Can the WTO Take a Lesson from the Paris Climate Playbook?

As readers will know from my previous entry at this blog (“Paris Agreement — A Good Foundation for Meaningful Progress”, December 12, 2015), I was busy with presentations and meetings during the 21st Conference of the Parties (COP-21) of the United Nations Framework Convention on Climate Change (UNFCCC) in Paris last December. However, I did have time to reflect on the process that was leading to the then-emerging Paris Agreement, including a series of discussions with my Harvard colleague – Professor Robert Lawrence, a leading international trade economist –who was back in Cambridge.

He and I realized that negotiators in a very different realm – international trade – could benefit from observing the progress that was being made in the international climate policy realm in Paris. This led to a co-authored op-ed that appeared in the Boston Globe on December 7, 2015 (“What the WTO Can Learn from the Paris Climate Talks”).

For many years, climate negotiators have looked longingly at how the World Trade Organization (WTO) was able to negotiate effective international agreements. But ironically, the Paris climate talks and the WTO negotiations, which were set to take place the following week in Nairobi, lead to the opposite conclusion. Trade negotiators can now emulate the progress made in the climate change agreements by moving away from a simplistic division between developed and developing countries.

For years, global climate change policy was hobbled by this division. Readers of this blog will be familiar with this issue. In the Kyoto Protocol, only developed countries committed to emissions reductions. Developing countries had no obligations. The stark demarcation made meaningful progress impossible, partly because the growth in emissions since the Protocol came into force in 2005 has been entirely in the large developing countries. Even if developed countries were to eliminate their CO2 emissions completely, the world cannot reduce the pace of climate change unless countries such as China, India, Brazil, Korea, South Africa, Mexico, and Indonesia take meaningful action.

The WTO negotiations, launched in 2001 in Doha, have remained at an impasse because of similar problems. They are tied up because nearly all the obligations assumed by WTO members depend upon whether they claim to be developed or developing. And since countries are allowed to self-designate, countries such as Singapore, South Korea, and the Gulf oil states seek to be treated the same as Ghana, Zambia, and Pakistan.

When developing countries accounted for a relatively small share of world trade, it was easy to grant all of them special treatment. But it has become impossible for developed countries to agree to additional liberalization without meaningful market-opening concessions by the large emerging economies, which will account for the majority of world trade growth in the future. Even though some have already liberalized unilaterally, many of these countries avoid making concessions at the WTO by claiming treatment as developing nations.

In the climate arena, the big break came in Durban, South Africa, in 2011, when countries agreed to achieve an outcome that was applicable to all parties. In Paris, the countries of the world adopted the Paris Agreement, which includes: bottom-up elements in the form of Intended Nationally Determined Contributions (INDCs) – national targets and actions that arise from domestic policies and circumstances; and top-down elements for oversight, guidance, and coordination. Now all countries are involved in protecting the climate system “on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities.”

Whereas the current commitment period of the Kyoto Protocol covers countries (Europe and New Zealand) that account for no more than 14 percent of global emissions (and zero percent of global emissions growth), INDCs submitted for the Paris agreement cover 186 countries, representing 96 percent of global emissions. This dramatic, path-breaking expansion of the scope of participation is the key reason for optimism about the Paris Agreement.

In the trade sphere, a similarly nuanced approach with differentiated responsibilities that reflect different capabilities could be adopted by the WTO. Instead of all countries having to subscribe as either developed or developing countries, the WTO could finally move beyond the North-South divide that is embodied in almost every draft proposed in the current Doha round.

The climate talks have shown that simplistic classifications of countries are a prescription for impasse. Robert Lawrence and I concluded that unless the WTO learns this lesson, it may become increasingly irrelevant, as coalitions of the willing turn to regional agreements to make what progress they can on international trade liberalization.

Paris Can Be a Key Step

I returned from a brief trip to Paris two days before the horrific events of November 13th, which have shocked and saddened civilized people everywhere. I was in Paris for discussions regarding climate change policy at OECD headquarters. Now, I’m preparing to return to Paris in less than two weeks with my colleagues from the Harvard Project on Climate Agreements (I’ve inserted a list of our forthcoming “public” activities at the Paris climate talks at the end of this blog post).

My purpose today, in this essay, is to explain why I believe that the Paris talks may turn out to be a key step in the international negotiations, and more important, a significant step in efforts to address the threat of climate change.

