Climate change—- new approaches to agreement

The text of an Op-Ed that will be pub­lished in the Aus­tralian Finan­cial Review on 31 Octo­ber.
The key to man­ag­ing cli­mate change is not car­bon-spar­ing tech­nol­o­gy — although that’s impor­tant — it’s find­ing an effec­tive tech­nol­o­gy for inter­na­tion­al agree­ment.
Eco­nom­ic mod­el­ing of cli­mate change abate­ment efforts con­firms that the broad­er the inter­na­tion­al par­tic­i­pa­tion the big­ger the ben­e­fits. But the dis­mal record of UN agree­ments offers lit­tle hope that almost two hun­dred economies will col­lab­o­rate effec­tive­ly while sub­merg­ing their indi­vid­ual inter­estin con­tin­u­ing with busi­ness as usu­al. We need to find new ways to col­lab­o­rate to meet a glob­al threat.

Australia’s cau­tious cli­mate pol­i­cy hangs on hopes for a tech­no­log­i­cal solu­tion to the car­bon emis­sions of coal and for broad­er bur­den-shar­ing. Stud­ies com­mis­sioned from the Aus­tralian Bureau of Agri­cul­tur­al and Resource Eco­nom­ics (ABARE) sug­gest that mit­i­ga­tion with­out that tech­nol­o­gy or broad par­tic­i­pa­tion in inter­na­tion­al efforts could cost Aus­tralia between 2.5 and 10 per­cent of GDP.

But the ABARE stud­ies offer only half of a pol­i­cy analy­sis: they mod­el the costs but not the ben­e­fits of mit­i­gat­ing change. Now it looks like Sir Nicholas Stern’s report, to be pub­lished this week, will pro­vide us with the oth­er half of the ledger. The for­mer World Bank chief econ­o­mist projects the cost of cli­mate change rang­ing from 5 to 20 per­cent of glob­al out­put. In oth­er words, if human activ­i­ties account for most or all of cur­rent cli­mate change, the ben­e­fits of con­trol­ling those activ­i­ties could be as much as 20 per­cent of future incomes.

Even at the low end of the Stern range of ben­e­fits any of ABARE’s cli­mate-change mit­i­ga­tion sce­nar­ios —pro­ject­ed to cost between 1.7% and 4.3% of glob­al out­put —offer a net ben­e­fit; for Aus­tralia too. In the futures mod­eled by ABARE, the cost to Aus­tralia of a pro­gram of mit­i­ga­tion in which all coun­tries par­tic­i­pate is no more than the aver­age glob­al cost.

Glob­al par­tic­i­pa­tion holds the key to net ben­e­fits because, despite its local vari­abil­i­ty, the cli­mate is a glob­al com­mons. Typ­i­cal­ly, man­age­ment of such com­mons in mul­ti­lat­er­al agree­ments like those on non-pro­lif­er­a­tion or increas­ing aid flows or reduc­ing trade bar­ri­ers relies on tar­gets to appor­tion the respon­si­bil­i­ty of indi­vid­ual economies for achiev­ing a shared goal and to audit their per­for­mance. But glob­al tar­gets —even if ‘dif­fer­en­ti­at­ed’ as they are in Kyoto —are noto­ri­ous­ly fal­li­ble for rea­sons are best sum­ma­rized by Oxford econ­o­mist John Kay who notes that if tar­gets worked the Sovi­et Union would have been an eco­nom­ic success.

Tar­gets in the Kyoto Pro­to­col seem cer­tain to fail; even its most ardent sup­port­ers will under­shoot. Tar­gets worked in the case of the Mon­tre­al pro­to­col, but for pecu­liar rea­sons: gov­ern­ment and busi­ness in the USA, which emit­ted almost 50 per­cent of CFCs, were con­vinced they had a self-inter­est­ed stake in their elim­i­na­tion even on the basis of ‘going it alone’. That degree of con­cen­tra­tion and com­mit­ment does not exist in the case of green­house gasses.

The nobel lau­re­ate Thomas Schelling argues that we don’t need to appor­tion defined emis­sion ‘tar­gets’ to indi­vid­ual coun­tries to achieve change. Gov­ern­ments, he says, can­not con­fi­dent­ly pre­dict the out­comes of mit­i­ga­tion poli­cies so ask­ing them to accept a tar­get oblig­a­tion on cli­mate change is ask­ing for a blank check. He points out that the sub­stan­tial bur­den of achiev­ing the shared secu­ri­ty objec­tives of NATO coun­tries was met with­out shar­ing out secu­ri­ty ‘tar­gets’ by con­tin­u­ous nego­ti­a­tions based on scruti­ny of the inputs gov­ern­ments made to achiev­ing the over­all objective.

Aus­tralian econ­o­mist War­ick McK­ib­bin and his col­league Peter Wilcox­en have devel­oped a plau­si­ble mech­a­nism for such a ‘tar­get­less’ reduc­tion of car­bon emis­sions using hybrid long-term and short-term emis­sion per­mits. The for­mer would cov­er some pro­por­tion of the ‘base load’ demand for emis­sions and the lat­ter would put an inter­na­tion­al­ly agreed price on incre­ments. This plan has inbuilt incen­tives to cap and reduce emis­sions but requires no inter­na­tion­al agree­ment beyond the ini­tial sys­tem design and the pric­ing of short-term per­mits. It’s a sim­ple inno­va­tion whose char­ac­ter­is­tics fit John Kay’s pre­scrip­tions for an auditable but ‘plu­ral­ist’ approach to achiev­ing objectives.

Even a sim­ple inno­va­tion, how­ev­er, recalls a sec­ond impor­tant les­son from six­ty years of mul­ti­lat­er­al­ism. Con­sen­sus deci­sions call for a long pre­am­ble of ‘dis­cov­ery’ as gov­ern­ments work out a bal­ance between domes­tic pres­sures, glob­al regimes and, pos­si­bly, ide­ol­o­gy. If Stern’s decade-or-so hori­zon for avoid­ing dis­as­ter is accu­rate, we need an imme­di­ate start.

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