From COP21 to COP22

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There was an interesting panel discussion (Climate and energy policy after the Paris Agreement) at the excellent EAERE 2016 conference in Zurich with Scott Barrett (Columbia University), Lucas Bretschger (ETH Zurich), Thomas Sterner (University of Gothenburg) and Herman Vollebergh (Netherlands Environmental Assessment Agency and Tinbergen University), all four of whom have been widely involved in climate negotiations or research thereof. So I chased them up in order to get their views on what economists should do, or prepare for, to help make COP22 in Marrakesh successful.

From Kyoto to COP21

COP21 brought a change of mind from the Kyoto approach. The Kyoto approach was about convincing or lobbying countries into an international agreement. According to Scott Barrett, “[i]n the early days, there was wide support among economists for tradable permits. There was also support from the beginning for a carbon tax, but the tradable permits crowd won out for a variety of reasons. The Kyoto Protocol is built around this concept. But it didn’t work. At the time, I was very sure it wouldn’t work because it didn’t provide a means for enforcement.”

Clearly, countries did not want to formally constrain themselves into an agreement. And it is understandable. One only needs to look at the debt threshold that the European Union imposed upon its member states: Those countries that are in a terrible economic state and ran over this threshold now also have to pay fees and are blamed and shamed for having crossed that threshold. So the point is that the fees should have been helpful as a commitment device to stop countries from crossing those thresholds, but obviously they don’t work.

Most economists approach this climate policy problem differently. They think about what is globally the best if everything works fine, which is of course very important to know, but often ignores the role of motivation and incentives. Scott Barrett argues that “[s]hortly before COP21, a number of distinguished economists led by Jean Tirole produced a kind of manifesto urging that negotiators adopt a carbon tax. Obviously, a tax is ideal in a top down world, but is it really better than the alternatives in the decentralized setting of international affairs? I know of no evidence for this. I am concerned economists will make the same mistake as before, advocating for an instrument (this time taxing; last time trading) without truly understanding that the problem lies elsewhere, and more specifically in the difficulty of enforcing whatever it is that countries agree to do.”

In this respect, Herman Vollebergh also argues that any international agreement is extremely difficult to come by simply because some of the main actors, namely fossil stock owners, are very unlikely to agree on this. He suggests that this should not come as a surprise, since “even within the EU we haven’t been able to get this agreement in 20 years, although we did succeed on minimum rates for several energy products. Going beyond the EU is, obviously, even much more involving. And we know that taxes may invoke retaliation (the Chinese dislike bilateral trade agreements, for instance).”

 

The new deal

Climate policy must come from intrinsic motivation or extrinsic incentives, meaning that the countries involved have to feel that the climate policy is in their best interest. Intrinsic motivation would be that the countries know that acting upon climate change now will do more good than harm, and extrinsic incentives would be some kind of transfers that induce countries to enter a climate agreement in case intrinsic motivators are not enough.

After too many rounds of discussion at previous COP sessions that provided seemingly few advances, the limitations were acknowledged and negotiations brought about the Intended Nationally Determined Contributions (INDCs). These are (mostly) intrinsically motivated and, as Scott Barrett notes, “clarify, at least to some extent, the interests of each country in addressing climate change unilaterally. Kyoto obscured the incentive to act unilaterally. I think the INDCs are revealing the Nash equilibrium more than they are improving upon the Nash equilibrium.”

So from an economist’s perspective something new is happening now. This move away from an international agreement yields individually rational, internally motivated emission reductions. These provide information about how countries understand their costs and benefits from climate policy. The question, thus, is whether we could somehow exploit the information that these INDCs provide. It is clear that the next rounds of negotiation at COP22 will be focusing on the INDCs. Politicians will argue that some countries fall short of what would be expected from them based on different criteria (e.g. via the ETH climate calculator). But certainly the main question is whether these further negotiations will yield us INDCs that take us closer to the 2°C (or 1.5°C) target or not. Since there is no enforcement or commitment necessary, it is a big question whether further rounds of negotiation can actually induce countries to increase their INDCs. This is where economists have to come in. The question is what they will say and what they should do.

The road ahead

The point that a global price on carbon is an utmost necessity seems to be shared by about all economists. But as suggested above there are some limitations and economists here tend to have different beliefs as to how discussions at COP22 should be approached.

Thomas Sterner notes that “I think most economists wanted to write something about carbon pricing in the treaty and the negotiators understood that this would ruin the chances for an agreement. The negotiators preferred an agreement in principle first even if it did not have the instruments or means in the text.  It is clear that eventually some sort of carbon price is needed but we must reflect on the timing of our advice. Maybe we put the cart before the horse. Maybe it was good to get agreement on principles first and better to wait till later with instruments – but actually I am not 100 percent sure of this.”

Hermann Vollebergh feels that “international negotiations that aim to create a common ground for a top down tax is a dead end. You can ‘tax’ carbon also through other means. It is just a shadow price. It is better to seek for complementary areas using agreements on standards. That also builds in my view on ideas related to international coordination of SO2 abatement. Those agreements were very successful, though in a different way than most economists think.”

So here we have two slightly different views. Thomas Sterner believes it is still important to push for a global tax on carbon, albeit – if I understand correctly – he does seem to prefer an agreement like the INDCs that at least yield some emission reductions to nothing at all. Hermann Vollebergh believes it is absolutely time to move on and not discuss about a global carbon price any longer but attempt to achieve emission reductions through other means (like standards).

Lucas Bretschger advocates the following: “I believe we need to build on the current agreement to induce future convergence towards more efficient and equitable INDCs. For this, we need to evaluate the INDCs based on a common metrics and hint at the gaps which are existing.”

Scott Barrett feels that COP21 is “an achievement in the sense of getting the world to agree, and [he] thinks we can and should make the most of it. [His] complaint is that it’s not enough. If we put all our efforts into Paris, we’ll still fall far short of where we need to be. So we also need to give our support to complementary approaches. Some economists are working now on how to make Paris effective, by focusing on the issues of measurement, reporting, and verification. Other economists will focus on trading. [His] focus will be on proposing coordination agreements for individual gases and sectors. [He] believes these will be effective because they start from the premise that enforcement is the central problem.”

Thus, both Lucas Bretschger and Scott Barrett want to work with the tools that have been developed in COP21 and build upon them. This would require more commitments from policy makers above those that are individually rational – assuming that the INDCs are based on some kind of Nash equilibrium calculations. As a result, this then requires some enforcement mechanisms or strategic extrinsic motivators.

I seriously doubt that it makes sense to solely push for a global price on carbon. While it is a clear message and certainly the first-best solution, history has repeatedly shown us that it does not seem feasible from a policy perspective. In my opinion we have only one possible roadmap if we as economists want to achieve something at COP22. We should acknowledge that all of the positions above are necessary to pursue, but what we certainly need is a proper roadmap and a more unified voice. We need (environmental) economists to sit down together and work out precisely the frameworks which are to be used at COP22. We need to make sure that if we push for standards this is a complementary approach to INDCs and not an alternative. We need to accept that climate negotiators prefer to trade off many different approaches as it gives them more flexibility in the negotiations. And when climate negotiatora come up with a new mix of strategies, we need to be ready to advice them on the impacts. And we need to start discussing more openly on what could be additional extrinsic motivators that shift countries away from their INDCs towards further emission reductions that bring us closer to the 2°C or 1.5°C  target. Finally, we also need to find a way to enforce these further emission reductions, assuming that the current level of INDCs is at the Nash equilibrium level.

Time is limited to achieve all this for COP22 and action is required now!

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