December 16, 2010

What role for game theoretic solution concepts and climate change?

Posted by Peter Wood under International Cooperation and Prisoner's Dilemmas | Tags: , , , , |
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In game theory, there are a number of solution concepts, such as the Nash equilibrium, and the subgame perfect equilibrium, that help us to understand strategic behaviour. What role do these concepts have when looking at how to facilitate international cooperation on climate change?

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.

 

December 11, 2010

Breakthrough at Cancún

Posted by Peter Wood under International Cooperation and Prisoner's Dilemmas | Tags: , , , , , |
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This post also appears on East Asia Forum.

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.

 

December 9, 2010

A ‘six-pack’ for long-term cooperative action

Posted by Peter Wood under Politics, International Cooperation and Prisoner's Dilemmas | Tags: , , , , , , , , , , , |
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This post first appeared on East Asia Forum.

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.

 

December 2, 2010

For the first time, the UNFCCC will look at new protocols

Posted by Peter Wood under International Cooperation and Prisoner's Dilemmas | Tags: , , , , , , , , , , |
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Last year before the negotiations at Copenhagen, five countries (Australia, Costa-Rica, Japan, Tuvalu, and the United States) submitted proposals for protocols under the convention – in other words, new proposals for a legally binding climate treaty. This is important because there had not yet been discussion since Bali on what legal form the final outcome could take. In the meeting, Tuvalu proposed that a “contact group” (the UN name for a working group) be established to discuss these proposals. But a new protocol was opposed by India, China, Saudi Arabia, South Africa and others. Furthermore, the formation of a contact group was opposed by Saudi Arabia, India, Venezuela, Algeria, Kuwait, Oman, Nigeria, Ecuador, and China. This ruled out any chance of a legally binding treaty at Copenhagen, disappointed many representatives of civil society, it seemed at the time that the prospects for a strong legally binding outcome in the near-future were grim.

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.

 

December 1, 2010

Day 2: Opposition to using international bunkers and aviation for finance

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The second day of negotiations consisted of ‘informal’ negotiations (where countries actually negotiate, but observers are not allowed); and plenaries of the subsidiary bodies: the Subsidiary Body on Implementation (SBI) and the Subsidiary Body on Scientific and Technical Advice (SBSTA). SBSTA covered a variety of issues, ranging from the new space-based Global Climate Observation System to whether Carbon Capture and Storage should be included in the Clean Development Mechanism (an issue that seems to attract strong passions, which I find somewhat curious, because I doubt that CCS would ever be cheap enough to generate CDM credits). Video of these plenaries should soon be online here.

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.

 

November 29, 2010

Cancun Climate Negotiations, Day 1

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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.

 

November 29, 2010

Despite China describing the US as “Pigsy” from “Monkey”, there is hope for progress at Cancun

Posted by Peter Wood under International Cooperation and Prisoner's Dilemmas, Politics | Tags: , , , , , , , , |
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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

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.

 

November 10, 2010

How to get a consensus on carbon pricing in Australia

Posted by Peter Wood under Carbon Price Signals, Politics, Uncertainty, Probability and Risk | Tags: , , , , , , |
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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.

 

November 5, 2010

A polycentric approach to climate change

Posted by Peter Wood under Carbon Price Signals, International Cooperation and Prisoner's Dilemmas, Politics | Tags: , , , , , , , , |
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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.

 

September 22, 2010

Too late for Australia to “go-it-alone” on a carbon price

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Some sections of Australia’s business community (as well as the Abbott opposition) are concerned that we should not go ahead of the rest of the world on a carbon price. This ignores the fact that much of the rest of the world is already moving ahead of Australia on both carbon pricing in particular, and climate change mitigation more generally.

The Australian Financial Review (unfortunately paywalled) reported on Thursday September 16 that a number of CEOs have made the above argument. These include QBE Insurance CEO Frank O’Halloran who said “we ought to be patient and go with the other major developed countries around the world and not try to be the first cab off the rank”; Coca-Cola Amatil CEO Terry Davis who said “I don’t think we should lead the world”. The Australian Chamber of Commerce and Industry has claimed that “unilaterally imposing an emissions trading scheme has low business support”. Tony Abbott, who once said that climate change was “crap”, recently said that “a go-it-alone carbon tax in Australia would be an act of economic self-harm”.

