Canada’s Step Away From the Kyoto Protocol Can Be a Constructive Step Forward

Canada confirmed this week that it will not take on a target under an extension of the Kyoto Protocol following the completion of the first commitment period, 2008-2012.  Given that Canada is likely to miss by a wide margin its current target under the first commitment period, this decision may not be surprising, but it is nevertheless important.  More striking, it may actually turn out to be a positive and constructive step forward in the drive to address global climate change through meaningful international cooperation.  Why do I say that?

The Current Situation

The Kyoto Protocol, which essentially expires at the end of 2012, divides the world into two competing economic camps.  Emission reductions are required for only the small set of “Annex I countries” (essentially those nations that used to be thought of as comprising the industrialized world).  Such reductions will not reduce global emissions, and whatever is achieved would be at excessive cost, because of having left so many countries and so many low-cost emissions-reduction opportunities off the table.  Furthermore, that dichotomous distinction is by no means fair:  more than 50 non-Annex I countries now have higher per capita incomes than the poorest of the Annex I countries.  (I have written about this and other issues surrounding the Kyoto Protocol in the past:  Defining Success for Climate Negotiations in Cancun; Defining Success for Climate Negotiations in Copenhagen; Three Pillars of a New Climate Pact).

The United States did not ratify the Kyoto Protocol, and has made it clear that it will not take on a target under a second commitment period.  The U.S. position continues to be that a considerably broader agreement is necessary – one that includes commitments not only from the Annex I (industrialized) countries, but also from the key emerging economies, such as China, India, Brazil, Korea, Mexico, and South Africa.

For much the same reason, Russia and Japan announced last year that they would not take on post-2012 commitments under the Kyoto Protocol.  Further, it is unlikely that Australia will take on such a commitment under Kyoto, essentially leaving the European Union on its own.

On the other hand, the Kyoto Protocol is enthusiastically embraced by the non-Annex I countries (sometimes inaccurately characterized as the “developing countries”), because it holds out the promise of emissions reductions by the wealthiest nations without any responsibilities (costs) borne by others, including the emerging economies.

The Path from Copenhagen to Cancun to Durban

Year after year, the Conference of the Parties to the United Nations Framework Convention on Climate Change has failed to reach agreement on a second commitment period for the Kyoto Protocol.  Most recently, in December, 2010, the issue was punted from the annual conference held in Cancun, Mexico, to the next conference, scheduled for December, 2011, in Durban, South Africa.

Because Durban provides the last opportunity to set up post-2012 targets (with time remaining for national ratification actions), it has been anticipated that the negotiations in Durban will re-ignite the divisiveness and recriminations that highlighted the Copenhagen negotiations in 2009 – with verbal hostilities between Annex I countries and non-Annex I countries dominating the discussions at the expense of any other considerations or meaningful actions.

A Positive and Constructive Step Forward


The decision just announced at meetings in Bonn, Germany, by the Canadian delegation that Canada will not take on a target in a second commitment period of the Kyoto Protocol can be a very constructive step forward.  This is because it greatly reduces the risk that this year’s annual meeting of the Conference of the Parties in Durban will be dominated by acrimonious debates about a second commitment period for the Kyoto Protocol.

On the contrary, this announcement should encourage the non-Annex I (“developing”) countries, which have been insisting on a second commitment period, to begin to accept the reality that with the United States, Japan, Russia, and now Canada on record as not endorsing a second commitment period for the Kyoto Protocol, it is infeasible for the European Union to go it alone.  (Indeed, one might suspect that Australia and most European nations are privately pleased by Canada’s announcement.)

The reality is that the world will be better off by focusing on sensible alternatives under the Long-Term Cooperative Action track of the UN negotiations and by “getting real” about post-Kyoto international climate policy architecture for the long term, such as by putting some additional meat on the Cancun Agreements and by considering any supplemental and sensible architectures the various parties wish to discuss.  (For previous posts on the Cancun Agreements, see:  Why Cancun Trumped Copenhagen; What Happened (and Why):  An Assessment of the Cancun Agreements; Defining Success for Climate Negotiations in Cancun.  For descriptions of a wide range of potential global climate policy architectures — ranging from top-down to bottom-up — see the diverse publications of the Harvard Project on Climate Agreements.)

