Freeman Spogli Institute for International Studies Program on Energy and Sustainable Development Stanford University


April 6, 2006 - In the News

A Climate for Not Much Change

The Kyoto pact to reduce greenhouse-gas emissions was hobbled from the start by politics, say economists, who propose various new plans to clear the air

Appeared in The Chronicle of Higher Education, March 31, 2006

By David Glenn

In the long-ago world of February 1997, more than 2,500 economists, including eight Nobel laureates, signed a short statement on climate change. The statement declared that global warming was a serious risk, that it was possible to reduce greenhouse-gas emissions without wrecking the world economy, and that "market mechanisms such as carbon taxes or the auction of emissions permits" were the best avenues to pursue.

It was a moment of Clintonian, center-left optimism. Inside the White House, economists were working late into the night in preparation for the Kyoto summit on climate change, which was held in December of that year.

"We at the Council of Economic Advisers got to play a much larger role than we normally did," recalls Jeffrey A. Frankel, now a professor of capital formation and growth at Harvard University's John F. Kennedy School of Government, "because on this issue we were right on the fulcrum" of disputes between the Kyoto skeptics at the Treasury Department and environmentalists in the Clinton administration's other wings.

Those long hours paid off - sort of. At the Kyoto summit, despite the initial resistance of the European delegates, the participants hammered out a market-based agreement that looked very similar to the policies drafted in Washington. The Clintonian consensus prevailed.

The catch, of course, is that Washington never actually adopted the system that it helped to design. President Bush withdrew the United States from the Kyoto process in 2001 - and many observers say that even a Democratic Senate under a Gore administration would have been extremely unlikely to ratify the agreement as written. The treaty required the United States to reduce its greenhouse-gas emissions to 7 percent below its 1990 level, and the country's rapid economic growth during the 1990s meant that it would have been in a serious pinch to meet that target. (According to the Environmental Protection Agency, emissions in the United States were 15.8 percent higher in 2004 than they were in 1990, and no decline is likely in the near term.)

Fast-forward to Boston, January 2006. At the annual meeting of the American Economic Association, several scholars, including Mr. Frankel, spoke at a panel devoted to gloomy, hand-wringing assessments of the Kyoto process, which almost all of them regard as moribund.

The Kyoto treaty officially cranked into gear in 2005, after Russia ratified it. But the scholars in Boston generally agreed that it was unlikely the United States and China would join the treaty for its second round, in 2012 - and without those two carbon-spewers on board, they said, Kyoto would never have much effect. One of the Boston speakers, William D. Nordhaus, a professor of economics at Yale University, recently calculated that the Kyoto agreement will cause worldwide carbon emissions in 2010 to be only 1.5 percent lower than they would have been with no treaty.

"This is not one of those cases where we can say, 'If only they'd paid attention to economic principles,'" said David Victor, an associate professor of political science at Stanford University, during the panel. Indeed, he says in an interview, the Clinton administration, if anything, paid too much attention to economic questions - to designing the nuts and bolts of the treaty's carbon-trading mechanisms - and not enough to the political difficulties of creating an enforceable international agreement that a sufficient number of countries would be willing to join.

Now environmental economists are mulling what to do next. The rough consensus of 1997 seems very far away. Some scholars are calling for Kyoto to be revamped in various ways; others say it would be better to scrap the treaty and aim instead for a patchwork of smaller, less ambitious agreements. The question is whether any version of Kyoto will survive political wrangling, and whether anything less will have the muscle to halt global warming.

Credits for Keeping Clean

The heart of the Kyoto Protocol - the element that most closely reflects economists' thinking - is the "cap and trade" mechanism. In general the treaty requires participating countries to reduce their emissions below the levels they produced in 1990. (The exact targets were painfully negotiated and vary by country: Japan, for example, agreed to cut emissions by 6 percent, and the European Union by 8 percent.) But the participating countries are not rigidly bound by their targets; if need be, they are permitted to trade emissions credits. If Japan performs even better than its Kyoto target but Europe comes up short, Europe can meet its obligations by buying credits from Japan.

Such a system, according to virtually all environmental economists, is vastly more efficient than a treaty that sets caps but does not allow trading. And it seemed to build on an encouraging precedent: When the United States sought to reduce sulfur-dioxide emissions in 1990, Congress set up a cap-and-trade mechanism that allows polluting companies to trade credits.

That program is widely regarded as a great success (although some scholars argue that the emissions plummeted during the 1990s for reasons unrelated to the trading scheme).