One CEO who does not share this opinion is BHP CEO Marius Kloppers who has called for a carbon price to be introduced in Australia. The speech where Kloppers said this can be downloaded here (pdf). We will know whether Kloppers is serious when we find out whether Minerals Council CEO Mitch Hooke continues his scaremongering about a carbon price or not.

I will list below some of the climate action around the world that makes it impossible for Australia to “go-it-alone” on carbon pricing. The most comprehensive carbon pricing is in the EU ETS, where a carbon price partially contributed to emissions covered by the EU ETS falling by 11 percent in 2009.

Japan is presently drafting plans for an emissions trading scheme to come into effect from 2013. It will cover emissions from large emitters, include provisions for domestic and international offsets, and compensation for trade exposed industries. Japan already has a voluntary ETS in operation, and a mandatory ETS covering Tokyo.

South Korea, which does have commitments under the Kyoto Protocol, is also planning on introducing an ETS. Korea has already passed a ‘Basic Law on Low-carbon and Green Growth’, which mandates a cap on emissions. It is planning to pass further legislation to make this cap operational.

Although the United States has not yet passed national legislation, state-based approaches to carbon pricing are expanding. The Regional Greenhouse Gas Initiative is operating in ten states; eleven states in the US and Canada are developing the Western Climate Initiative and seven states in the US and Canada are developing the Midwestern Greenhouse Gas Accord. New Zealand now also has an emissions trading scheme. China has been dramatically reducing steel production in order to meet energy efficiency targets and has been driving down the costs of solar and wind power with its clean energy industries.

As was pointed out by Paul Gilding in Climate Spectator, “we are in as much danger of leading in action on climate change as we are of leading on indigenous health”. The risk for Australian Business is not that we will go ahead of the rest of the world on climate policy – it is already too late for that. The risk is that lack of climate policy and high Australian per-capita emissions will lead to our industries being frozen out of markets in the future.

 

June 11, 2010

Forest Management Loopholes in Kyoto Negotiations

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Developed countries who have commitments under the Kyoto Protocol are negotiating loopholes for themselves that could lead to almost 400 Mt of extra emissions each year. After giving some background, I will describe the status of the negotiations, describe the loopholes, and quantify them. This will help us to see who the worst offenders are.

Emissions associated with land use are classified under the Kyoto Protocol as LULUCF – Land Use, Land Use Change, and Forestry. This includes deforestation – which is when you log a forest and replace it with some other form of land use such as grassland; but does not include forest degradation – which is what occurs when you log a forest and allow a forest to grow back. Because unlogged forests can store large amounts of carbon, emissions associated with forest degradation can be quite significant, but not accounted for. This can lead to perverse outcomes, for example it is possible to log old growth forests, use the wood to generate electricity, and not account for any of the emissions.

As a way of addressing this, the Kyoto negotiations have been looking at how to have countries include forest management in their accounts – this would include emissions from forest logging. Forests naturally absorb carbon dioxide, so when including forest management, reference levels (baselines) need to be negotiated so that countries don’t get credited for the removals that naturally occur anyway. Late in 2009, just before the Copenhagen negotiations started, countries submitted their preferred reference levels, as well as estimates of emissions in 1990, projections for the first commitment period (2008-2012) and projections for the second commitment period.

Each country proposed a reference level for itself, the numbers are given below (click on the image to enlarge it):

Forest Management Reference Levels

The problem with this approach is that each country has an incentive to choose a reference level that is generous to it. This is what has happened. Some countries who chose particularly generous reference levels for themselves include Russia, which chose a range between 0 and -177.8 Mt CO2-e of emissions, so that it gets credited if its forests are more of a sink than -177.8 Mt, but is only debited if its forests become net emitters and is projected to have emissions of -274 Mt in the first commitment period; New Zealand, who chose a reference level based on its forecast for 2013-2020, which is 19.4 Mt higher than its forecast for the first commitment period (over 23% of New Zealand’s 2005 emissions); and Japan, which chose a reference level of 0. These numbers all add up to 213-391 Mt CO2-e of excess allowances per year for Annex I countries compared to their projected forest management emissions for the first commitment period (depending on which number is used for Russia).

