International collective action (página 2)

21.1 Introduction Climate change is one of the greatest challenges to international co-operation the world is currently facing. As we have described in the preceding Parts of this Review, the scale of the problem and consequences of failure to tackle it are immense. This Review has made a compelling case for action – on both mitigation and adaptation – demonstrating that the global economic costs of business as usual paths are likely to far outweigh the costs of taking action to reduce the risks. We have also explored some of the local and regional co-benefits that can act as incentives to take action. A wide range of policy tools for mitigation and adaptation are available to national governments. However, no two countries will face exactly the same situation in terms of impacts or the costs and benefits of action, and no country can take effective action to control the risks that they face alone. International collective action to tackle the problem is required because climate change is a global public good – countries can free- ride on each others" efforts – and because co-operative action will greatly reduce the costs of both mitigation and adaptation. The international collective response to the climate change problem required is therefore unique, both in terms of its complexity and depth.

This chapter sets out a framework for understanding the scale and type of international collective action required for climate change. The first section examines and applies theories and analyses of collective action that have been developed, pointing out both their insights and limitations. The next section reviews the current arrangements for action on climate change including multilateral, coordinated and parallel action, and initiatives by the private sector that go beyond international frameworks. The final section considers how to build on these initiatives to develop an international response at the much larger scale that is now required, and how to develop an effective and transparent approach to sustaining co- operation.

21.2 Understanding international collective action Reducing the risks of climate change is the most important example of the provision of a global public good, as explained in Chapter 2. It is also in many ways the "purest" example of a public good in that emissions of greenhouse gases (GHGs) from any one country have the same effect on the atmosphere as those from any other. Climate change also shares some key characteristics with other environmental challenges that require the international management of common resources, including the depletion of fisheries1, the protection of the ozone layer, and with the provision of global public goods in other areas including health and development co-operation. While the impact of climate change is much larger in scale than any of these, there is much to be learnt from the experience of tackling these other problems.

Economists seek to understand the incentives relevant to situations that require collective action, and have studied the institutional arrangements that can facilitate co-operation. The study of collective action is concerned with understanding how to overcome the market failures that lead to the under-provision of public goods where individuals or countries face an incentive to free-ride on the actions of others2.

In The Logic of Collective Action, Olson (1965) argues that rational, self-interested individuals would not act to secure a common interest unless they were coerced, or induced to do so with incentives that were not available to those who did not participate. Collective action by independent sovereign nations is particularly challenging. In the area of climate change, there is no supranational authority to provide coercive sanctions3, so co-operation requires that nations perceive sufficient benefits that they are willing to participate in international treaties or other arrangements, and share a common vision of responsible behaviour. They must also recognise that without their involvement, international collective action may fail.

Game theory is a tool that economists have used to study the challenges of collective action, especially the problems of provision of local and global public goods.

Game theory has been used to explore the underlying structure of some common problems. The Prisoner"s Dilemma Game4 has been used to explore a wide range of situations in which individuals act rationally in the light of their own situation and yet find themselves faced with an outcome that leaves them worse off than if they were able to co-operate.

Box 21.1 Tragedy of the Commons?

Hardin (1968) set out an example of how private incentives might be expected to operate in the absence of co-operation to manage a common environmental resource. In The Tragedy of the Commons, he showed that individual farmers had powerful short-term incentives to contribute to the overgrazing and destruction of common land.

The metaphor has been criticised as oversimplified. Ostrom (1990) demonstrated that many local communities can and do co-operate to manage common resources, from irrigation networks to forests. In an article reviewing the impact of Hardin"s views, The Struggle to Manage the Commons, Dietz, Ostrom and Stern (2003) considered how global trends that drive environmental change limit the ability of local commitments to respond to those challenges.

Global environmental issues require choices to be made between clear and immediate local incentives and diffuse, long-term global benefits. These challenges cannot be resolved through local community action. They require co-operation between governments, as well as community involvement in local implementation.

The theory of collective action now recognises that many types of games are relevant, and in particular that strategic behaviour and repeated games provide a number of important insights for understanding how to promote international co-operation5.

