Only Private Sector Can Meet Finance Demands of Developing Countries

Things are getting hot here in Copenhagen.  It’s not the weather outside, but the debate taking place inside the Bella Center, home of the 15th Conference of the Parties of the UN Framework Convention on Climate Change.  This afternoon, the main session of the talks was suspended, following protests led by African countries, which accused the industrialized countries of trying to wreck the existing Kyoto Protocol.  At the heart of the controversy is the “finance question,” as it’s called here, with the developing countries asking for more than $100 billion to $200 billion annually to pay for their carbon mitigation and climate change adaptation through 2050!

At the National Journal’s “Copenhagen Insider” Blog, Congressman Ed Markey poses the highly relevant question of how much should wealthy countries help poor countries address climate change.  In response to Congressman Markey’s question, I maintain that it is inconceivable that the governments of the industrialized world, including the United States, will come up with sufficient foreign aid to satisfy the demands for financial transfers being made by the developing countries in Copenhagen.  However, 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 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 — China, India, Brazil, Korea, South Korea, South Africa, and Mexico — 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 won’t 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.  So, all in all, the job can be done, and governments have an important role, but as facilitators, not providers, of finance.  This should be the focus of the discussion here in Copenhagen.


Defining Success for Climate Negotiations in Copenhagen

The fact that President Obama has decided to attend the United Nations climate change negotiations in Copenhagen at the end of the two-week meetings on December 18th, rather than during the previous week on his way to Oslo to receive the Nobel Peace Prize, is important, because it increases – in my mind – the likelihood of a significant outcome from the negotiations.  However, my reasoning – as I explained in a blog post for the Financial Times – is not what most people may think.  It is a matter of what is called “endogeneity” in economics, that is, there is causality in both directions.  That’s a bit cryptic, so let me explain.

[Before I proceed, I should explain that I have agreed to blog periodically from Copenhagen for the Financial Times, analyzing some of the issues before the negotiators in response to questions from the Financial Times‘ editors and reporters.  Those posts can be viewed at the Financial Times energy-source web site.]

Although it is true that President Obama’s presence on the concluding day of the negotiations (when – taking Kyoto in 1997 as an example – some of the key deals are finally struck) can have some influence, it is even more true that this decision by the White House signals that the Administration has reason to believe that there will be a visibly successful outcome of the Copenhagen talks.

His initial decision to visit the negotiations the previous week would have shielded the President – to a considerable degree — from any embarrassment and bad publicity if the negotiations were to fall apart.  (The President does not need to fly back from Copenhagen a second time having failed on his mission; his attempt to bring the Olympic games to Chicago is still fresh in the minds of the international press.)

Therefore, the fact that the White House has decided to send the President to Copenhagen for the final day, where he will assemble with some 90 other world leaders, and participate in closing statements (not to mention photo opportunities), indicates that the Administration is relatively confident that the talks will not collapse in a logjam of disagreement between the industrialized world and the developing countries, but rather that there will be a successful outcome.

The key outstanding question is whether the outcome will be one that provides a sound foundation for meaningful, long-term global action, not simply some notion of immediate, albeit highly visible triumph.  This is a subject on which I wrote in the Boston Globe (“A Silver Lining in the Climate Talks Cloud”) on Sunday, December 6, 2009, and it is my major focus here.

The gloom and doom predictions we’ve been hearing about the global climate negotiations taking place in Copenhagen this week and next are fundamentally misguided.  The picture is much brighter than it might seem for this international conference aimed at coming up with a successor for the Kyoto Protocol, which essentially sunsets in 2012.

The best goal for the Copenhagen climate talks is to make real progress on a sound foundation for meaningful, long-term global action, not some notion of immediate triumph.  This is because of some basic scientific and economic realities.

First, the focus of scientists (and policy makers) is and should be on stabilizing concentrations at acceptable levels by 2050 and beyond, because it is the accumulated stock of greenhouse gas emissions — not the flow of emissions in any year — that are linked with climate consequences.

