Learning from Thirty Years of Experience with Cap-and-Trade Systems

“Those who do not remember the past are condemned to repeat it.”

The implication of this famous line (often misquoted as “those who do not learn history are doomed to repeat it”) from philosopher George Santayana’s 1905 book, The Life of Reason, Volume I – Reason in Common Sense, is that we are wise to learn from our mistakes.  This is undoubtedly true, as is the parallel recommendation that we are wise to learn from our successes.

Background

China is expected to launch later this year the world’s largest (CO2) emissions trading system; the European Union is in the process of extending and strengthening its CO2 cap-and-trade system; California has just extended and strengthened its CO2 cap-and-trade system; and earlier this week, nine New England and Middle Atlantic U.S. states announced their plan to extend and strengthen the Regional Greenhouse Gas Initiative.  With such developments in place and on the horizon, this is an important time to think carefully and critically about the history of cap-and-trade, and identify lessons that can be learned from three decades of prior experiences – both successes and failures.

That is precisely what Richard Schmalensee (Howard W. Johnson Professor of Economics and Management, Emeritus, at the Massachusetts Institute of Technology, and Dean Emeritus of the MIT Sloan School of Management) and I sought to do in an article which recently appeared in the Review of Environmental Economics and Policy (REEP) (“Lessons Learned from Three Decades of Experience with Cap and Trade,” Review of Environmental Economics and Policy, volume 11, issue 1, Winter 2017, pp. 59-79).  I encourage you to read the full article, which – in keeping with the style of the Review of Environmental Economics and Policy – is brief and broadly accessible.

In the hope that you may be stimulated to read the full article, in today’s blog essay I draw on the article to provide the historical context of our analysis, and to review some of our conclusions (for the actual analysis of individual cap-and-trade systems, and the justifications for our conclusions, you will need to see the article).

The Historical Context

Thirty years ago, many environmental advocates argued that government allocation of rights to emit pollution legitimized environmental degradation, while others questioned the feasibility of such an approach.  At the time, virtually all pollution regulations took a command-and-control approach, specifying the type of pollution-control equipment to be used or setting uniform limits on emission levels or rates.

Today, it is widely recognized – at least among students of economics – that because emission reduction costs can vary greatly, the aggregate abatement costs under command-and-control approaches can be much higher than under market-based approaches, which establish a price on emissions – either directly through taxes or indirectly through a market for tradable emissions rights established under a cap-and-trade policy.  Because market-based approaches tend to equate marginal abatement costs rather than emissions levels or rates across sources, they can achieve aggregate pollution-control targets at minimum cost.

In the REEP article, Dick Schmalensee and I examined the design and performance of seven of the most prominent emissions trading systems that have been implemented over the past 30 years in order to identify key lessons for future applications.  We focused on systems that have been important environmentally and/or economically, and whose performance has been well documented.  We excluded emission-reduction-credit (offset) systems, which offer credits for emissions reductions from some counterfactual baseline, because while emissions can generally be measured directly, emissions reductions are unobservable and often ill-defined.

The seven emissions trading systems we examined were:

  • the U.S. Environmental Protection Agency’s (EPA’s) phasedown of leaded gasoline in the 1980s;
  • the U.S. sulfur dioxide (SO2) allowance trading program under the Clean Air Act Amendments of 1990;
  • the Regional Clean Air Incentives Market (RECLAIM) in southern California;
  • the trading of nitrogen oxides (NOX) in the eastern United States;
  • the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States;
  • California’s cap-and-trade system under Assembly Bill 32; and
  • the European Union (EU) Emissions Trading System (ETS).

All of these programs except the first are textbook cap-and-trade systems.

In the article, we reviewed the design, performance, and lessons learned from each of the seven systems (and briefly discussed several other cap-and-trade systems).  In this blog essay, however, I turn immediately to our summary of key lessons.

Lessons from Thirty Years of Experience

Overall, we found that cap-and-trade systems, if well designed and appropriately implemented, can achieve their core objective of meeting targeted emissions reductions cost-effectively.  This is not something that was taken for granted in the past, and is still not accepted in some quarters.  That said, the devil is in the details, and design as well as the economic environment in which systems are implemented are very important.  Moreover, as with any policy instrument, there is no guarantee of success.  Based on the numerous specific lessons we identified in our analysis, several design and implementation features of cap-and-trade programs appear critical to their performance.