• Changing the structure of the incentives in the game can make co-operation more attractive. This can happen through increasing the shared understanding and awareness of the benefits of co-operation and making links to a wider range of benefits as well as through creating side payments (or, where costs of action are involved, sharing costs differently) to secure co-operation.

• Reciprocity plays a key role in situations where the players facing the prisoners" dilemma have the opportunity to play repeated games and remember the previous choices of the other player. In particular, many players adopt a strategy of conditional co-operation, in which they contribute more to the provision of a public good the more others contribute6.

• In repeated games, increasing the frequency of contact and transparency contributes to building co-operation, just as institutional structures and repeated negotiations do in international agreements7.

• In repeated games, options for renegotiation of the rules at key stages play an important role8. Compliance mechanisms that rely on harsh punishments are hard to enforce, as they often have a detrimental effect on the punisher as well as the punished and create incentives for both the punisher and the defector to seek renegotiation in the event of a breach of co-operation9.

• Reputation can play a significant role in influencing outcomes. A leader can create a positive dynamic by demonstrating a willingness to co-operate, and the actions of the leader have a strong influence on the beliefs that others in the game hold about the prospects for co-operation. It does not make a difference whether others in the game interpret these actions as "rational" or "irrational" – the point is they simply establish reputation10.

Though extremely useful as a starting point for analysing international collective action, most of these theories tend to focus only on self-interest very narrowly defined, and so leave out perspectives on responsibility and ethical standards – for example, the views on what constitutes human decency that are expressed by the public. This does not mean the theories should be ignored – on the contrary, their conclusions are always imperative to implement correctly. However, a broader vision can acknowledge the important senses of community and shared endeavour that are evident in the history of many international frameworks for co-operation.

Game theory has been used to try to identify key criteria for the design of frameworks for international collective action on climate change.

Arrangements for global collective action exist across a wide range of issues including international trade, health, development aid, terrorism and environmental protection. Sandler (2004) identified a number of conditions that would make it more or less likely that collective action would succeed in different circumstances. He found that international collective action was more likely to succeed where there was sufficient mutual self-interest (for example, international standards for telecommunications or aviation); in response to recognition of a shared threat (for example, increased co-operation on counter-terrorism in the immediate aftermath of 9/11), and where there was leadership by a dominant nation (for example, the role of the USA in securing agreement to protect the ozone layer). The barriers to action on climate change therefore included perceptions that country-specific costs of action dwarfed the benefits of action, and that was exacerbated by considerable uncertainty over the latter.

Barrett (2005) applied the lessons of collective action and game theory to an extensive review of over 190 arrangements for environmental co-operation – from the North Pacific Fur Seal Treaty to the Montreal Protocol on Ozone Depleting Substances. From this he concluded that the most successful treaties create a gain for all their parties, and sustain co-operation by changing the rules of the game – by restructuring the incentives for countries to participate and for parties to comply. Box 21.2 provides an example. Barrett suggested this requires a combination of carrots and sticks. Compensating payments may promote wide participation (for example because they distribute the gains from co-operation equally), while penalties, that are not too high to lack credibility, may deter non-participation and non-compliance.

Box 21.2 Gaining cross-country participation to protect the ozone layer11

The Montreal Protocol on Substances that Deplete the Ozone Layer is often cited as an example of successful international co-operation. Just 24 countries signed the original Protocol in 1987, but as at October 2006, the Protocol has 74 ratifications, including the major developing countries. Emissions of most depleting substances have been brought under control. There are strong signs that the ozone layer will recover within the next 100 years.

Several factors contributed to the success of the Protocol. First, there was a high degree of scientific consensus and evidence that there was a problem that required urgent political action, and public opinion galvanised politicians. The Protocol thus established targets and timetables to phase out the use of ozone depleting chemicals, based on recommendations of expert panels including government and industry representatives. Second, although developing countries initial consumption of ozone depleting substances was low, it was growing fast. Developing countries participated because of the science, and because of the financial support provided for their transition to phase out of harmful substances – albeit at a slower pace than that for developed countries. However, the flows involved were not great, and were time-limited. Third, Montreal recognised the importance of stimulating and developing new technologies so that industry could use non-depleting alternatives, and providing access to technologies in developing countries. Finally, establishing groups of like- minded countries was useful in providing a forum to examine the complex issues involved in and consequences of taking action.