Second, the cost-effective path for stabilizing concentrations involves a gradual ramp-up in target severity, to avoid rendering large parts of the capital stock prematurely obsolete.

Third, long-term technological change is the key to the needed transition from reliance on carbon-intensive fossil fuels to more climate-friendly energy sources.

Fourth, the creation of long-lasting international institutions is central to addressing this global challenge.

Indeed, it would be easy, but unfortunate, for countries to achieve what some people wish to define as “success” in Copenhagen:  a signed international agreement, glowing press releases, and related photo opportunities for national leaders.  Such an agreement could only be the Kyoto Protocol on steroids:  more stringent targets for the industrialized countries and no meaningful commitments by the key rapidly-growing emerging economies of China, India, Brazil, Korea, Mexico, and South Africa (let alone by the numerous developing countries of the world).

Such an agreement could — in principle — be signed, but it would not reduce global emissions and it would not be ratified by the U.S. Senate (just like Kyoto).  Hence, there would be no real progress on climate change.

If it’s not reasonable to expect that a comprehensive post-Kyoto policy architecture will be identified in Copenhagen, what would constitute real progress?  One important step forward would be a constructive joint-communiqué from major countries (just seventeen industrialized and emerging economies account for about 90% of annual emissions).

Such a joint-communiqué could lay out key progressive principles to underlie a future climate agreement, such as making the United Nations notion of  “common but differentiated responsibilities” meaningful through a the dual principles that:  all countries recognize their historic emissions (read, the industrialized world); and all countries are responsible for their future emissions (think of those rapidly-growing emerging economies).

This would represent a great leap beyond what has become the “QWERTY keyboard” (that is, unproductive path dependence) of international climate policy:  the distinction in the Kyoto Protocol between the small set of Annex I countries with quantitative targets, and the majority of countries in the world with no responsibilities.  Various policy architectures could subsequently build on these dual principles and make them operational, beginning to bridge the massive political divide which exists between the industrialized and the developing world.

In addition, a mid-term agreement could be reached on an approach involving an international portfolio of domestic commitments, whereby each nation would commit and register to abide by its domestic climate commitments, whether those are in the form of laws and regulations or multi-year development plans.  Support for such an approach has been voiced by a remarkably diverse set of countries, including Australia, India, and the United States.

The key question is not what this approach would accomplish in the short-term, but whether it would put the world in a better position two, five, and ten years from now in regard to a long-term path of action.

Consistent with this portfolio approach, President Obama recently announced that the United States would put a target on the table in Copenhagen to reduce emissions 17 percent below 2005 levels by 2020 (in line with climate legislation in the U.S. Congress).  In response, China announced that it would reduce its carbon intensity (emissions per unit of economic activity) 40 percent below 2005 levels over the same period of time.  Subsequently, India announced similar targets.  Given these countries rapid rates of economic growth, the announced targets won’t cut emissions in absolute terms, but they are promising starting points for negotiations.

So, despite the multitude of negative pronouncements about the slow pace of international climate negotiations, there are positive developments and promising paths forward. It is fortunate that a few key nations, including the United States, appear to be more interested in real progress than symbolic action.


Approaching Copenhagen with a Portfolio of Domestic Commitments

As we approach the beginning of the Fifteenth Conference of the Parties of the United Nations Framework Convention on Climate Change (UNFCCC) in Copenhagen in December, international negotiations are focused on developing a climate policy framework for the post-2012 period, when the Kyoto Protocol’s first commitment period will have ended.  In addition to negotiations under the UNFCCC, other intergovernmental outlets, including the G8(+5) and the Major Economies Forum, are trying to reach common ground among the world’s major emitters of greenhouse gases.  To date, these efforts have not produced a politically, economically, and environmentally viable structure for a future climate agreement.

In the Harvard Project on International Climate Agreements (a global effort which now includes 35 research initiatives in Australia, China, Europe, India, Japan, and the United States), we continue to investigate promising post-2012 international policy architectures, as part of our on-going effort to help the countries of the world identify the key design elements of a post-2012 architecture that is scientifically sound, economically rational, and politically pragmatic.

