Economics Can Still Help Solve the Climate Crisis

After climate negotiators from 195 nations at last month’s climate talks in Madrid were unable to reach agreement on rules that would govern global carbon markets, United Nations Secretary General António Guterres lamented that the international community “lost an important opportunity to show increased ambition on mitigation, adaptation, and finance to tackle the climate crisis.”  My view (as I explained in a recent essay at this blog) is that the lack of aspirational statements regarding future increases in ambition was not a significant disappointment, because such aspirational statements are really not meaningful.  Rather, the real disappointment of COP-25 was the failure to finalize rules for carbon markets under Article 6.2 of the Paris Agreement.

That said, the climate negotiators actually did accomplish something important — because of what they did not do. Instead of approving lax rules full of loopholes favored by Brazil, Australia, and a few other countries, the negotiators held the line and pushed off a decision on the rules for carbon markets until next year’s COP-26 in Glasgow, Scotland.

That is the starting point for an interview that was recently recorded for the Harvard Kennedy School’s “PolicyCast,” hosted by Thoko Moyo, HKS Associate Dean for Communications and Public Affairs.  You can listen to the interview, titled, “Economics Can Still Help Solve the Climate Crisis,” or, if you prefer to use your eyes rather than your ears, here is the transcript:

Thoko Moyo: Hello and welcome to the Harvard Kennedy School PolicyCast. I’m your host, Thoko Moyo. Today we’re joined by Harvard Kennedy School Professor Robert Stavins. Professor Stavins is the Director of the Harvard Environmental Economics Program and the Harvard Project on Climate Agreements. He’s also just returned from Madrid, where he was participating in the 12-day UN Climate Change Conference, or COP25. So you’re just back from the UN climate talks, COP25 in Madrid. The general consensus when you’re reading the newspapers are that it didn’t really achieve what people were hoping. Would you agree with that?

Robert Stavins: Well, there’s what people were hoping and what were reasonable expectations. I would say in general the COP was moderately successful, in that it sort of advances the ball. It passes on the ball till next year. I think what people were disappointed with—that you saw reflected in the popular press—was that there was not a statement, an aspirational statement, of countries talking about new targets that they would come up with next year, not this year, but next year. And that’s what a lot of activist groups, and particularly this new wave of youth activists who are obviously very important, were looking for. But I don’t actually consider those kind of aspirational statements with no meat to be very important in the first place.

Thoko Moyo: Okay, great. Okay, so let’s come back to that. But I think because we might have some people listening who are not experts, who probably maybe need a reminder, things like COP, what is COP? And then let’s also maybe just get it out the way, because it’s going to come up in our conversation, the Paris Accord, what is that? And I know just in September we had the huge UN Climate Action Summit, so what’s that? What are those three things and how do they fit together?

Robert Stavins: It starts in 1992 with the United Nations Framework Convention on Climate Change, which grew out of the Earth Summit in that year in Rio de Janeiro. The signatories to that are the parties to that agreement, the UNFCCC, the United Nations Framework Convention on Climate Change. They met for the first time in 1995, so that was the first conference of the parties. That was COP1. This year was the 25th conference of the parties. That was COP25.

Thoko Moyo: Okay. And so that then grew into or at least led to, in 2016, to the Paris Accord, the Agreement. What was that and why is it such a big deal?

Robert Stavins: Again, I’ll put it in a historical context. I think it might be helpful. That is, in 1997 at COP3 in Kyoto, Japan, countries agreed to the Kyoto Protocol, which was the first significant international agreement on climate change. That expires in 2020, so in 2016 in Paris, the conference of the parties established a new agreement that would succeed the Kyoto Protocol beginning in 2020. That’s what the Paris Agreement is.

Thoko Moyo: And the Kyoto Protocol, if I remember correctly, had targets and sounded like it had some way of enforcing, whereas the Paris Agreement seemed to step back a little bit and make it more the onus of the countries to determine what their reductions would be or not. Is that right, and why did they move in that direction as opposed to more top down?

