If you wish to read more about climate change, mathematics, and stuff, below are some publications:

• Wood, P. J. 2004. Wavelets and Hilbert Modules. Journal of Fourier Analysis and Applications 10 (6). pp. 593-598
  http://dx.doi.org/10.1007/s00041-004-0828-4
• Robins, V., Wood, P.J., and Sheppard, A. P. 2010. Theory and algorithms for constructing discrete Morse complexes from grayscale digital images. Accepted January 2010 in IEEE Transactions on Pattern Analysis and Machine Intelligence.
• Wood, P. J., and Jotzo, F. 2011. Price floors for emissions trading. Energy Policy 39 (3). pp. 1746-1753.
  http://dx.doi.org/10.1016/j.enpol.2011.01.004
• Wood, P. J. 2011. Climate Change and Game Theory. Annals of the New York Academy of Sciences 1219. pp. 153-170
  http://dx.doi.org/10.1111/j.1749-6632.2010.05891.x

Recent government projections suggest that Australia would need to reduce greenhouse gas emissions by  160 million tonnes of greenhouse gases per year by 2020 to reduce emissions to 5 percent less than 1990 levels, and by 270 million tonnes of greenhouse gases per year to reduce emissions to 25 percent less than 1990 levels. There is no politically feasible way to do this without a price on greenhouse gas emissions.

A carbon price works because if emission reductions are cheaper, there is an opportunity to make money from reducing emissions. It becomes like picking up a $100 bill from the ground. Now markets don’t work perfectly, and I might not pick up some of those bills (for example, due to an informational failure, I might not see some of them) but I’ll try hard to pick up as many as I can. Without a carbon price, this incentive is not there.

One argument used against carbon pricing is that it will increase the price of petrol or electricity, which is unpopular. But money raised from a carbon price can go back to households, and this is exactly what is planned. Petrol and electricity from fossil fuels will cost more, which will provide an incentive to use less, but we will get more than that back through paying less taxes, or through cheques in the mail. And we will get these cheques in the mail regardless of how much petrol or electricity we use, so the incentive to reduce emissions will remain.

Polluting industries will argue for assistance, and will have an incentive to exaggerate costs from a carbon price in order to bolster their case for assistance. But every dollar spent on assistance to industries will be one less dollar available for assistance to households. This is something that voters need to consider when greenhouse gas emitters make the case for assistance.

There is a string case for not all carbon price revenue to go to industry and households. Greenhouse gas emissions are an international problem, and carbon price revenue could be used to fund cost-effective emission reductions overseas and adaptation to the impacts of climate change. Technology advances could lower the cost of emission reductions, so there is a case for some carbon price revenue to be used for funding research and development. And the carbon price does not address emissions from agriculture, and probably not from land use, so there is a case for some of the money raised to provide incentives to sequester carbon in ecosystems.

Some key details:

• The scheme would commence with a fixed-price in July 2012, this fixed price would increase by a fixed percentage each year.
• After three to five years, the scheme would transition to a flexible price emissions trading scheme. The agreement does not specify any details about whether the emissions trading scheme would have measures such as price floors, price ceilings, or allowance reserves.
• At least 12 months before the end of the fixed price phase, there would either be a decision on a 2020 target, or a decision to extend the fixed price phase. Issues that could be considered when deciding whether to extend the fixed price phase include: the state of the international carbon market; international developments in carbon pricing; Australia’s internationally agreed targets and progress towards meeting them, including whether they have been incorporated into a binding legal agreement; the fiscal implications of any on-budget purchases of internationally allowances that may be required to comply with any international emissions target; potential impacts on the Australian economy; and implications for investment certainty.
• The scheme would cover emissions from energy, transport, industrial processes, fugitive emissions (methane leaking from things such as coal mines), and emissions from non-legacy waste (methane leaking from landfills). Agriculture would not be covered and sources covered under the proposed Carbon Farming Initiative would also not be covered.
• The communiqué notes that “Options to provide economic value to activities which store or reduce carbon in the land sector could potentially include the use of Kyoto-compliant credits in the carbon price mechanism or alternative funding arrangements for the land sector.”
• During the fixed price phase, international offsets will not be able to be used for compliance (although international allowances could potentially be purchased by the Australian government). During the flexible-price phase offsets could be used, with criteria concern quality and any other restrictions yet to be determined.
• Many other matters, such as what to do with carbon price revenue, are still to be determined.

Carbon price agmt release 240211

MPCCC Carbon Price Mechanism Final

Update: More analysis here.