21.3 Existing international arrangements for co-operation on climate change International collective action to provide global public goods at the appropriate level can take place in a wide variety of ways, including specific binding treaties, arrangements embedded in other agreements, aspirational declarations, and participation in partnerships and regional coalitions. Formal multilateral agreements are at one end of a spectrum of co-operation, and can, if commitment is strong or enforcement mechanisms are credible, provide a high degree of assurance that countries will contribute to meeting shared goals. Other mechanisms allow for coordinated action even where there is no international legal instrument creating binding obligations. In some areas, where a number of actors perceive an advantage or a responsibility to adopting a leading position, parallel action is motivated by unilateral goals that may themselves be informed by an understanding of the magnitude of the climate change challenge.

The UN Framework Convention on Climate Change and the Kyoto Protocol embody the core principles of a multilateral response to climate change.

The international response to climate change dates back to 1979 when the first World Climate Conference highlighted concerns arising from the increased carbon dioxide in the atmosphere. In 1988 the UN General Assembly passed a resolution, proposed by Malta, in favour of the protection of the climate for present and future generations. In the same year, the World Meteorological Organisation and the United Nations Environment Programme jointly created the Intergovernmental Panel on Climate Change (IPCC). The IPCC issued its First Assessment Report in 1990, confirming that climate change was a real concern and that human activities were likely to be contributing to it.

In recognition of the global nature of the problem, the United Nations Framework Convention on Climate Change (UNFCCC) was agreed at the Earth Summit in Rio de Janeiro in 1992.

189 countries, including all major developed and developing countries, have ratified the Convention12. The UNFCCC sets the overarching objective for multilateral action: to stabilise greenhouse gas (GHG) concentrations in the atmosphere at a level that avoids dangerous anthropogenic climate change. It also establishes key principles to guide the international response, in particular that countries should act consistently with their responsibility for climate change as well as their capacity to do so, and that developed countries should take the lead, given their historical contribution to greenhouse gas emissions. The Convention places a commitment to act on all countries. Whereas for developing countries this commitment is unquantified and linked to assistance from developed countries, the developed countries agreed to return greenhouse gas emissions to 1990 levels by 2000.

The Kyoto Protocol, agreed in December 1997, set out an approach for binding international action and agreed specific commitments up to 2012. It entered into force in February 2005 and has been ratified by 162 countries13. However, the US and Australia have declined to join the Protocol, and the Canadian administration has signalled that it is likely to be unable to meet its commitments14.

Climate change is becoming central to international economic relations, along with issues such as trade, development and energy security. A range of other institutions and arrangements support coordinated or parallel action on energy policy and land- use change.

Climate change is now a regular part of the agenda for G8 Summits, along with other aspects of international economic relations including trade and development. The Evian Summit in 2003 resulted in a statement on co-operation on various aspects of science and technology; at Gleneagles in 2005 leaders committed to an Action Plan for Climate Change, Clean Energy and Sustainable Development and launched a dialogue with other major economies; and at St Petersburg in 2006 the links between climate change and energy security were explored. Japan has asked for a report on progress from the Gleneagles Dialogue at its summit in 2008.

G8 declarations are non-binding, but they have provided strong direction to a range of other international bodies (including the IFIs and the International Energy Agency (IEA)).

The IEA provides a forum for energy ministers from OECD member countries to debate energy policy and provides a wide range of technical information to support national policymaking. It now produces detailed analyses of the prospects for energy efficiency and technology to reduce greenhouse gas emissions from energy. Energy ministers at the IEA Ministerial in March 2005 considered the challenge of climate change and set out a vision of a "clean, clever and competitive" energy future. The International Energy Forum (IEF) also provides an opportunity to discuss energy policy responses to climate change, as it brings together oil producers including OPEC, and energy consumers including the IEA.