Key Features for System Design and Implementation

First, it is important not to require prior approval of trades.  In contrast to early U.S. experience with emissions offset systems, transactions costs can be low enough to permit considerable efficiency-enhancing trade if prior approval of trades is not required.

Second, it is clear from both theory and experience that a robust market requires a cap that is significantly below BAU emissions.

Third, to avoid unnecessary price volatility, it is important for final rules (including those for allowance allocation) to be established and accurate data supplied well before commencement of a system’s first compliance period.

Fourth, high levels of compliance in a downstream system can be achieved by ensuring there is accurate emissions monitoring combined with significant penalties for non-compliance.

Fifth, provisions for allowance banking have proven to very important for achieving maximum gains from trade, and the absence of banking provisions can lead to price spikes and collapses.

Sixth, price collars are important.  A changing economy can reduce emissions below a cap, rendering it non-binding, or a growing economy can increase emissions and drive allowance prices to excessive levels.  Price collars reduce price volatility by combining an auction price floor with an allowance reserve.  The resulting hybrid systems will generally have lower costs (as more stable prices facilitate investment planning) at the expense of less certain emissions reductions.

Finally, economy-wide systems are feasible, although downstream, sectoral programs have been more commonly employed.

Political Considerations that Affect Cap-and-Trade Design

Experiences with cap-and-trade also indicate the importance of political considerations for the design of cap-and-trade programs.

First, because of the potentially large distributional impacts involved, the allocation of allowances has inevitably been a major political issue.  Free allowance allocation has proven to help build political support. Under many circumstances, the equilibrium allowance distribution, and hence the aggregate abatement costs of a cap-and-trade system, are independent of the initial allowance allocation (Montgomery 1972; Hahn and Stavins 2012).  This means that the allowance allocation decision can be used to build political support and address equity issues without concern about impacts on overall cost-effectiveness.

Of course, free allowance allocation eliminates the opportunity to cut overall social costs by auctioning allowances and using the proceeds to cut distortionary taxes.  On the other hand, experience has shown that political pressures exist to use auction revenue not to cut such taxes, but to fund new or existing environmental programs.  Indeed, cap-and-trade allowance auctions can and have generated very significant revenue for governments.

Second, the possibility of emissions leakage and adverse competitiveness impacts has been a prominent political concern in the design of cap-and-trade systems.  Virtually any meaningful environmental policy will increase production costs and thus could raise these concerns, but this issue has been more prominent in the case of cap-and-trade instruments.  In practice, leakage from cap-and-trade systems can range from non-existent to potentially quite serious.  It is most likely to be significant for programs of limited geographic scope, particularly in the power sector because of interconnected electricity markets.  Attempts to reduce leakage and competitiveness threats through free allocation of allowances do not per se address the problem, but an output-based updating allocation can do so.

Third, although carbon pricing (through cap-and-trade or taxes) may be necessary to address climate change, it is surely not sufficient.  In some cases, abatement costs can be reduced through the use of complementary policies that address other market failures, but the types of “complementary policies” that have emerged from political processes have instead addressed emissions under the cap, thereby relocating rather than reducing emissions, driving up abatement costs, and suppressing allowance prices.

Identifying New Applications

Cap-and-trade systems are now being seriously considered for a wide range of environmental problems.  Past experience can offer some guidance as to when this approach is most likely to be successful.

First, the greater the differences in the cost of abating pollution across sources, the greater the likely cost savings from a market-based system – whether cap-and-trade or tax — relative to conventional regulation (Newell and Stavins 2003).  For example, it was clear early on that SO2 abatement cost heterogeneity was great, because of differences in ages of plants and their proximity to sources of low-sulfur coal (Carlson et al. 2000).

