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Stavins on the global irony of cap-and-trade

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"Stavins on the global irony of cap-and-trade"

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Climate policy in Tokyo, Seoul, Brussels, and Washington

America sold the rest of the world on capping carbon and trading emissions.  But just as it is being embraced worldwide, the very phrase is an “anathema” here — an ironic turn of events that economist Robert Stavins discusses in this repost from Harvard’s Belfer Center for Science and International Relations Blog.

As I write this, I’m on board a flight from Seoul, South Korea, to San Francisco, California, on my way home to Boston, having spent the week of Harvard spring break meeting with senior government officials, academics, and leaders of civil society in Tokyo and Seoul on behalf of the Harvard Project on International Climate Agreements. Reflecting on these meetings in Asia and recalling meetings I’ve previously had in Brussels and Washington, some important opportunities and ironies about national and international climate policy come to mind.

Opportunities

The 15th Conference of the Parties (COP-15) of the United Nations Framework Convention on Climate Change (UNFCCC), which met in Copenhagen, Denmark, in December, 2009, produced two significant outcomes. The key substantive outcome, of course, was the Copenhagen Accord, about which I’ve written in detail in a previous blog post. The key institutional outcome was speculation that the UNFCCC may not be the best venue going forward for productive negotiations on climate change. (This is also a topic about which I’ve recently written at this blog.)

These dual outcomes of the Copenhagen conference point to the special importance of two key nations in international climate policy developments this year. I’m not referring to China and the United States (despite the fact that they are, of course, the world’s two leading emitters of carbon dioxide). Rather, I am referring to Korea and Mexico. Why?

First, these two nations are unique in being both long-time members (Korea since 1996, Mexico since 1994) of the Organization of Economic Cooperation and Development (OECD) and members of the group of non-Annex I countries under the Kyoto Protocol, which have no direct commitments under that international agreement. The OECD comes as close as anything to defining the set of industrialized nations of the developed world. Thus, Korea and Mexico have their feet planted firmly both in the developed world and the developing world (a fact that is readily apparent on even brief visits to these nations). This gives Korea and Mexico remarkable credibility with the two key blocks in international climate negotiations. That, on its own, would be of considerable importance, but there is another reality that makes this of even greater significance (and opportunity) in this year of 2010.

Coming out of Copenhagen, many participants in the international climate negotiations (as well as informed observers), noted that the UNFCCC has real limitations as the sole venue for future climate negotiations: too many countries – 192, excessively stringent requirements for agreement – unanimity, and a distinct tendency to polarize debates between developed and developing countries. Two other, potentially supplementary venues stand out as promising: the Major Economies Forum (MEF) and the G20.

The MEF, which has hosted productive discussions among 17 key countries and regions that together account for nearly 90 percent of global carbon dioxide (CO2) emissions, may be somewhat limited by the fact that is was created by and is chaired by the United States, a nation with constrained credibility on climate issues among some countries, particularly in the developing world. The G20, which brings together twenty of the world’s largest economies, focuses on economic as well as other global issues and consists of almost the same set of nations as the MEF, likewise accounting for about 90 percent of global emissions. The G20 could thus be an exceptionally promising supplementary venue for meaningful and realistic climate discussions. And in November of this year, the G20 will be hosted by Korea, when it convenes in Seoul. This gives the Korean government a special role in setting the agenda for the discussions and presiding at the sessions.

The G20 meetings in Seoul will come just two weeks before the Sixteenth Conference of the Parties of the UNFCCC, which will take place in Cancºn, Mexico. Thus, the Mexican government is also in a key position this year, because it will hold the Presidency of COP-16.

Add to this the fact that both Korea and Mexico have been particularly creative in their domestic climate policy initiatives and international proposals over the past year.

Together, Korea and Mexico, share credibility in the developing and developed worlds, and likewise share unique international legitimacy as the hosts and presidents of the G20 and COP-16 in 2010. This is why these two countries have a remarkable opportunity this year to provide leadership of the international community, and make real progress on negotiations to address the threat of global climate change. Those are the opportunities. Now, let me turn to the ironies that have come to the fore.

