Climate Policy: Shortcomings of Kyoto and Cap and Trade

1. Climate Policy: Shortcomings of Kyoto and Cap and Trade 21st Century Temperature Change Richard A. Slaughter, Ph.D. Climate Impacts Group University of Washington Scenario A1B CIG Seminar April 7, 2009

2. Magnitude of the task Source: IPPC

3. Climate Reality • Current emissions (CO2 only): 22.5 Gt in 1998 27.1 Gt in 2006 Growing 1.7% per year • Forecast 0.5% per year OECD • 2.7% per year non-OECD

4. Shares of emissions

8. Energy balance, to avoid increasing emissions Source: David Victor, 2004, p. 46

10. The policy problem • Required: substantially reduced GHG concentrations, resulting from changes in human activity (environmental impact) • Resulting from: changed human economic behavior (policy outcomes) • Induced by: domestic and international measures (outputs of climate regime)

11. Carbon intensity

12. Kyoto and its prospective successor • Obligation: member state (Party to ICCC) reductions • Only Annex I (industrialized) parties obligated • Baseline: 1990 absolute emissions • Large disconnect between obligations and capacity • To be handled through trading mechanism • Clean Development Mechanism (CDM) does not create developing country obligation • Companies have option to • Clean up own emissions • Purchase credits (CDM or excess “headroom”) • Move to developing country and escape the obligation

13. Cap and trade • Applied at national level • International trade through UN issued and certified credits • CDM is project based – individual impacts only through downstream effects • Utilities work well • Huge legal and consulting overhead • Manufacturing can clean up, buy credits, or move • Players will always game the system: arbitrage is a reality; efforts to direct outcomes always change relative prices

14. Cap and trade in practice(examples) • HFC-23 projects to burn waste gas from HCFC-22 production. GWP of 11,700. • 1 kg of HCFC-22 yields € 3.15, or € 2800 per ton of credits, net • Cost to destroy HFC-23 from production: € 0.09 • Adipic Acid (nylon feedstock): Net subsidy € 720 per ton of nitrous oxide (byproduct) • In 2010, subsidy of € 259 million for cost of € 5.4 million Source: Michael Wara, CFR working paper #56, July 2006

15. Free Rider Problem • It is not possible to control access to benefits in the public domain: My contribution to the public good may not come back to me, nor be matched by any contribution from my neighbor. • We are all free riders, owing to differences in cultural perceptions • Examples: Skimobiles in Yellowstone, fossil fuels • Phenomenon is limited by social institutions, both formal and informal

16. An efficient emissions regime • Create a market for pollution control (to protect returns from environment). • Automatically reward positive behavioral change. • Avoid confounding agendas. • Realize maximum effect from private investment decisions with a minimum of direct regulation. • Produce the minimum necessary internal political disruption within any country.

17. The tax alternative • Tax sends the right economic signal • Effects are cumulative, dynamically increase over time • The signal is more important than the initial level: avoid gas price shock, advance adaptation • Recognizes economic reality: innovations and technology cannot be known in advance • While difficult politically, tax revenues can be recycled through each economy and/or used for development support (e.g., technology transfer, institutional reform)

18. The problem of multilateral negotiation Time: treaty negotiations are lengthy and complex Lowest Common Denominator, weak result: all parties are able to press for special provisions because of the librum veto inherent in the negotiation We cannot afford either the time nor an ineffective regime

19. A leadership strategy from game theory Axelrod (1984), Prisoners Dilemma: tit for tat encourages cooperation when there are multiple rounds. Helps to build a “norm of reciprocity,” providing positive payoff for cooperative behavior. Discourages opportunism, builds trust. Keohane (1986): cooperation can be institutionalized over time through regime arrangements that increase certainty and credibility across broadening ranges of activity. New research in neural networks - learning

20. Getting to “yes” • A “soft” regulatory regime: • Need not be fully multi-lateral in the beginning • US, EU, and Japan might be sufficient • Based on trade, enforced through WTO or an ad hoc regime • US enforces labor and environmental law through Super 301 and Special 301 reports to Congress by the USTR, investigations, and WTO enforcement. • California has imposed its environmental regulation on much of the US because of the logic of market size • Greatly reduce the time cost and LCD of a fully negotiated treaty

21. Climate Impacts Group University of Washington King Building 4909 25th Avenue NE Seattle, WA 98195 Ph: 206.616.5350 Fax: 206.616.5775 karpov@u.washington.edu Richard Slaughter, Ph.D. 907 Harrison Blvd Boise, ID 83702 Ph: 208.850.1223 Fax: 208.345.9633 richard@rsaboise.com

22. Carbon intensity of major economies