Robert Stavins: That’s right. The Kyoto Protocol was very much a top-down approach. A very small number of countries actually were engaged in taking on targets. It was the set of countries that were essentially the industrialized countries of the world at the time, plus what were then the emerging market economies of Central and Eastern Europe. Those countries, which were listed in an appendix, Annex 1 of the Kyoto Protocol, they took on targets and timetables, but those targets and timetables that they took on, those specific numbers, were negotiated among the set of countries. So I negotiated what your target would be, and you negotiated what my target would be. That’s the top-down nature of the approach. Everyone was involved.

The scope was very narrow, so that currently in the second commitment period of the Kyoto Protocol, approximately 14% of global emissions are associated with complying countries. That’s European Union plus New Zealand. The United States never ratified the Kyoto Protocol. Russia dropped out, Japan dropped out, Canada dropped out, and Australia dropped out. So it’s a very narrow scope, but it was of a top-down structure.The countries of the world, particularly the United States and China, who played a leadership role leading up to Paris, they realized that that approach was never going to achieve much in terms of meaningful reductions, namely because emissions are either declining or relatively flat in the industrialized countries.

The place where the emissions growth is so great is the large emerging economies, China, India, Brazil, Korea, South Africa, Mexico, and Indonesia. And so those countries had to be brought inside. It was clear that it would not be possible to bring them inside with the top-down approach, that rather each country would have to say what it felt it could do given its national circumstances as well as its domestic politics. So the approach that’s in the Paris Agreement is this bottom-up approach, in the sense of each country says what they’re going to do. There are parts that are top-down that are binding under international law, but those are simply parts that say that every five years each of the countries has to come up with a new target, not what the targets are.

Thoko Moyo: But how does it work? I mean, this is a huge emergency, affects everyone, and it’s a bit of an honor system. You say what you can and you try and keep to that, but does it actually work? I mean, do the countries set ambitious targets, and if there’s no way of enforcing it, how do you even know they’re doing what they said they’d do?

Robert Stavins: Well, there’s an interesting trade-off, that the very element of the Paris Climate Agreement that caused it to have the broad scope of participation it does, namely compared to that 14% under Kyoto, we now have 97% of global emissions associated with signatory countries. If the United States does drop out, as it has said it would approximately a year from now, that 97% drops to 85%. Either way, it’s very impressive scope, but that same element that caused the scope to be very broad and inclusive …

Thoko Moyo: Which is important.

Robert Stavins: … which is very important, it also then brings about the reality that the ambition of the individual commitments or statements is not going to be very great, because it’s a global commons problem. Any country that takes action incurs the cost of taking action, but the benefits are spread globally, meaning that for any individual country, the direct benefits it receives are going to be less than the direct costs that it incurs. So it’s a fundamental consequence of the structure of the agreement, of this trade-off between adequate scope, but perhaps not adequate initial ambition.

Thoko Moyo: I guess an obvious question, then, is why would, I mean apart from the politics, but there might be another reason, why would the US pull out of an accord that doesn’t tell it what it needs to set as targets, and certainly there’s no enforcing? Why not just reduce the scale of your ambitions and do what you can? Why is it so important to withdraw from the accord, or is it just politics?

Robert Stavins: Well, that’s a very good question, and I guess my flippant answer would be you should ask the resident of the White House, not me, but back when, you may recall that former Secretary General of the United Nations Ban Ki-moon was resident at the Harvard Kennedy School as a visiting fellow and maintains an affiliation. When he was here about two months before the White House issued its decision, before the president spoke in the Rose Garden with his decision to pull out of the Paris Agreement, Ban Ki-moon and I wrote an op-ed that was in the Boston Globe. And we posed the same question, saying that what the United States could do would be to stay in the Paris Agreement so that you have a voice in deciding what’s going on, but to change what is called its nationally determined contribution, this bottom-up pledge. It could even make that to be equivalent to business as usual, so we didn’t have to do anything. It could have set it at anything.

That would have been an approach which would have been consistent in terms of what people in the administration were saying, but what it would not have accomplished is what, in my opinion, and I’m bi-partisan, with what the president wanted to accomplish, which was the announcement. The important thing was not what we did, but what he was able to announce, in terms of his political base. And he had the positive spin on that as he was living up to a campaign pledge. He said over and over again, is that he would pull us out of the Paris Agreement, and that was the decision that was made. What the president may not have recognized, although I would hope that White House staff recognized, was that when he announced that in June of 2017, what he was actually announcing was an intention to remove us from the Paris Agreement approximately three and a half years later, because that was the soonest that it could actually become effective, which is approximately a year from now.

