Symposium, Sept. 2015. (Background: Caps vs Price)
Fundamental Problems and Strategies
Economics of Energy and Environmental Policy
The 2015 Paris climate conference is a re-play of the 2009 Copenhagen conference, which failed except for Obama’s Copenhagen Accord. Although weak, this opened the door to uniting developed and developing countries in a common pledging process which it is hoped will be strengthened in Paris. But the path to agreement is still plagued by the same free-rider problems that divided the delegates in Copenhagen.
In fact, China has already pledged, and it appears it is, as Jean Tirole has predicted, weaker than would be expected from the classic free-riding problem. Chinese officials describe it as slightly weaker than the reductions in coal used needed to prevent local public health problems from getting intolerably worse. And they do not mention even local climate mitigation as a motivating factor. Instead they say their pledge is intended as “an upbeat signal to motivate other countries.”
Recently, several economists have taken the view that negotiation failures are not so much the fault of the countries or their delegates as the fault of the structure of the negotiations. The idea is that changing the negotiations game can partially overcome the global free-rider problem posed by climate change.
In September 2015, EEEP will publish a collection of papers presenting ideas on how to restructure the international climate negotiation process, with particular emphasis on overcoming the global free-rider problem. This will include papers by
- Joseph Stiglitz
- Martin Weitzman
- Jean Tirole and Christian Gollier
- Kenneth Arrow
- Richard Cooper
These will generally relate their most recent work to the upcoming negotiations in Paris. Here is a brief list of their most relevant papers (see their individual pages for more).
2010-01 Stiglitz, Joseph, “Overcoming the Copenhagen Failure,” (2 pp.) Project Syndicate.
2006-07 Stiglitz, Joseph, “A New Agenda for Global Warming,” (4 pp.) The Economists’ Voice, 3.7.
2013-11 Weitzman, Martin. “Can Negotiating a Uniform Carbon Price Help to Internalize the Global Warming Externality?“ (21 pp.) Harvard Project on Climate Agreements.
2012-01 Tirole, Jean. “Some Political Economy of Global Warming,” Economics of Energy and Environmental Policy.
2010-01 Tirole, Jean. “Climate Change Policy: A New International Architecture,” Conference on Infrastructure Economics and Development, Toulouse (slides).
2006-06 Arrow, Kenneth. “Information Acquisition and the Resolution of Conflict,” Barriers to Conflict Resolution, Norton, 1995.
2012-04 Cramton, Peter and Steven Stoft. “How to Fix the Inefficiency of Global Cap and Trade-04” (5 pp.) The Economists’ Voice, 9.
There will be a brief introduction by Peter Cramton, Axel Ockenfels and Steven Stoft. Topics may include (but will not be limited to):
- What is require to solve a global public goods problem?
- The effect of the required type of commitment on the strength of the agreement.
- Individual caps?
- Global cap and trade?
- Global price (with choice of implementation method)?
- Generalized pledge?
- The decision process.
- Unanimous voting?
- Coalition of those above an ambition threshold?
- Inducements and sanctions
- Green-Fund transfers, permit transfers and trade sanctions.
- What are their roles in reaching agreement?
- In stabilizing an agreement?
- Long-term commitments and periodic adjustments
- Which makes a strong agreement more likely?
- What is the role of information in facilitating agreement?
Current Ideas in a Dynamic Field
All of the authors appear to agree that the central dilemma of climate negotiations can be usefully understood as global public goods game. This is essentially a Prisoner’s Dilemma game with many prisoners. This view captures both the view that this is a problem of the global commons and that ambitious agreement is undermined by a strong free-rider problem. That is, ambitious action by any country or group of countries inevitably invites free riding by all others.
Several of the authors (Stiglitz, Weitzman, Nordhaus, Cramton, Okenfels, Stoft) agree that the best approach to changing this game appears to be to switch the focus of the agreement from individual quantity targets to a common global price target. As Weitzman explains:
- A global price will provide a focal point for a common commitment, while quantity targets (which present no such focal point) will remain individual commitments. As a consequence, negotiating a global price largely solves the externality problem while individual caps embody it.
- “Nations or regions could meet the obligation of a minimum price on carbon emissions by whatever internal mechanism they choose, a tax, a cap-and-trade system, a hybrid system, or whatever else results in an observable price of carbon.”
In his most recent climate paper, Tirole has noted that:
“As for the choice of instrument, a wide post-Weitzman (1974) literature has investigated the trade-offs between a carbon tax and cap-and-trade. Political economy considerations matter too, pushing in my opinion slightly in the direction of the cap-and-trade solution. … I feel that economists’ disaccord on the choice between taxes and permits … is in the current situation of second-order importance.”
Moreover Tirole’s prediction that the waiting game “will increase the cost of delay beyond that associated with the classic free-riding problem” seems already to be proven correct in the case of China, which has committed to a policy slightly weaker (according to its own officials) than dictated by local pollution costs and includes no local climate costs. However, we believe this analysis does not apply to negotiation of a global price commitment.
There appears to be no chance that Paris will consider a global cap-and-trade system. The EU uses both caps and fossil taxes and is currently trying to implement a “market stability reserve” to make its cap more tax-like. And, the new global-pricing proposal largely sidesteps the “choice of instrument” problem.