Ironies

More than a decade ago, it was the United States, as the leader of the so-called “Umbrella Group,” that successfully fought for the inclusion in the Kyoto Protocol – over the objections of the European Union – of three “flexibility mechanisms” to bring down the costs of meeting the Protocol’s objectives: joint implementation (Article 4), a global emissions reduction credit system, the Clean Development Mechanism (the CDM, Article 12), and emissions trading among countries (Article 17). Ironically, once the George W. Bush administration officially pulled the United States out of the Kyoto Protocol process, it was the European Union that implemented the world’s first CO2 emissions trading program, the European Union Emission Trading Scheme (EU ETS).

Beyond this, the United States was a pioneer with the use of national cap-and-trade systems, including lead trading in the 1980s and the SO2 allowance trading program beginning in 1995 under the Clean Air Act Amendments of 1990. In addition, despite its lack of ratification of the Kyoto Protocol, the U.S. government very early on began to give serious consideration to the development of an economy-wide cap-and-trade system for CO2 with the McCain-Lieberman legislation in the U.S. Senate (followed later by the Lieberman-Warner bill). More recently, of course, the U.S. House of Representatives passed the Waxman-Markey bill in June of 2009, including a significant economy-wide cap-and-trade system.

Over the past nine months, however, the very phrase, “cap-and-trade,” has evolved from being politically correct in Washington to nothing less than politically anathema. (How and why this happened is a topic for a future essay at this blog.) The great irony is that just when cap-and-trade has been under such vociferous attack in Washington, countries throughout the world are embracing this instrument, recognizing its great potential to address climate change cost-effectively and equitably.

In addition to the EU ETS, already in force, Australia is primed to put its cap-and-trade system in place, as is New Zealand. And just a few days before I arrived in Tokyo, the Japanese cabinet announced that the government will move forward with a cap-and-trade system (in contrast with Japan’s previously proposed sectoral approach). And, not to be outdone, Korea is considering the use of cap-and-trade as an element of its own domestic climate policy.

This irony is striking. Of course, it could be reduced or eliminated if Senators Kerry, Graham, and Lieberman can use their much-anticipated new climate proposal to pull victory from the jaws of anticipated defeat. Only time will tell.

– Robert Stavins

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10 Responses to Stavins on the global irony of cap-and-trade

  1. Are you planning on blogging on the recent climate change article(s) published by The Economist? Would definitely like to read your comments on it.

    [JR: It's on the list.]

  2. John McCormick says:

    Dr. Stavins gives credit to Mexico for being particularly creative in their domestic climate policy initiatives and international proposals over the past year.

    And, he sees Mexico chairing the COP 16 as a remarkable opportunity this year to provide leadership of the international community, and make real progress on negotiations to address the threat of global climate change.* He might be right.

    However, the Danes could not have been more passionate about crafting the right mix of provisions and agreements to launch the treaty on its homeland except for one glitch: the recognized failure of the Chair to marshal the debate and agreements through to a successful conclusion.

    On Dr.Stavins’ Dec 20 blog (posted also on CP). Steve Curwood made a cogent analogy between the perils of new chairs presiding over each COP and the World Health Organization’s structure which has to deal with immediate global threats of epidemics that threaten whole populations — but not on the scale of a 2.5-4 degree Celsius temp increase.

    Curwood’s comment is worth reading and considering:

    “The deeply sincere intentions of the Danes were no match for the forces unleashed, and in the end the weakness at the gavel has to be considered. Carlos Estrada gaveled Kyoto through in 1997; if the Danish style of COP moderation had been used at COP3 there would be no Kyoto. Mexico takes over now, and early, as the Danes have declined to continue for the next year.

    Question: is it time for the UN to create a true climate agency? Rotating chairs for what has become the greatest threat to our civilization means that rookies are always in charge. Imagine if the World Health Organization were organized like the UNFCCC. There would have been 192 different opinions about whether H1N1 had become pandemic and what to do about it, and the chair would have been a part time job for some health minister who had never managed a pandemic before.”

    Can you imagine the folly of having two term limits imposed on all members of the House of Representatives and the quality of the leadership that guided the health care bill through last evening.

    You might think that is a good idea but you overlook intellectual memory of House rules and the relationships built upon trust and respect that can only be achieved over time.