Skeptics now say a domestic sulfur-dioxide-trading program is a very different animal from an international carbon-trading program. In the sulfur case, a specific and finite set of smokestacks releases the pollutant; with carbon, the culprits include coal-burning electricity plants, miscellaneous factories, and the car in your driveway. "With sulfur markets," says Scott Barrett, a professor of environmental economics at the Johns Hopkins University's Paul H. Nitze School of Advanced International Studies, "you've got the total quantity of permits decided by Congress. Congress sets a fine for noncompliance. You've got technologies that provide real-time data on emissions, and those technologies are extremely accurate."

In a 2002 paper, Mr. Barrett argued that Kyoto's enforcement mechanisms are absurd on their face. If a participating country fails to meet its target during the treaty's first phase (2008-12), it must reduce its emissions by an extra 30 percent during the second phase (2013-17). But the basic targets for that second period have not yet been negotiated.

A delinquent country, Mr. Barrett pointed out, "may hold out for easy targets during the second period - so that the punishment, if triggered, doesn't actually bite."

There is also a great deal of grumbling about the role that Russia might play during the first phase of Kyoto. Because its economy slumped so severely after 1990, Russia is expected to have an easy time meeting its emissions target. It will then be in a position to sell credits to countries that have failed to meet their own goals. In October 1997, Mr. Victor says, he and his colleagues "did a back-of-the-envelope calculation to see what kind of rents would be likely to flow to Russia as a result of this deal. Our estimate at the time was that it was in the range of $120-billion to $150-billion. And that was what sealed it for me. The whole Kyoto effort, from that point forward, just seemed kind of wild." Part of Mr. Victor's concern is that unscrupulous governments could use their emissions credits to place money in the pockets of political cronies, much as Saddam Hussein's regime exploited the artificial scarcity created by the United Nations' oil-for-food program in Iraq.

It would be one thing if Kyoto were going to lead to a significant decline in global carbon emissions. But that is not necessarily the case. Christoph Böhringer, a scholar at the Center for European Economic Research, in Mannheim, Germany, has calculated that the Kyoto participants could actually, in theory, increase their carbon emissions by 6 percent in the aggregate by 2010 and still comply with the treaty because the Russian target has been set at such an easy level.

The Tax Approach

So, if all of these problems of governance, measurement, and gamesmanship make global carbon-trading unappetizing, what is the alternative? Some economists are calling for the rehabilitation of a decades-old idea: a simple carbon tax.

Among the most prominent fans of this approach is Mr. Nordhaus, of Yale. For more than a decade, he has used an elaborate forecasting model to predict the economic effects of various climate-change scenarios. A worldwide tax of $8 per ton of carbon emission in 2010, he suggests, would put the world on a path toward stabilizing atmospheric carbon concentration at 550 parts per million, which is double the preindustrial level.

Or, if we wanted to be more cautious and aim to limit global warming to 2.5 degrees Celsius, we should impose a tax of $26 per ton of carbon emitted. (According to the official estimates of the Intergovernmental Panel on Climate Change, restricting the temperature increase to 2.5 degrees would probably require stabilizing atmospheric carbon levels at 450 parts per million - although even that level might produce a temperature change of as much as 6 degrees, depending on how sensitive to carbon the climate system turns out to be.)

Mr. Nordhaus is not actually calling for an international tax; there is obviously no entity that could collect and enforce such a thing.

What he would like is a formal or informal international agreement in which countries would establish and harmonize their own domestic taxes. (If a country wanted to tax all of its carbon on an equal basis, it would create a gas tax and a tax on carbon-emitting factories.)

The advantages of such a system, he argues, are simplicity, flexibility, and transparency. A tax system, he writes, would be much easier to negotiate - and much less prone to corruption - than a system of tradeable permits. It would also accommodate change much more easily, he suggests. A Kyoto-style cap-and-trade system can be distorted if a particular country's economy and population grow more quickly or slowly than expected. But a tax would simply float on top of those bumps. Finally, Mr. Nordhaus argues that it would be far easier for latecomers to join a system of harmonized taxes than to negotiate their way into the Kyoto apparatus.

One frequent objection to the tax model is that it would result in unfair burdens. A gas tax, for example, would hurt low-income families that have no easy alternative to their cars. (It is sometimes suggested that this burden could be eased by an equivalent reduction in income or payroll taxes.) Developing nations might also be reluctant to injure their own fledgling industries by imposing new taxes. (Mr. Nordhaus replies that countries might not be expected to join his system until they reached a certain level of prosperity - say, a per-capita annual income of $10,000.)

