What Did (and Did Not) Happen at COP-25 Climate Talks in Madrid?

I recently returned from the climate negotiations in Madrid (the twenty-fifth Conference of the Parties – COP-25 – of the United Nations Framework Convention on Climate Change), and as I have done in previous years, I would like to provide you with my brief perspective on the outcome.  This year that means commenting both on what did and did not happen.

A Very Quick Overview

The press has characterized the Madrid climate talks in rather stark terms – as a failure, in contrast with the inspirational calls from youth activists and others for greater ambition.  For example, Somini Sengupta, writing in The New York Times, characterized COP-25 as “widely denounced as one of the worst outcomes in a quarter-century of climate negotiations …”  As usual, reality is somewhat more nuanced.

On the one hand, the inability of the climate negotiations to produce an aspirational statement calling for greater ambition in the next round of national pledges is not terribly significant in terms of its real effects, despite the fact that some members of civil society – ranging from Greenpeace to Extinction Rebellion – have framed this as the key task for COP-25.  On the other hand, there was a significant unfulfilled objective of the negotiations, namely writing meaningful rules (for Article 6.2 of the Paris Agreement) that would help facilitate global carbon markets.  As I explain below, this was indeed a significant disappointment, but not the fatal failure that some have portrayed it to be.

So, there is good news and bad news.  I will begin with the latter.

But before I turn to the substance, I will note for the record that we – the Harvard Project on Climate Agreements – were busy at COP-25, including:  five speaking engagements focused on two topics – national and sub-national carbon-pricing policies (carbon taxes and emissions trading), and international linkage and the critical role of Article 6 of the Paris Agreement); and podcasts with key observers and participants in the negotiations (Andrei Marcu on December 8th and Paul Watkinson on December 11th).

The Bad News

From my recent essay at this blog just before I departed for Madrid (What to Expect at COP-25 in Madrid, December 5th), you know that a key task for COP-25 was to complete the so-called Rulebook on Article 6, in particular, Article 6.2, which can potentially  facilitate international carbon markets and other forms of cross-border cooperation.

As I have said before, there are two necessary conditions for ultimate success of the Paris Agreement.  First is adequate scope of participation.  This has been achieved, with meaningful participation from countries representing some 98% of global emissions – or some 85% if the U.S. withdraws in November, 2020 (compared with the 14% of global emissions from countries committed to emissions reductions under the current, second commitment period of the Kyoto Protocol).

The other necessary condition is adequate ambition of the individual national contributions.  But the very element of the Paris Agreement that fostered such broad scope of participation – namely, that the individual national “pledges” (Nationally Determined Contributions or NDCs) are anchored in national circumstances and domestic political realities – implies that individual contributions may not be sufficient, due to the global commons nature of the climate change problem, and the attendant free-rider issues.

So, the challenge has been to identify ways to enable and facilitate increased ambition over time (not just to issue calls for greater ambition, but to devise ways of actually facilitating it).  Linkage of regional, national, and sub-national policies can be an important part of the answer – connections among policy systems that allow emission reduction efforts to be redistributed across systems.  Such linkage can bring down costs tremendously (in theory, to as little as 25% of what those costs otherwise would be), and thereby provide the latitude for countries to increase their ambition.

If such bilateral linkages among countries are to be correctly reflected when tallying countries’ emissions relative to their NDCs under the Paris Agreement, then the Agreement needs to include a robust accounting mechanism.  The obvious and clear home for this was (and is) Article 6.2, which provides for Internationally Transferred Mitigation Outcomes (ITMOs) and Corresponding Adjustments, which together can function as the international accounting mechanism to correctly reflect a multiplicity of international private-sector exchanges (under various international, intergovernmental linkages).  The negotiators needed to outline some brief and simple rules for double-entry bookkeeping.

Unfortunately, due to the insistence by Brazil and a few other countries for accounting loopholes that “would weaken transparency and mask emissions in a way that would undermine the integrity of the accord,” it turned out be impossible to reach agreement on Article 6.2, even after more than two weeks of extensive discussions and intense negotiations, which pushed the COP-25 proceedings 40 hours past their scheduled conclusion.