Second, the greater the degree of mixing of pollutants in the receiving airshed (or watershed), the more attractive a market-based system, because when there is a high degree of mixing, local hot spots are not a concern, and the focus can thus be on cost-effective achievement of aggregate emissions reductions.  Most cap-and-trade systems have been based on either the reality or the assumption of uniform mixing of pollutants. However, even without uniform mixing, well-designed cap-and-trade systems can be effective, as illustrated by the two-zone trading system under RECLAIM, at the cost of greater complexity.

Third and finally, since Weitzman’s (1974) seminal analysis of the effects of cost uncertainty on the relative efficiency of price versus quantity instruments, it has been well known that in the presence of cost uncertainty, the relative efficiency of these two types of instruments depends on the pattern of costs and benefits.  Subsequent literature has identified additional relevant considerations (Stavins 1996; Newell and Pizer 2003).  Perhaps more importantly, theory (Roberts and Spence 1976) and experience have shown that there are efficiency advantages of hybrid systems that combine price and quantity instruments in the presence of uncertainty.

Implications for Climate Change Policy

Two highly relevant lessons from thirty years of experience with cap-and-trade systems stand out.  First, cap-and-trade has proven itself to be environmentally effective and economically cost-effective relative to traditional command and control approaches. Moreover, less flexible systems would not have led to the technological change that appears to have been induced by market-based instruments (Schmalensee and Stavins 2013) or the induced process innovations that have resulted (Doucet and Strauss 1994).

Second, and equally important, the performance of cap-and-trade systems depends on how well they are designed.  In particular, it is important to reduce unnecessary price volatility, and hybrid designs can offer an attractive option if some variability of emissions can be tolerated, since substantial price volatility generally raises costs.

All of this suggests that cap-and-trade merits serious consideration when regions, nations, or sub-national jurisdictions are developing policies to reduce greenhouse gas (GHG) emissions.  And, indeed, this has happened.  However, because any meaningful climate policy will have significant impacts on economic activity in many sectors and regions, proposals for such policies have often triggered significant opposition.

In the United States, the failure of cap-and-trade climate policy in the Congress in 2010 was essentially collateral damage from a much larger political war that decimated the ranks of both moderate Republicans and moderate Democrats.  Nevertheless, political support for using cap-and-trade systems to reduce GHG emissions has emerged in many other parts of the world.  In fact, in the negotiations leading up to the Paris climate conference in 2015, many parties endorsed key roles for carbon markets, and broad agreement emerged concerning the value of linking those markets (codified in Article 6 of the Paris Agreement).

It is certainly possible that three decades of high receptivity to cap-and-trade in the United States, Europe, and other parts of the world will turn out to have been only a relatively brief departure from a long-term trend of reliance on command and control environmental regulation.  However, in light of the generally positive experience with cap-and-trade, there is reason for optimism that the tarnishing of cap-and-trade in US political debates will itself turn out to be a temporary departure from a long-term trend of increasing reliance on market-based environmental policy instruments.  Only time will tell.

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Market Mechanisms in the Paris Climate Agreement: International Linkage under Article 6.2

The Harvard Project on Climate Agreements hosted a research workshop in Cambridge, Massachusetts, on July 14–15, 2016, the purpose of which was to identify options for elaborating and implementing the Paris Climate Agreement, and to identify policies and institutions that might complement or supplement the United Nations Framework Convention on Climate Change (UNFCCC) process.  We were motivated by our recognition that while the Paris Agreement sets forth an innovative and potentially effective policy architecture for dealing with global climate change, a great deal remains to be done to elaborate the accord, formulate required rules and guidelines, and specify means of implementation.

Participants in the workshop – International Climate Change Policy after Parisincluded twenty-one of the world’s leading researchers focusing on climate-change policy, representing the disciplines of economics, political science, international relations, and legal scholarship. They came from Argentina, Belgium, China, Germany, India, Italy, Norway, the United Kingdom, and the United States.  (A list of workshop participants is here, biographies here, and the agenda here.)

The Harvard Project will next focus on communicating the ideas, insights, and recommendations of workshop participants to climate negotiators and policy makers, in the expectation that they might prove useful in elaborating and implementing the Paris Agreement. Each participant is preparing a brief—based largely on her or his presentation during the workshop. These briefs, together with a workshop summary, will be conveyed to participants in the Twenty-Second Conference of the Parties (COP-22) of the UNFCCC in Marrakech, Morocco in November 2016.  This will be done in meetings with negotiators representing UNFCCC member governments and in a side-event panel at COP-22.

