Climate deal badly needs a big stick

Pledges by nations to cut emissions of greenhouse gases not sufficient to stop temperature from rising

Few economists are as versed in the global diplomatic effort to combat climate change as Nicholas Stern of Britain.

So it was particularly distressing to hear him say, at a debate in New York a few weeks ago, that the international effort to achieve a worldwide climate agreement in Paris next December is already falling short on its most critical goal. The various pledges by nations to cut their emissions of heat-trapping greenhouse gases, he noted, will not be enough to prevent the earth’s temperature from rising beyond the level scientists consider the tipping point to devastating environmental disruption.

Professor Stern does not call this “failure.” At least emissions will be lower than without a deal. And he expects the agreement to include a mechanism to review progress every few years, so countries might ramp up their efforts to cut emissions as needed. “This is very much worth having,” he said.

Perhaps the word failure fits, however. More than a quarter-century of fruitless efforts to induce the world’s major greenhouse gas polluters like China and the United States to significantly cut their emissions suggests the entire approach may be fundamentally flawed.

Such failure indicates that getting countries to make the costly but necessary investments to reduce their greenhouse gas emissions will require more than diplomacy. It will require a big stick. Consider the United States, the world’s second-largest greenhouse gas emitter. What if every other advanced nation, as a way to encourage energy efficiency and spur investments in alternatives to fossil fuels, agreed to put a price of  $25 per tonne on carbon dioxide emitted into the atmosphere? As a tax, that would add some 22 cents to the price of a gallon of gas, something few American politicians — fearing public anger — are yet ready to consider. According to calculations by William Nordhaus, an expert on the economics of climate change at Yale, the United States, on net, would gain $8 billion a year by benefiting from everybody else’s efforts to slow down the earth’s warming without having to exert any effort itself. But if the other advanced nations had a stick — a tariff of 4 per cent on the imports from countries not in the “climate club” — the cost-benefit calculation for the United States would flip. Not participating in the club would cost Americans $44 billion a year.

This sort of approach offers perhaps the best chance of preventing a climatic upheaval.
In an article published in April in The American Economic Review, Professor Nordhaus proposed just such a climate club, in which countries committed to reducing carbon emissions would impose a uniform tariff on imports from nonmembers. Even if they agreed on a carbon price of as much as $50 a ton — which is consistent with the White House’s estimates of the overall costs imposed by climate change on society — a fairly low external tariff could induce near-universal participation in the club.

“The idea is exciting and provocative,” said Scott Barrett of Columbia University, one of the world’s leading experts on the dynamics of climate diplomacy. “He is aiming at a central problem in a direct and ambitious way.”

Martin Weitzman, a professor of economics at Harvard and co-author of “Climate Shock,” published by the Princeton University Press in February, agreed. “Bill’s proposal kind of wins by default,” he said. “I don’t see anything else out there.” To game theorists, it is no surprise that the many rounds of climate talks, including the Kyoto agreement in 1997, have failed time and again.

The most successful international agreements include some sort of device to encourage membership and ensure compliance. The Montreal Protocol, which successfully phased out the chlorofluorocarbons once used in aerosol sprays that were blowing a hole in the ozone layer, was built around enforcement. Countries that did not sign up to the deal could not trade CFCs with members of the club, encouraging everyone to join. Countries join the World Trade Organisation because they want to benefit from lower tariffs in other countries. They don’t slap arbitrary restrictions on another country’s products, because they would suffer the cost of retaliation.

Devastating consequences
Climate change is tougher. For one thing, it will be more costly for a country to limit emissions of greenhouse gases. The benefits will be shared by the entire world. Moreover, the threshold for devastating consequences is uncertain. For many, the optimal strategy will be to lie low and reap the gains as so-called free riders. While countries might cooperate if they were absolutely certain of the tipping point that led to catastrophe, climate science doesn’t work like that.

Experiments by Professor Barrett and Astrid Dannenberg from the University of Gothenburg in Sweden have found that where there is uncertainty, free-riding becomes irresistible, cooperation breaks down and catastrophe occurs. Professor Nordhaus’s proposal would change the rules of the game. “Unless we do something like this,” he said, “we will continue down the road we’ve been on since 1997.” Adopting Professor Nordhaus’s proposal, of course, would not be easy. One reason there is no truly enforceable climate agreement yet is that most countries are reluctant to sign up.
A system like that proposed by Professor Nordhaus would require some agreement to amend the rules of the World Trade Organisation, to prevent countries hit by the tariff from retaliating with tariffs of their own. Those countries most dependent on fossil fuels may not quickly climb on board.

And while it works fairly well at $50 a tonne or so, the mechanism starts breaking down when the price of carbon rises higher.

The question that must be answered, however, is whether the world has any viable, effective alternative. Professor Stern still holds out hope for the current diplomatic process, which relies on peer pressure to do the trick, allowing each country to decide on its own how much it wants to contribute to the climate goal. Professor Barrett suggests breaking the problem into smaller chunks that are easier to solve — like eliminating hydrofluorocarbons or imposing new regulations on aluminum production — rather than continuing to aim for the grand deal that has eluded global leaders for so long.These seem thin threads on which to hang the earth’s future. “When you add up all of this, even in my wildest dream you are not going to solve the problem,” Professor Barrett told me.Professor Weitzman may be the most realistic of all. “I think, alas, that we will keep drifting to higher and higher greenhouse gas concentrations until climate change is perceived as something catastrophic at a grass-roots level,” he said.