The Not-So-Bad News

This may sound like a rather technical, albeit unmet objective of COP-25, and that is not an unfair characterization.  But the press has focused on something else altogether, namely the demand from some countries – principally the smallest and some of the poorest nations – for an official decision at COP-25 endorsing significantly greater ambition than what is currently codified in the aggregation of the first round of NDCs under the Paris Agreement.  Such a consensus decision was not forthcoming, and that has been labeled as the great failure of the Madrid talks.

But how important is such an aspirational (even inspirational) statement of ambition, compared with putting in place sound rules to achieve the ambition to which the parties have already agreed?  As Nathaniel Keohane of the Environmental Defense Fund recently wrote, “If merely adding “ambition” to a UN decision made a difference to what nations do, we would have solved the climate crisis long before COP-25.  What matters to actual ambition is the operational substance of the decision.”

The very strong press attention to the lack of an official decision regarding increased ambition at COP-25 was no doubt brought about, at least in part, by the forceful youth activists who have focused their energies on the urgency of what is characterized as the climate emergency, rather than on the hard and sometimes technical work of improving public policies, whether at the international, national, or sub-national level.  Surely, Swedish high school student Greta Thunberg’s speeches have been inspirational, as were Al Gore’s exhortations not very many years ago, but the primary outputs in Madrid were disruptive protests inside the conference (which led to the expulsion of some of the youth activists, and the temporary barring of all members of civil society), and the dumping of manure outside the conference venue.

The Good News

It is very important to understand that although clear accounting rules under Article 6.2 would be very helpful, they are decidedly not necessary for the successful execution and operation of bilateral international linkages and consequent carbon markets.  Let me explain.

There are three distinct but closely related levels of relevant policy action.  First, national (or regional) governments can establish emission-reduction policies, including carbon taxes, cap-and-trade systems, and performance standards.  Second, these jurisdictions can link their policy instruments through mutual recognition of permits, allowances, or credits via bilateral agreements.  This allows trade among private-sector compliance entities of these units across international borders, which facilitates lower-cost achievement of the aggregate target.  But such transfers of emission reduction responsibilities and actions ought to be correctly counted toward compliance with respective NDCs under the Paris Agreement.  This is where Article 6 comes in!

In other words, the ITMOs of Article 6.2 would potentially be units of accounting for Corresponding Adjustments, not a medium of exchange for government-government purchase and sale.  Thus, international linkages among heterogeneous policies in different countries can continue to be executed, as they already have, and international carbon markets can and will proceed to grow!

It is surely unfortunate that the Madrid negotiators did not capitalize on their opportunity to define clear and consistent guidance for accounting for emissions transfers under Article 6.2, because such a robust accounting framework would increase confidence in successful linkages of climate policies across jurisdictions.  But if the guidance had extended much beyond basic accounting rules – such as implicit taxes on cooperation via what have been termed “share of proceeds” and “net global emission reduction” – then restrictive requirements would actually impede effective linkage, and thereby drive up compliance costs.

As Teresa Ribera, Minister for the Ecological Transition of Spain, observed at COP-25, “no deal is better than a bad deal” on carbon markets and Article 6.  Countries can now proceed to develop their own rules for international linkages that can foster high-integrity carbon markets.

 

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Fifty Years of Policy Evolution under the Clean Air Act

Fifty years ago, in 1970, the first Earth Day was celebrated, the U.S. Environmental Protection Agency (EPA) was established, and the U.S. Clean Air Act was passed.  Much has transpired with air pollution policy in the United States since that time.  Given the current state of Federal clean air policy in this country, it may be helpful to reflect on these fifty years of policy evolution, which is what Richard Schmalensee (of the MIT Sloan School of Management) and I do in a new article that appears in the Journal of Economic Perspectives (Volume 33, Issue 4, Fall 2019), “Policy Evolution under the Clean Air Act.”  I hope this brief essay will stimulate you to download and read the full article.

Setting the Stage

In the article, Professor Schmalensee and I review and assess the evolution of air pollution control policy under the Clean Air Act with particular attention to the types of policy instruments used.  After outlining key provisions of the 1970 act and its main changes over time, we trace and assess the historical evolution of the policy instruments used by EPA in its clean air regulations.  This evolution was sometimes driven by the emergence of new air quality problems, sometimes by innovation and experimentation within EPA, and sometimes by changes in the Clean Air Act itself.