Today I wish to share with readers just one of these draft briefs – namely, my own – on the topic of “International Linkage under Article 6.2 of the Paris Agreement.”

A Key Challenge for Sustained Success of the Paris Agreement

For sustained success of the international climate regime, a key question is whether the Paris Agreement with its Intended Nationally Determined Contributions (INDCs), anchored as they are in domestic political realities, can progressively lead to submissions with sufficient ambition?  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. By “linkage,” I mean connections among policy systems that allow for emission reduction efforts to be redistributed across systems. Such linkage is typically framed as being between two (or more) cap-and-trade systems, but national policies will surely be highly heterogeneous under the Paris climate regime.  Fortunately, research – by Gilbert Metcalf of Tufts University and David Weisbach of the University of Chicago – indicates that linkage between pairings of various types of domestic policy instruments may be feasible.

Linkage and the Paris Agreement

Experience indicates that linkage will bring both merits and concerns in most applications.  To begin with the good news, linkage offers a number of important advantages. First, it offers the possibility of achieving cost savings if marginal abatement costs are heterogeneous across jurisdictions, which they surely are. In addition, linkage can improve the functioning of individual markets by reducing market power, and by reducing price volatility, although we should recognize that price volatility will also be transmitted from one jurisdiction to another by linkage. Finally linkage can allow for the UNFCCC’s important principle of Common but Differentiated Responsibilities (CBDR), but do so without sacrificing cost-effectiveness.

The possibility of linkage also raises concerns, including that there will be distributional impacts within jurisdictions, that is, the creation of both winners and losers. Also, linkage can bring about the automatic propagation from one jurisdiction to another of some design elements, in particular, cost-containment mechanisms, such as banking, borrowing, and price collars. In this and other ways, linkage raises concerns about decreased autonomy.

Linkage under Article 6.2 of the Paris Agreement

It was by no means preordained that the Paris Agreement would allow, let alone encourage, international linkage.  Fortunately, the negotiations which took place in Paris in December, 2015, produced an Agreement that includes in its Article 6.2 the necessary building blocks for linkages to occur.

Under Article 6.2, emissions reductions occurring outside of the geographic jurisdiction of a Party to the Agreement can be counted toward achieving that Party’s Nationally Determined Contribution (NDC) via Internationally Transferred Mitigation Outcomes (ITMOs).  This enables both the formation of “clubs” or other types of coalitions, as well as bottom-up heterogeneous linkage.  Such linkage among Parties to the Agreement would provide for exchanges between compliance entities within the jurisdictions of two different Parties, not simply the government-to-government trading (of Assigned Amounts or AAUs), as was the case with the Kyoto Protocol’s Article 17.

Linkage among Heterogeneous Nationally Determined Contributions

There are three types of heterogeneity which are important in regard to linkage under Article 6.2 of the Paris Agreement. First is heterogeneity among policy instruments. As demonstrated by Metcalf and Weisbach (see above), not only can one cap-and-trade system be linked with another cap-and-trade system, but it is also possible to link a cap-and-trade system with a carbon tax system. In addition, either a cap-and-trade system or a tax system can be linked (via appropriate offsets) with a performance standard in another jurisdiction.  (Linkage with systems employing technology standards are not feasible, however, because such systems are not output-based.)

A second form of heterogeneity that affects linkage and is potentially very important under the Paris Agreement is heterogeneity regarding the level of government action of the relevant jurisdictions. Although the Paris Agreement has as Parties both regional jurisdictions (in the case of the European Union) and national jurisdictions, sub-national jurisdictions are also taking action in some parts of the world. In fact, linkage has already been established between the state of California in the United States and the provinces of Québec and Ontario in Canada.

