Climate agreements – which way now?

Tomorrow I will be at the conference “Economic stakes at the 2015 Paris Climate Conference of the Parties” at the French Ministry of Ecology, Sustainable Development and Energy. This should be a very nice event, with high level speakers and good discussions. What will be the main discussion and what to make of it?

Unfortunately one cannot register any longer since there is no more space. However, if you want to know what two of the main speakers, Jean Tirole and Christian Gollier, will most likely be speaking about, then you may want to read their new article published at The Economist. What is their main point: The Copenhagen and Lima climate accords, where a “pledge-and-review” mechanism was introduced, asks countries to register their voluntary climate actions. This is not going to be sufficient since there is basically no coordination among parties, and thus we are back to free-riding problems and mostly inefficient, uncoordinated individual country action. As a remedy the authors suggest that a cap-and-trade system should be introduced.

Of course we do know that a cap-and-trade system, as advocated by most economists, is most likely the best way to handle the climate change problem. However, all the prior COP meetings have tried to introduce something along the lines of an international agreement in the form of e.g. a cap-and-trade system, but have failed to do so. And thus the move away from a full-blown international agreement to the current “pledge-and-review” approach.

Thus, there are two lessons to take away from this: Either politicians are unaware that a cap-and-trade system is actually one of the best solutions, or they are simply unable to coordinate among themselves.

I do not believe that politicians nowadays are unable to understand the benefits of a cap-and-trade system. They may feel it is difficult to introduce one, but then again this is unlikely to be an issue anymore since many countries/regions implemented a cap-and-trade system already.

My guess is that the problem with a cap-and-trade system is the original one: not how to trade, but where to cap. And it is precisely here where politicians have had problems to agree on whom to place the burden. And it is precisely for this reason that policians have decided to move away from international coordination to a loose approach such as the pledge-and-review one.

Thus, international coordination is, yet again, the stumbling stone. While it is important that economists, over and over again, emphasize the benefits of strong international coordination via e.g. a cap-and-trade approach, we also have to understand that this requires a level of coordination that policy makers are simply unwilling to provide.

This may be somewhat understandable though. After all, most of these policy makers still belong to a generation that saw their parents, or themselves, at war with precisely the same nations that they are now supposed to come to an international agreement with. Furthermore, many politicians may still feel that the short-term costs of an international agreement will cost them dearly in terms of voters. And finally, politics is all about strategy – yes we want to reduce potential long-term costs from climate change, but we want to achieve that at a cost that is the lowest for our nation now.

We clearly do not have the luxury of waiting until a new generation of policy makers arises that is less suspicious of their peers. But we also have few means of making policy makers less strategic. Thus, one way ahead is to emphasize that the short-run costs of climate action may be much lower than feared. For example, Germany’s energiewende has led to some of the lowest electricity prices around; Organic food and greener products bring about many health benefits that reduce health expenditures and public clean-up costs; Investing in green technology has not led to the feared increase in unemployment; Greener countries do not grow slower. This list could go and on.

Thus, while it is important to push for international agreements, at the same time it is necessary to talk about the short-run benefits of climate action. This makes it easier for policy makers to sell an international agreement at home and still look good in front of the voters.

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