    John McCormick

  3. mike roddy says:

    Interesting thoughts, thanks. The details and practicality of cap and trade elude me, and the thoughts expressed here were quite educational.

    OT, I need to hear from Dr. Stavins on another issue. I’m addressing an international conference in Australia on carbon sequestration strategies that include supporting native forest regeneration. His 2005 paper on the subject is of great interest- as is Brendan Meckin’s new book- but I need to contact Dr. Stavins with a couple of questions. My email address is mike.greenframe@gmail.com.

  4. Very nice views. Interesting thoughts….

  5. Shouldn’t Bob Stavins reveal his ties, advisory and/or financial, to carbon trading exchanges (e.g., MCeX TCX, inter alia), like the geo-engineers should reveal their institutional and financial ties, or is Bob exempt from such demands?

    [JR: Have you checked his bio?]

  6. Ken Johnson says:

    It seems that “climate policy” has ceased to exist (if it ever did); governance is guided purely by “climate politics”.

    The economics profession — Stavins included — has failed to adequately address this most fundamental policy question: Should the success criterion of climate policy be (a) that it achieves a predetermined emission target at the lowest possible cost, or (b) that it achieves the lowest possible emissions at acceptable cost?

    The question is not academic. For example, had the U.S. acid rain program been grounded on the latter objective, as many as 20,000 annual premature deaths resulting from power plant emissions might have been avoided.

    In the context of GHG emissions, what is the point of limiting emission reductions to a predetermined cap that does not come close to climate stabilization requirements, particularly when “the entire 2020 target in the Waxman-Markey climate bill could be met with energy efficiency at a net savings to U.S. consumers and businesses of $700 billion“?

    In 1990 the Swedish parliament mandated regulations to limit stationary-source NOx emissions, with the intent of achieving a 35% reduction in regulated emissions within 5 years. By 1995, specific emissions had been reduced by 60% (the total, with demand growth, was reduced by 50%), and Swedish power plants’ NOx emission performance far exceeded that of other industrial countries. The estimated impact of the regulation on electricity prices was $0.0004/kWh.

    In 2004 Germany mandated a goal of increasing the renewable portion of its electricity generation to 12.5% by 2010, and to 20% by 2020. As of 2008, renewables were up to 15%, surpassing the 2010 target, and the 2020 target was revised upward to 30%. The program cost consumers only about 3 euros per household per month, and that cost was offset by multiple economic benefits including reduced electricity spot market prices due to competition from renewables.

    Neither emission caps nor standards were employed in either of the two preceding examples — if they had been, the programs would have achieved nothing more than their original targets. Costs could have been reduced, but what would be the point if costs were already well within acceptable limits?

  7. David B. Benson says:

    Druther have a carbon tax.

  8. Ronald says:

    If I had a choice, I’d like to go thru life rich, goodlooking and smart, but I’m stuck with what I was given. It’d be nice to choose our method of reducing CO2, but we’re somewhat stuck with what we can get away with and being allowed to do. and right now that ain’t much.

  9. Peter Wood says:

    A very interesting post.

    Unfortunately I am not as optimistic about cap-an-trade legislation in Australia. We have a Prime Minister that is averse to taking political risks, and we now have an opposition party that is lead by climate change deniers.

    It is interesting to note that the parties to the Copenhagen Accord do not include countries that are likely to block progress, such as Saudi Arabia and Venezuela. It will be interesting to see whether at some stage there will be a forum including those parties.

    Finally I can’t help note the irony that there may not be a second commitment period to the Kyoto Protocol, and hence no JI or CDM, because of opposition from Canada, Russia, Japan, (and in a slightly different manner) the United States.

  10. JeandeBegles says:

    I completly agree with Ken Johnston view: the purpose is to reach the lowest level of CO2 emission at an acceptable cost.
    Cap and trade may be a partial solution if it drives the business toward a low carbon economy. But the main driver is a carbon price supported by the end user, I mean the customer.
    Do you know that if you set in place the basic principle “polluter payer” (every one pays according to his carbon use) and 100% redistribution, then you get the double benefit:
    .the carbon price discourages the use of carbon intensive products and services
    .the redistribution funds the help for the poor people and the poor countries that are naturally the lowest carbon emitters and the first victims of the global warming consequences.