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Economics 331bSpring 2009

International Environmental Agreements:

Politics, Economics, Law

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The Next Step: Effective International Agreements

Step 1. Understanding the science, impacts, potential remedies such as mitigation, geoengineering, etc.

Step 2. Undertaking economic/political analyses of efficient and equitable steps to meet environmental objectives at minimum cost

Step 3. Design and agree to institutions and mechanisms that will attain objectives:- by obtaining the necessary agreement among nations- by ensuring that individual nations meet their agreements.

In the case of global warming, this is about as difficult as can be envisioned because of (i) global public good, (ii) stock quality, and (iii) long time horizon.

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Notes on International Agreements

Potential mechanisms for reaching agreement:- markets: inefficient for public goods/externalities- within nations: autocracy, legislation (majority or supermajority): inefficient for global public goods/externalities- among nations: force, multinational institutions, treaties

Note on treaties: these are legal “contracts” among govts

Special problems with international governance under current norms of international law:- need for voluntary agreements- generally cannot bind countries over time

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UN Framework Convention on Climate Change

The FCCC is the underlying treaty that sets the framework of further agreements. Entered into force in 1994.

Article 2. Objective“The ultimate objective … is to achieve … stabilization of greenhouse gas

concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved … to ensure that … economic development to proceed in a sustainable manner.”

Article 4. Commitments. “2. The developed country Parties … commit themselves ... :

(a) Each of these Parties shall adopt national policies … by limiting its anthropogenic emissions of greenhouse gases ... (b) [E]ach of these Parties shall communicate… information on its policies … with the aim of returning individually or jointly to their 1990 levels these anthropogenic emissions of carbon dioxide and other greenhouse gases …. “

Notes:- Essentially universally adopted. - No binding commitments.- Kyoto Protocol is an agreement within the Framework of the FCCC.

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Y (Low income)

Efficient withside payments

Market

Y (High income)

Some bargaining outcomes

A. Low income countries benefits (Kyoto Protocol)

B. Low income countries hurt (Mickey Mouse/drug treaties)

C. Efficient with side payments

A

B

C

Major Issues in Any International Climate-Change Regime

1. What should be the overall level of emissions reductions, and how should that change over time?

2. What should be the distribution of emissions or emissions reductions (or economic costs) among countries?

3. Should there by income transfers from high-income to low-income countries?

4. Design issues of how to coordinate international policies (quantities v. prices); enforcement; trade linkages; production v. consumption basis

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Major provisions:

- A “cap and trade” emissions reduction program

- Protocol negotiated in 1997

- Limiting emissions to fraction of 1990 rates.

- Limited to high-income countries

- Only agreed for 2008-2012 period

- Allows trading of emissions permits among countries

- US Senate passed a resolution in 1997 by 95-0 to warn that Senate would not ratify.

- Bush Administration withdrew in 2001.

- Protocol went into effect in Feb 2005 after Russian ratification.

Obama administration has proposed entering, but prospects in the Congress are uncertain in the near term.

Important note: Virtually all US proposals are “cap and trade” like Kyoto Protocol

The Kyoto Protocol

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Economic Modeling of Alternative Policies

1i

ni i i

i{c (t)}{ [c (t)]}max W U

1. Recall that the modeling strategy is to use the Samuelson-Negishi theorems to simulate the behavior of market systems:

2. To analyze policies, we add auxiliary constraints (like Lagrange maximization) to these:

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where are the limits (Kyoto or whatever).

ni

ii

ni i i

i{c (t)}E (t) E(t){ [c (t)]} (t)

E(t)

max W U

3. Note: The λ(t) are the Lagrange multipliers. They represent the “dual variables” or “shadow prices” on carbon emissions in each period. The market correspondence is the optimal carbon taxes or prices on emissions permits.

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Attrition of Kyoto Protocol

Fraction of Global Emissions Covered by KP

0%

20%

40%

60%

80%

100%

1990 2002

With US

Without US

Enthusiasts

Emission Reductions Under KP Will Be Minimal

Differences in CO2 Emissions

-20%

-15%

-10%

-5%

0%

1995 2005 2015 2025 2035 2045 2055 2065 2075

Dif

fere

nce f

rom

base (

perc

en

t)

Efficient policy

Original Kyoto Protocol

KP without U.S.

Winners, Losers, and Big Losers

Abatement Costs of Kyoto Protocolwith and without U.S. Participation

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

USA OHI Europe EE ROW World

Ab

ate

me

nt

co

sts

(tr

illi

on

s o

f 1

99

0 $

)

Without US

With US