Will the Paris Agreement Help or Hinder Cooperation among Nations?

I just returned from Florence, Italy, where I participated in the Second Carbon Market Workshop, organized by the European Commission, and hosted by the European University Institute.  This workshop, which brought together government representatives from around the world (with a sprinkling of academics and NGO representatives to add some spice to the discussion), was convened to examine how regional, national, and sub-national jurisdictions can cooperate in ways that could increase the effectiveness and/or reduce the costs of their respective climate change policies.  One of my tasks at the workshop was to make a brief dinner speech.  Jos Delbeke, the long-time,  legendary Director-General of Climate Action for the Commission, asked me to talk about how the Paris Agreement might help or hinder practical climate policy cooperation around the world.  I drew extensively upon my research with Michael Mehling and Gilbert Metcalf.  Here is the gist of what I said in my dinner speech.

Some Paris Agreement Fundamentals

The hybrid design of the Paris Agreement was key to its successful enactment in 2015 and its coming into force in November, 2016.  The hybrid design to which I refer is the combination of top-down (centralized) and bottom-up (decentralized) elements.  The top-down elements include, for example, the requirement that countries state their national contributions every five years, a schedule which is binding under international law for those jurisdictions that have ratified the Agreement.  The key bottom-up element is the set of individual Nationally Determined Contributions (or NDCs) themselves, which are not part of the Paris Agreement itself, but rather are listed in a separate Registry.  These are not binding under international law, but rather are left to the domestic authority of the respective countries.

This dual structure led to the achievement of one of two necessary conditions for ultimate success of the Paris Agreement, namely adequate scope of participation, which now includes countries accounting for 97% of global emissions, compared with the 14% that are covered by the current, second commitment period of the Kyoto Protocol.

But adequate scope of participation is only one of two necessary conditions; the other is adequate collective ambition.  Unfortunately, the fundamentally voluntary nature of the NDCs – which is precisely what facilitated the exceptionally broad scope of participation – works against adequate ambition to address this global commons phenomenon, which is plagued by free rider problems.

The Challenge for Climate Negotiators

This raises the key overall challenge that faced the negotiators in Bonn in May and will face them in Katowice, Poland, in December (at the Twenty-Fourth Conference of the Parties of the United Nations Framework Convention on Climate Change):  What can they do, when writing rules to put flesh onto the skeletal Paris Agreement, to encourage countries to increase their ambition over time?  That’s where carbon markets and cooperation among jurisdictions potentially come in.

International Cooperation under the Paris Agreement

Largely because cooperation among jurisdictions — including through carbon markets — can lower abatement costs, such cooperation may be essential for the ultimate success of the Agreement.  This cooperation might take the form of international linkage, where by “linkage,” I mean connections among policy systems that allow emissions reduction efforts to be redistributed among those systems.

Such linkage is typically framed as between cap-and-trade systems, but regional, national, and sub-national policies are and will be highly heterogeneous, including not only cap-and-trade, but offset systems, carbon taxes, performance standards, and technology standards.  Note that we already see this sort of heterogeneity within the European Union’s own set of climate change policies, as well as within California’s suite of climate initiatives.

The good news is that linkage among highly heterogeneous policies is eminently feasible, as I have written about previously in this blog, drawing on my research with Michael Mehling (MIT) and Gib Metcalf (Tufts University).  The even better news is that one part of the Paris Agreement provides a potential home for such international cooperation, linkage, and carbon markets – Article 6.  (If you are interested in the details, I recommend a recent report from the Asian Development Bank, “Decoding Article 6 of the Paris Agreement.”)

The Promise and Problems of Article 6

In the negotiations that led up to the 2015 Paris climate talks, it was by no means clear what role — if any — market mechanisms would play in the Paris Agreement.  In the negotiations, the European Union, Brazil, and other countries played crucial roles in generating the compromise that became Article 6 of the Agreement.

