COP-25 Disappointment Should Not Be Due to Lack of Aspirations for Future Ambition, But to Lack of Support for Global Carbon Markets

On December 18th, The Conversation (“academic rigor, journalistic flair”) – published my brief essay (“The Madrid climate conference’s real failure was not getting a broad deal on global carbon markets”), and today – in this blog post – I wish to share a slightly edited version with you (without the excellent graphics included in the original article).

The Reality Behind the Press Coverage

Press accounts of the Madrid climate conference that adjourned on Dec. 15 are calling it a failure in the face of inspirational calls from youth activists and others for greater ambition. But based on my 25 years following and analyzing this process together with scholars and government officials from around the world, I believe the reality is more complicated.

True, this round of climate talks did not produce an aspirational statement calling for greater ambition in the next round of national pledges. In my view, that’s not actually very significant in terms of its real effects, even though organizations such as Greenpeace and Extinction Rebellion framed this as the key task for this meeting.

On the other hand, the talks failed to reach one of their key stated goals: writing meaningful rules to help facilitate global carbon markets. As an economist, I see this as a real disappointment – although not the fatal failure some portray it to be.

Tackling the free-rider problem

Here’s some context to explain why international cooperation is essential to tackle climate change. Regardless of where they’re emitted, greenhouse gases mix in the atmosphere. That’s different from other air pollutants, which can affect localities or large areas, but not the entire world.

This means that any jurisdiction that reduces its emissions incurs all of the costs of doing so, but receives only a share of the global benefits. Everyone has an incentive to free-ride, relying on others to cut emissions while taking minimal steps themselves.

Recognizing this problem, nations adopted the United Nations Framework Convention on Climate Change at the Rio Earth Summit in 1992. As with many other international treaties, member countries agreed to hold regular meetings to devise rules for achieving the goals set out in the agreement. That’s how the Conference of Parties, or COP, process was launched.

Why climate change is a wicked problem

If the pace of progress at these meetings seems slow, keep in mind three factors that make their task enormously challenging.

First, every nation has an incentive to exploit the atmosphere and rely on other countries to cut emissions.

Second, making reductions costs money up front – but since carbon dioxide emissions remain in the atmosphere and warm the Earth for up to a century, many of the benefits of cutting emissions accrue much later.

Third, the costs of cutting emissions fall on particular sectors – notably, fossil fuel interests – that have a strong monetary incentive to fight back. But the benefits are broadly distributed across the general public. Some people care passionately about this issue, while others give it little thought.

At the COP-1 meeting in 1995 in Berlin, members decided that some of the wealthiest countries would commit to targets and timetables for emission reductions, but there would be no commitments for other countries. Two years later, nations adopted the Kyoto Protocol, which set quantitative targets only for Annex I (largely wealthy) countries.

That wasn’t a broad enough foundation to solve the climate challenge. Annex I countries alone could not reduce global emissions, since the most significant growth was coming from large emerging economies – China, India, Brazil, Korea, South Africa, Mexico and Indonesia – that were not part of the Annex I group.

Everybody in

At negotiations in 2009 in Copenhagen and 2010 in Cancun, distinctions between wealthy and developing countries began to blur. This culminated in an agreement at Durban, South Africa, in 2011 that all countries would come under the same legal framework in a post-Kyoto agreement, to be completed in 2015 in Paris.

The Paris Agreement provided a promising, fresh approach. It proposed a bottom-up strategy in which all 195 participating countries would specify their own targets, consistent with their national circumstances and domestic political realities.

This convinced many more nations to sign up. Countries that joined the Paris Agreement represented 97% of global greenhouse gas emissions, compared to 14% currently under the Kyoto Protocol. But it also gave every country an incentive to minimize its own actions while benefiting from other nations’ reductions.

Growing carbon markets

Are there ways to persuade nations to increase their commitments over time? One key strategy is linking national policies, so that emitters can buy and sell carbon emissions allowances or credits across borders.