Background on the Paris Climate Talks

The international climate change negotiations that will take place in Paris the first two weeks of December, 2015, are officially the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change.   It will be many years before any of us can truly assess the impact of the Paris talks, but it is clear now that they represent – at the very least – an important attempt to break with the past thrust of international climate policy and start anew with a much more promising approach.

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 stark demarcation in the Kyoto Protocol between developed and developing countries was one approach to realizing a principle in the underlying United Nations Framework Convention on Climate Change (UNFCCC), that countries should act to “protect the climate system … on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities.”

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 Road to Paris

In Paris next month, countries will likely adopt 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.

The current commitment period of the Kyoto Protocol covers countries (Europe and New Zealand) accounting for no more than 14% of global emissions (and 0% of global emissions growth). But as of November 9th, 156 of the 196 members of the UNFCCC had submitted INDCs, representing some 87% of global emissions (and this will likely reach 90% or 95% by the time of the Paris talks)!

Such broad scope of participation is a necessary condition for meaningful action, but it is not a sufficient condition. Also required is adequate ambition of the individual contributions. But keep in mind that this is only the first step with this new approach. The INDCs will likely 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 2.7-3.5 degrees Centigrade, more than the frequently-discussed aspirational goal of limiting temperature increases to 2 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) will quite possibly 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 being taken in the forthcoming Paris Agreement can be a key step toward reducing the threat of global climate change. Only time will tell.

A Paris Scorecard

I’ve been asked many times what success will look like in Paris. Here’s my scorecard and my predictions of five key elements that – if all were achieved — would constitute an exceptionally 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 will definitely be achieved.
  1. Establish credible reporting and transparency requirements. It is likely that this will be achieved.
  1. Begin to set up a system to finance climate adaptation (and mitigation) — the famous $100 billion commitment.  A key question is whether it includes private-sector finance, in addition to public-sector finance (that is, foreign aid). This is likely to be achieved.
  1. Agree to return to negotiations periodically, such as every 5 years, to revisit the ambition and structure of the INDCs. It is likely this will be achieved.
  1. Put aside unproductive disagreements, such as on so-called “loss and damage,” which looks to rich countries like unlimited liability for bad weather events in developing countries. Another unproductive disagreement is the insistence by some parties that the INDCs themselves be binding under international law. This would probably mean that the Paris Agreement would require Senate ratification in the United States, which means that the United States would not be a party to the Agreement. I can only hope that the delegates will realize the futility of pursuing such unproductive elements.

As you can see, I anticipate that elements #1 through #4 will be achieved in the Paris Agreement, and hopefully #5 as well. So, my fundamental prediction for Paris is success. (Unfortunately, some greens and some members of the press will mistakenly characterize this same outcome as “failure,” because the 2 degree C target has not been achieved immediately.)

Finally, for those of you who will be in Paris and/or like to keep up on the work of the Harvard Project on Climate Agreements, here is a partial schedule of our activities there (“partial” only because some of our engagements, including numerous bilateral meetings with national negotiating teams, press engagements, and other private meetings, are not included):

Harvard Project on Climate Agreements

Robert Stavins, Director, Robert Stowe, Executive Director, Jason Chapman, Program Manager, Harvard Environmental Economics Program

Events at the Twenty-First Conference of the Parties of the United Nations Framework Convention on Climate Change, November 30 – December 11, 2015, Paris, France

Events Co-Sponsored by the Harvard Project on Climate Agreements:

“Dialogue on the Comparison of Climate Change Policies”

Friday, December 4; 1:00 -3:00 pm; Pavilion of the People’s Republic of China (“Blue Zone”) — Co-host: National Center for Climate Change Strategy and International Cooperation (NCSC; Beijing) — Participants: Robert Stavins; Zou Ji, Fu Sha, Qi Yue, Chen Ji (NCSC); Duan Maosheng (Tsinghua University); Thomas Brewer (International Centre for Trade and Sustainable Development); Wang Mou (Chinese Academy of Social Sciences).