One approach we have recently examined is a “portfolio of domestic commitments,” an approach which could be effective, but more flexible and politically palatable than other international arrangements.  Under such a scheme, nations would agree to honor commitments to greenhouse gas emission reductions laid out in their own domestic laws and regulations.  A portfolio of commitments might emerge from a global meeting such as the UNFCCC Conference of the Parties, or a smaller number of major economies could negotiate an agreement among themselves, and then invite other countries to join.

Despite the obvious differences between such a system and the conventional “targets and time tables” approach embodied in the Kyoto Protocol, negotiators should not dismiss this new approach out of hand.  There are several ways to construct a portfolio of domestic commitments, and negotiators have numerous levers available to tailor an agreement to meet their political, economic, and environmental goals.  In a recent Harvard Project Viewpoint, I outlined some basic features of a portfolio approach, highlighted a few major issues and concerns, and discussed the potential feasibility of this approach.

The Portfolio of Domestic Commitments Approach

The core of a portfolio of domestic commitments is agreement among a set of member countries to conform to the climate change mitigation requirements specified by their respective domestic laws, regulations, and official planning documents (the last being domestically binding in centrally planned economies).  The portfolio approach gives member countries free rein to dictate the precise form their domestic commitments will take, whether those be greenhouse gas cap-and-trade systems, carbon taxes, intensity targets, performance or technology standards, or other instruments.  A portfolio agreement should be highly credible, given that it is grounded in domestic commitments, binding in and enforceable by law previously made by the very governments signing on to the international agreement.

Domestic commitments might take the form of specified greenhouse gas emission targets or the form of particular actions that could be taken to reduce emissions, both envisioned in the Bali Action Plan as “nationally-appropriate mitigation actions” (NAMAs).  A target-based approach has the advantage of being transparent and relatively simple to aggregate across countries to reach a global target.  On the other hand, action-oriented goals can be more concrete and may be easier for many governments to implement in the short term.  There is no reason why both targets and actions could not be pursued simultaneously.  Coexistence of multiple approaches is not uncommon in environmental policy.

Ongoing commitments for several years into the future are necessary to stabilize and eventually reduce atmospheric greenhouse gas concentrations to combat climate change.  Under a portfolio approach, these domestic commitments could be represented in a table of national schedules attached to an agreement.  Australia has proposed a model agreement that includes such schedules. The schedules would signal a continuing commitment to the international community, and their inclusion in an international agreement would provide a disincentive for member nations to deviate from them in the future.

Countries would not be limited to acting unilaterally to meet their domestic commitments.  They could choose to submit joint goals or targets — for example, on a regional level — or link with other countries through a multinational carbon trading regime to reduce costs.  (Such linkage is the subject of another Harvard Project paper — by Judson Jaffe and myself.)  The portfolio approach would not be a bar to international cooperation.

A primary consideration for a portfolio agreement is the well-established principle of “common but differentiated responsibilities.”  This principle acknowledges that responsibility is shared for solving the climate change challenge, but suggests that historical differences in contribution to the problem and economic and technical disparities be reflected in varying national commitments.  A portfolio of domestic commitments may be particularly well-suited to implement this principle because it allows for countries to make commitments along a continuum of stringency, rather than dividing nations into two groups as did the Kyoto Protocol.  The placement of each country upon the continuum would depend on an array of political, economic, and environmental concerns.  (On this, see recent Harvard Project papers by Jeffrey Frankel and Valentina Bosetti, and by Sheila Olmstead and myself.)

Key Issues for Negotiators

Negotiators will inevitably need to tackle a number of key issues in crafting a portfolio agreement, three of which we highlight here.  The first is the extent to which domestic commitments could be relaxed in later years to reflect changed circumstances.  The second is the formal status such an agreement would have under international law.  Third is the necessity to monitor conformance to domestic commitments.

