality that CEA typically had more influence by helping others in the Executive Office of the President in their efforts to stop bad ideas than by itself promoting good ideas.

  1. When Windows of Opportunity Open, Move Quickly

Two examples stand out for me of the importance of moving quickly when windows of opportunity open in the policy world to implement research ideas.  One is the work I carried out in the late 1980s under the sponsorship of the late Republican Senator John Heinz of Pennsylvania and former Democratic Senator Timothy Wirth of Colorado in the form of research that led to a report, “Project 88:  Harnessing Market Forces to Protect the Environment.”  One of the proposals in the report was to address the then politically prominent problem of acid rain with what is now called a cap-and-trade system.  This idea resonated with the incoming administration of President George H. W. Bush, particularly with the Counsel to the President, Boyden Gray.  In parallel with work being carried out by Joe Goffman and Dan Dudek (both then at the Environmental Defense Fund), I followed up the Project 88 report with numerous White House and other Washington meetings (commuting weekly from my Harvard perch), which eventually contributed to the Bush Administration’s proposal (to an initially resistant Democratic Congress) of the Clean Air Act Amendments of 1990, including its path-breaking sulfur dioxide allowance trading program.

The other example I mentioned to highlight the importance of moving quickly when windows of opportunity open in the policy world is associated with the negotiations carried out annually under the United Nations Framework Convention on Climate Change (UNFCCC).  At the seventeenth Conference of the Parties of the UNFCCC in Durban, South Africa, in 2011, the delegates agreed to the “Durban Platform for Enhanced Action,” which broke with nearly twenty years of UNFCCC policy by mandating a new approach in which all countries, not just the richest nations, would participate in addressing the need for greenhouse gas (GHG) emissions reductions.  The key challenge for climate negotiators was how to meet this new mandate while still observing the fundamental UNFCCC principle of “common but differentiated responsibilities,” which had previously been interpreted to mean that rich countries alone would shoulder the burden of reducing emissions.

At the Harvard Project on Climate Agreements, we recognized that negotiators around the world were suddenly open to outside-the-box thinking.  Indeed, in Science magazine, my colleague, Joe Aldy, and I wrote an article, “Climate Negotiators Create an Opportunity for Scholars.”  Over the following months (and years) we worked hard to help key negotiating countries develop a new policy architecture that could meet the challenge before them.  The result was a hybrid approach that combined elements of top-down architecture with a healthy dose of bottom-up “pledge-and-review,” which led eventually, of course, to the Paris Agreement of 2015.

  1. Politics Matter

For the Intergovernmental Panel on Climate Change’s (IPCC) Fifth Assessment Report (AR5), I served as Coordinating Lead Author (with Dr. Zou Ji of China) of the chapter on “International Cooperation:  Agreements and Instruments.”  I was surprised to find that the process was highly politicized – in two distinct ways.  First, whereas I had assumed that the Lead Authors (LAs) serving on our writing team were there only to represent their respective scientific expertise (in economics, legal scholarship, international relations, etc.), some of the LAs seemed to represent the interests of their respective countries.

Second, I was very naive about the final step of the process, when the governments of the world are asked to approve the IPCC’s Summary for Policy Makers line by line.  The controversy associated with our chapter on international climate agreements resulted in that entire section of the SPM being eviscerated of all meaningful substance at the Government Approval Sessions for Working Group III (WG III) in Berlin in April, 2014.  I was disappointed and dismayed by the process and its outcome.

Fortunately, I learned from that experience and my attitude (and behavior) was quite different just six months later, when I found myself in Copenhagen for what was essentially the final stage of the entire five-year enterprise of research, writing, and government approval of the various reports of IPCC AR5, namely the government approval sessions for the Synthesis Report (SYR), which summarizes and synthesizes the key findings from all three Working Group reports.  I had learned my lesson.  Rather than disdaining the politics of the occasion, I embraced it and spent the week in Copenhagen in careful negotiations with the key national governments, the result of which was that all of the essential text on international cooperation and agreements was preserved in the Synthesis Report.