Next Steps

At Cancun, it was encouraging to hear fewer people holding out for a commitment to another phase of the Kyoto Protocol, but it was politically impossible to spike the idea of extending the Kyoto agreement entirely.  Instead, it was punted to the next gathering in Durban.  Otherwise, the Cancun meeting could have collapsed amid acrimony and recriminations reminiscent of Copenhagen.

Usefully, the Cancun Agreements recognize directly and explicitly two key principles:  (1) all countries must recognize their historic emissions (read, the industrialized world); and (2) all countries are responsible for their future emissions (think of those with fast-growing emerging economies).  In important ways, this helps move beyond the old Kyoto divide.

The acceptance of the Cancun Agreements last December suggested that the international community may have begun to recognize that incremental steps in the right direction are better than acrimonious debates over unachievable targets.  Canada’s announcement should help advance that recognition, and can thereby lead to vastly more productive talks this year in Durban.


What’s in a Name? Wine, Economics, and Terroir

Today, I’m pleased to offer a temporary respite from analysis of climate change policy (and other environmental policies, for that matter), while remaining well within the general province of environmental and natural resource economics.  I do this through a merger of profession and avocation, in my case, economics and oenonomy (the study – as well as the enjoyment – of fine wine).

A Blend of Economy and Oenonomy

As some readers may know, in addition to having served as the founding Editor (and current Co-Editor) of the Review of Environmental Economics and Policy, I have had the distinct pleasure of being one of the founding Editors (along with Kym Anderson, Orley Ashenfelter, Victor Ginsburgh, and Karl Storchmann) of the Journal of Wine Economics.  If you’re laughing, let me quickly note that the Journal consists of serious, refereed articles, many by leading economists, and has been referenced by the New York Times, The Economist, and The Financial Times.  And – in what may be our high point or low point, depending upon your perspective – a discussion paper from the affiliated American Association of Wine Economists was referenced – and mocked – by Stephen Colbert on his “Colbert Report.”

A New Article

In an article that is forthcoming in the Journal of Wine Economics, Robin Cross, Andrew Plantinga (both of the Department of Agricultural and Resource Economics at Oregon State University), and I examine a concept that is central to the thinking of wine geeks around the world – terroir.  The Journal article – “The Value of Terroir:  Hedonic Estimation of Vineyard Sale Prices” – has not yet been published, but a brief version of our analysis – “What is the Value of Terroir?” – has just been published in the American Economic Review Papers and Proceedings 2011, and so I’m pleased to provide an even briefer summary here (quoting and paraphrasing from our AER P&P article) – both for wine geeks and for others.  First, however, let me acknowledge Chuck Mason and other participants in a session at the 2011 American Economic Association meetings for having offered helpful comments on a previous version of the paper.   Now, to the subject at hand.

Some Background

Wine producers and enthusiasts use the term “terroir,” from the French terre (meaning land), to refer to the special characteristics of a place that impart unique qualities to the wine produced.  The Appellation d’Origine Contrôlée (AOC) system in France, and similar systems adopted in other wine-producing countries, are based upon the geographic location of grape production, predicated on this notion of terroir.  Under the U.S. system, production regions are designated as American Viticultural Areas (AVAs), with finer geographical designations known as sub-AVAs.  Such designations allow wineries to identify the geographical origin of the grapes used in producing their wines, and – equally important – seek to prevent producers outside an AVA from making false claims about the nature and origin of their wines.

Some Empirical Questions

“What is the value of terroir in the American context?”  Does the “reality of terroir” – the location-specific geology and geography – predominate in determining the quality of wine?  Does the “concept of terroir” – the location within an officially named appellation – impart additional value to grapes and wine?  Does location within such an appellation impart additional value to vineyards?

