10/06/2009 - 08:09

The politically possible: How to achieve success in Copenhagen

Jeffrey Frankel

Jeffrey Frankel

Frankel is James W. Harpel Professor of Capital Formation and Growth at Harvard University's...

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The clock is running out on preparations for the December climate change conference in Copenhagen. The meeting is supposed to negotiate the successor agreement to the Kyoto Protocol. But negotiations have been blocked by a seemingly insurmountable obstacle. The United States is at loggerheads with the developing world, especially China--now the world's largest emitter of greenhouse gases (GHG)--and India. Fortunately, there might be a way to break through this roadblock.

On the one hand, the leaders of India and China are clear: They won't cut emissions until after the United States and other developed countries have cut theirs first. After all, the industrialized countries created the problem of global climate change, and got rich in the process. Developing countries shouldn't be denied their turn at economic development, they argue. As the Indians point out, Americans emit more than 10 times as much carbon dioxide per person as they do.

On the other hand, the U.S. Congress is equally clear: It will not impose quantitative limits on U.S. GHG emissions if it fears that emissions from China, India, and other developing countries will continue to grow unabated. Indeed, that is why the Senate was unwilling to ratify the Kyoto Protocol 10 years ago. Why should U.S. firms bear the economic cost of cutting emissions if energy-intensive domestic aluminum smelters and steel mills, for example, would just migrate to countries that have no caps and cheaper energy? (A problem known as leakage.) Global emissions would simply continue their rapid rise in a different part of the world.

In June, the U.S. House of Representatives passed the American Conservation and Energy Security Act, show also known as the Waxman-Markey bill, which (among other things) would set targets for domestic GHG emissions. It seeks to address the issues of leakage and competitiveness by penalizing imports of carbon-intensive products from countries that were deemed not to be doing their share to fight global climate change.

But that particular provision won't do the trick. First, it won't legitimately level the playing field--by equalizing the price of carbon at home and abroad--and thus won't support international climate efforts without distorting the market. Rather, it seeks to buy off energy-intensive industries that fear international competition, even at the cost of meeting its objectives. Indeed, President Barack Obama courageously warned of its protectionist dangers. (The same flaws are found in similar measures that have been adopted by the European Union, although it at least has the legitimacy of having ratified the Kyoto Protocol and of already having begun to cut emissions.)

Furthermore, such political reassurances to domestic industries that fear losing their competitiveness are insufficient. The bottom line is, emission cap legislation is unlikely to pass the Senate as long as major developing countries haven't accepted quantitative targets of their own.

Global issues of leakage and competitiveness can only be effectively addressed at the multilateral level. Thus, the diplomats preparing for the Copenhagen negotiations need to do two things. First, they should pursue a set of multilaterally agreed upon guidelines for countries that want to adopt import tariffs or other border measures against non-participating competitors. If such measures are properly designed, they can be fully consistent with World Trade Organization guidelines, accomplishing the objectives of the international climate change regime without violating the international trade regime. Otherwise, each country will adopt whatever measures are demanded by its own domestic industry; the resulting measures will lack legitimacy and will fail to accomplish their ostensible purpose. Second, negotiators should coalesce on a specific mechanism for setting the actual numbers that signatories of a Copenhagen Protocol can adopt as their future emission targets. The framework must address the three gaping holes in the Kyoto Protocol: the absence of a mechanism for setting targets in the long run, the lack of participation by many major emitting countries, and the lack of faith that signatories will fulfill their commitments.

I see one, and only one, practical solution to the apparently irreconcilable differences between the United States and the developing countries regarding binding quantitative targets: Washington would agree to join Europe in adopting emission targets, something along the lines of the big cuts specified in the Waxman-Markey bill. Simultaneously, in the same agreement, China, India, and other developing countries would agree to a path that immediately imposes binding emission targets on them. These would be targets that in the first five-year period simply follow the so-called business-as-usual path, defined as the rate of increase in emissions that these countries would experience in the absence of an international agreement, as determined by experts' projections.

The idea of developing countries committing only to business-as-usual targets will be met with loud objections from both environmentalists and U.S. business interests because it doesn't obligate China or other developing countries to cut emissions. But this commitment is far more important than it may sound at first. Specifically, it precludes carbon leakage from undermining the environmental goal. The developing countries can't go above their set business-as-usual paths as they would in the absence of this commitment and, therefore, can't exploit developed states' emissions reduction efforts by expanding carbon-intensive industries. This step mitigates the competitiveness concerns of carbon-intensive industries in developed countries.

Such an approach recognizes the reality that it would be irrational for China to agree to substantial cuts in the short term. Indeed, the developing countries, for their part, may object when asked to take on any kind of binding targets at all, at this stage. But they should realize that they would gain in strictly economic terms from such an agreement. The commitment, in an international system of emission permits trading, would give China the ability to sell permits at the world market price. How do we know Beijing would come out ahead? It is currently building roughly 100 power plants per year to accommodate its rapidly growing energy demand. The cost of shutting down an already-functioning U.S. coal-fired power plant is far higher than the cost of building a new low-carbon plant in China. For this reason, when a U.S. firm pays China to cut its emissions voluntarily, thereby obtaining a permit that the U.S. firm can use to meet its emission obligations, both parties benefit, even in strictly economic terms. The environmental benefit is that China's aggregate emissions would voluntarily fall below its business-as-usual commitment from the beginning.

Of course, the next step to this solution requires that China and other developing countries make cuts below their business-as-usual path in future years and, eventually, make cuts in absolute terms as states gain confidence in the framework. But the developing countries must agree to the principle of making cuts similar to those made by Europe, the United States, and others who have gone before them, taking due account of differences in income. Emission targets can be determined by formulas that (1) give lower-income countries more time before they start to cut emissions and (2) lead to a gradual convergence of emissions per capita over the course of the century, while (3) taking care not to reward any country for joining the system late.

(I have constructed an example of such formulas, with specific parameters and country-by-country emission targets chosen so as to hit the environmental goal of 500 parts per million CO2 concentration levels by 2100 without violating the political and economic constraints for any country, and another example to hit the goal of 460 parts per million concentrations.)

Realistically, no country (rich or poor) will abide by targets in any given period that entail extremely large economic sacrifices relative to the alternative of simply not participating in the system. It's time to stop making sweeping proposals that assume otherwise, and to pursue instead the narrow thread of the politically possible.