November 2010

The climate negotiations commenced today in Cancún. Today was dominated by opening plenaries, these are open to observers, and webcasts are made available on the internet. These generally consist of set piece speeches from the main negotiating blocs. Things of interest that happened include:

  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.

The next UN climate conference, the 16th Conference of Parties to the UNFCCC, will commence on November 29 in Cancun, Mexico. ClimateDilemma will be attending these talks, will blog about what is going on, and also provide more up-to-minute updates via Twitter.

The stage was set at some negotiations earlier this year in Tianjin, China. It is unlikely that there will be anything like a comprehensive legally binding climate protocol emerge from Cancun, so the focus instead is on a “balanced set of decisions” on issues such as finance, adaptation, reducing emissions from deforestation and forest degradation in developing countries, technology, and possibly measurement, reporting and verification (transparency). The key stumbling block is agreement between the US and China on these issues. These difficulties were illustrated when in response to a speech by US Special Envoy on Climate Change Todd Stern, Chinese negotiator Su Wei referred to the US as what has been translated as a “pig preening itself in a mirror“.

As has been pointed out by Angel Hsu from Yale, this reference is to the character Zhu Ba Jie, from the Chinese novel Journey to the West. A well known television adaptation in some western countries is the show Monkey, a dubbed version of a Japanese television series. This will be particularly well known to Australians who grew up in the 1980’s (such as myself), when the show was very popular. In Monkey, Zhu Ba Jie is known as “Pigsy”.


Pigsy, portayed by Toshiyuki Nishida, from the opening credits for "Monkey"

Todd Stern’s speech made a number of salient points about the negotiations, but downplayed the problem of lack of US domestic progress. Lack of domestic progress is a major issue – the World Resources Institute has done a study investigating how much state-based approaches and regulation could reduce emissions without national legislation, and their most ambitious scenario has emissions lowered by 12 percent, which falls short of the 17 percent commitment. Stern also summarised the US negotiating position which is to not support action on “financing, technology, adaptation and forests” unless there is progress on mitigation and transparency.

Todd Stern made several comments that relate to China:

  • He stated that “you cannot build a system premised on the notion that China should be treated the same as Chad” and made some comments on China’s emission statistics;
  • He pointed out the “political reality” that it would be impossible to get support from US congress for an agreement that required action from the US but not from China and emerging markets;
  • He stated that in Tianjin, “Chinese negotiators have acted almost as though the Accord never happened, insisting on legally binding commitments for developed countries and purely voluntary actions for even the emerging markets”. He also stated that Chinese negotiators have merely listed their targets as a “fyi”, with “no political commitment to implement them”.

Stern’s statement that China should not be treated the same as Chad does bring up an important point about the way developed and developing countries are divided up in the Kyoto Protocol. The developed countries are specified as “Annex I Parties” which includes relatively poor countries such as Turkey, but does not include very rich countries including Qatar and the United Arab Emirates. It also does a mediocre job of distinguishing between different levels of per-capita emissions – Australia and the US have far higher per-capita emissions than France, and the highest per-capita emitter, Qatar, is not an Annex I country. The Kyoto Protocol has no mechanism non-Annex I countries to automatically become Annex I countries.

But the key issue is not so much whether emission reduction commitments are legally binding, it is whether countries will meet those commitments. Stern points this out in his speech, and so it is curious that Stern attaches so much attention to the legal status of China’s commitments. China is quick to point out that their targets are not legally binding, and stated in their Copenhagen Accord submission that “please note that the above-mentioned autonomous domestic mitigation actions are voluntary in nature”. China is perhaps more likely to meet its target than the US, and China has been implementing measures such as blackouts and slashing steel production in order to meet its domestic energy intensity target. So Stern’s statement that “Chinese negotiators have acted as though the Accord never happened” is not very fair. The other key issue is the ambition of the commitments themselves – an international agreement must be designed in such a way that the ambition of commitments can be readily ramped up – Kyoto has failed to do this, with countries preferring to take on weak targets and sell “hot air” (when countries – such as Russia – get allocated emission targets that are greater than business as usual emissions).