There was some extensive discussions on this issue at the Bonn climate negotiations on June 7, 2010, in the contact group on Further Commitments for Annex 1 Parties under the Kyoto Protocol. These negotiations were not broadcast, but some of what happened was broadcast on twitter (look up the #COP16 or #UNFCCC hashtag). I don’t know which countries did or did not have a constructive role in these negotiations, but would be very interested in finding out. The LULUCF negotiating text is here.

 

May 22, 2010

Working Paper – Climate Change and Game Theory: a Mathematical Survey

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I have recently written a working paper, available from the Environmental Economics Research Hub website.

Wood, P. J., 2010, ‘Climate Change and Game Theory: a Mathematical Survey‘, Environmental Economics Research Hub Research Report No.62.

The abstract is as follows:

This survey paper examines the problem of achieving global cooperation to reduce greenhouse gas emissions. Contributions to this problem are reviewed from non-cooperative game theory, cooperative game theory, and implementation theory.

Solutions to games where players have a continuous choice about how much to pollute, games where players make decisions about treaty participation, and games where players make decisions about treaty ratification, are examined. The implications of linking cooperation on climate change with cooperation on other issues, such as trade, is examined. Cooperative and non-cooperative approaches to coalition formation are investigated in order to examine the behaviour of coalitions cooperating on climate change.

One way to achieve cooperation is to design a game, known as a mechanism, whose equilibrium corresponds to an optimal outcome. This paper examines some mechanisms that are based on conditional commitments, and could lead to substantial cooperation.

 

May 21, 2010

China likely to introduce carbon price before Australia

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This post was published in Crikey on Friday, 14 May 2010.

When defending putting off the Carbon Pollution Reduction Scheme (CPRS) until “the end of the Kyoto commitment period”, Kevin Rudd stated that “progress on global action has been slower than any of us would like”. The Copenhagen Accord may not have resulted in a legally binding agreement, but countries are now working out policies to implement their Copenhagen commitments. The Australian policy to not reintroduce legislation until 2013 leaves Australia in danger of being left behind.

In particular, it is becoming increasingly likely that China will introduce a price on greenhouse gas emissions before Australia does. China Daily is reporting that China is likely to be levied between 2011 and 2015. Business Green has reported that the Chinese language Economic Information Daily quoted the Chinese Ministry of Finance saying that the tax will be introduced in 2012 or 2013, will start at 20 yuan per tonne of carbon dioxide, and rise to 50 yuan (about $A8) by 2020. Professor Ross Garnaut has since announced that China is better than Australia on climate action. Ironically, Business Green is reporting that China will also introduce resource tax reform, probably not welcome news to the mining companies that have been complaining about the CPRS and an Australian resource rent tax.

The US Senate is now considering a Bill — the American Power Act — that will place a cap on emissions from 2013. It would reduce carbon pollution by 17% by 2020, and more than 80% by 2050. Australia is committed to a 60% reduction by 2050. The US legislation may not get past the Senate, but the Obama Administration is supporting it and not planning to postpone things until 2013.

In 2009, emissions covered by the European Union emissions trading scheme dropped by 11%. Part of this drop in emissions would have been due to the global recession, but the EU ETS has been in operation since 2005. Tony Abbott has advocated a “wait for the rest of the world” strategy on climate change, and Kevin Rudd now appears to be advocating the same thing. If Australia’s policy is to wait for the rest of the world, then the time to act is now.

 

April 27, 2010

Kevin Rudd Jumps the Shark on Climate Change and the Carbon Pollution Reduction Scheme

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Today the Rudd Government backed away from implementing their emissions trading scheme (the CPRS) until 2013, making a carbon price in Australia before then very unlikely. The CPRS had many flaws, but was far superior to there being no carbon price at all, and could have been changed later. The Rudd government was facing difficulties getting a carbon price through parliament, but there were two ways that it could have done so:

  • It could have negotiated with the Greens to implement an interim carbon tax, while the details of an emissions trading scheme are worked out later;
  • If could have used the CPRS legislation as the trigger for a double dissolution election, in which case the legislation could be put before a joint sitting of both houses of parliament.