Wood, P.J., Jotzo, F., Price floors for emissions trading. Energy Policy (2011), doi:10.1016/j.enpol.2011.01.004

The paper (as well as this blog) proposes that one way that a price floor could be implemented is for emitters to pay an additional fee or tax per tonne of emissions. The carbon price is then equal to the sum of the ETS permit price and the extra fee. The UK government has proposed to introduce a carbon price floor via this approach, and has been engaging in consultations. The proposal is the reform the Climate Change Levy so that it functions like a carbon tax. Because the UK is part of the EU ETS, firms would also pay for EU permits, and so the effective UK carbon price will be equal to the sum of the Climate Change Levy and the EU ETS permit price.

The discussion paper includes three different “illustrative carbon price scenarios” of £20/tCO2, £30/tCO2 and £40/tCO2 which is somewhat more ambitious than likely to be proposed for the carbon price in Australia, or the price floor that was proposed in the Waxman-Markey Bill.

Because most EU emissions are determined by the EU ETS, the direct effect on global emissions is likely to be minimal. Emissions in the EU are determined by the cap. If the whole EU ETS had a price floor, and the floor price was met, then that would reduce total EU emissions; but when a single country has a price floor, overall emissions are unchanged. For this reason Climate Strategies has made the important point that the UK should embed its policy in a strategy to strengthen EU emission reduction targets.

What the UK proposal does do is provide ‘learning-by-doing’ on carbon pricing, which provides valuable information to other jurisdictions that may consider a carbon price. A UK price floor proposal is consistent with a polycentric approach to climate change. It also provides much more certainty about the carbon price for investors in emission reductions. By eliminating the risk that the carbon price will go below a particular level, the cost of investing in emission reductions is significantly less.

The UK proposal has attracted a storm of controversy. It will mean that polluters will have to pay more, and steel-makers have already started to complain. This is to be expected – if firms can shape government policy to reduce their costs, then their investment in shaping policy could have a huge payoff. This is why rent-seeking is such a big issue in climate policy.

What was less expected was the opposition from two environment groups: the WWF and Greenpeace (presumably the UK branches of these organisations). They have claimed in a media release that because a price floor will raise electricity prices, and nuclear generators do not have significant emissions, their profits will increase, which will make a “mockery of the Coalition government’s stated opposition to any form of public subsidy for nuclear” and “this is yet another taxpayer handout to a failing nuclear industry.”

Any carbon price will increase the profitability of nuclear energy, just like it will increase the profitability of renewable energy or energy-efficiency. A carbon price is technology neutral and the claim that it is a subsidy or taxpayer handout for the nuclear industry in completely ridiculous. This proposal is good policy and the WWF and Greenpeace should be supporting it rather than attacking it.

For more on price floors, see http://climatedilemma.com/2008/07/19/making-the-polluter-pay-prices-quantities-or-both/

When using a model to help understand a problem, it is important to be aware of the limitations of the model. Many applications of game theory require that decision makers are rational. That is, they have clear preferences, form expectations about unknowns, and make decisions that are consistent with these preferences and expectations. These assumptions may not be consistent with experimental psychology. Elinor Ostrom has considered the the role that human behaviour considerations relate to cooperation problems, and applied this to climate change. She found that a `surprisingly large number of individuals facing collective action problems do cooperate’. She also found that cooperation is more likely if people gain reputations for being trustworthy reciprocators; reliable information is available about costs and benefits of action; individuals have a long-term time horizon; and are not in a highly competitive environment.

So the application of game-theoretic solutions concepts should be taken with a pinch of salt. For example, there is Nash equilibrium that arises from a basic model where countries make a continuous choice about how much to reduce their emissions. As one would expect, this involves small amounts of emission reductions (that reflect the damage that a country will do to itself from its greenhouse gas emissions), but much less than would occur in a fully cooperative situation. But what if one country were to go first, and reduce its emissions by more than the Nash equilibrium choice? If the marginal damage from a tonne of emissions increase with respect to total emissions, then the Nash equilibrium response of other countries would be for them to reduce their emissions by less than they otherwise would (see e.g. Finus, 2001, Chapter 9). But behavioural considerations suggest that other countries would be likely to reciprocate, and reduce emissions by more than they otherwise would.

Eric Maskin, in a paper published in 2009, argues that “the principal theoretical and practical drawbacks of Nash equilibrium as a solution concept are far less troublesome in problems of mechanism design than in most other applications of game theory”. Mechanism design is focused on how to design games whose solution concepts lead to cooperative outcomes. One reason why game theoretic solution concepts are less troublesome in mechanism design, is that the rules of the game are clear to players, and to analysts. Another reason given by Maskin is that one can design games that do not have multiple equilibria or have equilibria that are stronger than the Nash equilibrium.