The largest barrier is Congress, in particular the US Senate. Ratifying a treaty requires 67 out of 100 votes, and even getting the Senate to vote on legislation requires 60. The US failed to pass climate legislation last year because it couldn’t get 60 votes in the Senate. If any institution was to resemble Pigsy, it would be the US Senate. But there have been failure at the White House as well: it made major strategic blunders when climate legislation was before the Senate; and failed spectacularly when it comes to framing and messaging, including on climate change. Congress is difficult because the Republicans are taking an extremist denialist position, but this could be politically damaging to the Republicans and untenable if the White House and/or the Democrats put pressure on the Republicans over climate change and framed the issue to be one of Republican obstruction, instead of one of “Democrats seeking bipartisanship”.

Issues with Congress and the strategic US-China relationship mean that there is little prospect for a fair legally binding and ambitious ‘top-down’ agreement in the near future, and that probably means the next decade. Since Copenhagen, the challenge is to ramp up emission reductions in a ‘bottom-up’ world, and turn political commitments into political action. We know from implementation theory and literature on private provision of public goods that if countries can commit to increase their reductions if others do the same, then a situation that is previously a “prisoner’s dilemma” becomes transformed into a situation where there is likely to be a cooperative outcome. Furthermore, if there is an expectation that there will be a legally binding agreement in the future that is fair, high per-capita emitters will have a strong incentive now to start reducing their emissions.

Progress in Cancún on transparency, financing, technology, adaptation and forests could ultimately facilitate cooperation on mitigation. One reason for optimism is that developing countries including India have made concrete proposals on measurement, reporting and verification (i.e. transparency), so the key reason for obstruction from the US may be resolved. But anything can happen in these negotiations, so only time will tell.

Much of the debate on carbon pricing mechanisms is on whether to go with a carbon tax (a price based approach), or with cap-and-trade (a quantity based approach). It should not be forgotten than any carbon pricing instrument is far better than having no carbon price at all. Often debates on carbon pricing instruments ignore various hybrid approaches that incorporate mechanisms such as price ceilings (a maximum carbon price), price floors (a minimum carbon price), and allowance reserves – which we will discuss here in more detail. It is disappointing that hybrid approaches sometimes get ignored, because the economics of uncertainty suggests that these approaches are superior in the sense of having the lowest expected costs. But governments may have other policy objectives than minimising costs in the presence of uncertainty, and hybrid approaches can be useful for these as well. Because of this, hybrid approaches to carbon pricing could lead to the consensus required to introduce a carbon price into Australia.

An allowance reserve is a little bit like a price ceiling. When an emissions trading scheme has a price ceiling, the government makes a commitment to sell an unlimited amount of extra permits at the ceiling price. With an allowance reserve, there are two differences: the amount of extra permits is limited; instead of selling them at a fixed ‘ceiling’ price, they are auctioned at a reserve price. An allowance reserve provides some price stability, but unlike a price ceiling, the total amount of emissions is also capped.

In Australia, a proposed emissions trading scheme (the Carbon Pollution Reduction Scheme or CPRS) failed to pass through parliament because the Liberal Party got taken over by deniers of climate change; but also failed to get the support of the Greens because the targets were too weak, and there were concerns that it risks ‘locking in’ weak targets. An issue with the CPRS is that it would have risked locking in a weak target range for too long – maybe 5-10 years but possibly longer. But there was some sort of administrative review mechanism in around 2013 or 2014, and including some sort of review mechanism is a useful part of any solution. But the main way to get a carbon price to work effectively is through having it send a strong long term price signal to investors in long-lived assets such as buildings and power plants. This is why there is resistance to setting targets for a shorter period of time.Since the August 2010 election, the support of the Greens will be required to introduce a carbon price. The two most difficult issues are the targets themselves, and what to do about the process for setting targets.

In January 2010, the Greens proposed an interim carbon tax for Australia. The idea being to introduce a carbon tax (or fixed-price ETS) and transition to an ETS with targets decided at a later date. But when the interim target is in place, how do you provide a long-term carbon price signal? This is important because assets such as power stations and buildings are very long-lived, so the future carbon price is what drives investment decisions. A solution is that after transitioning to an ETS with a cap on emissions, it should maintain a price floor. If the price floor is the same as the level of the carbon tax, and it steadily increases by some percentage above the rate of inflation, there will still be a strong long term price signal.

