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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