After Kyoto: Solving The Climate Conundrum

Environmental activists holding flags from around the world demonstrate in front the of the conference center where the negotiation of a post Kyoto protocol deal is taking place during the UN Climate Conference Friday Dec. 14, 2007 in Nusa Dua, Bali, Indonesia. AP Photo/Binsar Bakkara

Sheila M. Olmstead is Associate Professor of Environmental Economics, School of Forestry and Environmental Studies, Yale University; and Visiting Scholar, Resources for the Future. Robert N. Stavins is Albert Pratt Professor of Business and Government, John F. Kennedy School of Government, Harvard University; University Fellow, Resources for the Future; Research Associate, National Bureau of Economic Research; and Director of the Harvard Project on International Climate Agreements.

President Obama will join some 90 other heads of state in Copenhagen on December 18th to showcase the outcome of the international climate negotiations on a successor to the 1997 Kyoto Protocol, which expires in 2012. To be effective and ultimately successful, any feasible successor agreement must contain three essential elements: meaningful involvement by a broad set of key industrialized and developing nations; an emphasis on long-term accomplishment; and use of policies that work through the market, rather than against it.

In a discussion paper of the Harvard Project on International Climate Agreements, we examine in detail these three pillars of a new international climate agreement.

Consider the need for broad participation. Industrialized countries have emitted most of the stock of man-made carbon dioxide (CO2) in our atmosphere. For equity's sake, shouldn't they reduce emissions before developing countries are asked to contribute? While this seems to make sense, we offer four reasons why the new climate agreement must engage all major emitting countries - both industrialized and developing.

First, emissions from developing countries are significant and growing rapidly. China surpassed the United States as the world's largest CO2 emitter in 2006, and developing countries may account for more than half of global emissions within the next decade.

Second, developing countries provide the best opportunities for low-cost emissions reduction; their participation could dramatically reduce total costs.

Third, the United States and several other industrialized countries may not commit to significant emissions reductions without developing country participation. Fourth, if developing countries are excluded, up to one-third of carbon emissions reductions by participating countries may migrate to non-participating economies through international trade, reducing environmental gains and pushing developing nations onto more carbon-intensive growth paths (so-called "carbon leakage").

How can developing countries participate in an international effort to reduce emissions without incurring costs that derail their economic development? Their emissions targets could start at business-as-usual levels, becoming more stringent over time as countries become wealthier.

If such "growth targets" were combined with an international emission trading program, developing countries could fully participate without incurring prohibitive costs (or even any costs in the short term).

The second pillar of a successful post-2012 climate policy is an emphasis on the long run. Greenhouse gases remain in the atmosphere for decades to centuries, and major technological change is needed to bring down the costs of reducing CO2 emissions. The economically efficient solution will involve firm but moderate short-term targets to avoid rendering large parts of the capital stock prematurely obsolete, and flexible but more stringent long-term targets.

Third, and finally, a post-2012 global climate policy must work through the market rather than against it. To keep costs down in the short term and bring them down even lower in the long term through technological change, market-based policy instruments must be embraced as the chief means of reducing emissions. One market-based approach, known as cap-and-trade, is emerging as the preferred approach for reducing carbon emissions among industrialized countries.

Under cap-and-trade, sources with low control costs may take on added reductions, allowing them to sell excess permits to sources with high control costs. The European Union's Emission Trading Scheme (EU-ETS) is the world's largest cap-and-trade system. In June, the U.S. government took a significant step toward establishing a national cap-and-trade policy to reduce CO2 emissions, with the passage in the House of Representatives of the American Clean Energy and Security Act. Other industrialized countries are instituting or planning national CO2 cap-and-trade systems, including Australia, Canada, Japan, and New Zealand.
Linking such cap-and-trade systems under a new international climate treaty would bring cost savings from increasing the market's scope, greater liquidity, reduced price volatility, lessened market power, and reduced carbon leakage.

Cap-and-trade systems can be linked directly, which requires harmonization, or indirectly by linking with a common emission-reduction credit system; indeed, this is what appears to be emerging even before a new agreement is forged. Kyoto's Clean Development Mechanism allows parties in wealthy countries to purchase emissions reductions credits in developing countries by investing in emissions-reduction projects.

These credits can be used to meet emissions commitments within the EU-ETS, and other systems are likely to accept them as well.

Nations meeting in Copenhagen this week and next should consider these three essential elements as they negotiate the fundamentals of a new climate agreement. A new international climate agreement missing any of these three pillars may be too costly, and provide too little benefit, to represent a meaningful attempt to address the threat of global climate change.

By Sheila M. Olmstead and Robert N. Stavins:
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