Instead the government has decided that they dont want climate change to be an election issue, and the Prime Minister has hardly mentioned climate change in the past 3 months. This contrasts very strongly with his rhetoric last year. At Copenhagen, he gave a speech where he said:

When I arrive home at the end of this week, will I be able to sit down, look my children in the eyes and tell them in clear conscience that I did absolutely everything I could to achieve action to avoid dangerous climate change.

Because if we cannot, then we will have failed in our basic duties as leaders of our nations, as fathers and mothers of our children and custodians of our nations’ future.

The children of the world are watching.

They are listening.

And history will be the judge of each of us here today.

Now that the Copenhagen meeting is over, does this mean that history will no longer be judging our action on climate change? Will Kevin Rudd be able to look his children in the eye and say “I did absolutely everything I could to achieve action to avoid dangerous climate change”? History may well judge that Kevin Rudd has jumped the shark today.

Kevin Rudd has said (in defense of postponing the CPRS)
“The rest of the world is being slower to act on appropriate action on climate change.
“It’s very plain that the correct course of action is to extend the implementation date.”
In her paper ‘A Polycentric Approach for Coping with Climate Change’. Policy Research Working Paper 5095. World Bank., Nobel prize winner Elinor Ostrom said:
Given the severity of the threat, simply waiting for resolution of these issues at a global level, without trying out policies at multiple scales because they lack a global scale, is not a reasonable stance.

Ostrom has made it clear why it is unreasonable for individual countries to wait for the rest of the world.

 

April 10, 2010

Climate Negotiations Have Resumed in Bonn

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UNFCCC climate change negotiations have resumed in Bonn. Between April 9 – April 11, meetings are occurring for both the ad-hoc working group for long-term cooperative action under the convention (AWG-LCA), and the ad-hoc working group on further commitments under the Kyoto Protocol (AWG-KP). These working groups have been tasked with completing the Bali action plan by the COP 16 meeting in Cancun, Mexico. Some of the Bonn meetings are webcast here. According to the UNFCCC website:

The first sessions of the AWG-KP and AWG-LCA in 2010 will focus on the organization of work of both working groups this year, including the need for additional meeting time, with a view to reaching a successful conclusion of their work at COP 16 /CMP 6 in Cancun.

Several issues have played a significant role so far:

  • There is a proposal that the Secretariat draft a new next that would draw on both the LCA text from last year, and the Copenhagen Accord. The other option would be to continue negotiating on the old text. If there was a new text, it would be released before some negotiations in June. At the time of writing, it seems like a new text is being opposed by Bolivia, Venezuela, Egypt and Saudi Arabia.
  • Countries are staking out (and to a certain extent re-iterating) the positions. Some non-Annex I parties have emphasised the importance of the Kyoto Protocol, and that Annex I parties to the Kyoto Protocol should have stronger commitments, and that loopholes involving permit carryover and LULUCF accounting should be addressed.
  • Russia stated that negotiations should be more efficient; countries should not use up time by repeating their positions; and negotiations should not take place at night, so that negotiators could get some sleep (this particular point received applause).
  • An issue for discussion is the number of meetings, some suggestions for two additional meetings.
  • The US stated made a statement that included the following points: Copenhagen was a remarkable breakthrough because: an agreement to limit temperature rises to 2 degrees; a framework where countries can list their actions or targets; a framework for transparancy; finance commitments; technology; adaptation; and REDD. But there was not much progress in the formal negotiations on the ‘crunch issues’, over 100 pages of brackets. But heads of state achieved things that the formal process could not. The accord should materially influence negotiations. Support chairs proposal to draft new text.
  • Ghana stated that Annex I parties should fund the extra meetings and fund the participation of two participants from each non Annex I party.
  • In order to simplify the negotiations, and make them more inclusive, the chairs of each working group have proposed to create a single contact group corresponding to each working group.
  • Papua New Guinea has called for ministers to meet in order to provide political direction, and when progress is made, then negotiators should meet and integrate progress into the negotiating text.
  • Other negotiators, including the Phillipines, have said that the process should be ‘party driven’ in order to avoid the ‘mistakes of Copenhagen’.
 

March 18, 2010

Stern vs. Stern on the Role of the UNFCCC in Climate Negotiations, and Some Comments on Coalitions.