Thoko Moyo: And so how much of that came up in the talks, in the COP25 talks? Because we saw some coverage of the former mayor of New York, Michael Bloomberg, saying that a lot of cities in the US are committed to the Paris Accord and they’ll stay in it if they could. We didn’t really hear much about the official US position. What was said?

Robert Stavins: Well, the US did not have political level appointees present, so it is the State Department officials who have been working on these issues for 20 or 30 years. It’s what sometimes is derogatorily referred to as the deep state, although being at the Harvard Kennedy School, where we’re producing people that go into that world, whether it’s the State Department or the Department of Agriculture, we think it’s not the deep state. It’s rather an extremely important professional class, and it will be wonderful if the US had it of the quality that France and so many other countries do. Those individuals have been consistent. Some have left, but they’re still there.

And in fact, one of the things I’ll tell you that I was struck by, certainly last year when we were at the talks, which were in Katowice in Poland just one year ago, is that when we would sit down in the room to talk with a negotiating team from some other country in the world at their request, because they’re interested in the research we’re doing and looking for help with that, they would say, “Well, Stavins, you’re from Harvard, right?” “Yes.” “That’s in the United States. Before we talk about your research and what you’re doing, we just wanted to say something to you we don’t understand. You know, your president says that climate change isn’t real, and he’s pulling out of the Paris Agreement, but your delegation is here and they’re working very constructively.” And that’s something I never repeated to the press, lest it be read by some congressional staffer, and it’d get back to the White House. But the US delegation has actually continued at that level to be quite constructive. They’ve continued in particular, jointly with China, to run what’s called the transparency, which is the monitoring, reporting, and verification aspects of the climate talks.

Thoko Moyo: And is the US unique in having a sort of high profile, it seems high profile, debate about whether climate change actually exists, or are there other countries as well that have that sort of debate in a way that’s quite prominent in the politics?

Robert Stavins: The United States is close to unique. What is true is that Australia, as it’s gone from governments back and forth from right to left, when governments have been in from the right, conservative governments, they have been very resistant to any action on climate change, and the Australians played a role in that in these talks just now. What’s even more striking is certainly Brazil, President Bolsonaro, who is a right wing populist climate skeptic, so not unlike our own president. They have also played that kind of role. And then certainly the Gulf oil states, in particular Saudi Arabia, have been very vocal in the climate talks, which is perhaps understandable, because for them it’s not just increasing their costs, it’s perhaps sending their economy back to what it was 75 or 100 years ago if there was no demand for fossil fuels.

Thoko Moyo: Okay. The other thing that we were going to get out the way is the UN Climate Action Summit that was in September, and that saw one of the largest youth-led protests in history. How is that different from COP25? What was that?

Robert Stavins: Those climate summits in September is something that was started by the previous Secretary General, Ban Ki-moon, because he had decided to make climate change an important issue for himself, and so he saw a September summit as an opportunity, a cheerleading session really, to bring countries together into the General Assembly, let heads of state give speeches at lots of different sessions in meetings, before three months later when the annual conference of the parties would take place. And they have continued since then. And I would say the role that it has played is precisely what was intended. It’s a cheerleading session, by which I don’t mean to denigrate it, but just to take it at what it is. There’s no legal authority there. It’s not part of the United Nations Framework Convention on Climate Change negotiations.

Thoko Moyo: But it gets attention focused on it.

Robert Stavins: It draws attention, and it certainly does. It also ties up the traffic in Manhattan, as New Yorkers will tell you, for a week.

Thoko Moyo: Okay, so let’s actually go to the meeting, COP25 in Madrid. This year’s tagline was “Time for Action,” and it does come at a time when there’s been more and more scientific evidence to show that there are devastating effects of climate change on land, oceans, and societies. We started off by saying that you thought it was a moderate success. Let’s talk a little bit about the sort of hopes, expectations, or goals of the meeting going in.