For example, California and Quebec have linked their emissions trading systems. On Jan. 1, 2020, the European Union and Switzerland will do likewise.

Note, however, that such linking need not be restricted to pairs of cap-and-trade systems. Rather, heterogeneous linkage among cap-and-trade, carbon taxes and performance standards is perfectly feasible.

Expanding carbon markets in this way lowers costs, enabling countries to be more ambitious. One recent study estimates that linkage could, in theory, reduce compliance costs by 75%.

But for such systems to be meaningful, each country’s steps must be correctly counted toward its national target under the Paris Agreement. This is where Article 6 of the Paris Agreement comes in. Writing the rules for this article was the primary task for negotiators in Madrid (28 other articles were completed at the 2018 COP in Katowice, Poland).

Unfortunately, Brazil, Australia and a few other countries insisted on adopting accounting loopholes that made it impossible to reach agreement in Madrid on Article 6. Negotiators had an opportunity to define clear and consistent guidance for accounting for emissions transfers but failed to close a deal.

But if they had adopted guidance that extended much beyond basic accounting rules, as some countries wanted, the result could have been restrictive requirements that would actually impede effective linkage. This would have made it more expensive, not less, for nations to achieve their Paris targets. 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.

The baton for completing Article 6 has been passed to COP-26 in Glasgow in November 2020. In the meantime, without agreement on an overall set of rules, countries may develop their own rules for international linkages that can foster high-integrity carbon markets, as California, Quebec, the European Union and Switzerland already have. If negotiators can keep their eyes on the prize and resist being diverted by demands from activists and interest groups, I believe real success is still possible.

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What to Expect at COP-25 in Madrid

The “Rulebook” for the Paris Agreement puts flesh on the bones of the skeletal 13-page Agreement, and was completed last year at COP-24 in Katowice, Poland, with the exception of one very important part of the Agreement, namely Article 6, which potentially  provides for international carbon markets and other forms of cross-border cooperation.  Watch for key developments in Madrid!

Key Challenge for Long-Term Success of Paris Agreement

There are two necessary conditions for ultimate success of the Paris Agreement.  First, 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.  This is where the greatest challenges lie.

The very element of the Paris Agreement that has 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, are there ways to enable and facilitate increased ambition over time?  Linkage of regional, national, and sub-national policies can be part of the answer – connections among policy systems that allow emission reduction efforts to be redistributed across systems.  Linkage is typically framed as between cap-and-trade systems, but regional, national, and sub-national policies will be highly heterogeneous.  More about this below.

Merits and Concerns regarding Linkage

Linkage facilitates significant compliance cost savings by allowing firms to take advantage of lower cost abatement opportunities in other jurisdictions.  According to one recent study, costs could – in theory – be reduced to 25% of what they otherwise would be!  Also, linkage means improved functioning of markets by reducing market power and price volatility, and there are political benefits to linking parties as a sign of momentum when political jurisdictions band together.  Another advantage is administrative economies of scale.  Finally and very importantly, linkage allows for the UNFCCC’s key equity principle of “common but differentiated responsibilities and respective capabilities” (CBDR) to be achieved without sacrificing cost-effectiveness.

There are also some legitimate concerns about policy linkage.  First, there are distributional impacts, both in the form of redistribution within jurisdictions, and redistribution across jurisdictions.  Such impacts are politically problematic.  There is also the automatic propagation of some design elements, in particular, the cost-containment elements of banking and price collars which propagate from one linked system to another.  For that matter, weak design in one jurisdiction affects prices and quality in all linked jurisdictions.  And price shocks can propagate through linked jurisdictions.  Finally, there is decreased autonomy, as rules are set jointly by all linked parties.

Linkage and the Paris Agreement

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 of these units across international borders, which facilitates lower-cost achievement of the aggregate target.  But such transfers of emission reduction responsibilities and actions need to be correctly counted toward compliance with respective NDCs under the Paris Agreement.  This is where Article 6 comes in!

In particular, Article 6.2 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 linkages).