“Comparison and Linkage of Mitigation Efforts in a New Paris Regime”

Monday, December 7; 11:45 am – 1:00 pm; Pavilion of the International Emissions Trading Association (IETA) (“Blue Zone”) — Co-Hosts: International Emissions Trading Association (IETA), World Bank Group Networked Carbon Markets initiative — Participants: Robert Stavins; Dirk Forrister (IETA); David Hone (IETA and Shell); Andrei Marcu (Centre for European Policy Studies); Gilbert Metcalf (Tufts University); Vikram Widge (World Bank Group)

“The IPCC at a Crossroads: Enhancing the Usefulness of IPCC to the UNFCCC Process”

Wednesday, December 9; 11:30 am – 1:00 pm; Observer Room 12 (“Blue Zone”) — Co-Hosts: Fondazione Eni Enrico Mattei (FEEM; Venice and Milan), Mercator Research Institute on Global Commons and Climate Change (MCC; Berlin), Stanford Environmental and Energy Policy Analysis Center (SEEPAC) — Participants: Robert Stavins; Carlo Carraro (FEEM); Ottmar Edenhofer (MCC); Charles Kolstad (SEEPAC); Hoesung Lee (Chair, Intergovernmental Panel on Climate Change)

“Key Elements of the Paris Agreement and Implications for Business”

Wednesday, December 9; 3:30 – 5:00 pm; Room 9, Climate Generations Area (“Green Zone”) — Co-Host: Enel Foundation — Participants: Robert Stavins; Joseph Aldy (Harvard Kennedy School, by Skype); Dirk Forrister (IETA); Simone Mori (Enel SpA)

Other public events at which Robert Stavins is speaking:

“International Carbon Markets in a Post 2020 Climate Regime”

Thursday, December 3; 4:00 – 5:30 pm; Africa Pavilion (“Blue Zone”) — Hosts: African Development Bank Group, European Commission

“China-California Low Carbon and Climate Change Cooperation”

Monday, December 7; 2:00 – 4:00 pm; Pavilion of the People’s Republic of China (“Blue Zone”) — Hosts: State of California and the National Development and Reform Commission (Government of the People’s Republic of China)

“Can National Policies and INDCs Alone Lead to a Workable and Effective Climate Regime?”

Based on new book, Towards a Workable and Effective Climate Regime (available for free here), edited by Scott Barrett, Carlo Carraro, and Jaime de Melo — Tuesday, December 8; 11:30 am – 1:00 pm; Observer Room 4 (“Blue Zone”) — Hosts: Fondation pour les Etudes et Recherches sur le Développement International (FERDI), University of Venice, ClimateWorks Foundation — Participants: Carlo Carraro (University of Venice and Fondazione Eni Enrico Mattei), Surabi Menon (ClimateWorks Foundation), Roger Guesnerie (Collège de France), Jaime de Melo (University of Geneva), Scott Barrett (Columbia University), Robert Stavins

“Exploring the Potential for International Trading Partnerships in Emissions Permits”

Thursday, December 10; 12:00 – 1:30 pm; Pavilion of the International Emissions Trading Association (IETA) (“Blue Zone”) — Host: Electric Power Research Institute

“Building a Low-Carbon Society: Think Tank Views on Long-term Action”

Thursday, December 10; 1:00 – 3:00 pm; Pavilion of the People’s Republic of China (“Blue Zone”) — Host: Government of the People’s Republic of China

I’m exhausted just reading that list, but I promise to report on some of the highlights from Paris during and after COP-21.

A Key Element for the Forthcoming Paris Climate Agreement

The upcoming Paris climate negotiations will constitute a critical step in the ongoing international process to reduce global greenhouse gas (GHG) emissions. The question of whether the Paris outcome will be sufficiently ambitious to put the world on a path towards limiting global average warming to 2o C, as agreed in Cancun, can be answered now.  It will not, because that target, while possibly useful as an aspirational goal, is not achievable, as the most recent report of Working Group III of the IPCC documented. What is clear, however, is that greater ambition is more easily realized when costs are low. Market-based mechanisms are an important element in the portfolio of actions that can lead to cost-effective solutions. Linkage – between and among market and non-market systems for reducing GHG emissions – is a closely-related key element.

In an article just published in Climate Policy, “Facilitating Linkage of Climate Policies through the Paris Outcome,” my co-authors – Daniel Bodansky of Arizona State University, Seth Hoedl of Harvard Law School, and Gilbert Metcalf of Tufts University – and I examine how the Paris outcome, and more generally the ongoing climate negotiations, can allow for and advance linked systems.

