Innovations in Climate Change Policy
April 29, 2003

Introduction
Recent attempts at multilateral climate policy have stalled, most clearly evidenced by the sputtering Kyoto Protocol. Although nearly 100 countries have signed on to Kyoto, the world’s two largest emitters – the United States and China – are not party to the treaty.

On April 29, 2003, the AEI-Brookings Joint Center convened a panel of experts to address global climate change policy and the need for an effective international approach encompassing environmental and economic considerations. Robert Hahn, Executive Director of the AEI-Brookings Joint Center, opened and moderated the discussion; James Connaughton, chairman of the White House Council on Environmental Quality, delivered the keynote address highlighting continued U.S. leadership in climate change policy; Richard Stewart, New York University; Jonathan Wiener, Duke University; and Scott Barrett, School of Advanced International Studies (SAIS) at Johns Hopkins University, offered significantly different roadmaps for economically sensible and politically feasible climate change policies. Although all of the members of the panel stressed the necessity of radically rethinking the foundations of present approaches to climate change, they debated the efficacy of different proposals.

James L. Connaughton, Council on Environmental Quality
As senior environmental advisor to President George W. Bush, Mr. Connaughton’s address focused on the Bush administration’s climate change strategy. Mr. Connaughton emphasized the need to remodel the current climate change paradigm, in particular stressing the importance of getting all nations to face in the same direction and take a modest step together. According to Mr. Connaughton, policy measures around the world look pretty much alike in that they are all focused on advancing the science further, employing appropriate technologies, and taking economically feasible steps.

The United States’ leadership role in establishing a common ground for climate change is growing. The U.S. government’s rejection of Kyoto has led to significant bilateral activity in the form of science and technology partnerships and has called attention back to the basics of international climate change policy: having conversations about shared objectives; figuring out what people want and the implications of those wants; and deciding how best to address those implications.

Mr. Connaughton also emphasized the need to get the science right. To this end, the U.S. funds over half of world climate change research – a $3 billion market. Similarly, the Bush administration’s $4.5 billion budget for addressing climate change is as high as it has ever been and is unmatched in the rest of the world. Mr. Connaughton believes that real climate change progress is essentially a capital stock issue: massive reinvestment in an economically feasible manner is necessary.

The administration is pushing incentives, instead of regulation, and offering industries the necessary latitude to create feasible emissions plans. Finally, Mr. Connaughton discussed the Bush administration’s “Energy Trifecta” of near-, mid-, and long-term goals: building the world’s first zero-emission coal-fired plant; the hydrogen car initiative; and exploration of fusion energy.
 
Jonathan B. Wiener, Duke University
Mr. Wiener began his presentation by clearly stating that the key to climate change policy is getting the incentives right. Poor policy frameworks yield environmental and economic costs, and are difficult to adjust once designed. Currently, the atmosphere is being used as a global dumping ground. Despite serious uncertainties, climate change poses salient risks. The requisite response is how to make the best decision in the face of these uncertainties. According to Mr. Wiener, smarter regulatory design consists of designing the most efficient property rights regime to “fence in” the commons and serve as a worthwhile hedge against the potential costs of climate change.

Mr. Wiener discussed some of the major flaws in the Kyoto Protocol, including the remaining constraints in international trading, the use of sinks, omission of developing countries from the regime, and targets that are too drastic. He then put forth another option that he designed with Mr. Stewart. This option would engage China (and perhaps, Australia) in a parallel regime that makes full use of trading, banking and borrowing, emissions sinks, and comprehensively addresses all greenhouse gases. Mr. Wiener advocates engaging China through side payments in the form of headroom allowances that can be sold back to industrialized countries. Utilizing a benefit-cost framework, more modest emissions targets based on emissions intensity should be designed to maximize net benefits. In addition to a more sustainable agreement, the proposal would yield a greater degree of price stability and even tangential geopolitical benefits.