If humans are more cooperative than assumed in our models, the models could work as a ‘lower benchmark’, and at least as much cooperation as predicted by the models could be observed. When mechanisms have game theoretic solution concepts that could lead to more cooperation on climate change, such mechanisms ought to be given serious consideration.

The UNFCCC COP16 climate conference has been a success. There has been agreement on a series of decisions that are known as the Cancún Agreements. On the morning of the final day, there were tense moments, and it but unclear whether there would be much progress at all. But after the draft texts were circulated, the Mexican Foreign Minister, Patricia Espinosa, convened an ‘informal plenary’ where she said that in these texts, every Party had been listened to, and after two hours for people to examine the texts, the plenary will reconvene. There was then sustained applause and a standing ovation. From that moment on, there was a great sense of hope that there would be a positive outcome.

Video Courtesy of Phil Ireland

The main decision results from the work of the Ad-hoc Working Group on Long-term Cooperative Action. It is very comprehensive – covers the ‘six-pack’ that negotiators were hoping for – and includes:

• A shared vision that recognises that deep cuts are required; calls for urgent action to meet a goal of keeping temperature increases below 2 degrees; a review to look into whether that goal should be 1.5 degrees; and realises that addressing climate change requires a paradigm shift towards building a low-carbon society.
• Mitigation commitments from developed countries and actions from developing countries that will be combined in a separate document – a  bit like the annex to the Copenhagen accord. Like the Copenhagen Accord, this could include countries that are responsible for something like 80 percent of greenhouse gas emissions – while without even including the US, the Kyoto Protocol covers less than 30 percent of emissions. There are measures to enhance the transparency these actions and commitments. The agreement also urges developed countries to increase the ambition of their targets to a level consistent with what has been recommended by the Fourth assessment report of the IPCC.
• There are provisions for finance and a Green Climate Fund; adaptation; REDD+; opportunities for using markets; technology; consequences of response measures; capacity-building; and working towards legally binding protocols.

What is remarkable is that this is an agreement between nearly 200 countries. The only country that opposed consensus was Bolivia (which lead to an interesting closing plenary). Because so much effort over the past few years has been invested in these negotiations, and because of the detailed consensus achieved, there is a huge amount of ‘buy-in’ for the Cancún Agreements. What has been achieved is a good outcome for addressing climate change, and a good outcome for multilateral diplomacy.

The negotiators at Cancún are currently trying to negotiate a ‘balanced package’ – also known as a ‘six-pack’ – that combines progress on mitigation, transparency (measurement, reporting and verification – or MRV), adaptation, finance, technology, and REDD+ (reducing emissions from deforestation and forest degradation). The Mexicans are extremely determined to get some sort of outcome from the conference – both for the climate and for multilateral negotiations. They so far seem to have been quite confident in the way that they have facilitated the negotiations, and there seems to be much more trust in the Mexicans from Parties than there was for the Danes last year.

What is uncertain is how ‘good’ the decisions will be – in terms of criteria such as ambition (including capacity to ramp up ambition later), efficiency and equity; how detailed the decisions would be; and whether there is sufficient consensus to get a package of decisions at all. Different Parties are interested in progress on different elements of the six-pack, so the total level of progress will be determined by whatever element has the least progress. For example, the United States requires progress on mitigation and transparency in order to support progress on adaptation, finance, technology and REDD+.

There are two tracks to the negotiations: one track is focused on further commitments under the Kyoto Protocol for ‘Annex I parties’ (which consists of developing countries, but does not include many countries that could be considered ‘developed’ such as Qatar, Saudi Arabia, and Singapore); the other track is focused on implementing the Bali Action Plan – that covers the six-pack described above. Developing countries (including China) have stated that for an agreement, they require progress on a second commitment period of the Kyoto Protocol. There could be progress on ‘technical’ aspects of the Kyoto Protocol – such as new gases, surplus emission allocations, and accounting for forest management. But Japan has now stated clearly what many have already known – that they do not intend to inscribe their target into the second commitment period. If this issue is not resolved, it could cause a potential deal to unravel.