Robert Stavins: They were twofold. I mean, there were the popular press and from the activists, expectations and hopes, and those were for statements in what is called the decision, which just means the statement that comes out at the end of the COP with no legal force, it’s just a statement that comes out at the end, the decision, that they wanted a statement that countries were committed to coming up with much more ambitious targets a year from now in 2020 when the next set of targets will be submitted at the next COP. So that was for them, and that definitively did not happen.

And that’s why those individuals, and I think much of the press, because that’s a pretty obvious sort of thing to talk about, is what are the targets, what’s the aspiration, have characterized it as a terrible failure. I know The New York Times did this morning. But for those people, both the negotiators and for those of us on the outside in NGOs and in universities who are very engaged in the process and in research, what we were looking at much more was the actual text of the Paris Agreement, what wasn’t being completed and what needed to be completed, just in order to achieve the targets that they already have pledged, let alone thinking about the next set of targets.

Thoko Moyo: And what were those things?

Robert Stavins: And that was something very specific in particular, and it ties in with the notion of international carbon markets. There’s one portion of the Paris Agreement, which is Article 6, or even to be more picky, Article 6.2, that provides for countries to cooperate with one another so that one country can help another country to accomplish something. And then the country that does the helping can take credit for that against its pledge that it’s made.

Thoko Moyo: Okay, so said another way, if you are performing poorly on your targets, you could set up a deal with a country that’s over-performing on their targets and somehow get… I mean, how? How does it work?

Robert Stavins: It wouldn’t necessarily be a country who is performing poorly. They might be performing perfectly, but nevertheless that they could finance what’s taking place in another country. So it’s a matter of finance. In fact, it’s a means of foreign direct investment. It just means that the incremental costs, what economists call the marginal costs, of reducing CO2 emissions vary tremendously across different countries, and that’s because the modern economies were already very energy efficient, and so there isn’t a lot of low-hanging fruit. But if you go to other parts of the world, there is low-hanging fruit. There are a lot that can be done at relatively low cost.

So that means if you’re in one of these countries where it’s very costly, you could finance things being done in one of those other countries. That’s to everyone’s benefit, if it’s voluntary on both sides, and it’s a means of foreign direct investment into those countries, which of course they’re very happy about. The big issue there, though, is to make sure that both countries don’t take credit for that same emissions reduction, that there isn’t double counting. That’s where the Paris Agreement comes in. That’s what article 6.2 is potentially about, are accounting measures to prevent double counting. That was not completed. That’s the one part of the Paris Agreement, what’s called the Rule Book, which is the text of the rules, that was not completed last year in Katowice. It was punted to this year. So for the cognoscenti, for those of us who are really involved a lot in the Paris Agreement and in the negotiations, the goal was to complete Article 6. That’s what it was about.

Thoko Moyo: And was it completed?

Robert Stavins: And Article 6 was not completed, but I’m going to give you an important caveat, it was not completed because Brazil and Australia, Saudi Arabia in particular, wanted some aspects in there that would have introduced loopholes that would have allowed double counting. And so what I take as the good news, and that’s why I say a qualified success, is that rather than producing what would have been a bad deal, they produced no deal. And I’m very serious about that.

We did research here at Harvard years ago with colleagues at Tufts University and MIT, in which we said what needed to be in the Paris Agreement on this issue of sharing responsibility, bringing down costs. And we said the first important thing is that they not put in the following kind of items, which would make everything worse, and that didn’t happen. So it’s in that sense that I think it’s a qualified success, that even though there’s no deal, there’s still a possibility for it at the next meeting.

Thoko Moyo: At the next meeting. So you think that something can happen in the next 12 months before Glasgow to get to a point where you have the sort of accounting rules or standards that could get Article 6 done?

Robert Stavins: That’s exactly right. I think that that can happen. I wouldn’t say that I think it will happen, because there is political opposition to it happening.

Thoko Moyo: Let’s talk a little bit about the voices at these talks. The most obvious sort of divide, as it were, would be between developed and developing nations. How does that play out? I mean, who gets to talk here and and who gets listened to?