A third form of relevant heterogeneity is with regards to the NDC targets themselves.  Some are in the form of hard (mass–based) emissions caps, while others are in the form of rate-based emissions caps, either emissions per unit of economic activity, or emissions per unit of output (such as per unit of electricity production). There are also relative mass-based emissions caps in the set of existing NDCs, such as those that are relative to business-as-usual emissions in a specific future year.  Beyond these, there are other parties that have put forward NDCs that do not involve emission caps at all, but rather targets in terms of some other metric, such as the degree of penetration of renewable energy sources.

Combinations of various options under these three forms of heterogeneity yield a considerable variety of types of potential linkages, which may be thought of as the cells of a three-dimensional matrix.  Not all of these cells, however, represent linkages which are feasible, let alone desirable.

The Path Ahead – Key Issues and Questions

There are a substantial number of issues that negotiators will eventually need to address, and likewise, there are a set of questions that researchers (including within the Harvard Project on Climate Agreements) can begin to address now. Among the key issues for negotiators will be the necessity to develop accounting procedures and mechanisms. Also, it will be important to identify means for the ITMOs to be tracked in order to avoid double-counting of emissions reductions. And a broader question is whether and how the UNFCCC Secretariat or some other designated institution will provide any oversight that may be required.

For research, three questions stand out.  First, among pairings from the (3-D matrix) set of instrument–jurisdiction–target combinations that emerge from the three types of heterogeneity identified above, which linkages will actually be feasible?  Second, within this feasible set, are some types of linkages feasible, but not desirable? And third, what accounting treatments and tracking mechanisms will be necessary for these various types of linkages?  Future research will need to focus on these and related questions in order to achieve the potential benefits of Article 6.2 of the Paris Agreement.  Please stay tuned as this work develops.

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Paris Agreement — A Good Foundation for Meaningful Progress

The Paris Agreement, a truly landmark climate accord, which was gaveled through today, December 12, 2015, at 7:26 pm (Paris time) at the Twenty-First Conference of the Parties (COP-21), checks all the boxes in my five-point scorecard for a potentially effective Paris Agreement, described in my November 17th blog essay, Paris Can Be a Key Step.  The Agreement provides a broad foundation for meaningful progress on climate change, and represents a dramatic departure from the Kyoto Protocol and the past 20 years of climate negotiations.

Essential Background

Anyone who has read this blog over the past several years, or – even more so — my academic writing over the past twenty years on international climate change policy architecture, knows that I have viewed the dichotomous distinction between Annex I and non-Annex I countries as the major stumbling block to progress. That distinction was first introduced in the climate negotiations at COP-1 in Berlin in 1995. That was, in my view, an unfortunate and narrow interpretation of the sound equity principle in the United Nations Framework Convention on Climate Change (UNFCCC, 1992) – “common but differentiated responsibilities and respective capabilities.” It was codified two years later in the Kyoto Protocol.

The Kyoto Protocol, which has been the primary international agreement to reduce the greenhouse-gas emissions that cause global climate change, included mandatory emissions-reduction obligations only for developed countries. Developing countries had no emissions-reduction commitments. The dichotomous distinction between the developed and developing countries in the Kyoto Protocol has made progress on climate change impossible, because growth in emissions since the Protocol came into force in 2005 is entirely in the large developing countries—China, India, Brazil, Korea, South Africa, Mexico, and Indonesia. The big break came at the annual UNFCCC negotiating session in Durban, South Africa in 2011, where a decision was adopted by member countries to “develop [by December 2015, in Paris] a protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties.” This “Durban Platform for Enhanced Action” broke with the Kyoto Protocol and signaled a new opening for innovative thinking (which we, at the Harvard Project on Climate Agreements, took to heart).

The Paris Agreement is a Departure from the Past

Today, in Paris, representatives of 195 countries adopted a new hybrid international climate policy architecture that includes: bottom-up elements in the form of “Intended Nationally Determined Contributions” (INDCs), which are national targets and actions that arise from national policies; and top-down elements for oversight, guidance, and coordination. Now, all countries will be involved in taking actions to reduce emissions.

Remarkably, 186 of the 195 members of the UNFCCC submitted INDCs by the end of the Paris talks, representing some 96% of global emissions. Contrast that with the Kyoto Protocol, which now covers countries (Europe and New Zealand) accounting for no more than 14% of global emissions (and 0% of global emissions growth).

