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.

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Can Countries Cut Carbon Emissions Without Hurting Economic Growth?

In the September 21st issue of the Wall Street Journal, the editors pose the following question: can countries cut carbon emissions without hurting economic growth? In his introductory essay, Michael Totty frames the issues as follows:

“There’s little doubt: Cutting greenhouse gases will be costly. But that leads to two big questions. First, how costly? And second, can nations afford it? As policy makers around the world take action to avoid a predicted climate catastrophe, the debate is turning to the costs of reducing carbon-dioxide emissions. Energy-efficiency measures are often pricey, and alternative energy sources are more expensive than the fossil fuels they replace. A steep price on carbon emissions will ripple through the economy. Does that mean a serious effort to tackle global warming is incompatible with economic growth? Or can we make significant cuts in greenhouse-gas emissions without causing serious damage to the economy?

We put the question to a pair of experts. Robert Stavins, a professor of business and government at Harvard University and director of Harvard’s environmental economics program, says the answer to the second question is yes: Making the necessary cuts need cause little more than a blip in world-wide growth if smart policies are used.

Steven Hayward, a fellow at the American Enterprise Institute for Public Policy Research, says no: Energy use — and the carbon dioxide it emits — is so central to the world’s economy that major cuts can’t be made without significant damage.

Of course, the answers can depend in large part on how “significant cuts” and “serious damage” are defined. Many scientists, the European Parliament and the Waxman-Markey climate legislation approved by the U.S. House of Representatives have set a goal of cutting carbon emissions about 80% by 2050, so that was picked as constituting significant cuts.

As the accompanying essays show, such a definition leaves plenty of room for disagreement.”

I encourage you to read the entire Journal Report on Environment in the Wall Street Journal (there’s an excellent Q&A on carbon offsets by Bob Curran) and to check out my affirmative response, “Yes: The Transition Can be Gradual — and Affordable,” as well as Steven Hayward’s well-articulated negative response, “No: Alternatives are Simply Too Expensive.”

Understandably, the editors wanted to highlight differences between us in order to develop a concise and clear debate. I find it interesting, however, that in an audio interview/debate at the Wall Street Journal web site (Podcast: Crafting a Global Policy), which was by nature more free-wheeling and less limited by space constraints, there is a remarkable amount of agreement between Mr. Hayward and me on a number of key issues.

For now, in today’s post — liberated from space constraints — I want to expand a bit on my WSJ essay, in which I responded, yes, the transition can be gradual and affordable.

Can the nations of the world meaningfully address the threat of global climate change without inflicting unjustifiable damage to their economies? The answer that has emerged with increasing clarity is a resounding “yes.”

Although “The Day After Tomorrow,” the 2004 disaster epic about the greenhouse effect’s apocalyptic consequences, had less scientific basis than “The Wizard of Oz,” scientific reality is disturbing enough. Man-made emissions of greenhouse gases — including carbon dioxide (CO2) from the combustion of fossil fuels — are very likely to change the earth’s climate in ways that most people will regret. World energy trends are unsustainable — environmentally, economically, and socially.

The global recession has slowed emissions growth, but the world is on a path to more than double global atmospheric greenhouse gas (GHG) concentrations to 1,000 parts per million (ppm) in CO2-equivalent terms by the end of the century, resulting in an average global temperature increase of 6 degrees Centigrade. But increased temperatures — which might well be welcome in some places — are only part of the story.

The most important consequences of climate change will be changes in precipitation (causing, for example, 75 to 250 million people in Africa to be exposed to increased water stress due to climate change by 2020, with rain-fed agriculture yields falling by as much as 50%), disappearance of glaciers throughout the world (and decreased snowpack in areas ranging from the western United States to Asia), droughts in mid to low latitudes (with severe effects in Australia), decreased productivity of cereal crops (at lower latitudes, especially in tropical regions), increased sea level, loss of islands and 30% of global coastal wetlands, increased flooding (in all parts of the world, but greatest in Asia), greater storm frequency and intensity (both typhoons and hurricanes), risk of massive species extinction (20 to 30% of all species, including massive coral mortality), and significant spread of infectious disease. On the other hand, climate change will also bring some health benefits to temperate areas, such as fewer deaths from cold exposure. But such benefits will be greatly outweighed by negative health effects of rising temperatures (cardo-respiratory, diarrhoeal, and infectious diseases, and increased morbidity and mortality from heat waves, floods, and droughts), especially in developing countries.