That compromise resulted in text that — to put it kindly — is very much subject to interpretation.  Now, as Benito Müller, Kelley Kizzier, and their colleagues have observed, intentional vagueness and ambiguity of text can be quite helpful in achieving a negotiated compromise, but such vagueness is decidedly not helpful when it comes to making an agreement operational.

This compromised home for markets emerged in Article 6 despite the entrenched opposition of a small set of vocal countries — including some Latin American socialist economies (the so-called ALBA coalition) — who wanted nothing of the kind to appear in the Paris Agreement.  They succeeded in keeping the word “market” out the Paris Agreement, but the concept and the potential reality is very much there!  (Ironically, at their insistence, the phrase “non-market” does appear in the Agreement.)

In any event, provision for markets and international cooperation is implicit in Article 6.2, which allows for cooperative approaches involving Internationally Transferred Mitigation Outcomes (or ITMOs), which are vague and without definition, but can function as an international accounting mechanism for international trades, exchanges, and cooperation.  And Article 6.4 establishes a more centralized mechanism to contribute to emissions mitigation and support sustainable development, essentially as a successor to the Clean Development Mechanism (and may soon come to be called the “Sustainable Development Mechanism” or SDM).

Advantages and Concerns about Cooperation and Linkage

Despite the opposition I mentioned, most parties to the Paris Agreement are supportive of cooperative approaches (and more than half explicitly mentioned carbon markets in their respective NDCs).

This may be because of six important advantages of such cooperation:  first, cost savings by allowing firms to take advantage of lower cost abatement opportunities in other jurisdictions; second, reducing market power of individual firms by enlarging the market’s scope, and reducing total price volatility by thickening markets; third, political benefits to Parties, by providing a sign of “momentum” as jurisdictions band together, possibly influencing other parties to participate; fourth, administrative economies of scale through knowledge sharing in design and operations, as well as shared administrative and oversight costs; fifth reducing leakage and competitiveness impacts by harmonizing the shadow price of carbon across jurisdictions; and sixth, allowing for the achievement of the UNFCCC’s critical principle of “Common but Differentiated Responsibilities” without sacrificing cost-effectiveness.

There are also real concerns about linkage:  first, distributional impacts within and across linked jurisdictions; second, automatic propagation of certain design elements, in particular, cost-containment elements (banking, borrowing, and price collars); and third, decreased national autonomy.

Back to the Article 6 Negotiations and International Policy Linkage

Article 6 can be a home both to linkage of the sort we usually talk about, as well as “soft linkage,” such as an agreement — explicit or implicit — to harmonize carbon prices either at some level or within overlapping bands.

Thinking about the UNFCCC negotiations taking place now, most types of heterogeneity – of policy instruments, level of political jurisdiction, and nature of NDC targets – do not present insurmountable obstacles to linkage, but some do present real challenges, and indicate the need for specific guidance as the rulebook of the Paris Agreement is written.

Unfortunately, some countries want the Article 6 guidance to go beyond fundamental issues of accounting and environmental integrity to broader matters of environmental ambition, which properly belong in other parts of the Paris Agreement.  Whereas, accounting provisions to avoid double-counting of NDC actions through ITMOs surely belong in the Article 6 rulebook, some countries have proposed, for example, that all ITMO exchanges themselves must actually reduce net emissions.

This sounds very much like the U.S. Environmental Protection Agency’s 20% rule in its 1970’s Emissions Trading Program, which required that net emissions fall by 20% with each trade.  This was a tax and an inhibition on trading, and the result was that virtually no trading occurred.  This reminds me of a corrupted version of George Santayana’s admonition that those who do not learn from history are doomed to repeat it.  Instead we have, “I’ve learned from my mistakes, and I can repeat them exactly the same again.”

The general problem is that if the guidance extends much beyond basic accounting rules, then restrictive requirements could actually impede effective cooperation.  True to the nature and spirit of the Paris Agreement, less can be more!