Introducing a fixed price beforehand will help, but there is no doubt that the issue of targets will be difficult even if a interim fixed price is introduced. One approach that could make this less difficult is to use an allowance reserve.  Consider the following approach: the amount of ‘normal’ permits (which are auctioned with a reserve price that is the same as the floor price, e.g. $20) adds up to enough emissions for a 25 percent reduction by 2020. But there is an allowance reserve auctioned at a reserve price of $40, and if all of them are auctioned that adds up to a 5 percent reduction by 2020. The Greens are happy, because if the carbon price is $40 or less, emissions will be less that the weak 5 percent target; and if the carbon price is less than $20, emissions will be less than 25 percent below 2020. The Government is happy, because they get to keep their targets, but gain some environmental credibility. Investors are happy, because they have long-term information about the carbon price.

If you wanted, you could have more than one allowance reserve. For example, you could have normal permits that add up to a 40 percent reduction; Allowance Reserve 1, that is priced higher than the normal permits and goes up to a 25 percent reduction; and Allowance Reserve 2, that has an even higher reserve price, and takes you up to a 5 percent reduction.

By going beyond the “carbon tax vs ETS” paradigm and thinking creatively, it may be possible to forge enough of a consensus to introduce a carbon price to Australia. Hybrid approaches to carbon pricing not only are advantageous in terms of the economics of uncertainty; they also provide us with new approaches for dealing with political realities.

An earlier version of this post appeared as a comment responding to Tim Hollo’s blog post ‘Is an ETS automatically more ambitious than a tax?’ at Crikey’s Rooted blog.

The absence of a comprehensive legally binding global deal has sometimes been used as an excuse for lack of policy action. Australia’s conservative opposition leader Tony Abbott claimed that the outcome at Copenhagen “vindicated his party’s decision not to support the Federal Government’s emissions trading scheme legislation”; the absence of an international deal was also an excuse when Australia’s former Prime Minister Kevin Rudd abandoned a proposed emissions trading scheme. But how much does slow international progress really matter?

In a report for the World Bank and a journal article, political scientist and Nobel Economics Prize winner Elinor Ostrom has argued that we should not wait for a ‘global solution’ to emerge from international negotiations before acting on climate change. Instead, action on climate change should occur at all scales. These include individual, community, municipal, regional, and national scales as well as the international scale.

Ostrom argues for a polycentric approach for several reasons:

  1. There is evidence that people are more likely to be cooperative than predicted by conventional game theory. People are in particular more likely to be cooperative when they trust each other to be reciprocators. For this reason, it is possible to have cooperative action without negotiating a ‘global solution’.
  2. Action on climate change can also lead to positive externalities such as clean air. Clean air is particularly relevant to China, where air pollution is a major problem.
  3. At any scale, policies may encounter errors, but without trial and error, learning cannot occur. A polycentric approach facilitates learning at multiple scales.

What implications does this have for critical areas of climate policy, such as technology and carbon pricing? Policies such as research and development, as well as investment in renewable energy, all help to drive down mitigation costs. Like clean air, this is a positive externality that we need more of.

Two major issues when trying to negotiate an international climate agreement are participation and compliance. This is one reason why legally binding agreements are desirable, but designing a treaty to maximize participation and compliance is difficult. When a country makes a commitment to reduce its emissions, how do we know it will meet this commitment? Action at multiple scales means that meeting such a commitment is much more likely. If a country introduces an emissions trading scheme, it will then be highly likely that it meets the target specified by the scheme. But in the United States, the national government did not successfully pass legislation. Fortunately there are regional measures in the United States that are reducing emissions: the Regional Greenhouse Gas Initiative is an emissions trading scheme that operates in ten states; eleven states and provinces in the US and Canada are developing the Western Climate Initiative; and seven states and provinces in the US and Canada are developing the Midwestern Greenhouse Gas Accord. These approaches make it easier for the United States to argue that it will reduce emissions by 17 percent by 2020.

Because domestic policies and measures add credibility to countries’ targets, a climate agreement with a mechanism for countries to list their policies and measures as well as targets is more likely to be successful. The Copenhagen Accord had annexes for developed countries to specify their targets and developing countries to specify policies and measures. It would make sense for climate agreements to have developed countries specify policies and measures as well.

The good news is that action on climate change is occurring at multiple scales. If Ostrom is right, there are reasons to be optimistic about the prospects for long-term cooperation. But there still are advantages to more agreement at an international level, including less excuses for inaction from politicians.