How to negotiate a climate agreement that will actually work

Illustration by Greg Clarke

The recent COP21 negotiations in Paris were based on the ‘pledge and review’ framework, first proposed by Japan in a memo to the UNFCCC in 1991. The pledges are the Intended Nationally Determined Contributions (INDCs). Kyoto was similarly based on individual commitments. Twenty years of failure should have taught us that individual commitments do not motivate nations to decarbonize.

Countries will promise to reduce their emissions by amounts that will be revised later. The narrative is that this will “enable an upward spiral of ambition over time”. History and the science of cooperation predict that quite the opposite will happen.

From “Price Carbon — I Will If You Will” by David J. C. MacKay, Peter Crampon, Axel Ockenfels & Steven Stoft

I expected another ineffective outcome from COP21, just more feel-good politics. The failure of Kyoto and Copenhagen had convinced me that nations would only commit to what was in their narrow self-interest. The free-rider problem seemed insurmountable. As Paris approached I thought that “We’ve seen this movie before”, so a useful agreement simply wasn’t going to happen. Because: Roger Pielke’s Iron Law. Because: lack of motivation – “the building isn’t burning yet”.

So my focus has been largely on developing clean energy options that are “cheaper than coal”. We need to fund energy innovation at multiples of current levels. This is a no-regrets approach, because the fast-growers can’t afford to decarbonize until they can buy clean energy that doesn’t retard their economic growth.

As the media frenzy built leading to COP21 I read the Nature comment by MacKay et al “Price Carbon — I Will If You Will”. I have to say that the Nature piece and the supporting papers got me excited! Then on December 8th the authors published a free eBook “Global Carbon Pricing” making it much easier for all of us to understand how much we have to gain by fixing the cause of these negotiation failures. That led to doing more research at Carbon-Price.com.

Since then I have been wondering “what if I was wrong – what if in fact we could get a commitment to, say, a $50 carbon price floor?” Why do I now think that — given the proper negotiation framework — an agreement is feasible? Well, I hadn’t done my homework on the science of cooperation. I knew about Elinor Ostrom’s 2009 Nobel prize – but I didn’t really understand the significance of her work in this context. I did not appreciate that a better negotiating framework could eliminate the free-rider roadblock. Ostrom showed how changing one negotiation-game rule could change a negotiation from impossible to optimal. For example, in Törbel, Switzerland, the common-commitment rule is “no citizen can send more cows to the alp than he could feed during the winter.”

If it works for the Swiss farmers, perhaps it can work for self-interested nations? If we change just one rule in the negotiation game – instead of the Paris result we would get cooperation. That new rule is a common price commitment. How does the proposed treaty process work? Countries pay or receive transfers Gi from the climate fund:

Gi = g × Xi × P

where g is the generosity parameter, X is the excess emissions of country i, and P is the global price. Excess emissions are defined as emissions above what would occur if the country had the global-average per capita emissions rate. Negative values of G (resulting from below average per-capita emissions) indicate a payment from the climate fund. This formula transfers funds from rich to poor countries. Climate fund payments are only paid to countries that are in compliance with the global carbon price.

The treaty negotiation proceeds in two steps:

  1. Negotiate the generosity parameter g (the g negotiation is structured with only one goal in mind—to maximize the global carbon price). 
  2. Given g, negotiate the global price-floor, P, to be flexibly met by each member of the “Climate Club”.

So what are the most important member-country incentives (in addition to the climate benefits) ?

  • Reducing absolute emissions reduces rich country costs, increases poor country payments
  • Provides an incentive for poor countries to vote for a higher level of P.

The authors recommend that g should be determined by countries that do not have a conflict of interest regarding climate-fund payments. These will be countries that have near-zero excess emissions and hence participate little in the climate fund. Such countries will be inclined to focus on getting a successful climate treaty with a high carbon price.