It is striking that until about 2000, EPA made increasing use of market-based instruments, enabled by major amendments to the Act in 1977 and 1990, which passed with overwhelming bipartisan support. In recent years, however, environmental policy has become a partisan battleground in the United States, and until now, it has not been possible to provide an effective response to climate change or to address other new and evolving air quality problems.

Policy Instruments Used under the Clean Air Act

Three major types of policy instruments have been employed under the authority of the Clean Air Act:  technology standards, which specify the equipment or process to be used for compliance; performance standards, which specify the maximum quantity of emissions or maximum atmospheric concentrations that are allowed; and emissions trading systems, either in the form of emissions-reduction credit (offset) systems or cap-and-trade. In addition, taxes have sometimes been employed, although their use under the Clean Air Act has been peripheral.

The Evolution of Air Quality Policy Instruments

Under the 1970 Clean Air Act, all federal air pollution regulation involved either technology standards or performance standards.  At that time, some environmental advocates argued that facilitating greater flexibility through tradable emission rights would inappropriately legitimize environmental degradation, while others questioned the very feasibility of such an approach.  But over time, as the Clean Air Act was amended and as its interpretation by EPA evolved, air pollution regulation evolved from sole reliance on conventional, command-and-control regulations to greater use of emissions trading.

In the article, we examine EPA’s early experiments with emissions trading in the 1970s, and then turn to the leaded gasoline phasedown in the 1980s, implemented via a tradable performance standard by the Reagan administration.  We also take a look at the U.S. approach to complying with the Montreal Protocol for stratospheric ozone protection, which involved both an excise tax and a trading system.

Next up in our review and assessment is the path-breaking sulfur dioxide allowance trading program, under the Clean Air Act amendments of 1990.  We also examine several regional programs that were executed under the authority of the Clean Air Act, including the Regional Clean Air Incentives Market (RECLAIM) in southern California, NOx trading in the eastern United States, and the NOx budget trading program.

To bring this up to date, Dick Schmalensee and I also examine climate change policies, including those of the Obama administration, as well as those of the current, Trump administration.

Conclusions

We conclude that the supporters of the 1970 Clean Air Act, who no doubt hoped that it would produce major environmental benefits, would be pleased that despite the fact that real U.S. GDP more than tripled between 1970 and 2017, aggregate emissions of the six criteria pollutants declined by 73 percent.

On the other hand, the original supporters of the 1970 Clean Air Act might be quite surprised by some aspects of the evolution of clean air regulation under the Act.  For example, it is difficult to imagine that any of the supporters of the 24-page 1970 Act would have predicted how complex air pollution regulation would become over the subsequent half century. And we suspect that the evolution toward more intensive use of market-based environmental policy would also have been a surprise to those involved in passage of the 1970 Clean Air Act.

However, those involved in the bipartisan passage of the 1970 Clean Air Act would likely be disappointed that environmental policy has become a partisan battleground. It has become impossible to amend the Clean Air Act or to pass other legislation to address climate change in a serious and economically sensible manner.

The Path Ahead

In the final part of the article, we note that an implication of these five decades of experience may be that policies to address climate change and other new environmental problems should be designed in ways that make them more acceptable in the real world of politics. This could mean, for example, giving greater attention to suboptimal, second-best designs of carbon-pricing regimes, such as by earmarking revenues from taxes or allowance auctions to finance additional climate mitigation, rather than optimizing the system via cuts in distortionary taxes, or using such revenues for fairness purposes, such as with lump-sum rebates or rebates targeted to low income and other particularly burdened constituencies.

Economists might also be more effective by sometimes working to catch up with the political world by examining better design of second-best non-pricing climate policy instruments, such as clean energy standards, subsidies for green technologies, and other approaches. At some point the politics may change, of course, which is why ongoing economic research on climate policy instruments of all kinds is important.

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A Key Issue for the Upcoming Climate Conference in Santiago

In December of this year, delegates to the 25th Conference of the Parties (COP-25) of the United Nations Framework Convention on Climate Change (UNFCCC) will assemble in Santiago, Chile, for two weeks of negotiations.  The location for the Conference was changed to Santiago when the Chilean government graciously stepped in as host after the Brazilian government reneged – two months after winning the bid and one month after the election of President Jair Bolsonaro – on its previous commitment to host COP-25.