Below is a summary of where things are at in the six-pack:

• On mitigation, key questions are how to anchor pledges that were part of the Copenhagen accord, and what could be done later to increase ambition. Points of contention include how developed country commitments relate to the Kyoto Protocol and the nature of developing country commitments. China has said that it would submit its emission reductions as a binding UN resolution – but this is conditional on progress on a second commitment period to the Kyoto Protocol. Todd Stern has described China’s announcement as nothing new.
• There is some information on transparency in the negotiating text, but the United States want more detail. The Indian Environment Minister Jayram Ramesh has put forward a proposal, but it is uncertain how much support there is for it from major developing countries.
• On adaptation, there is relatively clean text. But some countries (including Saudi Arabia) want adaptation to be linked to ‘response measures’, which essentially means that as well as assisting countries with adapting to the effects of climate change, oil exporting countries would somehow be compensated for lost fossil fuel revenue.
• On finance, a major point of debate has been the establishment of a fund, that was called for as part of the Copenhagen Accord. Some countries wanted it established at Cancún, but others argue that time will be needed to set it up and that it should instead be set up in the period between Cancún and the negotiations next year in Durban, South Africa. Areas of discussion include the transitional committee to set it up, the operating entity of the fund, and its relationship to the World Bank. Australia’s Minister Combet has been involved with consultations on finance.
• On technology, there is clean text, but the United States is likely to block progress if they do not see progress on other issues.
• The text on REDD+ is largely complete, with most of the remaining areas of disagreement (mainly on the role of market mechanisms) expressed as clear options.

The Mexican Foreign minister, Patricia Espinosa, stated on Wednesday December 8 that an ambitious and broad package of decisions is within reach but we no not have it in our grasp. We are now in the final stage of negotiations, where the final political issues need to be resolved, and negotiators may not get much sleep. If nearly 200 countries can come up with an ambitious and broad package of decisions, it will be a major success in diplomacy that could rejuvenate the UN process.

This year, on Wednesday Dec 1, the Conference of Parties again considered these five proposals, and a sixth proposal from Grenada on behalf of the Alliance of Small Island States. Grenada called for a contact group to be established. Grenada noted that we have not yet had a discussion on legal form; and that this could provide certainty to governments, markets, and the private sector. Costa-Rica and Tuvalu also discussed their proposals and called for a contact group.

But India opposed a “formal group”, saying that in the “current context”, we should be “investing our time in deliverables of Cancún”; that “too much is on our plate”; we “need to address Kyoto instead” (perhaps a reference to Japan stating that it will not inscribe its 2020 target into the Kyoto Protocol); we should “focus on the two texts from Tianjin”; the “Article 17 proposals should be allowed to rest”; “forms should follow substance” and “let us consider substance first”.

China, which strongly opposed a contact group at Copenhagen, offered a nuanced response. They thanked Grenada and AOSIS for their proposal; they said they support the “proposal that legal form be discussed” and that the “final outcome should be a legally binding outcome”; but they “hope to have more time on other issues” and ask “is it possible that we avoid discussion separately? Maybe chair can conduct informal consultations, or maybe allow AWG-LCA consider this issue?”; and happy to “leave to the wisdom of the President” (the ‘President’ refers to the Mexican Foreign Minister who chairs the meeting). So China raised some concerns, but strongly hinted that they would not block consensus.

Saudi Arabia said that they support India and China, had concerns about the future of the Kyoto Protocol (probably also relates to Japan’s statement, even though Saudi Arabia is a far worse polluter than Japan, and has no commitments under the Kyoto Protocol), and that it would be better to focus on the negotiations still taking place.

Some countries who had opposed a contact group last year supported one this year, including South Africa and Venezuela. The 2011 negotiations will happen in South Africa, and they stated that the lack of discussion on legal form has been a barrier.

The call for a contact group was also supported by Guatemala, Cuba, the Maldives, the Democratic Republic of Congo, Nauru, Cook Islands, the EU, the Dominican Republic, Australia, Vanuatu, the Marshall Islands, St Lucia, Guyana, and some observer organisations.

The Mexican Foreign Minister (the ‘President’) resolved to set up a contact group, stating (and I paraphrase somewhat):

We have had a very important exchange on a question that is of transcendental importance for many delegations. We have heard many opinions. A clear testimony to diversity of points of view and complexity. We must recognize that in the exercise of sovereign governments and they are insisting that proposals discussed. Proposals refer to subjects being dealt with in negotiations in LCA and KP. And we still don’t have clarity on how negotiations will conclude. Indispensible that negotiations will proceed quickly and make progress and consolidate decisions. I propose we establish discussion in the form of a contact group that will have as its exclusive aim to provide this space to allow exchange of proposals including Grenada, Costa Rica, Tuvalu. But I think delegations have clearly expressed that proposals relate to subsequent work. If there is agreement to establish this dialogue, and better understand opinions that differ, I don’t want that to be detriment to discussions of two working groups. I repeat this dialogue should not lead to a negative effect that would reduce urgency that we apply to negotiations.