These impacts will have severe economic, social, and political consequences for countries worldwide, ranging from malnutrition and mass migration (hundreds of millions of people displaced) to national security threats. Bottom-line, comprehensive estimates of economic impacts of unrestrained climate change vary, with most falling in the range of 2 to 5% of world GDP per year by the middle of the century. The best estimates of marginal damages of emissions (again, by mid-century) are in the range of $100 to $175 per ton of CO2 (in today’s dollars).

The world is already experiencing the adverse effects of increasing concentrations of GHGs in the atmosphere, with concentrations already about 60% above pre-industrial levels, greatly exceeding the natural range over the past 600,000 years. Just one example: the Greenland ice sheet has been losing mass at a rate of 179 billion tons per year since 2003.

To have a coin toss’s 50-50 chance of keeping temperature increases below 2 degrees Centigrade — the level at which the worst consequences of climate change can be avoided — it will be necessary to stabilize atmospheric concentrations at 450 ppm. (Even this would result in significant sea-level rise, species loss, and increased frequency of extreme weather, according to the U.N. Intergovernmental Panel on Climate Change.) Consistent with the 450 ppm goal is a long-range target of cutting U.S. emissions 80% below 2005 levels by 2050, which happens to be the target of legislation passed earlier this year by the U.S. House of Representatives, H.R. 2454, the so-called Waxman-Markey bill.

Now, to the heart of the WSJ question: will a serious effort to tackle global warming is incompatible with economic growth? My response was and is that the nations of the world do not have to wreck their economies to avert the crisis. If appropriate and intelligent policies are employed, the job can be done at reasonable and acceptable cost.

Critics argue that the Waxman-Markey legislation — to cut U.S. emissions 80% below 2005 levels by 2050 — will mean big, disruptive changes to our infrastructure and untold economic damage. But they make a couple of basic errors. For one thing, they seem to think we’d have to replace the entire infrastructure quickly, paying trillions of dollars to shift to cleaner power. They also seem to assume that we have to choose between much more expensive energy and no energy at all.

The move to greener power doesn’t have to be completed immediately, and it doesn’t have to be painful. The right transition plan will increase consumers’ bills gradually and modestly, and allow companies to make gradual, well-timed moves.

How would this work? One way is via a combination of national and multinational cap-and-trade systems. Companies around the world would be issued rights by their governments to produce carbon, which they could buy and sell on an open market. If they wanted to produce more carbon, they could buy another company’s rights. If they produced less carbon than they needed, they could sell their extra rights. What’s more, companies could earn more rights by creating appropriate “offsets” that mitigated their carbon use, such as planting forests. Nations could add carbon taxes to the mix.

The effect would be to send price signals through the market — making use of less carbon-intensive fuels more cost-competitive, providing incentives for energy efficiency and stimulating climate-friendly technological change, such as methods of capturing and storing carbon, as well as safe nuclear power.

[NUKES_STAVIN]

Julian Puckett

Robert Stavins

More Efficient

True, in the short term changing the energy mix will come at some cost, but this will hardly stop economic growth. As economies have grown and matured, they have become more adept at squeezing more economic activity out of each unit of energy they generate and consume. Consider this: From 1990 to 2007, while world emissions rose 38%, world economic growth soared 75% — emissions per unit of economic activity fell by more than 20%.

Critics argue we can’t possibly increase efficiency enough to hit the 80% goal. In a very limited sense, that’s true. Efficiency improvements alone, like the ones that propelled us forward in the past, won’t get us where we need to go by 2050. But this plan doesn’t rely solely on boosting efficiency. It brings together a host of other changes, such as moving toward greener power sources. What’s more, making gradual changes means we don’t have to scrap still-productive power plants, but rather begin to move new investment in the right direction.

As for how much this will cost, the best economic analyses — including studies from the U.S. Congressional Budget Office and the U.S. Energy Information Administration — say such a policy in the U.S. could cost considerably less than 1% of gross domestic product per year in the long term, or up to $175 per household in 2020. (As the Obama administration is fond of saying, that’s about the cost of one postage stamp per household per day.)