The previous year, COP-24 took place in Katowice, Poland.  As I’ve previously written at this blog (”Climate Negotiations in Poland Advanced Implementation of the Paris Agreement”, December 20, 2018), the delegates at that Conference reached consensus on a 156-page “Rulebook” that filled in important details for 28 of the 29 articles of the skeletal Paris Agreement.  Consensus was not reached on one very important part of the Agreement, Article 6, the home for international cooperation that can bring down costs, and thereby facilitate greater ambition.

This presents a major challenge for the delegates to this year’s COP as they seek to complete the Rulebook with details for Article 6; in particular, how to facilitate a robust system of international cooperation (that allows for international carbon markets) while avoiding the possibility of double counting of emissions reductions, that is, counting the same emission reduction more than once when assessing progress towards the achievement of climate mitigation targets.

This is the topic of an article that appeared very recently in Science, “Double Counting and the Paris Agreement Rulebook,” which I had the pleasure of co-authoring with an international set of colleagues – Lambert Schneider, Maosheng Duan, Kelley Kizzier, Derik Broekhoff, Frank Jotzo, Harald Winkler, Michael Lazarus, Andrew Howard, and Christina Hood.  In this blog essay, I provide a brief summary, which I hope will entice readers to check out the full version in Science (Volume 366, Issue 6462, pp. 180-183, October 11, 2019).

The Context

It is important to distinguish among three distinct yet closely related levels of actions in regard to international cooperation under Article 6 of the Paris Agreement:

First, national or regional jurisdictions can establish domestic policies, such as emissions trading systems, carbon taxes, or performance standards, for the purpose of achieving the targets specified in their respective Nationally Determined Contributions (NDCs) under the Agreement.

Second, jurisdictions can link their respective domestic policy instruments, as, for example, California and Quebec have done, allowing allowances to be traded across international borders.  Such linkage was the subject of a previous article in 2018 in Science I co-authored with Michael Mehling and Gilbert Metcalf (a more complete version of that work appeared in the periodical, Environmental Law, earlier this year).

Third, and the focus of the new Science article and this blog essay, Article 6.2 provides a potential home for accounting mechanisms (“Internationally Transferable Mitigation Outcomes” or ITMOs, and “Corresponding Adjustments”) that can properly take account of such international transfers when demonstrating achievement of national targets under the Paris Agreement.

The Risk of Double Counting

If two different jurisdictions, such as two countries with their own NDCs, were both to take credit for the same emission reductions, there would be double counting under the Paris Agreement, which would be a significant threat to the integrity of the Agreement and any carbon markets employed in its implementation.  Given that half of the Parties of the Paris Agreement have indicated their intention to participate in carbon markets, avoiding (that is, reducing the risk of) such double accounting is critical for the credibility of the Paris regime.  A robust system to account for international transfers of emission reductions is necessary.

As my co-authors and I explain in the Science article, Article 6.2 of the Agreement provides the needed accounting framework through provision for “corresponding adjustments,” which can function as a form of double-entry bookkeeping.  But despite the fact that the Paris Agreement is explicit that double counting should be avoided, some Parties to the Agreement disagree about how it should be avoided, and indeed, about what constitutes double counting.  In addition, there is some controversy related to how much international oversight is needed to ensure robust accounting

The Path Ahead

Success at COP-25 in Santiago is critical.  In our Science article, my co-authors and I propose several principles to guide the negotiations.  I will mention just two of these in this brief essay.

First, a single set of common international accounting rules should apply under the Paris Agreement, irrespective of what type of carbon market mechanism is used to generate emission reductions.

Second, effective accounting will be greatly facilitated by all countries adopting targets (NDCs) that are economy-wide, cover all GHGs, apply to common multi-year time periods, and are expressed as GHG emissions. The Paris Agreement expressly foresees that countries will move toward such economy-wide targets over time.

If international cooperation is to combat climate change cost-effectively, the Paris Agreement needs to employ rules for international carbon markets that ensure environmental integrity and avoid double counting.  Otherwise, carbon markets may sadly undermine the Paris climate agreement.

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