UNFCCC Update from Bonn

I closed my dinner comments in Florence with a brief update on the negotiations that concluded the previous week in Bonn.  The two weeks of meetings of the Article 6 group were reported to be much tougher than they had been previously, yet the progress on the Article 6 work is actually ahead of that of groups focused on other parts of the Paris Agreement.  Although positions on Article 6 are hardening, there is no clear blocking party or coalition (unlike in the work on some of the other parts of the Agreement).  There may be less resistance to agreement simply because participation in Article 6 instruments would ultimately be voluntary.

The Path Ahead

So, as the negotiations proceed, a combination of common accounting rules and an absence of restrictive conditions can accelerate linkage, allow for broader and deeper climate policy cooperation, facilitate the emergence of a robust global carbon market, and – most important – increase the latitude of the Parties to the Paris Agreement to scale up the ambition of their long-term contributions to global greenhouse gas emission reductions.

Whether that will come to pass, we simply do not know as of now.  As usual, only time will tell.

Share

Linking Heterogeneous Climate Policies (and Activities at COP-23 in Bonn)

It’s well known that the Paris Agreement has achieved broad participation by countries accounting for some 97% of global GHG emissions (in contrast to the 14% of global emissions associated with countries taking on responsibilities under the current commitment period of the Kyoto Protocol).  That is a very important accomplishment, but as negotiations begin to elaborate key details of the Agreement (as they will in Bonn in November), a critical question is how to create incentives for countries to increase ambition over time. The ability to link different climate policies, such that emission reductions undertaken in one jurisdiction can be counted toward the mitigation commitments of another jurisdiction, may help Parties increase ambition over time.  A new paper from the Harvard Project on Climate Agreements by Michael Mehling of MIT, Gilbert Metcalf of Tufts University, and myself explores options and challenges for facilitating such linkages in light of the considerable heterogeneity that is likely to characterize regional, national, and sub-national efforts to address climate change.  The full paper is available for downloading, as is a two-page summary.

We will be presenting our results on November 13th and 14th in Bonn at the Twenty-Third Conference of the Parties (COP-23) of the United Nations Framework Convention on Climate Change.  At the end of this blog essay, I offer some details about these and other forthcoming activities of the Harvard Project on Climate Agreements at COP-23 in Bonn.

Background

Linkage is important, in part, because it can reduce the costs of achieving a given emissions-reduction objective. Lower costs, in turn, may make it politically feasible to embrace more ambitious objectives. In a world where the marginal cost of abatement – that is, the cost to reduce an additional ton of emissions – varies widely, linkage improves overall cost-effectiveness by allowing jurisdictions with relatively higher abatement costs to finance reductions from jurisdictions with relatively lower costs. In effect, linkage drives participating jurisdictions toward a common cost of carbon, equalizing the marginal cost of abatement and producing a more efficient distribution of abatement activities. These benefits are potentially significant: The World Bank has estimated that international linkage could reduce the cost of achieving the emissions reductions specified in the initial set of NDCs submitted under the Paris Agreement 32% by 2030 and 54% by 2050.

Article 6 of the Paris Agreement provides a foundation for linkage by recognizing that Parties to the Agreement may “choose to pursue voluntary cooperation in the implementation of their” NDCs through “the use of internationally transferred mitigation outcomes” (ITMOs). In contrast to the Kyoto Protocol (which likewise included provisions for international cooperation), the voluntary and flexible architecture of the Paris Agreement allows for wide variation, not only in the types of climate policies countries choose to implement, but in the form and stringency of the abatement targets they adopt.

Heterogeneous Linkage

Linkage is relatively straightforward when the policies involved are similar. However, linkage is possible even when this is not the case: for example, when one jurisdiction is using a cap-and-trade system to reduce emissions while another jurisdiction is relying on carbon taxes. There are several potential sources of heterogeneity: type of policy instrument used (for example, taxes vs. cap-and-trade vs. performance or technology standard); level of government jurisdiction involved (for example, regional, national, or sub-national); status under the Paris Agreement (that is, whether or not the jurisdiction is a Party to the Agreement – or within a Party); nature of the policy target (for examle, absolute mass-based emissions vs. emissions intensity vs. change relative to business-as-usual); and operational details of the country’s NDC, including type of mitigation target, choice of target and reference years, and sectors and greenhouse gases covered.