In the end, we would be delaying 2050’s expected economic output by no more than a few months. And bear in mind that previous environmental actions, such as attacking smog-forming air pollution and cutting acid rain, have consistently turned out to be much cheaper than predicted.

The best economic experts have validated the wisdom of adopting climate policies: from Yale’s William Nordhaus, who has supported moderate carbon taxes to cut emissions as an “insurance policy” against the most serious consequences of climate change, to MIT’s Richard Schmalensee and Columbia’s Glenn Hubbard, who have endorsed the climate policy recommendations of the bipartisan National Commission on Energy Policy, to Harvard’s Martin Weitzman, who has argued for much more aggressive policies because of the risk of particularly catastrophic outcomes. And a diverse set of CEOs, including the heads of some of the largest U.S. corporations, acting as part of the U.S. Climate Action Partnership, have called on the government “to quickly enact strong national legislation to require significant reductions of greenhouse gas emissions.”

Critics are wary of raising energy prices, arguing that no nations have grown wealthy with expensive power. But historically, it is the scarcity and cost of energy that have prompted technological changes as well as the use of new forms of power. What’s more, critics challenge the price estimates the experts have set out. They say that the predictions depend on extensive — and unrealistic — cooperation among nations. In particular, they say, developing nations won’t sign onto plans for curbing emissions, for fear of losing their economic momentum.

Indeed, we do need a sensible international arrangement in place to achieve low costs, and the economic pain will be much greater if we don’t set up an international carbon market. But it can be done. Many nations have already initiated such emissions-control policies. And the world can be brought together in a meaningful, long-term arrangement that is scientifically sound, economically rational and politically pragmatic.

Road to Cooperation

Because the benefits of any single nation taking action to address global climate change are spread worldwide, unlike the costs, it may never be in the self-interest of a single country to take unilateral action. This is the nature of a global commons problem. For this reason, international cooperation is required; this is the point of climate negotiations among some 190 countries, which will continue in Copenhagen this December. It is also the motivation for the U.S. administration’s Major Economies Forum, which brings together the 17 largest economies, accounting for 80% of GHG emissions.

Europe has already put significant climate policy in place, and Australia, New Zealand, and Japan are moving to have their policies in place within a year. But without evidence of serious action by the U.S., there will be no meaningful future international agreement, and certainly not one that includes the key, rapidly-growing developing countries — Brazil, China, India, Indonesia, Mexico, South Africa, and South Korea. U.S. policy developments can and should move in parallel with international negotiations.

Understandably, developing countries have a very different perspective than the currently industrialized world regarding climate policy. After all, the vast majority of the accumulated stock of man-made greenhouse gases in the atmosphere is due to economic activity in the richer countries over the past century and more. But the share of global emissions attributable to developing countries is significant and growing rapidly. China surpassed the United States as the world’s largest CO2 emitter in 2006. And developing countries are likely to account for more than half of global emissions by the year 2020, if not before. China, Korea, and others are beginning to take action.

Most important, all of the key countries of the world can be brought together in a meaningful and pragmatic arrangement. Such a post-Kyoto international agreement can expand the scope of action to include key developing countries, but with targets linked via an appropriate formula with economic growth, so that emissions can be reduced around the world, while emissions (and job) leakage from the industrialized to the developing world is avoided, and economic growth continues in all parts of the world.

Reducing Costs

The longer we put off serious action, the more aggressive our future efforts will need to be, as greenhouse gases and carbon-spewing capital assets continue to accumulate. Plants built today will determine emissions for a generation. In the steel sector — where plant lifetimes typically exceed 25 years — more than half of all plants in the world are now less than 10 years old. The picture is similar in the cement industry, as well as more broadly throughout the economy. For every year of delay before moving to a sustainable emissions path, the global cost of taking necessary actions increases by hundreds of billions of dollars.

Critics argue that we can afford to wait because the world of tomorrow will be wealthier and better able to absorb the costs. But acting sooner, such as by adopting the emission caps proposed in the U.S. House legislation, will lower the ultimate costs of achieving the target, because there will be more time allowed for gradual transition — which is what keeps costs down. Perhaps most important, the costs of failing to take action — the damages of climate change — would be substantially greater.

Getting serious about climate change won’t be free, and it won’t be easy. But if state-of-the-science predictions about the consequences of continued delay are correct, the time has come for sensible and meaningful action.

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