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The difficulties with finding cooperation on climate change were illustrated at Copenhagen, which resulted in a political ‘accord’, but where there remained too much disagreement to arrive at a binding international treaty. There has been an ongoing political debate about the role of the United Nations, and whether more could be achieved in negotiations involving smaller groups of countries. The Copenhagen negotiations may have made the latter more likely. The lead US climate change negotiator, Todd Stern, stated:

You can’t negotiate in a group of 192 countries. It’s ridiculous to think that you could.

but that

It is certainly premature to write off the UNFCCC. There is a credibility that is provided by the full group. So on the one hand, I don’t think you can negotiate in that grouping, but on the other hand, it’s good for there to be a larger grouping that the smaller representative group can come back to.

Some of the rules [of the UNFCCC] can be difficult. If you’ve got 185 countries wanting to do something and a handful that don’t want to, that blocks everything.

Nicholas Stern has offered a different perspective, stating that “The fact of Copenhagen and the setting of the deadline two years previously at Bali did concentrate minds, and it did lead… to quite specific plans from countries that hadn’t set them out before”, and that it was vital to stick with the UN process, whatever its frustrations. Stern also stated that the “disappointing” outcome of December’s climate summit was largely down to “arrogance” on the part of rich countries.

Other perspectives in this debate have been offered by Jonathan Pershing, Robert Stavins, and Andrew Light. Gro Harlem Bruntland, the UN special envoy on climate change, has said that there is likely to be a two-track process, with negotiations both within, and outside the UN.

I have written more on the role of different countries at Copenhagen (including ‘rich’ countries) here. A major deadlock in the negotiations is due to developing countries being unhappy with Canada, Japan and Russia not being willing to be part of a second commitment period to the Kyoto Protocol. Another problem is that Saudi Arabia and other OPEC members (many of these countries could be considered to be ‘rich’, even though they are not Annex I countries) are blocking discussion of new legally binding protocols under the UNFCCC, sometimes using lack of progress under Kyoto as an excuse.

Game theory can provide useful insights when considering debates such as these. In fact, there has been a parallel debate in the game theory literature on whether cooperation is more likely to arise from a `grand coalition’ of all countries, or from smaller coalitions. The debate has been surveyed by Chander and Tulkens. An important contribution is from Finus and Rundshagen, who consider different ways to model coalition formation as a non-cooperative process.

In some ways the Annex I parties to the Kyoto protocol behave like a coalition — members behave more cooperatively with respect to each other than they do towards non-members. The set of Annex I Parties to the Kyoto Protocol is similar to the ‘open membership’ coalitions described by Finus and Rundshagen. Other countries are free to join the Annex I Parties, but generally they don’t want to. Many Annex I countries instead want to leave.

The European Union is closer to a ‘classical’ coalition. They choose their emissions in a cooperative manner, negotiate collectively in the UNFCCC, and participate in an emissions trading scheme together. Membership is not open, and decided collectively, in a manner similar to the ‘exclusive membership games’ described by Finus and Rundshagen. Processes where countries link their emission trading schemes may also work in a similar way to an exclusive membership game. In the cases studied by Finus and Rundshagen, although open membership coalitions are easier to join, the equilibria for exclusive membership coalitions involve larger coalitions and a more cooperative outcome.

A possible implication of this is that a process where a small amount of ‘major emitters’ negotiate a coalition, which others are then free to join, is likely to be less successful than a process that tries to find the largest possible group of countries who are willing to cooperate with each other. Carbon market linkage may also facilitate cooperation.

 

March 5, 2010

What Really Happened at COP 15? Podcast and Speaking Notes

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The podcast of the ANU event “What Really Happened at COP 15″ is here.

The notes for my talk are below, as well as some slides (which I wasn’t able to show on the day).

(more…)

 

February 22, 2010

ANU Event – What Really Happened at Copenhagen? – 12pm, Feb 23

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What really went on at the Copenhagen Climate Change Conference? Was it a ‘fiasco’ or a positive step forward? Those are some of the questions to be addressed by a panel of experts tomorrow at The Australian National University.

The panel discussion – Post Copenhagen: Where do we go now? – will bring together people who experienced the COP15 discussions first hand. They will attempt to shed light on what really happened at the negotiations, what the failure to reach a binding agreement means and what comes next.