Analyzing Potential Linkages (Consistent with the Paris Agreement)

The full paper examines five specific cases of linkage, with various combinations of features, to identify which types of linkage are feasible, which are most promising, and what accounting mechanisms are needed to make their operation consistent with the Paris Agreement.  Each of the cases maps to a real-world example.

Most forms of heterogeneity – including with respect to policy instruments, jurisdictions, and targets – do not present insurmountable obstacles to linkage. However, some of these characteristics present challenges and call for specific accounting guidance if linkage is to include the use of ITMOs under the Paris Agreement. In particular, robust accounting methods will be needed to prevent double-counting of GHG reductions, to ensure that the timing (vintage) of claimed reductions and of respective ITMO transfers is correctly accounted for, and to ensure that participating countries make appropriate adjustments for emissions or reductions covered by their NDCs when using ITMOs. Additional issues under Article 6 include how to quantify ITMOs and how to account for heterogeneous base years, as well as different vintages of targets and outcomes.

Issues for the Climate Negotiators

Broader questions that bear on the opportunities for linkage under Article 6.2 include the nature of NDC targets and whether these are to be treated as strict numerical targets that need to be precisely achieved; the nature and scope of ITMOs, which have yet to be defined, let alone fully described, under the Paris Agreement; and finally, whether transfers to or from non-Parties to the Agreement (or sub-national jurisdictions within non-Parties) are possible, and if so, how they should be accounted for. Parties have differing views, however, on whether the guidance on Article 6.2 should extend to such issues.

Clear and consistent guidance for accounting of emissions transfers under Article 6 can contribute to greater certainty and predictability for Parties engaged in voluntary cooperation, thereby facilitating expanded use of linkage. At the same time, too much guidance, particularly if it includes restrictive quality or ambition requirements, might impede linkage and dampen incentives for cooperation. Given their limited mandate, Parties should exercise caution when developing guidance under Article 6.2 that goes beyond key accounting issues. This does not mean that concerns about ambition and environmental integrity should be neglected. However, if the combination of a set of common accounting rules and an absence of restrictive criteria and conditions can accelerate linkage and allow for broader and deeper policy cooperation, it can also increase the potential for Parties to scale up the ambition of their NDCs. And that may ultimately foster stronger engagement between Parties (and non-Parties), as well as with regional and sub-national jurisdictions.


++++++++++++++++++++++++++++++++++++++++++++++++++++++++


The Harvard Project on Climate Agreements at COP-23 in Bonn

We will conduct three panel events at the Twenty-Third Conference of the Parties (COP-23) of the United Nations Framework Convention on Climate Change (UNFCCC) in Bonn, Germany, during the week of November 13, 2017.  If you have credentials to access the secure area of the COP, you are most welcome to attend any or all of these.  Also, COP-23 attendees who wish to meet with the Harvard Project during the conference should email: Jason Chapman (Jason_Chapman@hks.harvard.edu).

Events in Brief:

Heterogeneous Linkage and the Evolution of Article 6
Monday, November 13
12:00 – 1:30 pm
Pavilion of the International Emissions Trading Association (IETA)

Implementing and Linking Carbon Pricing Instruments: Theory and Practice
Tuesday, November 14, 2017
11:30 am – 1:00 pm
Side Event Meeting Room 12

Carbon Pricing Policy Design
Tuesday, November 14, 2017
2:00 – 3:30 pm
Pavilion of the International Emissions Trading Association (IETA)

Events in Detail:

Heterogeneous Linkage and the Evolution of Article 6, Monday, November 13, 12:00 – 1:30 pm, Pavilion of the International Emissions Trading Association (IETA)

Participants:

Jos Delbeke, Director General for Climate Action, European Commission

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

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

Gilbert Metcalf, Professor of Economics, Tufts University

Robert Stavins, A. J. Meyer Professor of Energy and Economic Development, Harvard Kennedy School