Box 21.3 Gleneagles Dialogue on Climate Change, Clean Energy and Sustainable Development The Gleneagles Dialogue is a process that brings together 20 countries with the greatest energy consumption, including the G8 and the major emerging economies of Brazil, China, India, Mexico and South Africa, and allows them to discuss informally innovative ideas and new measures to tackle climate change outside the formal negotiations under the UNFCCC. The Gleneagles Dialogue will also monitor the implementation of the Plan of Action, to ensure delivery of the commitments made by the G8 heads. To assist with the implementation of the Plan of Action, the G8 asked the IEA to develop and advise on alternative energy scenarios and strategies aimed at a "clean, clever and competitive" energy future. In addition, the G8 have engaged with the World Bank and other international financial institutions to create a new investment framework for clean energy and development, including investment and financing.

The second Gleneagles Dialogue Ministerial meeting was held in Mexico in October 2006. The meeting saw progress on the Gleneagles Plan of Action (on which the Japanese Presidency of the G8 will receive a report in 2008); discussed the progression and debated the future direction of the work undertaken by the World Bank and other International Financial Institutions; considered how the IEA"s programme of work can be utilised by governments; and debated the global economic implications of many of these policies.

Climate change is also becoming increasingly important in the work of UN and other agencies (including the UN Environment Programme, and the UN Food and Agriculture Organisation) and partnerships (including. PROFOR, the collaborative programme on forests hosted by the World Bank) dealing with land use and agriculture.

In addition to formal multilateral arrangements, international partnerships launched in recent years allow interested governments, NGOs and private sector firms to co-operate in relevant areas. Some of these have been particularly successful at identifying opportunities for profitable action on climate change, including the Renewable Energy and Energy Efficiency Partnership and the Methane to Markets Partnership.

The Asia Pacific Partnership, launched in 2005, brings together energy, environment and foreign ministers and industry representatives from Australia, China, India, Japan, South Korea, and the USA – countries together responsible for around 50% of global GHG emissions, energy consumption, GDP and population. It has eight sectoral working groups, providing opportunities for networking and the development of joint public-private research and commercial projects for reducing greenhouse gas emissions. Other partnerships, such as the Carbon Sequestration Leadership Forum (CSLF) are focused on particular technologies, and will be discussed further in Chapter 24.

Many countries, regions, and cities have adopted approaches that complement and go beyond action under the multilateral framework.

National initiatives and policy measures designed to foster national and international co- operation in support of global environment issues are numerous, and rising in numbers. They can be found in countries at all stages of development. A comprehensive UNDP study (2005) found that more than half of these policy measures flow from national policy choices, while the others are undertaken in co-operation with multilateral organisations.

The majority of the world"s largest economies now have goals in place to reduce carbon emissions, or to decrease energy intensity increase renewable energy and decrease deforestation. Countries have adopted a range of goals; if they can successfully deliver these, emissions will be reduced significantly below their "business as usual" path. Table 21.1 summarises some of the relevant goals adopted by countries that account for around two thirds of the global economy and emissions.

Half the world"s population lives in cities and many more travel into cities to work each day. By some estimates, urban areas account for 78% of carbon emissions from human activities16. Increasingly cities are taking initiatives aiming to reduce emissions. The Clinton Climate Initiative and the Large Cities Climate Leadership Group, a grouping of 22 of the largest cities in the world, have pledged to reduce emissions and increase energy efficiency by creating a purchasing consortium to lower the prices of energy-saving products and accelerate their development. Cities in the developing world have also taken action, for example tackling local air pollution and congestion in ways that also have the effect of reducing greenhouse gas emissions.

International companies are taking a lead in demonstrating how profits can be increased while reducing emissions from industrial activities globally.