It is worth keeping the role of a “legally binding” agreement in perspective – the point of an agreement is to provide confidence that commitments will be kept. Making it legally binding could perhaps help with that – but what will make a real difference is domestic legislation that will send a signal to the world that a commitment will be met. The only sort of domestic legislation (apart from perhaps shutting down steel production and imposing blackouts) that can achieve this is some sort of carbon price. Australia – for example – is highly unlikely to increase its 2020 emission reductions target beyond 5 percent until there is a carbon price.

The fact that countries changed their position to a cooperative one on this issue, and were willing to compromise, is a positive sign for the negotiations. Compared to Copenhagen (so far) there seems to be less uncompromising positions, there hasn’t been any walkouts, there seems to be more confidence in the country hosting the negotiations, and less late nights. All of this could change, but there is reason for cautious optimism.

An issue in SBSTA that attracted strong disagreement today was the what to do about emissions from international shipping and aviation. At the moment, emissions from these industries don’t come under any jurisdiction, so the question is what to do about it. In particular, whether this should be addressed through the UNFCCC, or the International Civil Aviation Organisation (ICAO) and International Maritime Organisation (IMO). This issue is significant not only because of their emissions (about 420 Mt/yr for aviation and 870 Mt/yr for maritime emissions) but also because significant amounts of international finance could be raised from getting these industries to pay for their emissions. The UN Advisory Group on Finance suggest that somewhere between $3 billion and $25 billion could be raised per year by 2020, and this could be used for adaptation and mitigation in developing countries.

While the ICAO and IMO are doing something to reduce emissions for these sectors, it is unclear whether they will do enough. It is also less clear whether they would be willing to provide finance for mitigation and adaptation in developing countries. The ICAO stated in the ICAO/IMO submissions to SBSTA that:

The international aviation sector should not be singled out as a source of revenues for all other sectors. This is likely to result in a shortage of resources to facilitate mitigation activities by the international aviation sector itself, and in a disproportionate contribution of resources from this sector as compared to other economic sectors.

This comment, by bringing up the possibility of “a shortage of resources” for the aviation sector, totally ignores the ability of these industries to pass on costs. If the aviation sector had to pay $20 per tonne CO2, then people like me might have to pay $100 more for a flight between Australia and Cancun. This is small compared to the cost of the flight, so the airlines would be able to pass costs onto consumers and the effect on the income of the aviation industry would be small.

The dodgy economics from the ICAO comment is similar to the sort of thing that would be expected from an industry group representing Australian polluters, one would expect more reasoned analysis from an international organisation. This hardly inspires confidence in the ICAO to play its fair part in paying the costs that its emissions in others.

But there was considerable support in SBSTA for ICAO and IMO to address emissions in these sectors, rather than the UNFCCC. Many developing countries would benefit from finance if there was a strong UNFCCC regime regulating these industries. But many of the countries who supported emissions to be addressed by ICAO/IMO were developing countries. Countries that supported emissions being addressed by that ICAO and IMO rather than the UNFCCC included Panama, Singapore, Cuba (representing Argentina, Brazil, China, Saudi Arabia and India), Ukraine, the Bahamas (who said that the IMO should be the only forum for these issues), South Africa (who raised concerns about maritime emissions being used as a funding source) and others. The EU highlighted the urgent need to address emissions from transport, and that this should take place in the AWG-LCA. The US pointed out that ICAO/IMO do not hame “common but differentiated responsibilities” in their mandates.

There could be huge potential for international transport to finance mitigation and adaptation in developing countries, but this will be extremely difficult, especially after these events. Using maritime emissions for finance will be particularly difficult.

1. PNG proposed that in the case that the UNFCCC cannot reach a consensus on something, as a last resort there should be some sort of vote, which would then require some sort of supermajority to make a decision. This proposal was opposed by Bolivia, India, and Saudi Arabia.
2. The previous negotiations this year on long-term cooperative action have resulted in very dirty text with a large amount of brackets (parts of the text where there is not consensus, and which would could be deleted), and a large amount of pages. The chair has prepared here own text to facilitate negotiations. Various Parties (countries) have made comments or criticisms of the text, but it seems like it will be a useful basis to go forward.
3. Japan made a comment in the opening plenary of the ad-hoc working group on further commitments under the Kyoto Protocol that its 25 percent emission reduction target is not a target that it plans to inscribe into the Kyoto Protocol.

Unlike Copenhagen, participants haven’t had to line up for long to get into the venue -instead the shuttle buses have been slowed down by a traffic jam that was caused by security arrangements. The main venue where the negotiations have taken place – the “Moon Palace Hotel” – is a giant fancy golf resort but where people who are not staying at the hotel have been subjected to bad expensive food and bad coffee. There have been problems with the internet all day, with it only working intermittently. Not ideal for getting things done.