The key principles that we identify are motivated by the fact that sovereign nations cannot be compelled to act against their wishes. As a result, successful treaties must create adequate internal incentives for compliance, along with external incentives for participation. In particular, a credible international climate change agreement must be: (1) equitable; (2) cost-effective; (3) able to facilitate significant technological change and technology transfer; (4) consistent with the international trade regime; (5) practical, in the sense that it builds—where possible—on existing institutions and practices; (6) attentive to short-term achievements, as well as medium-term consequences and long-term goals; and (7) realistic. Because no single approach guarantees a sure path to ultimate success, the best strategy may be to pursue a variety of approaches simultaneously.
We also highlight four promising policy architectures for an international climate agreement. Although we do not endorse any single policy architecture, each of the four architectures is promising in some regards and raises important issues for consideration. The first calls for quantitative emissions caps based formulas that allocate emissions to countries through 2100. These caps would be implemented through a global system of linked national and regional cap-and-trade programs, and would allow for trading among firms and sources.
The second potential architecture is a system of linked international agreements that separately address mitigation in various sectors and gases. These agreements would also cover issues such as adaptation, technology research and development, and geoengineering.
A third architecture would impose harmonized domestic taxes on greenhouse gas emissions from all sources in all nations. The tax would be adjusted internationally from time to time, and each country would collect and keep the revenues it generates.
The fourth architecture is a bottom-up system that relies on linkage between national and regional cap-and-trade systems. In the short term, indirect linkages would occur via the Clean Development Mechanism (CDM); in the longer term, more nations would agree to direct linkages between their respective tradable permit systems. We highlight this option less as a recommendation and more by way of recognizing the structure that may already be evolving as the de facto post-Kyoto international climate policy architecture.
Regardless of which overall international policy architecture is chosen, a number of essential design elements stand out as particularly important. We focus on five issues: burden-sharing, technology transfer, CDM reform, addressing deforestation, and making global climate policy compatible with global trade policy.
Reaching agreement on burden sharing is the most challenging aspect of establishing a post-Kyoto international climate regime. Key stumbling blocks include the relationship between global climate policy and economic development, and the issue of fairness. One approach to thinking about this issue is to start by focusing on what is politically possible, and then to identify an allocation of responsibility—with appropriate changes over time—that makes every country feel that it is doing only its fair share. In the longer term, discussions of fairness often focus on the desirability of moving all countries toward equal per capita emissions.
Technology transfer is another critical design element for a successful agreement. Achieving long-term climate goals will require a remarkable ramp-up in the innovation and deployment of energy-efficient and low-carbon technologies. Transitioning away from fossil fuels as the foundation of industrialized economies and as the basis for development in emerging economies will likely necessitate a suite of policies to provide incentives for technological change. Two principal categories of policies are important to drive the invention, innovation, commercialization, diffusion, and utilization of climate-friendly technologies: (1) international carbon markets and other pricing strategies; and (2) non-price mechanisms such as technology transfer and coordinated innovation and commercialization programs.
A future climate agreement must also evaluate the role played the Clean Development Mechanism. A serious concern about the CDM is that that it may give credits for emission reductions that would have occurred even in its absence. To address this problem, there have been calls to develop procedures to improve the likelihood that credits represent emission reductions that are truly “additional, real, verifiable, and permanent.” There are also a number of more dramatic changes that merit consideration. One promising approach would involve less emphasis on strict ton-for-ton accounting and more emphasis on a range of activities that produce significant long-term benefits. Another approach is a “Technology CDM” under which technology transfer would be the only emissions-reducing activity for which credits would be awarded. A third approach—which is an alternative to the CDM—involves “climate accession deals” that would be negotiated on a country-by-country basis. Each accession deal would consist of a set of policies that are tailored to gain maximum leverage on a single developing country’s emissions, while still aligning with its interests and capabilities. Industrialized countries would support each accession deal by providing benefits such as financing, technology, and security guarantees.
A fourth important design issue is how to address deforestation in an international climate agreement. The approach currently used by the CDM awards credits to individual landowners for projects that increase the carbon stored in forests on their lands. Unfortunately, experience has shown that such project-by-project accounting faces serious challenges, especially in establishing a counterfactual baseline against which to evaluate projects. One alternative approach would “delink” forest carbon programs from emission credits systems, and instead focus on inputs such as policies to discourage deforestation and better manage forests. Another promising approach is national inventory accounting. Under this approach, nations would conduct periodic inventories of their forest carbon stock. The measured stock would be compared with a pre-negotiated baseline to determine the offset credits that can be redeemed, or debits that must be covered, in the permit market.
The fifth design issue we highlight is the relationship between efforts to address climate change and efforts to reduce barriers to trade. Some countries have expressed concern that carbon-intensive industries will shift their emissions and economic output to countries that do not regulate greenhouse gas emissions. A key question is whether trade measures can be used to address this concern without running afoul of World Trade Organization rules and goals. Fortunately, the WTO’s founding Articles, agreements, and recent rulings support the principle that trade measures can be used to environmentally harmful target processes and production methods. Both tariffs and requirements for importers to surrender tradable permits are likely to be WTO-compatible.
Great challenges confront the community of nations seeking to establish an post-2012 international climate regime. Our hope is that the principles, policy architectures, and design elements presented here will be useful to leaders and policymakers as they reconcile their diverse interests and move forward with effective solutions to the enormous, collective challenge posed by global climate change.
Joseph E. Aldy
Resources for the Future
Aldy received at Ph.D. in economics from Harvard University in 2005 and a Master of Environmental Management from Duke University in 1995. Aldy's research addresses questions about climate change policy, mortality risk valuation, energy subsidies to low-income households, and energy policy.
Robert N. Stavins
Harvard University Environmental Economics Program
Stavins holds an M.S. in agricultural economics from Cornell University and a Ph.D. in economics from Harvard University. Stavins' current research includes analyses of technology innovation, environmental benefit valuation, political economy of policy instrument choice, and econometric estimation of carbon sequestration costs.