The Paris climate-change conference needs to be more ambitious

By Thomas Sterner | University of Gothenburg

In December talks in Paris involving more than 200 countries may result in a new agreement aimed at reducing carbon emissions. In the months leading up to the conference, The Economist will be publishing guest columns by experts on the economic issues involved. Here, Thomas Sterner of the Univesity of Gothenburg argues that countries attending the Paris talks will need to be more ambitious than they have so far.

WHEN world leaders went to the Copenhagen climate conference in 2009, it was with a sense of great optimism that it might result in meaningful progress toward global climate and development goals. Those ambitions quickly proved unrealistic. But sentiment now seems to have moved too far in the other direction. As the climate change conference scheduled to take place in December in Paris draws nearer, the goals being set for the conference are far too modest rather than too ambitious.

Remember the photo with Angela Merkel, Germany's chancellor, and Barack Obama, America's president, looking rather lost. The disappointment knew no bounds but was mainly due to unrealistic ambitions. This time disappointment may be less: no one really expects COP21 in Paris to resolve the whole climate-change issue.

Today I worry about the opposite: we are aiming for too little. Time is running out. Action is urgent but the negotiations are moving at frustrating snail's pace. We could, at rather limited cost, solve the problems. Still the prospect is bleak. Economists keep on repeating: all you need is a price on carbon. This is true in one narrow sense: had there—by some (peak-oil or other) magic had there been a high price on carbon then the world economy would just adapt and we would hardly notice—just like we have “adapted” to expensive gold and titanium.

The problem lies in how to design the institutions and instruments that create that high price when the market does not. Subsidies must be removed, fossil fuels taxed (or subjected to permit trade) and all countries need to agree on the details in a way that all find “fair”. In Copenhagen, people hoped for a treaty that kept warming below two degrees and an agreement that was generous in giving poor countries more of the remaining space.

That idea could be justified on equity grounds. Poor countries have historically produced only a small share of emissions. But also on practical grounds: how otherwise get poor countries to agree to a deal? In their agendas, growth typically trumps future concerns of any kind. The Kyoto Protocol design built on the principle of “Common but Differentiated Responsibilities” (CBDR): rich industrialised countries should reduce their emissions, but not countries like China. This was fundamentally unacceptable in America, which eyes China warily as a rising power. I've heard environmentalists in America who speak bitterly of CBDR as being all the coal lobby could ever wish for: as long as CBDR shaped international treaty design, no American government would ever do anything effective to join an international treaty.

Now Kyoto and CBDR are dead and the Paris conference aims to encourage each country to set its own targets without coordination. These are referred to as “Intended Nationally Determined Contributions” (INDCs). Intention is good, but how is country performance to be monitored and ensured? “Nationally Determined” challenges everything economics teaches about the provision of public goods which normally requires coordination. Suppose our tax payments were “Individually Determined” and—suppose declared intention was enough—how much revenue would be collected? Maybe however this was the only avenue possible and this may be a good first stepping stone. When all the countries of the world see that the sum of the INDCs is insufficient they might be motivated to start negotiating revisions.

The negative attitude to heavy UN negotiations is so strong that some welcome a more “decentralised architecture” of the climate negotiations and policymaking. Some claim we do not need an agreement. It is sufficient for each country to have an individual target and permit trading scheme and then all the permit schemes could be linked together. Linked permit markets would exhibit all the advantages to trade and circumvent the need for an international agreement.

Linking is an interesting step but this is still overly optimistic, since all the difficulties in negotiating an international treaty will come back to bite when connecting emission-trading schemes. Normally, expanding trade is beneficial, because it allows each country to specialise. However permits are not normal goods—they are created by climate policy. Linking requires agreement on how many rights each country has. Otherwise, each trading scheme would effectively become a printing press and countries would be tempted to print money by giving themselves many permits (ie., setting lax goals for their permit schemes).

The trouble is that if neither centralised nor decentralised approaches look promising, we still, urgently, need an international price on carbon and other greenhouse gases. In most countries the carbon price is far too low—reflecting subsidies instead of taxes. The prospect for the Paris COP is therefore rather bleak.