Multinational companies are accountable for their operations around the world, and a growing number of business leaders would now prefer to see a clear long-term international framework17. In many ways, large companies have longer time horizons than governments, and are making their own forecasts of where policy is likely to go, based in part on their views of current and future public opinion. For example, in an open letter to the British Prime Minister ahead of the G8 Summit, one group of business leaders said "We need to create a step-change in the development of low-carbon goods and services by rapidly scaling up our existing investments and starting to invest in new technologies. To achieve this, we need a strong policy framework that creates a long-term value for carbon emissions reductions and consistently supports and incentivises the development of new technologies."18 The World Economic Forum has also convened a round table on climate change, which included businesses from around the world. A statement from the group urged G8 governments to "establish a long-term, market-based policy framework extending to 2030 that will give investors in climate change mitigation confidence in the long-term value of their investments"19.

Businesses are motivated by opportunities to reduce costs from increased energy efficiency (as BP demonstrated through its introduction of an internal emissions trading scheme) and by intelligent forecasting of future markets – as for example with the development of hybrid cars by some auto manufacturers, the emphasis on low-carbon innovation in GE"s Ecomagination campaign, and moves to explore non-fossil energy sources and carbon capture and storage by several major power and energy companies. We have discussed some of these incentives in Chapter 12. They are also motivated by opportunities to define and demonstrate responsible behaviour, including by protecting their staff and customers from the impacts of their emissions. Box 21.2 provides several examples.

Pressure from campaigners and stakeholders (including institutional investors and the general public) is also leading to increased board-level oversight of climate change risks. There have been several attempts to establish the legal liability of companies for their emissions, inspired by precedents including class action suits over tobacco and asbestos. Institutional investors are keen to see companies avoid being drawn into litigation. The US-based Ceres coalition of investors, environmental and public interest organisations regularly assesses the performance of companies in managing these and other direct and indirect risks from climate change20. In the UK, the Institutional Investors Group on Climate Change (representing investors with over $1 trillion in assets) has pledged to work with governments and companies to promote a co-ordinated international response to climate change21.

Box 21.4 Visions for a zero carbon society – private sector leadership on climate change A number of multinational companies in several sectors, including the automotive, power, energy intensive and financial industries, have begun to identify strategies for a zero-carbon society.

Toyota aim to build recyclable cars with zero emissions by minimising the environmental impact of vehicles over the lifecycle of a car. Energy use can be reduced through efficient manufacturing and production, engine types offer potential to reduce emissions from driving, and disposal at the end of life has been part of their vision of sustainable mobility.

In 2002, Avis Europe introduced a scheme to allow their car hire customers to offset carbon emissions, in partnership with the CarbonNeutral company (formerly Future Forests). They state that they have become "carbon neutral" by 2005 by using their buildings more efficiently, recycling materials, and offsetting non-reducible emissions via tree planting and support of renewable energy and technology projects to reduce GHG emissions.

Vattenfall, an energy company that operates hydro, nuclear and coal generators has been developing and implementing three main CO2-reducing measures: optimisation of existing technology to reduce emissions per unit of energy, increased use of non-CO2 energy sources, and a long-term project to capture and permanently store CO2 from fossil-fuel power plants.

Alcan has an ambition to become "climate neutral" by no later than 2020 through the full life- cycle of its aluminium products. They have sought to increase energy efficiency through continued research and development in technology and process improvements, as well as reducing GHG emissions related to energy use, and pursuing the best energy mix from available energy resources and non carbon-based energy projects.

HSBC became the world's first major bank to become "carbon neutral" in December 2005. To meet this goal, a Carbon Management Plan has been put in place which consists of three parts: reducing direct emissions, reducing the carbon intensity of the electricity used by buying from renewable sources where feasible, and offsetting the remaining CO2 from the bank"s own operations by buying emission reductions from "green" projects.

21.4 Building and sustaining coordinated global action on climate change The scale of action required to reduce the risk of dangerous climate change requires both broad participation and high levels of ambition by all countries.

The existing international arrangements, national goals and business-led initiatives provide a strong foundation for action. Much has been learned in the last fifteen years, and there is growing international momentum to support moves to co-operation on a much greater scale. The UNFCCC Dialogue on Long-term Action, the Kyoto Protocol discussions on the second commitment period, and a range of partnerships and initiatives provide room to explore a range of approaches.