Brief Background

In the Durban Platform for Enhanced Action, adopted by the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) in 2011, the parties agreed to develop a “protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties,” for adoption at COP-21 in December, 2015, in Paris. It is likely that the Paris outcome will reflect a hybrid climate policy architecture – one that combines top-down elements, such as for monitoring, reporting, and verification (MRV), 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. This outcome will be embodied in a core agreement, which likely will be legally binding, as well as ancillary instruments such as annexes, national schedules, and COP decisions.

The ability to link regional, national, and sub-national climate policies will be essential to enhancing the cost-effectiveness of such a system – and thus the likelihood of achieving significant global emissions reductions. By ‘linkage’, we mean formal recognition by a GHG mitigation program in one jurisdiction (a regional, national, or sub-national government) of emission reductions undertaken in another jurisdiction for the purposes of complying with the first jurisdiction’s requirements.

First Necessity for Paris: Do No Harm

The minimum requirement for the Paris agreement in regard to linkage is to do no harm. Silence on linkage could possibly accomplish that. But any provisions in the agreement that would require nations to achieve their respective INDCs exclusively within their own borders – a constraint that has been favored by the ALBA countries – would, in effect, prohibit not only international carbon markets but any sort of meaningful linkage (and would thereby greatly drive up costs).

Common Definitions of Key Terms

If linkage is to play a significant role in a hybrid international policy architecture, then several categories of design elements merit serious consideration for inclusion in the Paris outcome, either directly or by establishing a process for subsequent international negotiations. In general, effective linkage requires common definitions of key terms, including particularly the units to be used for compliance purposes. This will be particularly important for links between heterogeneous systems, and it is an area where a model rule could be particularly helpful (more about this below).

Registries and Tracking

Linkage requires registries and tracking mechanisms, whether the systems being linked are homogeneous or heterogeneous. Indeed, a key role for the top-down part of a hybrid architecture that allows for international linkage of national policy instruments will be the tracking, reporting, and recording of allowance unit transactions.

International compliance units would make the functioning of an international transaction log more straightforward and reduce the administrative burden of reconciling international registries with national registries. Minimum standards for approving and measuring offsets may be important. Market oversight and monitoring may increase confidence in the system, although in some cases, national and international institutions that can provide oversight already exist and may need only relatively minor additional capacity to assume these functions.

Too Much of a Good Thing Can be Bad

Including detailed linkage rules in the core agreement is not desirable as this could make it difficult for rules to evolve in light of experience. Instead, minimum standards to ensure environmental integrity should be elaborated in COP decisions, or by other means; for example, the COP could establish minimum requirements for national monitoring, reporting, and verification (MRV), registries, and crediting mechanisms.

In terms of linkage, the function of the core agreement might be confined to articulating general principles relating to environmental integrity, while also authorizing the COP or another organization to develop more detailed rules. Whatever minimum standards are adopted, oversight of compliance will be important to ensure the integrity both of the Paris outcome and of linked national systems.

The Utility of Default or Model Rules

Many elements of GHG linkage can be addressed through default or model rules from which nations are free to deviate at their discretion. Rules that may benefit from this approach are typically concerned with the details of linking two regulatory systems. For example, nations interested in linking their cap-and-trade systems would have to consider rules for market coverage, cost containment, banking and borrowing, compliance periods, allocation methods, and the treatment of new emitters and emitter closures. Additional rules may be needed for linking of heterogeneous systems.

Developing uniform rules to address all of these issues is unrealistic. Instead, a degree of harmonization could be achieved through default rules that facilitate linkage by providing a common framework for nations to use when developing their own linkage agreements. Although there is no need for the core agreement itself to elaborate harmonized linkage rules, it might authorize the COP to develop default linkage rules that nations can use in negotiating bilateral linkage agreements.

Less is More

In our Climate Policy article, Dan Bodansky, Seth Hoedl, Gib Metcalf, and I conclude that the most valuable outcome of Paris regarding linkage might simply be the inclusion in the core agreement of an explicit statement that parties may transfer portions of their INDCs to other parties and that these transferred units may be used by the transferees to implement their INDCs. Such a statement would help provide certainty both to governments and private market participants. This minimalist approach will allow diverse forms of linkage to arise, among what will inevitably be highly heterogeneous INDCs, thereby advancing the dual objectives of cost effectiveness and environmental integrity in the international climate policy regime.