Robert Stavins: That’s an exceptionally important point, as it is in the United Nations in general. As an economist, whereas normally most of the analysis we do, whether it’s teaching in the classroom or it’s research on the outside or it’s conversations with the government, are focused on efficiency issues. But when you get into climate change, the international aspects, the aspects of distributional equity are extremely important. Going all the way back to the beginning, 1992 Brazil Summit, there’s a very important principle in the overarching document, the United Nations Framework Convention on Climate Change, which is, although it’s a global commons problem, we’re all in it together, nevertheless, there are common, but there are differentiated responsibilities.

Different countries have contributed different amounts to the accumulated stock. United States is number one, China’s second. And there are different capabilities, different wealth. That principle is exceptionally important, and everyone in the negotiations recognizes that. Having said that, as you said, that there has been in the past a polarization between the industrialized countries and the developing countries, and that was codified in the Kyoto Protocol, because only the industrialized countries had responsibilities.

Under Paris, it’s much more of an even playing field, although obviously some countries, particularly the European Union, take on much more aggressive targets than do poorer countries. Certainly, countries in Sub- Saharan Africa, from my point of view, need not do anything, I mean, their contributions are small and they’re mired in terrible poverty. So that differentiation remains, but there are lots of other constituencies at play. A very important one are the Small Island States, because for most countries in the world, ranging from the United States to the European Union to even the Gulf oil states, when we talk about addressing climate change, we’re talking about an increase in cost to our economy or a reduction in productivity. For the small island states, climate change is existential, so it’s at a whole nother level of concern. So their voice is very important, and although they are very small in terms of population, although they are very small in terms of their share of global gross domestic product, they’re actually very vocal and very effective, I’d say, in the talks. Remember, one last point is that under the rules of the United Nations, voices are all one country, one vote. The United States has the same vote as the smallest country in the world.

Thoko Moyo: Okay. Okay. So just one more question, just looking at the actual meeting. Another thing that we’re getting used to is seeing the protests and the demonstrators, and I know in Madrid one session you had protestors actually storm the session. We read a lot about the protest out on the streets. Is that actually having an impact? Is that sort of pressure having an impact on the deliberations and the progress that could be made?

Robert Stavins: Well, I think it certainly provides support, for example, for the small island states, the countries that wanted the most aggressive pledges to be made, because they feel tremendous support there. I don’t think it had any effect on the pace of the negotiations themselves, except that they were disrupted for a few hours that one afternoon. Other than that, I don’t think it has any particular influence. I’m not making a judgment with that. Maybe it should, maybe it shouldn’t, but I don’t think it does.

Thoko Moyo: Okay. We’ve talked a little bit about, you’re an environmental economist. Why is the economic perspective important in environmental issues? I mean, what are some of the things that you think about, and necessarily, what’s in your research?

Robert Stavins: Well, what I’d start by saying is that the causes of environmental problems, whether it’s economics or it’s local hazardous waste, the causes of environmental problems are essentially economic. It’s a result of the fact that there are unintentional negative aspects, consequences, factors that are the result of fundamentally meritorious activity by private firms making the products or the services that you and I want to buy. And sometimes the result of consumers when they’re using those products. They are external to the decision-making, which is why economists refer to environmental pollution as an externality.

And there are also then consequences of environmental pollution that have economic dimensions. So surely, if the causes of environmental pollution are fundamentally economic, which they are, and if the consequences of environmental pollution have important economic dimensions, then that would suggest that an economic perspective can be helpful for understanding those problems fully.

But you know, we’re sitting here at the Harvard Kennedy School, not at the Department of Economics in the Faculty of Arts and Sciences, so it’s not understanding just for understanding’s sake, it’s understanding so that we can make a difference. And the way that this understanding can make a difference is to identify public policies that are effective. And by effective, I mean they reduce pollutant emissions, they don’t simply demonize the bad guys, that they are economically sensible, by which I mean they’re cost effective, that we don’t shoot ourselves in the foot and spend more than we have to. After all, we don’t only care about the environment, we care about the cost of education, healthcare, food, fuel, and a thousand other things. And that perhaps they’re more likely to be politically pragmatic. I think this economic perspective, although it’s not the only legitimate perspective, surely, can be helpful in those regards.

Thoko Moyo: You mentioned the private sector in that, actually, and we haven’t talked about that. What role does the private sector have in the solutions in climate change, and what sort of actions are required of, and what sort of actions are private sector taking?