Ironically, by recognizing, accepting, and indeed participating in the fundamentally political aspects of the IPCC government approval process, I was able to keep the report of research from itself being politicized.

Summing Up

So, the three points I made regarding the relationship between economic research and policy making at last week’s Harvard workshop were these:  first, economic research results can be used as a light bulb or a rock, and either or both can be effective; second, it is important to move quickly when windows of opportunity open in the policy world to implement research ideas; and third, politics matter, and should not be ignored.

I left it to others at the workshop – and I leave it to readers of this essay – to judge whether any of this applies more broadly to “Climate Science in a Time of Political Disruption.”


Rex Tillerson is out as Secretary of State: What Should We Make of This?

Two hours ago, I received a “Breaking News Alert” from the New York Times“Secretary of State Rex Tillerson is out, after a rocky tenure. President Trump will replace him with Mike Pompeo, the director of the C.I.A.”  This came three months after the November 30, 2017 New York Times story, indicating that the Trump White House was planning to oust Rex Tillerson as Secretary of State, and replace him with Mike Pompeo, the Director of the Central Intelligence Agency (CIA) and former Republican member of the U.S. House of Representatives.  Need I mention that the President labeled that November story “fake news?”

What should we make of this change — particularly in regard to climate change policy?  To examine this question, I can draw on my December 3, 2017 blog essay, “If Tillerson Departs State Department, Will We Go from Bad to Worse?”  In fact, that takes us back even further … to a time that now seems long ago:  the beginning of the Trump administration.

Looking Backward for Some Perspective   

On January 3, 2017, two weeks before Inauguration Day, I posted an essay at this blog on “Trying to Remain Positive,” in which I searched for any remotely positive elements of the incoming Trump administration.  I wrote:

“Remarkably, the least worrisome development in regard to anticipated climate change policy may be the nomination of Rex Tillerson to become U.S. Secretary of State.  Two months ago it would have been inconceivable to me that I would write this about the CEO of Exxon-Mobil taking over the State Department (and hence the international dimensions of U.S. climate change policy).  But, think about the other likely candidates.  And unlike many of the other top nominees, Mr. Tillerson is at least an adult, and – in the past (before the election) – he had led his company to reverse course and recognize the scientific reality of human-induced climate change (unlike the President-elect), support the use of a carbon tax when and if the U.S. puts in place a meaningful national climate policy, and characterize the Paris Climate Agreement as “an important step forward by world governments in addressing the serious risks of climate change.”

It’s fair to say that it is little more than damning with faint praise to characterize this pending appointment as “the least worrisome development in regard to climate change policy,” but the reality remains.  Everything is relative.  Of course, whether Mr. Tillerson will maintain and persevere with his previously stated views on climate change is open to question.  And if he does, can he succeed in influencing Oval Office policy when competing with Scott Pruitt, Trump’s pick to run EPA, not to mention Rick Perry, Trump’s bizarre choice to become Secretary of Energy?”

Since then, we have learned the answer to that question.  Despite Secretary Tillerson’s (apparent) support for the U.S. to remain in the Paris Agreement, the combined forces of EPA Administrator Pruitt, Secretary of Energy Perry, and – most important – former White House Chief Strategist, Steve Bannon, the President announced in June of last year his intention to withdraw the United States from the Agreement, following on a host of moves to reverse the Obama administration’s domestic climate change policies.

Secretary Tillerson’s Record at the State Department

Perhaps Mr. Tillerson should be credited for the fact that the State Department has at least remained engaged in the climate change negotiations under the United Nations Framework Convention on Climate Change (UNFCCC), including by sending a delegation to the annual talks in Bonn, Germany (from which I reported last year), where negotiators from other Parties to the Paris Agreement personally related to me how surprised they were by the constructive role the U.S. delegation was continuing to play (in putting meat on the bones of the Paris Agreement).  However, such continued bureaucratic involvement cannot make up for the fact that the U.S. is disengaged at political levels, which must be attributed – at least in part – to Tillerson’s ineffectiveness in tilting the President toward a more sensible path on climate change policy.

