Tag Archives: carbon pricing

Global Problem, Global Solution… Right?

One would think that if you have a global problem that there is always (and perhaps only) a global solution. But that way of looking at climate change has become naive and does not allow you to see the entire picture. So often we see states, provinces, and other subnational entities leading the charge with innovative climate policy and initiatives while the national governments sit back arguing over whether or not climate change is really even a problem. Despite the annual COPs, the UNFCCC stage for negotiations, and bilateral discussions (such as the one between US and China), national and international policies are very behind what these subnational actors have been doing for years.

I am not saying that climate change can be solved by a few states in America by creating an Emissions Trading Scheme. If only a few subnational actors make moves to combat climate change, the emissions reductions will never be large enough to solve our problem. But, what I am saying is that someone has to begin to make moves or we won’t ever see a solution. And, historically, it hasn’t been the national governments (or international agreements) that have taken the first steps towards a solution to climate change – it has been the subnational actors. To name just a few:

  • British Columbia has implemented a carbon tax in order to reduce greenhouse gas emissions and are a part of the Pacific Coast Collaborative Agreement with four other subnational parties.
  • California has consistently established itself as a leader in environmental protection, as it has much to lose from the effects of climate change. California has many standards and programs in place, but the most notable is likely the cap-and-trade program established by Assembly Bill 32, and recent linkage with Quebec. These linked programs just successfully held their first joint auction preceding COP20.
  • China has begun implementing pilot cap-and-trade programs in certain provinces, and if successful, might lead to a national cap-and-trade program in 2016.

As I was listening to the subnational leaders speak at the COP this week, I began to wonder why we even try so hard to get a global agreement if the implementation and practical solutions come from the local actors instead of national political leaders. But then, I realized: You can’t solve climate change alone and you can’t solve climate change in an annual conference. What needs to happen, instead of ignoring either the international or local roles in the fight against climate change, is a union between all of these subnational groups to combine their efforts on an international level to reach the same goal; essentially, working in tandem.

The international and subnational approaches to climate change should not conflict with each other but they also play different roles. The relationship between these methods should be more of a push-pull relationship and where one lacks the other leads. Subnational actors have led the charge with innovative policy solutions to climate change but they cannot fight the problem alone. For those countries who cannot be influenced by subnational groups, we also have the international community influencing how we deal with climate change. If these two approaches were to work in tandem, global climate change would be that much easier to protect ourselves against. The international agreement, then, becomes more than just an agreement between nations. An international agreement is the platform for which national and local actors can build upon to implement real effective solutions that are right for their own people.

So, you see? We need a global agreement. This is a global problem, which requires a global effort and a universal solution. Okay, let’s say we do get a solid agreement out of COP21 in Paris. This would be fantastic. But, we need to continue to look beyond the agreement: we need each and every local, indigenous, state, subnational, and national party to act or we will not be able to stand a chance against climate change. That said, I think my last post requires a title change. How about: Global Problem, Global Solution, Local Action.


Can Voluntary Carbon Restrictions be Politically Attractive?

The IMF recently released a paper (“How Much Carbon Pricing is in Countries’ Own Interests? The Critical Role of Co-Benefits”) with findings that if the co-benefits of carbon restrictions were taken into account, it would be in countries’ self interest to unilaterally implement carbon pricing programs. The paper notes that countries can benefit from reduced use of fossil fuels, primarily through improved air quality and reduced vehicular traffic congestion. Accounting for these externalities in the top 20 emitting countries justify efficient national CO2 prices that are quite high, for example, $63 per ton in China and $57 per ton in the US. These are comparable with the estimated optimal global CO2 price of $35 per ton. In short, even if countries do not care about climate change, carbon mitigation is in their national interests. Given that, they should proceed with national level carbon pricing and not wait for an international climate agreement.

The paper’s release was timed to embolden national leaders at the UN Climate Summit on 23 Sep to consider more aggressive commitments, given the short runway left to the critical COP21 in Paris. It has drawn renewed calls to action by climate change friendly economists like Paul Krugman and Martin Wolf. Since climate action is not in conflict with economic growth, there is now no excuse for leaders to continue to kick the can down the road for the next generation to deal with.

With the IMF’s findings, the deal seems almost too good to be true. With carbon mitigation, leaders can further national interests and yet be seen to be good responsible global citizens. Should they not be falling over themselves to declare aggressive CO2 reduction commitments?

Not so fast. The enticingly high estimates of co-benefits from carbon mitigation may not be enough to change the leaders’ political calculations on climate change efforts.

One, environmental co-benefits may not matter that much to the leaders. The paper’s authors noted that although the fossil fuel externalities should ideally be addressed via direct policies, e.g. air pollution charges for coal use and road congestion tolls, it is unlikely that countries will comprehensively internalize them for a long time. This reality reflects the low priority attached to these environmental costs. Although these are longstanding environmental problems, many countries consciously choose not to correct them, as other national goals take precedence. For example, cheap electricity from coal is seen to be essential to support the growth of heavy industries. The resultant unhealthy air quality is unfortunate, but that is the inevitable price to be paid for economic development. For countries where ruling legitimacy is not established through ballot boxes, it is even more important to justify continued leadership with strong economic performance. Environmental achievements without progress in material metrics cannot secure obeisance. Even among the other countries, compromised air quality and long commutes are often accepted as part and parcel of urban living. While a politician may be cheered for acting on these environmental issues, the voting public’s expected strong and sustained displeasure over higher electricity rates and tolls would make such a move ‘courageous’, as defined by Yes Minister’s Sir Humphrey Appleby. Ultimately, a dollar is not a dollar is not a dollar. The co-benefits are likely to be highly discounted in most government’s calculations of national interests.

Two, countries care about relative competitiveness. The authors acknowledge that dynamic responses are not considered. For example, the reduced fossil fuel demand could depress an energy exporting country’s terms of trade. More critically, there could be emissions leakage if firms in energy intensive and tradeable sectors relocate to other countries that still do not price carbon. The loss of competitiveness and resulting hollowing out of industries can potentially offset the co-benefits, making carbon pricing a costly exercise if undertaken unilaterally. However, if carbon pricing was concurrently adopted by other countries, especially the competitor economies, the relative competitiveness will not be disturbed. That is why even when countries are prepared to do what is right for the climate, they are insistent that other countries commit to actions commensurate with their respective levels of economic development.

These concerns could be overcome if carbon pricing improved competitiveness instead, along the lines of the Porter hypothesis that strict environmental regulations induce efficiency and spur innovations that give local firms a dominant competitive position over firms in other countries without the regulations. Although the hypothesis’ logic has been much criticized, the thinking has helped to spur the Green Growth movement. The promise that going green can be a long-term driver for economic growth is relatively easy for governments to market to voters, and many have signed up with public funding for green industries.

I look forward to eventual conclusive evidence that green growth works, so as to boost the case for unilateral climate action. Otherwise, there is no avoiding the Gordian Knot of equity at climate negotiations. The painful, messy process of reaching a global agreement of coordinated commitments will have to run its course before countries initiate effective climate change mitigation.