Why is this treaty process politically feasible? As far as I can tell all of the Kyoto-style global cap and trade faults have been eliminated by design:

  1. The proposed treaty structure is extremely flexible: each nation can choose its preferred machinery to meet their average carbon price commitment.
  2. The carbon price floor doesn’t directly cost a member country anything. The most obvious case is the countries that choose a revenue-neutral carbon tax, like James Hansen’s “Fee and Dividend”.
  3. There is no forced compliance with the scheme. No nation need join the treaty Climate Club if they don’t like it.

The decarbonization math tells us it is going to be really expensive if we don’t get started actually doing decarbonization soon. We know that the largest increases in future emissions will come from the fast-growers, the LDCs, the global south. The proposed treaty structure should provide the financial incentives to motivate the LDCs to pay attention to decarbonization – in addition to their focus on growth.

The truth of where we are now is that the 2C target is toast. We should be emphasizing not “numerology” but specific plans to decarbonize and reduce the chance that we are facing 4C by 2100. For those of us striving to accelerate development of reliable, clean energy that is “cheaper than coal” — what would it mean if the US and China had a $50 revenue-neutral carbon price? Globally we have some fifty advanced nuclear innovators needing billions of capital to prove their designs. What would a global carbon price do to enhance their financing, to build and operate the required national test and research facilities?

A global carbon price treaty would mean a new seriousness amongst the OECD political class. Imagine if the political leadership was actually committed to decarbonizing? I think that would translate into much more interest in policies that will work (instead of feel-good like Energiewende). For example, I think that would mean leadership focus to get organized to deploy nuclear power fast, like France and Sweden did in the 1980s and 90s. I think Global Carbon Pricing [PDF] will work. What am I missing?

Some footnotes:

[1] COP21 in Paris Will Block all 2C Scenarios.

[2] Kevin Anderson’s summary of COP21 and how the remaining shreds of 2C scenarios depend on BECCS. Didn’t you know?

3 thoughts on “How to negotiate a climate agreement that will actually work

  1. The fly in the ointment here is that all countries have strong incentives to cheat.  Any LDC receiving payments would benefit by under-reporting its emissions and over-reporting its population.  There’s even an incentive to quietly export population to developed countries to increase their emissions and thus payments (which would be funneled through the corrupt governments in LDCs).

    • Cheat? A nation would cheat? For sure we have to think about how to keep cheating to a tolerable level. It will happen. We already have cheating on the carbon credit trades that the EU has encouraged. From setting up factories to make CFC just so they can claim credits for not making the CFC. To inflated biomass planting reports.

      It’s hard to think of performance-based transfers that aren’t vulnerable to bad accounting/reporting. We’ve lived with that “friction” through all the foreign aid programs. But like every energy option has risks and benefits. We try to make the “least worst choice.” Are the benefits of getting the fast-growers to invest in more expensive clean power worth the overhead of policing and enforcing? I think we will innovate clean energy options that are cheaper than fossil. But it’s hard to imagine delivering same to Uganda inside of a decade. Hopefully we get there with volume alternatives in two decades.

      Is there a better alternative to the Common Commitment scheme? And can we dress up this simple outline to keep the “friction” to an acceptable level? E.g., the payments are for the purpose of supporting lower emission alternatives (like natural gas vs. coal). I was imagining that such payments are trackable.

      Cheating on emissions reporting seems tricky to me. It’s not difficult to audit reasonableness from the data on fossil consumption, steel, concrete, fertilizer.

      • All a small, corrupt country would have to do to cheat is to fail to do what they’re failing to do anyway.  Census data is notoriously inaccurate for many countries in sub-Saharan Africa.  Unless you were using spy satellites to count truckloads of coal from individual mines to their destinations, it would be very hard to prove the “official” numbers wrong.  Given that the oceans soak up CO2 it would be hard to prove where discrepancies were coming from.

        I think what we’re going to have to do is simply prohibit trade in things like coal boilers and steam turbines other than for non-emitting plants.  The corrupt countries can’t build these things for themselves, and all the ones they have will eventually fail.  Once they fail there is no more fuel consumption to feed them.

        Yes, the people in those countries will sink into misery.  They can’t produce anything better on their own, and nobody owes them anything.  Just keep them from leaving their countries and make them deal with their own problems.

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