Rigidity of Commitments

One approach would be for a portfolio agreement to log domestic commitments and allow countries to relax those commitments in response to changes in political or economic climate or advances in the understanding of the threat of climate change.  In essence, such an agreement would function as a depository for current domestic legislation, serving the dual roles of information-gathering and diplomatic recognition of shared commitment to the climate problem.  It is difficult to imagine countries registering objections to such an agreement, given that they would not be binding themselves to future commitments.

For precisely this reason, however, climate negotiators may wish to stay the hand of future governments by barring relaxation or abandonment of preexisting climate commitments.  In other words, the agreement could set minimum commitments on a country-specific basis.  Amendments would be allowed only if they maintained or strengthened domestic commitments to climate change mitigation.  Such a precommitment strategy is not generally included in domestic legislation or plans, and it is likely to require careful wording and additional domestic legislation to become effective in some countries.

There is surely the possibility of domestic commitments being ignored by future leaders, but note that this concern is not unique to the portfolio approach.  All climate policy architectures — indeed, all international agreements — face this problem, and the question is whether the precommitment challenge is greater under this approach than it would be under others.  One possible compromise position would be to allow revision of domestic commitments, but only at specified intervals, in order to account for dramatic shifts in economic or environmental situations and expectations.

Type of Legal Instrument

Another key issue is the official legal status of a portfolio of domestic commitments.  There are a number of possible structures for such an agreement, each with different implications under international law.  A treaty is the most formal option and would be the most binding on participating nations.  Treaty law is relatively well-developed, as compared with the law governing other international instruments, and the law of treaties provides a framework for enforcement and dispute resolution.  But treaties are difficult to craft and face the perils of national ratification.

Outside of a treaty, there are various other instruments of international law that could be used in the portfolio approach.  For example, in the United States, congressional-executive and sole-executive agreements can be entered into by the President and do not require the approval of two-thirds of the Senate, as do treaties.  (See, for example, Nigel Purvis’s work on executive agreements.)   Other “soft law” instruments, such as explicitly nonbinding agreements, political declarations, and U.N. declarations, are fallback options which merit consideration for implementing a portfolio approach.  Ultimately, negotiators will choose the best instrument, based on how open countries are to the agreement and what obligations the agreement imposes.

Monitoring and MRV

Throughout the industrialized countries — and increasingly in the emerging economies — domestic environmental regulations include internal mechanisms for monitoring and enforcement.  A portfolio agreement could rely on countries to be prompted by international pressure to enforce their commitments, or an agreement could take a more active role.  The agreement could, for example, put in place an international monitoring body, license domestic entities in each country to monitor national commitments, or suggest model codes for enforcement.  International assistance may be necessary to aid countries lagging in technical or administrative capacity to monitor greenhouse gas emissions and enforce domestic policies.  More broadly, the agreement would need to define—to the extent possible—uniform measurement, reporting, and verification (MRV) procedures and assure that all countries could implement these procedures.

Feasibility of a Portfolio of Domestic Commitments

A portfolio of domestic commitments has several advantages as the foundation of a future international climate policy architecture.  The agreement could be flexible enough to allow countries to implement the mitigation instruments of their choice and link those instruments with domestic instruments in other nations if they so chose.  It could also allow for countries to accede at various times, thus giving them adequate time to prepare to participate.  (See David Victor’s Harvard Project paper on climate accession deals.)   This approach could also be an ideal vehicle for implementing the principle of common but differentiated responsibilities, since member countries would not need to be lumped together into rigid tiers of commitment (as they are under the dichotomous Annex I approach of the Kyoto Protocol).

Perhaps most crucial is the political feasibility of the portfolio approach.  In recent months, several major economies have expressed willingness to consider a climate policy architecture along these lines, including Australia, India, and the United States.  For this reason alone, the portfolio approach merits serious consideration, despite the significant hurdles to negotiating an effective portfolio agreement.

The concerns regarding this approach to a future global climate policy architecture are significant, but so are its potential advantages.  In general, there are real challenges to developing any post-2012 international climate policy architecture that is scientifically sound, economically rational, and politically pragmatic.  The challenges facing this approach are no greater – and may be less – than those facing other means of addressing the threat of global climate change.