This broad scope of participation under the new Paris Agreement is a necessary condition for meaningful action, but, of course, it is not a sufficient condition. Also required is adequate ambition of the individual contributions. But this is only the first step with this new approach. The INDCs will be assessed and revised every five years, with their collective ambition ratcheted up over time. That said, even this initial set of contributions could cut anticipated temperature increases this century to about 3.5 degrees Centigrade, more than the frequently-discussed aspirational goal of limiting temperature increases to 2 degrees C (or the new aspirational target from Paris of 1.5 degrees C), but much less than the 5-6 degrees C increase that would be expected without this action. (An amendment to the Montreal Protocol to address hydrofluorocarbons (HFCs) is likely to shave an addition 0.5 C of warming.)

The problem has not been solved, and it will not be for years to come, but the new approach brought about by the Paris Agreement can be a key step toward reducing the threat of global climate change.

The new climate agreement, despite being path-breaking and the result of what Coral Davenport writing in The New York Times rightly called “an extraordinary effort at international diplomacy,” is only a foundation for moving forward, but it is a sufficiently broad and sensible foundation to make increased ambition over time feasible for the first time.  Whether the Agreement is truly successful, whether this foundation for progress is effectively exploited over the years ahead by the Parties to the Agreement, is something we will know only ten, twenty, or more years from now.

What is key in the Agreement is the following: the centrality of the INDC structure (through which 186 countries representing 96% of global emissions have made submissions); the most balanced transparency requirements ever promulgated; provision for heterogeneous linkage, including international carbon markets (through “internationally transferred mitigation outcomes” – ITMOs); explicit clarification in a decision that agreement on “loss and damage” does not provide a basis for liability of compensation; and 5-year periods for stocktaking and improvement of the INDCs.

The Key Elements of the Paris Agreement

Here are some of the highlights of what stands out to me in the Paris Agreement.

Article 2 of the Agreement reaffirms the goal of limiting the global average temperature increase above the pre-industrial level to 2 degrees C, and adds 1.5 degrees C as something even more aspirational.  In my opinion, these aspirational goals – which come not from science (although endorsed by most scientists) nor economics, and may not even be feasible – are much less important than the critical components of the agreement:  the scope of participation through the INDC structure, and the mechanisms for implementation (see below).

Article 3 makes it clear that the INDC structure is central and universal for all parties, although Article 4 blurs this a bit with references to the circumstances of developing country Parties. But throughout the Agreement, it is abundantly clear that the firewall from the 1995 Berlin Mandate has finally been breached. In addition, five-year periods for the submission of revised INDCs (and global stocktaking of the impact of the Paris Agreement) are included in Article 14.  The first stocktaking review will be in 2018, with the start date for new INDCs set for 2020.

Article 4 importantly describes transparency requirements (domestic monitoring, reporting, and verification).  This is crucial, and represents a striking compromise between the U.S. and Europe, on the one hand, and China and India, on the other hand. All countries must eventually face the same monitoring and reporting requirements, regardless of their status as developed or developing.

Article 6 provides for international policy linkage, and is thereby exceptionally important for the successful exploitation of the foundation provided by the Paris Agreement.  The necessary language for heterogeneous international policy linkage (not only international carbon markets, but international linkage of other national policy instruments) is included. I have written about this key issue many times over the past ten years. It can bring down compliance costs greatly, and thereby facilitate greater ambition over time. (See our paper on this from the Harvard Project on Climate Agreements:  “Facilitating Linkage of Heterogeneous Regional, National, and Sub-National Climate Policies Through a Future International Agreement” By Daniel Bodansky, Seth Hoedl, Gilbert E. Metcalf and Robert N. Stavins, November 2014.)  The Paris Agreement accomplishes this through provision for “internationally transferred mitigation outcomes.” With this provision, we have a new climate policy acronym – ITMOs – about which I suspect I will be writing in the future.

There is considerable discussion of “finance” in Article 9, but the numbers do not appear in the Agreement, only in the accompanying Decision, where item 54 states that by 2025, the Parties will revisit the total quantity of funding, using the current $100 billion target as a “floor.”