Robert Stavins: Well, the private sector plays an extremely important role, because that’s where the emissions for the most part come from, either actually from private industry, from manufacturing, electricity generation, or from products that they produce, such as motor vehicles. So their role is exceptionally important, and I’ve long had the view that only working through the market can much be accomplished. You know, that’s why, if I may say, back in 1988 when I first joined the faculty at the Kennedy School, a previous dean, Graham Allison, that he and I launched a project which was titled Harnessing Market Forces To Protect the Environment with two members of the US Senate, a bi-partisan pair of senators, something you couldn’t conceive of today, because it’s so important to work through the market.

Robert Stavins: And private industry in my view is aware of that. So there’s a lot of support actually from private industry for, for example, the Paris Agreement. The lobbying of the White House on the Paris Agreement, when there was about a six-month period in which it wasn’t clear what the president was going to decide about pulling out of Paris or not, private industry, with one exception, that’s the coal industry, was lobbying to stay in the Paris Agreement. And that includes the oil and gas industry.

Thoko Moyo: Interesting. And so what sort of promising approaches have you seen, the things that you’re particularly excited about in the markets that you think could have a real impact on the goals for climate change?

Robert Stavins: Well, I think the best thing, frankly, that private industry can do is to press for public policies in this realm, so it really takes me back to government. I don’t think it’s ever going to be dealt with sufficiently through voluntary actions by private industry, because again, it’s an externality. It’s not in the interest of their bottom line. They have fiduciary responsibilities to shareholders, and it’s taking money from shareholders to spend more than your competition is. So I think the best thing they can do is what to some degree they have been doing, and that’s to press for more aggressive public policies, whether it’s in the international domain or more importantly in the domestic national policies. And then when those public policies are put in place, not to fight them, but to comply.

And actually, the largest corporations do that, partly because they’re more equipped to take on the costs, but it’s particular sectors that would be really hard pressed that find it most difficult. It’s interesting, something that’s, I don’t know if it’s even recognized in the popular press, but that if you look at the climate legislation during the Obama administration, which was called the Waxman-Markey Bill, this was going to include a cap and trade system and lots of other policies to address climate change, that at that time there was a private industry consortium supporting the legislation, and that included a lot of large corporations. But there’s something that all of those corporations had in common. They all produced energy-consuming durable goods. So in there leading it was General Electric. The automobile companies were in there, Boeing was in there, because a climate policy means an increase in energy prices. When energy prices go up, that’s good for those companies, because it renders prematurely obsolete the current stock of energy-consuming equipment, because suddenly energy is more expensive. I mean, the reason why United Airlines buys a new airplane is not because they want the one with blue lights in the ceiling instead of white lights, it’s because it’s more efficient. And it’s more efficient, actually, not because of more efficient engines, it’s more efficient because the aircraft is lighter. They use composite materials rather than metals to build the aircraft.

Thoko Moyo: So there’s a business case for it.

Robert Stavins: There’s a business case, so those are the ones that were supportive. On the other hand, you didn’t see United Airlines or Lufthansa lobbying for that, because for them it’s an increase in cost. The price of jet fuel goes up a little bit, that’s the difference between profit and loss year after year after year for commercial airlines. So a lot of industries are supportive of climate policy because of the fact that it’ll help their bottom line. There are other ones that are not affected much one way or the other, but they’re still supportive, for example, of staying in the Paris Agreement or of some climate policies, because what they want is certainty. What they really hate is the uncertainty of not knowing what’s the price on carbon going to be 10 years from now? It’s so hard to make investment decisions on that basis.

Thoko Moyo: We don’t have a lot of time left, but I do have two more questions. I want to hear a little bit about your research, what it is that you are working on and sort of key findings and any sort of policy recommendations that come out of it. And then I want to look ahead to next year at Glasgow. I mean, what are the big expectations or hopes for that meeting, and what’s your sense in the next 12 months about that?

Robert Stavins: There have been two major threads of my research over, we’ll say, the past year, year and a half or so and going forward. One we’ve already talked about, it ties in with international cooperation and how that connects with Article 6 of the Paris Agreement, so I won’t say more about that. The other thread has been looking at and comparing the two major carbon pricing policy instruments, the two ways of working through the market to address climate change. One is with a tax on the carbon content of fossil fuels, coal, petroleum, and natural gas. That’s a carbon tax. The other is with a carbon or CO2 cap and trade system.