Richard B. Stewart, New York University
Mr. Stewart followed up many of Mr. Connaughton’s and Mr. Wiener’s points with similar beliefs. Mr. Connaughton had mentioned the law of unintended consequences and Mr. Stewart echoed his sentiments by stating that a comprehensive approach is necessary in order not to push the problems of one sector to another sector. Mr. Stewart also echoed Mr. Connaughton’s belief that simply because climate change is a global problem does not necessarily dictate that we need to engage the issue only through global agreements. Mr. Stewart believes that smaller coalitions of like-minded countries can be more effective than a global regime with lukewarm international support. In this respect, the Bush administration correctly helped break the myth of lockstep multilateralism.

Following up on Mr. Wiener’s comments, Mr. Stewart expressed the opinion that, despite serious uncertainties, the potential environmental risks alone are significant enough to demand action. Furthermore, he predicted that if the United States does not become more active in the global debate, the European Union and others will take the lead. Finally, Mr. Stewart offered some general conclusions to help guide the U.S.’s path. First, emissions taxes are subject to the fundamental flaw that developing countries will never agree to them, and any agreement without developing countries is futile. Second, economic incentives are very often more efficient than technology standards. Third, transparency is extremely important for adequate enforcement.

Scott Barrett, SAIS, Johns Hopkins University
Mr. Barrett began by stating that the way to solve common problems is to write a treaty that compels countries to behave differently than they otherwise would. He claimed that the three main influences of Kyoto – the Helsinki Protocol, the Montreal Protocol, and Title IV of the Clean Air Act – were all incorrect models for Kyoto to follow. According to Mr. Barrett, although Kyoto succeeds in avoiding the major pitfalls of these treaties, it still fails to produce the appropriate incentives.

As background, Mr. Barrett went into some detail about the strengths and weaknesses of those models. The main fault of the Helsinki Protocol is that it fails to attract participation by important countries like the United States and the United Kingdom. In addition, all of the participants in the Helsinki Protocol that do comply actually over-comply, and would have complied anyway in the absence of the agreement. Therefore, the treaty fails to make countries behave differently than they otherwise would have.

By comparison, the Montreal Protocol is a resounding success, with almost 100% participation and countries doing almost as much as is technically feasible. According to Mr. Barrett, an important component of the Montreal Protocol is that it can impose trade restrictions between countries that are in the treaty, and countries that are outside the treaty. The threat alone of the trade restrictions is sufficient to get every country into the agreement. This component is missing in the Kyoto Protocol.

Finally, a key difference between Kyoto and Title IV of the Clean Air Act is that Title IV demands compulsory participation. Therefore, full compliance is accomplished along with severe penalties for non-compliance.

Turning his focus back to the Kyoto Protocol, Mr. Barrett pointed out that Kyoto lacks an enforcement mechanism, a weakness highlighted by Article 18, which essentially allows for the creation of a new treaty every time compliance mechanisms are negotiated. This provision weakens Kyoto's potential, thus necessitating a new climate change treaty. To achieve a functional and desirable treaty, Mr. Barrett believes that a performance-based standards approach offers the most benefits. First, the lack of incentive towards capital turnover and perverse lock-in effects are minimized. Second, economies of scale in technology research and development will likely emerge; if the economies of scale are strong enough, the world will want to standardize on its own. In this respect, strong network externalities can lead to an international harmonization similar to what occurred in the automobile market. Finally, performance-based standards can be tied easily to automatic trade restrictions (although, as Mr. Stewart pointed out, the enforcement problem does not go away with a standards regime since companies can simply turn on the technologies when inspectors come and turn them off when they leave). 

Conclusion
The Joint Center conference “Innovations in Climate Change Policy” convened a panel of experts that presented and critiqued alternative proposed frameworks for international environmental agreements. Despite the lack of consensus, the participants agreed that new thinking is needed to address climate change. All were in similar agreement about the flaws of Kyoto, especially the lack of an adequate enforcement mechanism. Both the world and the United States need a new paradigm for tackling climate change – one outside of the two most common options of either joining Kyoto as is, or doing nothing.

Troy A. Kravitz is a research assistant with the AEI-Brookings Joint Center.