A second, closely related objection is that carbon taxes are so politically unpopular that there is no point in talking about them. The European Union initially announced that it would meet its Kyoto target by imposing a carbon tax - but after fierce objections from French farmers, British coal-plant operators, and others, it backed off and created an internal cap-and-trade system. New Zealand recently went through a similar dance; it announced a domestic carbon tax but scrapped the plan in January in the face of complaints from industry. Five Scandinavian countries did introduce carbon taxes during the 1990s, but "when you actually look a those taxes closely," says Stanford's Mr. Victor, "they get implemented in strange ways. For example, the most energy-intensive industries are sometimes fully or partially exempted."

'On the Fringe'

Carbon taxes are appealing on paper, but they will probably never be central to the global-warming debate, says Robert N. Stavins, a professor of business and government at the Kennedy School. "For 30 years or more, economists made themselves quite irrelevant in domestic environmental-policy discussions," he says. "We were on the fringe. The sole response of an economist to an environmental problem was the textbook response. ... We said, 'Environmental pollution is an externality. Slap a tax on the externality that's equal to the damages at the efficient level of control.' But for political reasons, that wasn't going to happen, and so economists were irrelevant."

That changed, Mr. Stavins says, when economists brought forward the cap-and-trade model that was introduced in the sulfur-dioxide arena in the 1990s. Despite all of its problems, he says, the cap-and-trade architecture of the Kyoto Protocol should be preserved and built upon.

In January, Mr. Stavins and Sheila M. Olmstead, an assistant professor of environmental economics at Yale's School of Forestry, released a sketch of a potential post-Kyoto policy. They argue that the next international agreement should use time horizons that are much longer than Kyoto's five-year blocks. If the atmospheric carbon level is to be stabilized at 550 parts per million, they say, then annual carbon emissions should peak around the year 2030, according to the most cost-effective model.

Along similar lines, Mr. Stavins and Ms. Olmstead argue that nonparticipating low-income countries should be lured into the next treaty with short-term targets that are above their current emissions levels, so they will not feel any immediate anxiety about harming their industries. What matters most, the two scholars say, is what happens a decade or two down the line.

Many climate scientists, however, strenuously disagree with any suggestion that carbon abatement can be postponed. Stephen Schneider, a professor of biological sciences at Stanford, has argued that the risk of irreversible climate changes makes stringent, short-term carbon-reduction policies much more cost-effective than most economists believe.

A More Modest Proposal

The speakers in Boston were united in their pessimism but shared no consensus about how to move forward. Mr. Victor is not terribly enthusiastic about either Mr. Nordhaus's or Mr. Stavins's proposals. He would prefer to see a looser patchwork of international agreements that put more emphasis on areas such as research and development. The goal of any carbon tax or emissions fee, after all, is to create incentives to invent and use technologies that use less carbon. An international climate regime should evolve slowly, in piecemeal fashion, just as the Global Agreement on Tariffs and Trade did, argues Mr. Victor. "I have come to be even more aware of the fragmented, bottom-up nature of these kinds of systems," he says.

William A. Pizer, an economist at Resources for the Future, a Washington-based research group, agrees that a loose patchwork is the most likely path. "I'm generally skeptical about the ability of an international treaty to enforce something," he says. "I think countries can get together and say, Hey, this is what we want to do. And everybody can get on board and recognize that their actions are going to be judged, and if they're not up to snuff, there's going to be some kind of day of reckoning. But that day of reckoning is not going to be financial penalties or the other kinds of enforcement mechanisms that might be envisioned in a domestic program. It's just going to be public embarrassment."

But Mr. Frankel, of the Kennedy School, who spent years helping the Clinton administration deal with Kyoto, says the agreement, with all of its warts, was still a crucial step forward. He argues that Mr. Victor's analogy to trade agreements is misconceived. "It's true that trade organizations developed slowly," Mr. Frankel says, "but at the initial meeting where they tried to set up what eventually became the GATT, they were very ambitious. So, you know, maybe you have to be very ambitious, and it doesn't all go through the first time, but that's how you move forward. That's how you get there."

In any case, he says, no environmental policy, domestic or international, will succeed unless the public sees a need for it. "They used to say, If we had a few really hot summers and some hurricanes, that would change some minds," Mr. Frankel says. "I don't know if that's true. ... The Scandinavian countries are always doing things that are just a drop in the bucket in the grand scheme of things, but they do them because it's the right thing to do."

The danger is that the global public won't reach Scandinavian levels of anxiety until climate change has become essentially irreversible. Earlier this year, researchers at the National Oceanic and Atmospheric Administration determined that atmospheric carbon dioxide levels have reached 381 parts per million, a new high.

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