We have argued in Chapter 13 of this Review that there is a strong case for stabilisation between 450-550ppm CO2e. This would require very strong action to limit and reduce global emissions, starting now and continuing over the next 50-100 years. Robust, durable frameworks for international co-operation, based on a shared understanding of long-term goals, are required to meet this challenge.

It is essential that all major developed countries participate in this action. However, this will not be enough. Figures 21.1 and 21.2 demonstrate this by showing the extent of action that might be required globally for different possible stabilisation goals, given assumptions about emissions reductions by 2050 made by developed countries on their 1990 levels of emissions22. For example, even if developed countries reduce their emissions by 60% on their 1990 levels by 2050, depending on the overall stabilisation goal, the remaining emissions from developing countries could not exceed an increase of 25% on 1990 levels by 205023.

The distinction between developed countries taking responsibility for emissions reductions and making physical reductions within their borders is an important one. This is because the former can drive investment flows globally that can make it possible for developing countries to limit their emissions far below the levels they would otherwise be expected to reach.

For example, were developed countries to take responsibility for reducing their emissions in 2050 by 90% on their 1990 levels, but put in place frameworks that allowed at least 50% of the investment in meeting these goals to take place outside their physical borders, they could meet the rest through investment in reducing carbon emissions in developing countries. This would mean, depending on the overall stabilisation goal, developing countries would still have to reduce the emissions within their physical borders in 2050 by around 50% on 1990 levels, but we calculate that they could also have flows of up to US$40 billion per year that could be directed towards helping achieve this24. Therefore, the more that developed countries commit to taking responsibility for, the more incentives could be provided for developing countries that take on commitments to limit or reduce emissions themselves.

It remains important that developing countries do take on commitments – in suitable forms and with the appropriate support. If the investment flows that are created by the rich countries take place only through the use of project mechanisms that allow them to offset their own commitments through action elsewhere, without any responsibility on the part of the recipient countries to take appropriate steps to constrain other sources of emissions themselves, there is a substantial risk of moral hazard25.

Reductions on this scale are likely to be achieved only within frameworks that reduce the costs of action as far as possible, and that support an equitable distribution of effort. The following chapters will consider how global carbon markets can be mobilised to create the appropriate price signals and channel investment towards a low-carbon economy in both rich and poor countries, and how these frameworks apply to technology co-operation and reversing emissions from land use change.

The key challenge is to devise an agreement or a set of arrangements that attracts wide participation including all countries with significant sources of emissions, and achieves deep and lasting reductions in emissions from all sectors.

Countries are motivated to participate in international co-operation on climate change for a number of reasons, including the extent to which co-operation supports a range of short-term goals as well as the long-term goal of reducing the risks of climate change. For example, Chapter 12 discussed local co-benefits of mitigation.

Designing arrangements that are compatible with the underlying incentives of the participants is an effective way to ensure their continued adherence to the rules of the game and therefore a credible, lasting framework. Box 21.5 provides one illustration of the national short and medium term policy considerations that are relevant to international co-operation on climate change.

Box 21.5 Drivers for participating in international collective action on climate change There are a number of drivers for participation in international collective action for both developed and developing countries. For example, an analysis of drivers for China"s participation carried out by the Chinese Academy of Social Sciences (2006) shows a range of short and medium-term goals, including improving energy efficiency and financing the development and deployment of low carbon technology. Co-benefits include reducing air pollution and improvements to industrial structure, employment and regional development.

Shared notions of responsible and collaborative behaviour, within and outside governments, create the conditions in which countries honour international commitments.

The game theory that underpins analyses of international co-operation for global public goods tends to take as its starting point a narrow perspective of self-interest as the only motivation for action, distinguishing it from ethical approaches. In fact, these can be combined26.

Although the key conclusions arising from these analyses are vital to examine, the creation of norms, and links to notions of responsible behaviour, are central to actions taken by governments27. Indeed, as we have noted, some game theory is moving beyond the traditional focus to examine the importance of reciprocity and reputation in solving collective action problems.