Abstract:

The Paris Agreement has achieved one of two key necessary conditions for ultimate success — a broad base of participation among the countries of the world. But another key necessary condition has yet to be achieved — adequate collective ambition of the individual nationally determined contributions (NDCs). How can climate negotiators provide a structure that provides incentives to increase ambition over time? One part of the answer can be facilitating international linkage of regional, national, and sub-national policies. A central challenge is how to accomplish this in the context of the great heterogeneity that characterizes climate policies, along several dimensions, in the context of Paris-Agreement NDCs. Panelists will review the status of linkage in the world, the evolution of Article 6, and the relationship between the two.

Implementing and Linking Carbon Pricing Instruments: Theory and Practice, Tuesday, November 14, 2017, 11:30 am – 1:00 pm, Side Event Meeting Room 12, Co-Hosts: Harvard Project on Climate Agreements and Enel Foundation

Participants:

Andrei Marcu, Senior Fellow, International Centre for Trade and Sustainable Development

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

Gilbert Metcalf, Professor of Economics, Tufts University

Simone Mori, Head of European Affairs, Enel

Robert Stavins, A. J. Meyer Professor of Energy and Economic Development, Harvard Kennedy School

Other participant(s) to be determined

Abstract:

The Paris Agreement has achieved one of two key necessary conditions for ultimate success — a broad base of participation among the countries of the world. But another key necessary condition has yet to be achieved — adequate collective ambition of the individual nationally determined contributions. This panel will consider how this issue might be addressed by international linkage of regional, national, and sub-national policies — that is, formal recognition of emission reductions undertaken in another jurisdiction for the purpose of meeting a Party’s own mitigation objectives. A central challenge is how to facilitate such linkage in the context of the very great heterogeneity that characterizes Nationally Determined Contributions along several dimensions. We consider such heterogeneity among policies, and identify which linkages of various combinations of characteristics are feasible; of these, which are most promising; and what accounting mechanisms would make the operation of respective linkages consistent with the Paris Agreement. The panel will draw in part on a paper by Michael Mehling, Gilbert Metcalf, and Robert Stavins, “Linking Heterogeneous Climate Policies (Consistent with the Paris Agreement),” available here

Carbon Pricing Policy Design, Tuesday, November 14, 2017, 2:00 – 3:30 pm, Pavilion of the International Emissions Trading Association (IETA), Co-Hosts:  Harvard Project on Climate Agreements and Enel Foundation

Participants:

Daniele Agostini, Head of Low Carbon Policies and Carbon Regulation, Enel

Joseph Aldy [via videoconference], Associate Professor of Public Policy, Harvard Kennedy School

Gilbert Metcalf, Professor of Economics, Tufts University

Robert Stavins, A. J. Meyer Professor of Energy and Economic Development, Harvard Kennedy School

Other participant(s) to be determined

Abstract:

This panel will review experiences with cap-and-trade and carbon-tax policies, and draw lessons from those experiences. Panelists will also examine the choice between — and design of — such policies, through a political-economy lens, in order to highlight important public policy principles and policy options in carbon-pricing-policy design. The panel will draw in part on a paper by Joseph Aldy, “The Political Economy of Carbon Pricing Policy Design,” available here.

Share

A Challenge for the 2015 Paris Climate Agreement

At the recent climate negotiations at the 20th Conference of the Parties (COP-20) of the United Nations Framework Convention on Climate Change (UNFCCC) in Lima, Peru, a very important issue was left on the table, unresolved: Will the 2015 Paris Agreement (scheduled to be signed in December of this year at COP-21) facilitate – or at least avoid inhibiting – international linkage of national (and for that matter, sub-national) climate policies?

