A Pragmatic Global Climate Policy Architecture
Jeffrey Frankel and Valentina Bosetti
October 12, 2009
This commentary summarizes a proposed international architecture for global climate policy that takes into account a variety of likely political constraints. These include, for example, limits on the burden borne by individual countries, and the reluctance of developing nations to make commitments without aggressive action to cut emissions in the United States.
The 15th Conference of the Parties will take place shortly in Copenhagen and many observers are questioning the likelihood that much of substance will happen, much as they have many times before. As Yogi Berra said, “It’s déjà vu all over again.”
In fact, a key weakness of the first attempt to coordinate international climate policies was its lack of credible emissions targets—most countries failed to commit to emission targets under the 1997 Kyoto Protocol, and many of those who did ratify are expected to exceed their targets for the first commitment period, 2008–2012. These considerations underscore the critical need to develop a global climate policy architecture that takes political realities into account.
Although there are many ideas for developing a successor to the Kyoto Protocol, the existing proposals are typically based on just one or two of the following factors: science (capping global carbon dioxide [CO2] concentrations at 450 parts per million [PPM]); equity (allocating equal emissions per capita across countries); or economics (weighing the economic costs of aggressive short-term cuts against the, albeit speculative, long-term environmental benefits). Our proposal for emissions reductions takes these considerations into account, but is more practical because it is based heavily on politics. Although it accepts the framework of national targets for emissions and tradable permits, it also attempts to solve the most serious deficiencies of the Kyoto agreement: the need for long-term targets, the absence of participation by the United States and developing countries, and the incentive for countries to fail to abide by their commitments.
|In our judgment, any future climate agreement must comply with six important political constraints.
- First, aggressive targets to cut U.S. emissions will not be credible if China and other major developing countries do not commit to quantitative targets at the same time, due to concerns about economic competitiveness and the movement of energy-intensive industries to countries without emissions caps (“carbon leakage”).
- Second, China and other developing countries will not make sacrifices different in character from those made by richer countries that have gone before them, taking due account of differences in per-capita income, per-capita emissions, and baseline economic growth.
- Third, in the long run, no country can be rewarded for having ramped up its emissions high above the levels of 1990 (the baseline year for emissions targets embodied in the Kyoto Protocol).
- Fourth, no country will agree to participate if the present discounted value of its future expected costs exceeds a threshold level which, for illustration, we assume is one percent of GDP.
- Fifth, no country will abide by targets that cost it more than, say, five percent of GDP in any five-year budget period.
- Sixth, if one major country drops out, others will become discouraged and the system may unravel.
How It Would Work
Under our proposal, rich nations would begin immediately to make emissions cuts along the lines that their political leaders have already committed to (consistent with emissions targets in the European Trading Scheme or in recent U.S. legislative proposals). Developing countries would agree to emissions caps that maintain their projected business-as-usual emissions in the first decades but, over the longer term, commit to binding targets that ultimately reduce emissions below business as usual. This approach prevents carbon leakage and gives industries a more even playing field. However, it still preserves developing countries’ ability to grow their economies; they can also raise revenue by selling emissions permits. In later decades, the emissions targets asked of developing countries would become stricter, following a numerical formula. However, these emissions cuts are no greater than those made by rich nations earlier in the century, accounting for differences in per-capita income, per-capita emissions, and baseline economic growth.
Future emissions caps are to be determined by a formula that incorporates three elements. First is a progressivity factor that requires richer countries to make more severe cuts relative to their business-as-usual emissions. Second is a latecomer catch-up factor that requires nations that did not agree to binding targets under Kyoto to make gradual emissions cuts to account for their additional emissions since 1990. This prevents latecomers from being rewarded with higher targets, or from being given incentives to ramp up their emissions before signing the agreement. Finally, the gradual equalization factor addresses the fact that rich countries are responsible for most of the carbon dioxide currently in the atmosphere. From 2050 onward, this factor moves per-capita emissions in each country in each period a small step in the direction of the global average of per-capita emissions.
We analyzed the numerical targets using an energy/climate model that represents emissions mitigation opportunities for different regions at different future time periods. Some of the main results include the following.
- The world CO2 price reaches $20–$30 per ton in 2020, $100–$160 per ton in 2050, and $700–$800 per ton in 2100.
- According to the economic simulations, most countries sustain economic losses that are under 1 percent of GDP in the first half of the century, but then rise toward the end of the century.
- Atmospheric concentrations of CO2 stabilize at 500 ppm in the last quarter of the century, implying a projected increase in world temperatures above pre-industrial levels of about 3oC.
We have not been able to achieve year-2100 concentrations of 450ppm or lower (to limit projected warming to about 2oC) without violating the same political-economic constraints.
The proposal calls for a successor international agreement that establishes a global cap-and-trade system. The emissions caps are set using formulas that assign quantitative emissions limits to countries in every five-year period from now until 2100. Three political constraints are particularly important in specifying the formulas. First, developing countries are not asked to bear any cost in the early years. Second, even later, developing countries are not asked to make any sacrifice that is different from the earlier sacrifices of industrialized countries, accounting for differences in incomes. Third, no country is asked to accept targets that cost it more than 5 percent of GDP in any given year.
The framework here allocates emissions targets across countries in such a way that every country is given reason to feel that it is only doing its fair share. Furthermore, the framework—a decade-by-decade sequence of emissions targets determined by a few principles and formulas—is flexible enough that it can accommodate major changes in circumstances during the course of the century.
Valentina Bosetti is Senior Researcher, Fondazione Eni Enrico Mattei, Milan, Italy. She specializes in environmental resource economics, particularly climate policy modeling.
Jeffrey Frankel is James W. Harpel Professor of Capital Formation and Growth, Harvard Kennedy School. His research interests include international finance, currencies, monetary and fiscal policy, commodity prices, regional blocs, and global environmental issues.