The central question we sought to address in this work was whether measurable site attributes – such as slope, aspect, elevation, and soil type – or appellation designations are more important determinants of vineyard prices.  We did this by conducting a hedonic price analysis to investigate sales of vineyards in Oregon’s Willamette Valley, one of the most important wine-producing regions in the United States.

Thinking About These Questions

How should site attributes and sub-AVA designations influence vineyard prices?  If site attributes significantly affect wine quality and if consumers are able to discriminate such quality, then vineyard prices would depend on site attributes, and AVA designations might be redundant.

Alternatively, consumers might not be able to discriminate among wines perfectly and might use AVA designations as signals of average quality of wines from respective areas, and/or might derive utility directly from drinking wines which they know to be of particular pedigree.  In this case, site attributes and AVA designations would influence vineyard prices, with parameters for site attributes indicating how producers value intra-AVA differences in vineyard characteristics.  Presumably, producers attach premiums to site attributes that enhance wine quality, provided that consumers can perceive and are willing to pay for such quality differences.

What if, at the extreme, variation in vineyard prices were explained completely by AVA designations (that is, site attributes are irrelevant)?  This would indicate that terroir matters economically – as a concept, though not as a fundamental reality.  In other words, producers recognize the value of the AVA designation because they know that consumers will pay more for the experience of drinking wine from designated areas.  (Likewise, producers might bid up the value of vineyards located in designated appellations because there is prestige associated with owning vineyards in these areas.)  But if site attributes known to affect wine quality have no impact on vineyard prices, this would suggest that consumers cannot discern quality differences.  Any appreciation they might express for an area’s terroir would essentially be founded on reputation, not reality.

Our Analysis

We estimated a hedonic model of vineyard prices in Oregon to examine whether such prices vary systematically with designated appellation, after controlling for site attributes.  In other words, we carried out an econometric (statistical) analysis to examine the factors that appear to affect vineyard prices.

We employed a new data set we developed on vineyard sales with extensive information about respective properties, combined with GIS-based information on specific parcels.  In our sample (actually, the universe of sales of vineyard – and potential vineyard – properties in the Willamette Valley between 1995 and 2007), the average price of vineyards was about $10,000 per acre, with prices ranging from $2,500 to $42,000 per acre.

We also carried out a check on our vineyard pricing analysis by examining price premiums paid by consumers for wines from related origins.  If you’d like to read about either methodology, or see our quantitative results, please take a look at the article.  But, for now, I will just summarize our results.

Some Answers

We found that vineyard prices are strongly determined by location within specific sub-AVAs, but not by site attributes.  These appellations are supposed to reflect the area’s terroir, but our finding that the physical characteristics of vineyards are not priced implicitly in land markets raises questions about whether sub-AVA designations have a fundamental connection with terroir.

On the other hand, our results make clear that the concept of terroir matters economically, both to consumers and to wine producers.  Buyers and sellers of vineyard parcels in the Willamette Valley of Oregon attach a significant premium to sub-AVA designations.  One possibility is that buyers are less informed than sellers about how the attributes of a vineyard will affect wine quality and, therefore, rely on sub-AVA designations as quality signals.

In any event, consumers are evidently willing to pay more for the experience of drinking wines from these areas.  While they may not discriminate among wines in terms of their intrinsic qualities, consumers are apparently responding to extrinsic qualities of wines, such as price and area of origin.  So, terroir survives – as a concept, but somewhat less as a fundamental reality.


Misguided Objection to Progressive Policy: The EJ Lawsuit Against Implementation of California’s AB 32 Climate Policy

On May 20th, San Francisco Superior Court Judge Ernest Goldsmith ruled that the California Air Resources Board had not adequately explained its choice of a market-based mechanism —  a cap-and-trade system  — to achieve approximately 20 percent of targeted emissions reductions by 2020 under Assembly Bill 32, the Global Warming Solutions Act of 2006.