In other words, I view ITMOs as units of accounting for Corresponding Adjustments, not as a medium of exchange for government-government purchase and sale.  Otherwise, Article 6.2 would become equivalent to the Kyoto Protocol’s Article 17 (international emissions trading), and will fail as that did, because governments are not cost-minimizing agents, and lack requisite information even if they were (Hahn & Stavins, “What Has the Kyoto Protocol Wrought? The Real Architecture of International Tradeable Permit Markets,” 1999).

Is Heterogeneity a Challenge for Linkage?

Yes, it can be.  There are three major categories of heterogeneity that can pose challenges to effective international policy linkage under the Paris Agreement.  First, there are heterogeneous policy instruments:  cap-and-trade; tradable performance standards; emission reduction credits (offsets); taxes; and performance standards.  Second, there are heterogeneous jurisdictions and geographic scope:  regional, national, and sub-national; and status under the Paris Agreement (Party and non-Party).  Third, the NDC targets themselves area highly heterogeneous:  hard (mass-based) emissions caps; relative mass-based emissions caps (relative to BAU); rate-based emissions caps (per unit of economic activity or per unit of output); and non-emissions caps, such as some degree of penetration of renewable energy sources.  Also, there are differences in base year, target year, sectors, GHGs, estimated global warming potential, and conditionality.

Is Linkage Among Such Heterogeneous Policies Feasible or Wise?

With Michael Mehling (MIT) and Gilbert Metcalf (Tufts University), I have carried out research on heterogeneous linkage and the Paris Agreement (“Linking Climate Policies to Advance Global Mitigation.” Science 359, 2018).  Among our major findings is the following.  Most features of heterogeneity do not present insurmountable obstacles to linkage, but some present real challenges, and indicate the need for specific accounting guidance to avoid double-counting.    Article 6.2 provides an obvious home for this accounting guidance (Schneider, Duan, Stavins, Kizzier, Broekhoff, Jotzo, Winkler, Lazarus, Howard, and Hood.  “Double counting and the Paris Agreement rulebook.”  Science 366, 2019).

The Outlook for Heterogeneous Linkage under Article 6.2 of the Paris Agreement

The negotiators in Madrid have an opportunity to define clear and consistent guidance for accounting for emissions transfers under Article 6.2.  A robust accounting framework can foster successful linkages of climate policies across jurisdictions.  But if guidance extends 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 will impede effective linkage, and thereby drive up compliance costs.  True to the spirit of the Paris Agreement, less may be more!

So, a combination of sensible common accounting rules and absence of restrictive criteria and conditions can accelerate linkage, allow for broader and deeper climate policy cooperation, and – most important – thereby increase the latitude of Parties to scale up the ambition of their NDCs.

Only time – and the work of the delegates in Madrid – will tell.

 The Harvard Project on Climate Agreements at COP-25

Along with my Harvard colleagues, Joseph Aldy, Robert Stowe, and Jason Chapman, I will be at the Twenty-Fifth Conference of the Parties (COP-25) of the United Nations Framework Convention on Climate Change (UNFCCC) in Madrid, Spain, leading our delegation from the Harvard Project on Climate Agreements (HPCA), December 8-11, 2019.

In addition to holding a series of bilateral meetings with various national delegations, I will participate in at least four events.  Two of these are panel sessions organized by HPCA, while the two others are panel sessions organized by national delegations.  Our team will be at COP-25 during the week of December 8-12, 2019.  COP-25 attendees who wish to meet with the Harvard Project during the conference should send an email Jason Chapman, Project Manager (jason_chapman@hks.harvard.edu).