These instruments are hotly debated. Economists around the world and most policy analysts would say yes, we need to have carbon pricing in a modern economy. We won’t be able to achieve sufficient emission reductions in any other way. Why is that? Because when we’re talking about CO2 emissions in a country such as the United States, for example, we’re not just talking about 1,500 sources, as we were for sulfur dioxide with acid rain. We’re talking about every electricity producer that uses fossil fuels, every manufacturer, every commercial facility, every residence, every motor vehicle, every backyard barbecue grill and lawn mower.

Robert Stavins: It is inconceivable that those could be regulated with conventional standards, technology and performance standards. The only way to affect all of those is with the dissemination through the market of relative prices. So there’s this agreement that carbon pricing is necessary, maybe not sufficient, for the task, but necessary. Where the disagreement has come in is carbon tax versus cap and trade.

I recently did research for the National Bureau of Economic Research, in which I think I wrote what is a relatively exhaustive and probably the most comprehensive study that’s ever been done of comparing the two instruments. And my conclusion, which surprised even me, was that actually the choice between the two, that dichotomous choice, is vastly less important than the design of either one, that actually there’s a policy continuum from a pure carbon tax to a pure cap and trade, from a pure price-based mechanism to a pure quantity-based mechanism, if both work through the market. And then it’s various points along this spectrum are determined by the design.

Thoko Moyo: So either-or or both together, well-designed.

Robert Stavins: Yeah, either one well designed, either one well designed. And so then the question comes up is, if it is well designed, gee, it’s still not happening in the United States, and that’s surely because of political factors. So what I’m working on now with a Harvard Kennedy School PhD student in public policy, Dan Stewart, and a Harvard PhD recipient, now a professor at Duke University, William Pizer, is looking at the politics of this, really, and analyzing how these different instruments, and some others that are of great interest in the Congress, compare when we really take into account the political feasibility of different approaches going forward. And that’s research that we’re just beginning at this moment.

Thoko Moyo: Okay. So to end off, we’ve talked about COP25 and how that went. Another one coming up next year in Glasgow. What’s the sort of focus there, and what’s your sense about what should be focused on between now and next year and what the meeting will center on?

Robert Stavins: My hope would be that Article 6, this last part of the Paris Agreement in which the Rule Book has not been completed, that this can be completed in ways which are simple and, if I could say so, relatively pure. This is a case in which less is more. It will be much better to have something which is five sentences long, which simply validates global carbon markets and doesn’t get in the way, than to have detailed rules that go on for four pages, but of those four pages, there are two paragraphs that cause problems.

Thoko Moyo: I can’t imagine five sentences in a UN document, though.

Robert Stavins: Well, that’s the challenge. That’s the challenge. But you know, the Paris Agreement is only 13 pages long. It’s not a long document. So there is reason to hold out hope for something which is brief and simple. Last, if you ask me what my expectations are, I think that the demonstrations will be even greater, that youth activism in this realm is surely on the rise. I’m from an era in which there was youth activism I participated in on the Vietnam War. So I applaud the youth activists. I don’t want to sound like my father did to me at that time.

Thoko Moyo: But it’s real. I mean, the young people are the ones who are really, truly going to feel the biggest effects of what’s happening today. It makes sense that they are focused on it. It’s literally their lives at stakes.

Robert Stavins: Yes. No, and continue the analogy with Vietnam, it was because for young people, we were the ones that were going to go off and fight. It wasn’t going to be the 60-year-olds who are going to go off and fight. But you’re right, there is a reason why youth have the attitude they have, and I applaud them for it.

Thoko Moyo: Terrific. Thank you so much. This is great.

Robert Stavins: My pleasure.

Thoko Moyo: Thanks for listening. Please join us for our next episode, when we’ll talk with Harvard Kennedy School Professor Archon Fung about civic engagement and responsibility and how to ensure that in 2020, American democracy isn’t a spectator sport.


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.


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

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

A Very Quick Overview

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

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

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

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

The Bad News

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

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

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

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

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

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

The Not-So-Bad News

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

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

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

The Good News

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

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

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

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

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