Chapter 22

1. The Economics of Global Agreements Chapter 22

2. Introduction

3. International Agreements in Principle • In principle, each country might contribute its true willingness to pay for a treaty • Result: an efficient level of global pollution control

4. But… An international agreement is a public good: FREE-RIDING! • Treaties will be too weak from a benefit-cost point of view • Once signed, nations have an incentive to cheat

5. Solving the Environmental Free-Rider Problem • At the national level: • Government mandates and enforces clean-up regulations • At the international level: • No government exists to force countries into compliance • This leaves: • Social Pressure, Trade Sanctions, Compensation Funds

6. Monitoring and Enforcement • Each treaty sets up its own inter-governmental organization (IGO) • Set non-binding standards that countries are expected to meet • Monitor compliance with agreements

7. Enforcement Tools • Compensation fund • Carrot for both joining a treaty and complying with its terms • Only effective with poor countries • Trade sanctions • The most powerful tool available • Usually restricted to related products

9. Ozone and The Montreal Protocol • The ozone layer: screens out ultraviolet rays • Not to be confused with ground-level ozone = urban smog • Chlorofluorocarbons (CFCs) break down the ozone layer • Active for up to a hundred years

10. The Ozone Hole • 1977: US bans CFCs as aerosol propellants • 1980: Treaty negotiations begin, major opposition from CFC producers • 1985: British study documented a huge, seasonal ozone hole over Antarctica • 1987: Countries sign the Montreal Protocol to Protect Against Atmospheric Ozone Reduction • 1988: Conclusive scientific link between ozone depletion and CFCs established

11. Montreal Protocol • 10-year, 50% reduction in CFC production from a 1986 baseline • Developing countries given a 10-year grace period • Compensation fund of $60 million convinced India and China to join • Trade restrictions on CFCs • 1992: Treaty nations agreed to eliminate CFC production by 1996

12. Why the Montreal success story? • How did countries overcome the free-rider problem? • Single pollutant • Small number of sources • Dramatic evidence of threat • Compliance was much cheaper than anticipated • Compensation fund brought poor countries on board

13. Biodiversity • Preserving the stock of genetic material in natural ecosystems is important for its • Existence value • Gene pool for medicine and agriculture • Historically: an open-access common property resource

14. Earth Summit • Rio Biodiversity Treaty, 1992 • Nations required to inventory and monitor their biological assets • Nations pursue sustained yield development and conservation efforts, with aid $$ from rich countries • Products developed from the genetic resources of a country are the intellectual property of the host nation

15. Effectiveness of the Rio Biodiversity Treaty • US initially failed to sign • Poor countries have regulated access to biodiversity • No requirement that rich countries contribute to the conservation fund • No enforcement mechanism established • Bottom line: Not much progress!

16. Strengthening the Rio Process? • Difficult to assess compliance with and progress toward such an agreement • Distant threat of biodiversity loss is unlikely to galvanize an aid effort from the developed world

17. Stopping Global Warming: Theory • Good news for a treaty • Growing concern over catastrophic impacts • A clearly defined target: CO2 concentrations in the atmosphere • Bad news for a treaty • Widely decentralized nature of the problem • Fear of high costs for high emitters (US, China) • Preventing deforestation will be difficult

18. Stabilizing CO2 Concentrations at 450 ppm

19. Bare Bones for a Successful Treaty • Mandate numerical emission reduction targets for CO2 and methane • Provide a mechanism by which rich countries can transfer technology and resources to poor countries • Provide strong enforcement mechanisms

20. Model Greenhouse Treaty

21. Cap & Trade System • Annual cap on targeted global emissions • Rich countries trade expertise and technology to poor countries in exchange for permits • Each country then reduces CO2 emissions to the level of permits held • Authorize comprehensive trade sanctions against failing countries

22. Stopping Global Warming: Reality • 1992 Earth Summit: US pleaded uncertainty and weakened the framework global warming convention • Kyoto Protocol in December 1997

23. Kyoto Protocol • Imposed emission targets and timetables on industrialized countries • Trading: • Clean Development Mechanism • Joint Implementation • Ratified by European countries, Canada, and Japan. Europe has met the 2010 goal; other countries have not. • US is the major industrialized country that has not ratified

24. Opposition to Kyoto: 1 • Uncertainty as to the potential damage from climate change • Most economists agree: both neoclassical and ecological economists now advocate mandatory emission caps. Disagreement on stringency: Kyoto or something weaker?

25. Opposition to Kyoto: 2 • Poor countries should be forced into the same timetables as rich countries • Rich countries have the resources to develop clean technologies, so that poor countries can comply at lower cost in the future. • Because CO2 lasts for 100 years, rich countries will remain primarily responsible for warming for the next few decades.

26. Opposition to Kyoto: 3 • Kyoto would cost too much; would lead to large-scale job loss • At this point, Kyoto would cost a lot! But if we had started in 2005, estimates suggest costs of between $0 and $400 per household per year. • For comparison, war in Iraq has cost well over that. • Previous estimates of job loss from environmental regulation have never been borne out.

27. The Last Word… • Set your environmental goal: • Efficiency, Safety, Sustainability • Recognize the constraints on effective government action • Look for ways to do better • Incentive-based regulation • Clean technology promotion • Now, get to work!