A POST-KYOTO AGENDA FOR ADDRESSING GLOBAL WARMING

1. A POST-KYOTO AGENDA FOR ADDRESSING GLOBAL WARMING Joseph Stiglitz Kyoto July 4, 2006

2. The Achievement of Kyoto • Recognition of the importance of global warming • A global agreement signed by most advanced industrial countries • A slowing of global emissions by the advanced industrial countries

3. The Failure of Kyoto • Enforcement • Failure of U.S., the largest polluter, to join • Impasse in bringing along developing countries • Insufficient progress on deforestation—undoing much of the progress made elsewhere Global warming is too important to rely on goodwill, to just hope a way out of the impasse will be found.

4. Three Reforms • Using WTO as an enforcement mechanism • Rainforest initiative—credit for avoided deforestation • A common emissions tax

5. I. WTO as An Enforcement Mechanism • Enforcement mechanism is necessary • Avoiding global warming is a public good • There is a danger of a free rider problem • There may even be some countries that could benefit • Yet global costs are enormous • An example of a global negative externality • Especially important given role of special interests in some countries in setting policies • Cannot allow any rogue state to hurt others • Damage greater than that of any war

6. There Are Precedents • Principle already established in shrimp-turtle case • Environment trumps commercial concerns • Thai shrimp caught in turtle-unfriendly nets could be barred from U.S. • Process mattered • Clearly, global warming is a more important global concern • Principle used in Montreal Convention on ozone- destroying gases

7. Underlying Economics • WTO tries to create a level playing field • Subsidies are illegal • Not paying full environmental costs is just as much a subsidy as not paying full labor costs • The U.S. has an enormous unfair advantage because its firms do not pay costs of emissions • But rest of world is paying consequences

8. Simply A Matter of Political Resolve • Europe, Japan need to bring action • Ban energy intensive goods produced in the United States, or impose countervailing duties (to offset emission subsidy) • Alternatives: could impose “emissions equivalent tax” on all goods (on emissions embedded in them), with offsetting credits for energy taxes already paid • No net taxes would be due on European, Japanese goods, only on American produced goods

9. II. Rainforest Initiative • Developing countries provide enormous environmental services to developed countries, for which they are not being compensated • Biodiversity • Carbon sequestration • Fair market value of compensation is very large • Costa Rica has shown that such a system can work, delivering benefits to small landowners • Major mistake at Kyoto – failure to include avoided deforestation • Magnitude of which is huge • Offsetting much of the gains from Kyoto

10. Rainforest Coalition • South cooperative effort • Recognizing global warming as a global problem • In which there must be South participation • Could make substantial difference for global environment and development of affected countries • Increased supply of carbon credits will lower overall cost of meeting emissions reduction targets

11. III. A Global Emissions Tax • Key problem with Kyoto framework—establishing targets for developing countries • Has to be done in a way they find acceptable • Which means it has to be perceived as fair • But reductions from 1990 base makes no sense: • Why should those who polluted more in the past be entitled to pollute more in the future?

12. Alternative Standards • Common standards • Developing countries argue that advanced industrial countries should reduce pollution more because their pollution caused most of the current problem • And besides, the advanced industrial countries can more easily afford pollution reductions • A common emission per capita standard • Will not constrain developing countries for decades • But will not likely be acceptable to U.S. • A common emissions per dollar GDP standard • Might be acceptable to U.S., but not to developing countries • Why should richer countries be granted larger entitlement to pollute just because they are richer?

13. An Economics-Based Solution • Problem is that polluters do not pay the marginal social cost of pollution—marginal social cost of emissions • Solution: force all to pay marginal cost through common tax • High enough tax would lead to same level of reductions as in Kyoto

14. Critique of Emissions Tax • Setting targets has more certainty of achievement (if only agreement could be reached and enforced) • But tax could be adjusted over time • And risk is not related to annual emissions • But to overall concentration level • So with regular adjustments in tax rates, little additional risk in area of concern

15. Further Advantage of Emissions Tax • Revenues could be used to finance global public goods • Of increasing importance as globalization proceeds • Resulting in greater interdependence • And therefore greater need for collective action • Including the provision of global public goods • Including financing development

16. Alternatively… • Each country could keep its own revenues • Which would reduce distributional consequences • Emissions tax substitutes for other taxes (labor, capital) • Taxing “bads” (with corrective, Pigouvian taxes) is preferable to taxing “goods” • For most countries, cost negative • Only difference is between deadweight loss of emissions tax and the taxes for which it substitutes • And distributional consequences relate only to differences in those differences

17. There Will Be Opposition… • There are global distributional consequences from the reduction in the demand for emission-generating activities • But these are the same as would arise in an effective targets-based approach • And there will, as a result, be opposition from special interest groups • Especially important in flawed democracies where special interests play large role, e.g. through campaign contributions

18. Sunk Costs • The world has invested enormously in the targets approach • Including creation of emissions trading schemes • Represents major achievement • And it is understandable to try to take advantage of political momentum behind it, to make it work • But there have been no serious proposals for a way out of the current impasse

19. Global Warming Is Too Important… • Global warming is too important to rely on goodwill, just to hope a way out of the current impasse will be found • It is time to begin exploring other ways of reaching a global agreement on what can be done to solve this problem