Brief History

In the Durban Platform for Enhanced Action, adopted by COP-17 in 2011, negotiators agreed to develop a new legal instrument “under the Convention applicable to all Parties,” for adoption at COP-21 in December, 2015, in Paris. With the Lima talks now behind us, it appears that the 2015 agreement will reflect a hybrid climate policy architecture—one that combines top-down elements, such as for monitoring, reporting, and verification, with bottom-up elements, including “Intended Nationally Determined Contributions” (INDCs), describing what a country intends to do to reduce emissions, based on domestic political feasibility and other factors. (I wrote about this in Assessing the Outcome of the Lima Climate Talks, posted on December 14, 2014.)

Can the Aggregation of INDCs be Cost-Effective?

A major question facing negotiators is how can the new hybrid policy architecture encourage greater ambition, while remaining true to the principle of “common but differentiated responsibilities.” A key answer to that question is to allow for the linkage of heterogeneous national policy instruments. Why do I say that?

Here’s the reason. An attribute of the Paris architecture that will encourage greater ambition over time is cost-effectiveness. (Another key attribute to encourage greater ambition is comparability of INDCs, a topic on which we’re also working at the Harvard Project on Climate Agreements, about which I will write in the future.) To enhance the cost-effectiveness of the new system, a key feature will be linkages among regional, national, and sub-national climate policies. By linkage, I mean formal recognition by a greenhouse gas (GHG) mitigation program in one jurisdiction (a regional, national, or sub-national government) of emission reductions undertaken in another jurisdiction for purposes of complying with the first jurisdiction’s mitigation program.

Linkage can be straightforward, as with the bilateral recognition of allowances under two cap-and-trade regimes, but – importantly — linkage can also take place among a heterogeneous set of policy instruments, such as between systems of performance standards, carbon taxes, and cap-and-trade.

Linkage in the Paris 2015 Agreement

In a new paper that was released by the Harvard Project on Climate Agreements at a packed “side event” in Lima, my co-authors – Daniel Bodansky of Arizona State University, Seth Hoedl of Harvard Law School, and Gilbert Metcalf of Tufts University – and I analyze theoretical issues relating to linkage among heterogeneous climate policy instruments and apply this analysis concretely to the 2015 Paris agreement. In “Facilitating Linkage of Heterogeneous Regional, National, and Sub-National Climate Policies Through a Future International Agreement,” we examine how the agreement can help facilitate the growth and operation of a robust system of international linkages of regional, national, and sub-national policies, as well as how inappropriate or excessive rules could obstruct effective, bottom-up linkage. Importantly, both economic and legal perspectives are represented in this research (which was supported by the International Emissions Trading Association (IETA) and six of its member companies: Chevron, GDF-Suez, Global CCS Institute, Rio Tinto, Shell, and TransCanada)

Key Findings from Research

I encourage you to take a look at the full paper or, at least, its executive summary, but here – in very brief form — are the key findings.

First, there are a number of design elements the 2015 agreement should avoid, because they would inhibit linkage. These include “supplementarity requirements” that require parties to accomplish all or most of their emissions-reduction commitments within their national borders. The 2015 agreement also should avoid including detailed linkage rules in the core agreement; an agreement with more flexibility would allow rules to evolve on the basis of experience.

Second, to advance linkage, the 2015 agreement should: define key terms, in particular the units that are used for compliance purposes; establish registries and tracking mechanisms; and include default or model rules, from which nations are free to deviate at their discretion.

The most valuable outcome of the Paris Agreement regarding linkage may simply be including an explicit statement that parties may transfer portions of their emissions-reduction contributions to other parties—and that these transferred units may be used by the transferees to implement their own commitments.

It sounds simple, but a small but vocal set of (largely socialist) countries – including Bolivia, Venezuela, and Cuba – have vehemently opposed in the climate negotiations anything that looks remotely like a market, and will try hard to prevent such provisions from appearing in the 2015 agreement.

Next Steps

As the negotiating teams from 195 countries prepare to meet this month in Geneva, Switzerland, and in June in Bonn, Germany, the question remains of whether the 2015 Paris Climate Agreement will allow for and indeed facilitate international linkage of national and sub-national policies, and thereby encourage cost-effectiveness and greater environmental ambition. Over the next several months, the answer to this question will become clear.

Share