Four Events in Brief

 Reducing Greenhouse Gas Emissions through Carbon Pricing:  Recent Research, Analysis, and Experience
Robert Stavins, Moderator and Panelist; Joseph Aldy, Panelist; Hosted by Harvard Project on Climate Agreements, Enel Foundation, and Tsinghua University Global Climate Change Institute; Monday, December 9, 2019; 11:30 am – 1:00 pm; Location:  Side Event Room 3

The Seventh Global Climate Change Think Tank Forum:  The Latest Developments in Climate Change Economics
Robert Stavins, Presenter; Hosted by China National Center for Climate Change Strategy and International Cooperation; Tuesday, December 10, 2019;  6:00 pm – 7:30 pm; Location:  China Pavilion

 Realizing the Potential of Article 6 of the Paris Agreement
Robert Stavins, Moderator and Panelist; Joseph Aldy, Panelist; Hosted by the Harvard Project on Climate Agreements; Wednesday, December 11, 2019;  12:30 pm – 2:00 pm; Location:  Pavilion of the International Emissions Trading Association (IETA)

 Enhancing Capacity of Developing Countries to Address Climate Change: Issues and Opportunities
Robert Stavins, Keynote Speaker; Hosted by Korea University, Green Asia, Center for Climate and Sustainable Development Law and Policy, Global Green Growth Institute, UNDP Seoul Policy Centre, UN Office for Sustainable Development; Wednesday, December 11, 2019;  3:00 pm – 4:30 pm; Location:  Korea Pavilion

 Two Harvard Project Events in Detail

 Reducing Greenhouse Gas Emissions through Carbon Pricing:  Recent Research, Analysis, and Experience

Monday, 9 December, 2019; 11:30am – 1:00pm, Location: Side Event Room 3

Speakers will present recent research and analysis of carbon-pricing policy to reduce greenhouse-gas emissions. The panel will give some attention to experience and prospects in South America and to China’s emerging national system. A new research paper by Robert Stavins on the relative merits of cap and trade and carbon taxes will provide a basis for much of the discussion.

Speakers: Joseph Aldy, Harvard University; Simone Mori, Enel; Raffaele Mauro Petriccione, Director General of DG Climate Action in the European Commission; Robert Stavins, Harvard University; Zhang Xiliang, Tsinghua University; government representatives to be invited.

Realizing the Potential of Article 6

Wednesday, 11 December 2019; 12:30pm – 2:00pm; Location:  Pavilion of the International Emissions Trading Association (IETA)

Panelists will discuss the potential of Article 6 to decrease mitigation costs and incentivize increased ambition. They will review the status of the negotiations on the Article 6 rulebook, including issues remaining to be resolved at that point in the COP – including potentially, ongoing discussion about double counting (environmental integrity) and the Article 6 – Article 13 interface (applications of the enhanced transparency framework to Article 6 transfers).

Panelists: Joseph Aldy, Harvard Kennedy School; Kay Harrison, Ministry of Foreign Affairs and Trade, New Zealand; Kelley Kizzier, Environmental Defense Fund; Andrei Marcu, European Roundtable on Climate and Sustainable Transition; Robert Stavins, Harvard Kennedy School

The Path Ahead

After COP-25, I will post an essay at this blog assessing the progress (or lack thereof) made in Madrid – on Article 6, as well as other elements and issues.

In the meantime, if you will be at COP-25, and would like to meet with the Harvard Project on Climate Agreements, please contact Jason Chapman (jason_chapman@hks.harvard.edu).

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Harvard Project on Climate Agreements at COP-24

Along with my Harvard colleagues, David Keith, Robert Stowe, and Jason Chapman, I will be at the Twenty-Fourth Conference of the Parties (COP-24) of the United Nations Framework Convention on Climate Change (UNFCCC) in Katowice, Poland, leading our delegation from the Harvard Project on Climate Agreements (HPCA), December 10-13, 2018.

In addition to holding a series of bilateral meetings with various national delegations, the Harvard Project will participate in (at least) five events.  Two of these are panel sessions organized by HPCA, while the three others are panel sessions organized by national delegations.  My team and I will be at COP-24 in Katowice during the week of December 10, 2018.  COP-24 attendees who wish to meet with the Harvard Project during the conference should send an email Jason Chapman, Project Manager (jason_chapman@hks.harvard.edu).