Finally, the Agreement’s Article 8 on Loss and Damage was necessary from the point of view of the most vulnerable countries, but the most contentious issue is settled in Decision 52, where the Parties agree that this “does not involve or provide a basis for any liability of compensation.”  That decision was absolutely essential from the perspective of the largest emitters.

Anticipated Impacts of the Paris Agreement

Before I turn to my assessment of the Agreement, I should comment briefly on a topic that seems to be of considerable interest to many people (based on the questions I received from the press during my 10 days in Paris), namely what effect will the Agreement have on business, what signals will it send to the private sector?

My answer is that impacts on businesses will come largely not directly from the Paris Agreement, but from the policy actions that the various Parties undertake domestically in their respective jurisdictions to comply with the Paris Agreement.  I am again referring to the 186 countries which submitted Intended Nationally Determined Contributions – INDCs – under the Agreement.

So, in the case of the United States, for example, those policies that will enable the country to achieve its submitted INDC are: the Clean Power Plan (which will accelerate the shift in many states from coal to natural gas for electricity generation, as well as provide incentives in some states for renewable electricity generation); CAFE (motor vehicle fuel efficiency) standards increasing over time (as already enacted by Congress); appliance efficiency standards moving up over time (as also already enacted by Congress); California’s very aggressive climate policy (AB-32); and the northeast states’ Regional Greenhouse Gas Initiative.

These various policies are credible, and they will send price signals that affect business decisions (but not across the board nor with ideal efficiency, as would a national carbon tax or a national carbon cap-and-trade system). In terms of impacts on specific companies, impacts will continue to vary greatly. But a useful generalization is that a major effect of most climate policies is to raise energy costs, which tends to be good news for producers of energy-consuming durable goods (for example, the Boeing Company) and bad news for consumers of those same energy-consuming durable goods (for example, United Airlines).

An Assessment with my Paris Scorecard

Lastly, here is my November 17th scorecard and my assessment of the five key elements I said would constitute a successful 21st Conference of the Parties:

  1. Include approximately 90% of global emissions in the set of INDCs that are submitted and part of the Paris Agreement (compared with 14% in the current commitment period of the Kyoto Protocol). This was obviously achieved, with total coverage reaching 96% of global emissions.
  1. Establish credible reporting and transparency requirements. This was achieved, through long negotiations between China and India, on the one hand, and Europe and the United States, on the other.
  1. Move forward with finance for climate adaptation (and mitigation) B the famous $100 billion commitment. This was achieved.
  1. Agree to return to negotiations periodically, such as every 5 years, to revisit the ambition and structure of the INDCs. This was achieved.
  1. Put aside unproductive disagreements, such as on so-called “loss and damage,” which appears to rich countries like unlimited liability for bad weather events in developing countries, and the insistence by some parties that the INDCs themselves be binding under international law. This would have required Senate ratification of the Agreement in the United States, which would have meant that the United States would not be a party to the Agreement. There was success on both of these.

Final Words

So, my fundamental assessment of the Paris climate talks is that they were a great success. Unfortunately, as I have said before, some advocates and some members of the press will likely characterize the outcome as a “failure,” because the 2 degree C target has not been achieved immediately.

Let me conclude where I started. The Paris Agreement provides an important new foundation for meaningful progress on climate change, and represents a dramatic departure from the past 20 years of international climate negotiations.  Of course, the problem has not been solved, and it will not be for many years to come. But the new approach brought about by the Paris Agreement can be a key step toward reducing the threat of global climate change. In truth, only time will tell.

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As many of you know, over a period of ten days, we (the Harvard Project on Climate Agreements) were hard at work at COP-21 in Paris. I made a dozen presentations and we held bilateral meetings on a daily basis with national negotiating teams and and others. You will find videos, photos, and numerous stories about our activities in Paris at our Tumblr page. Thanks are due to the entire team who were with me in Paris – Robert Stowe, executive director, Jason Chapman, program manager, and Doug Gavel, director of media relations — as well as Bryan Galcik, communications coordinator, back in Cambridge.

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