The discussion includes Associate Professor Janette Lindesay of the Fenner School of Environment and Society at ANU, Dr Peter Wood of the Resource Management in Asia-Pacific Program and ANU students Jonathan Pickering, Phoebe Howe and Alexei Trundle. The discussion will be moderated by Executive Director of the ANU Climate Change Institute, Professor Will Steffen.

Professor Steffen said although the Copenhagen discussions had been seen as a failure by many, there were still reasons to be optimistic about future negotiations.

“Although the Copenhagen Accord did not go as far as many would like it, it represents a significant progress towards an international agreement,” said Professor Steffen. “The Accord continued to draw on climate change science as underpinning foundation of efforts to stabilise the climate. In particular, the agreement that the rise in global temperature should be limited to two degrees or less is based on a massive body of research on human interference with the climate system.”

The lunchtime discussion will be streamed live at www.livestream.com/anuchannel with an online chat room allowing for viewer interaction and discussion.

 

February 4, 2010

The Copenhagen Accord and Vagueness

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Parties associated with the Copenhagen Accord have now submitted their quantified economy-wide emission targets and mitigation actions. These submissions are on the UNFCCC website. The US Climate Action Network has provided a useful table which summarises these submissions.

It is useful to have a ‘schedule’ (such as the chapeau of the accord) in which as many emitters as possible list their targets and commitments. It is also useful to have conditional targets (along with conditions) placed into this schedule. If countries are able to commit to both conditional and unconditional targets, then we have a framework that could lead to countries choosing their targets cooperatively. This has been strongly suggested by research on mechanisms that implement public goods.

Unfortunately the way that these things are done in the accord is far too vague to work. It is hard to say what the accord’s targets imply in terms of actual emissions, because issues such as LULUCF accounting, international trading, carryover of Kyoto AAUs, and definitions of ‘business as usual’ are completely unspecified. Furthermore, the conditions that countries have specified for their conditional targets are completely vague, and it is impossible to be able to tell with much certainty from the accord schedule whether any of these conditions have been met. For example, the EU conditions use words like “comparable emission reductions” and “responsibilities and respective capabilities” without stating what these conditions actually mean.

A global framework for emission reductions should have an accounting framework that converts commitments into actual emissions. When countries make conditions for their commitments, these conditions should be based on this framework. Countries would then know what they would need to do in order for other countries to increase their level of ambition.

If a legally binding treaty is negotiated, it should be designed with these considerations in mind. Unfortunately progress on a legally binding agreement has been difficult: at Copenhagen, Tuvalu proposed to form a Contact Group to discuss legally binding agreements, but this was blocked by China, India, Saudi Arabia, and some other OPEC states.

 

February 2, 2010

On emissions trading, the Coalition does not understand the difference between price and cost

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Australian opposition leader Tony Abbott has launched a new climate policy. The plan states on page one:

Our policy will cost $3.2 billion over 4 years, while the ETS costs $40.6 billion over the first four years.

This is comparing oranges with apples. It is referring to the their policy spending $3.2 billion, and the ETS raising $40.6 billion from sale of permits (much of which will go back to households or polluters), but they are completely different things. And the “cost” of a policy is how much is spent on emission reductions, be it by firms, the government, or whatever. This has nothing to do with the amount of auction revenue in an ETS.

The Coalition does not appear to understand the difference between price and cost. Professor Ross Garnaut spelled out the difference at a public lecture at the ANU in November 2007:

Finally, it is worth differentiating between the price of carbon and its cost to the economy. The cost to the economy is not, as some have suggested, the carbon price set for emission permits. The “price” is not the cost – this has been a fallacy of the Australian discussion to date.

The cost to the economy is the expenditure on substitutes net of existing higher costs imposed through mandatory schemes. While carbon prices will rise over time, the cost of mitigation does not rise at the same rate. It could be more or less depending on expenditure on substitutes such as renewable energy development, increased costs of structural industry adjustment and improving energy efficiency.

But over time, the incremental cost of new energy sources applies to a smaller part of the economy; and continued technological and institutional improvement in supply of the new substitutes for the old high-carbon activities may bring down their cost, even when the carbon price is rising.

 

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