It is beyond the scope of this blog (and my expertise) to comment more broadly on Mr. Tillerson’s general leadership of the State Department or on the many key areas of international relations outside of the climate policy realm.  But, I will note that my Harvard Kennedy School colleague (and former ambassador), Nicholas Burns, together with another former ambassador, Ryan Crocker, described in a scathing New York Times Op-Ed how the Foreign Service has been virtually dismantled under Tillerson.

In another harsh New York Times Op-Ed, Antony Blinken assessed “How Rex Tillerson Did So Much Damage in So Little Time.”  But, as Blinken points out, the great irony is that Tillerson had “good judgment” on many of the critical international issues facing the administration.  In addition to (apparently) asking the President to keep the U.S. in the Paris Agreement, Tillerson supported the Trans-Pacific Partnership (TPP), Obama’s nuclear deal with Iran, a calmer approach to North Korea, staying firm against Russian aggression (such as in Ukraine), and calming the Qatar-Saudi Arabia controversy, which was instigated, in part, by Trump himself.  But on all of these issues, Tillerson’s sensible, if inexperienced, diplomatic advice failed to win the day.

Out with the Bad, In with the Worse?

Enter Mike Pompeo.  What would his presence as Secretary of State mean – both broadly, and in particular, for climate change policy?

In broad terms, Pompeo is apparently smart (as is Tillerson), highly ideological (which Tillerson, a moderate, is decidedly not), and very partisan (which, again, Tillerson is certainly not).  This does not sound like good news for the leadership of the U.S. Department of State.

On the other hand, Pompeo might be expected to slow down, if not reverse, the hollowing out of the State Department’s political leadership and Foreign Service officer corps that has occurred under Tillerson’s enthusiastic down-sizing of the Department.

Antony Blinken’s conclusion was that with Pompeo in the lead, “we can expect a focus on hard-power solutions to every problem, … and an even more aggressive pursuit of ‘America First.’”  Whereas Tillerson apparently tried to check Mr. Trump’s worst instincts, “now we may see them fully unleashed.”  Good God, what a thought!

The Path Ahead for Global Climate Change Policy

That is a rather frightening prognosis across the board.  But what about climate change policy, in particular?  Does Mr. Pompeo at least share Mr. Tillerson’s personal understanding of the reality of the problem and the importance of addressing the threat?

Sorry, but the answer does not provide cause for hope.  In the House of Representatives, before his move to the CIA, Congressman Pompeo was a consistent, long-term, and vocal skeptic of the science of climate change, and an outspoken critic of the Obama administration’s climate policies, which he characterized in 2015 as a “radical climate change agenda.”  Although he may have modified his views since his appointment as CIA Director, at his confirmation hearings in January, 2017, he stated that Obama’s view that climate change is a significant issue for national security was “ignorant, dangerous, and absolutely unbelievable.”

Final Words

Secretary Tillerson’s exit from the State Department and Mr. Pompeo’s entry, assuming he is confirmed by the U.S. Senate, will constitute yet another sad chapter in the short history of the sorry state of governance under the presidency of Donald Trump.  During twenty-eight years of teaching at Harvard, until 2016, I had remained stubbornly non-partisan, but sixteen months after the election, I still find it difficult to believe that we have elected such an individual to be President of the United States.

Whether or not you agree with my admittedly harsh assessment of this President, his administration, and the political environment in which we now find ourselves, I want to recommend two books:  How Democracies Die by Steven Levitsky and Daniel Ziblatt (a pair of Harvard political science professors); and Trumpocracy:  The Corruption of the American Republic by David Frum (a conservative writer at The Atlantic).  Together they provide a superb diagnosis of the evolution of the current national — and international — political environment.  Unfortunately, I am still looking for a prescription for a promising way forward.