The ruling was in response to a lawsuit brought by a set of “environmental justice” groups, who fear that the cap-and-trade system will hurt low-income communities.  These groups hope — at a minimum — to delay implementation of the system, scheduled for January 2012.  Their preferred outcome would be for California Governor Jerry Brown to abandon the approach altogether in favor of conventional regulatory mechanisms.

I’ve written about this controversy before, but the potential importance of Judge Goldsmith’s ruling suggests that it’s important to revisit this territory.

The National Context

As far as we know, Governor Jerry Brown plans to move forward with the implementation of Assembly Bill 32, the Global Warming Solutions Act, under which California seeks to take dramatic steps to reduce its greenhouse gas emissions.  Questions have been raised about the wisdom of a single state trying to address a global commons problem, but with national climate policy developments having slowed dramatically in Washington, California is now the focal point of meaningful U.S. climate policy action.  Indeed, for this reason, Nature Magazine recently labeled Mary Nichols, the Chairman of the California Air Resources Board, “America’s top climate cop.”

California’s Plan

A key element of the mechanisms to be used for achieving California’s ambitious emissions reductions will be cap-and-trade, a promising approach with a successful track record, despite its recent demonization as “cap-and-tax” by conservatives and other opponents in the U.S. Congress.

Under this approach, regulators restrict emissions by issuing a limited number of emission allowances, with the number of allowances ratcheted down over time, thus assuring ever-larger reductions in overall emissions.  Pollution sources such as electric power plants and factories are allowed to trade allowances, and as a result, sources able to reduce emissions least expensively take on more of the pollution-reduction effort.  Experience has shown that cap-and-trade programs achieve emissions reductions at dramatically lower cost than conventional regulation.


Some groups in California have been very uneasy about the prospect of cap-and-trade.  In particular, the Environmental Justice movement has long opposed this approach, citing concerns that it would hurt low-income communities.  Professor Lawrence Goulder of Stanford University and I addressed such concerns in an article in The Sacramento Bee in March of 2008.

One expressed concern has been that a cap-and-trade policy might increase pollution in low-income or minority communities.  The apprehension is not about greenhouse gases (the focus of AB 32), since these gases spread evenly around the globe and thus would have no discernible impact in the immediate area.  Rather, it’s about “co-pollutants,” such as nitrogen oxides, carbon monoxide, and particulates, which can be emitted alongside greenhouse gases.

Because a cap-and-trade system would reduce California’s overall greenhouse gas emissions, it would also lower the state’s emissions of co-pollutants. Still, it’s possible, though unlikely, that co-pollutant emissions would increase in a particular locality.  But here it’s crucial to recognize that existing air pollution laws address such pollutants, and so any greenhouse gas allowance trades that would violate local air pollution limits would be prohibited.

If current limits for co-pollutants are thought to be insufficient, the best response is not to scuttle a statewide system that can achieve AB 32’s ambitious targets at minimum cost.  Rather, the most environmentally and economically effective way to address such pollution is to revisit existing local pollution laws and perhaps make them more stringent.

While much attention has been given to the effects of potential climate policies on environmental conditions in low-income communities, it’s also important to consider their economic impacts on these communities.  Reducing greenhouse gas emissions will require greater reliance on more costly energy sources and more costly appliances, vehicles and other equipment.  Because low-income households devote greater shares of their income to energy and transportation costs than do higher-income households, virtually any climate policy will place relatively greater burdens on low-income households.  But because cap-and-trade will minimize energy-related and other costs, it holds an important advantage in this regard over conventional regulations.

Moreover, a cap-and-trade system gives the public a tool for compensating low-income communities for the potential economic burdens:  If some emission allowances are auctioned, revenues can be used to mitigate economic burdens on these communities.

The Way Forward

All in all, cap-and-trade serves the goal of environmental justice better than the alternatives.  This progressive policy instrument merits a central place in the arsenal of weapons California employs.  Beyond helping the state meet its emissions-reduction targets at the lowest cost, it offers a promising way to reduce economic burdens on low-income and minority communities.  For these reasons, the EJ lawsuit is not only misguided, but — if ultimately successful — will be counter-productive.