Five Events in Brief

A Dialogue on Promoting China and US Climate Action
Robert Stavins, Panelist
Hosted by the Counsellors’ Office of the State Council (China) and World Resources Institute
Monday, December 10; 15:30 – 17:00
Location:  China Pavilion

Elaborating and Implementing Article 6 of the Paris Agreement
Hosted by the Harvard Project on Climate Agreements and the Enel Foundation
Tuesday, December 11, 2018;  15:00 – 16:30
Location:  Side Event Room “Wisla”

Governance of Solar Geoengineering Deployment
Hosted by the Harvard Project on Climate Agreements
Wednesday, December 12, 2018;  11:00 – 12:30
Location:  Pavilion of the International Emissions Trading Association (IETA)

Enhancing Capacity of Developing Countries to Address Climate Change: Issues and Opportunities
Robert Stavins, Keynote Speaker
Hosted by Korea University, Global Green Growth Institute, and others
Wednesday, December 12, 2018;  15:00 – 18:00
Location:  Korea Pavilion

Sixth Global Climate Change Think Tank Forum: Global Climate Governance and a Community with a Shared Future for Mankind
Robert Stavins, Keynote Speaker
Hosted by the National Center for Climate Change Strategy and International Cooperation (China)
Wednesday, December 12, 2018;  17:30 – 19:00
Location:  China Pavilion

Two Harvard Project Events in Detail

Elaborating and Implementing Article 6 of the Paris Agreement
Hosted by the Harvard Project on Climate Agreements and the Enel Foundation
Tuesday, December 11, 2018
15:00 – 16:30
Location:  Side Event Room “Wisla”

Participants:

Kelley Kizzier
Co-Chair, Article 6 negotiations
UNFCCC Subsidiary Body for Scientific and Technological Advice

Michael Mehling
Deputy Director, Center for Energy and Environmental Policy Research
Massachusetts Institute of Technology

Daniele Agostini
Head of Low Carbon and European Energy Policies at Enel
Enel Group

Robert Stavins
A. J. Meyer Professor of Energy and Economic Development, Harvard Kennedy School
Director, Harvard Project on Climate Agreements

Other participant(s) to be determined

Abstract:

Speakers will consider progress in elaborating Article 6 and what remains to be done, with reference to the potential of Article 6 to enhance ambition. Discussion will be based on practical experience with market mechanisms, academic research, and a close reading of the Paris-Agreement negotiations. The discussion will be based in part on a background paper by Michael Mehling.

Governance of Solar Geoengineering Deployment
Hosted by the Harvard Project on Climate Agreements
Wednesday, December 12, 2018
11:00 – 12:30
Location:  Pavilion of the International Emissions Trading Association (IETA)

Participants:

Daniel Bodansky
Regents’ Professor
Sandra Day O’Connor College of Law, Arizona State University

David Keith
Gordon McKay Professor of Applied Physics, Harvard John A. Paulson School of Engineering and Applied Sciences
Faculty Director, Harvard’s Solar Geoengineering Research Program

Robert Stavins
A. J. Meyer Professor of Energy and Economic Development, Harvard Kennedy School
Director, Harvard Project on Climate Agreements

Other participant(s) to be determined

Abstract:

“Solar geoengineering” (SG) refers to technologies that help reduce radiative forcing and cool the planet. Governing SG deployment poses some unique challenges, in part driven by the incentive structure associated with SG, its risks and uncertainties, and its interaction with mitigation. Panelists will discuss these challenges and the potential role of SG in addressing climate change – relative to mitigation and adaptation. The panel is based in part on a research workshop held at Harvard Kennedy School in September 2018, which I wrote about in my previous entry at this blog.

The Path Ahead

After COP-24, I hope to post an essay at this blog assessing the progress (or lack thereof) made in Katowice.  In the meantime, if you will be at COP-24, and would like to meet with the Harvard Project on Climate Agreements, please contact Jason Chapman (jason_chapman@hks.harvard.edu).

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