On many dimensions of international relations, governments make and respect international obligations because they are in line with perceptions of responsible and collaborative behaviour, and because domestic public opinion supports both the objectives and the mechanisms for achieving them.

Custom plays a very important role in international relations, and is often embodied in understandings and agreements that are not formally binding. These are often referred to as soft law. Environmental collective action provides numerous examples of the soft law approach and creation and recording of acceptable norms of behaviour between countries.

The principles set out in the non-binding 1972 Stockholm Declaration on the Human Environment were developed in numerous subsequent formal and informal agreements. They were picked up at the Earth Summit held in Rio de Janeiro in 1992. At Rio, world leaders signed conventions on climate change, biodiversity and desertification. They also adopted Agenda 21, a wide-ranging blueprint for action to achieve sustainable development worldwide. The Earth Summit concept of think globally, act locally inspired action from governments, community groups and individuals around the world. The Earth Summit was followed up at the World Summit on Sustainable Development in Johannesburg in 2002, where governments agreed a non-binding Plan of Implementation. This was supported by the launch of a large number of multi-stakeholder partnerships to take forward specific action. The UN Commission for Sustainable Development is currently reviewing the Johannesburg commitments on sustainable energy.

Soft law may allow countries to take on obligations that otherwise they would not. This is because non-binding instruments usually have an element of good faith that they will be adhered to by countries if possible, and may embody a desire to influence the development of state practices towards actual law making28. They can also be vehicles for focusing consensus on rules and principles and for mobilising a consistent, general response on the part of states. An example of this is "tote-board diplomacy", whereby a collective standard for action is held up publicly, and countries that fail to agree are subject to collective pressure29.

A collective sense of responsible behaviour and public acceptance of policy measures requires a shared understanding of action around the world. Governments also tend to look to the actions of neighbouring countries and key trade partners to benchmark the level of effort they are willing to make.

Co-operation across a broad range of issues including security and development can be sustained by norms of internationally responsible behaviour. Powerful statements stressing the importance of such behaviour in these contexts have been made by individual leaders, or expressed in a variety of non-binding international legal texts such as the declarations of the United Nations and communiqués from bodies such as the G8.

Collective action can be strengthened through actions taken at smaller, regional and national levels, for example, because "innovative rule evaders can learn how to get around a single type of rule more effectively than a multiplicity of rules-in-use."30. Therefore, codifying and passing commitments into domestic law can reinforce current and future commitments for action on a global public good. This sends a strong signal that a country is sincere in pledging action – and it means that reversing course becomes considerably more difficult and politically and legally challenging. Trust and credibility will be built especially when a country is seen to be taking real action to meet those commitments.

Formal compliance mechanisms have a role to play in managing specific and limited infractions of rules within international regimes. Agreed processes of adjustment may promote continued participation in a regime.

Where governments have set up a regime to take international action, compliance mechanisms can be used to maintain the credibility of that regime. The credibility of the regime will be damaged if rules of the regime are seen to be flouted, and this will quickly lead to a loss of support from other participants.

The existence of a compliance procedure may be sufficient to deter free-riding within the regime, provided that there is transparency, monitoring of actions, and, most importantly, there is pressure for the country concerned to remain part of the regime. However, participants can quit regimes. This means that for global public goods, formal compliance mechanisms are likely to only be effective for specific and limited infractions.

Chapter 14 discussed the issues for ensuring credibility of climate change mitigation policy on the national level31. National commitments, or sanctions applied in domestic law if those commitments are not met, may not be credible because governments can renege on their predecessors" commitments. This can also present a problem for international compliance32.

We thus provided in Chapter 14 the rationale for short-term flexibility within an overall framework that has clear long-term goals in line with the scale of action required. The corresponding notion on the international level is that an international regime requires clear goals, and may require some form of adjustment of specific levels of effort to reach those goals over time to allow flexibility to respond to unforeseen circumstances. Adjustment could take account of economic growth, the underlying carbon price in economies, the cost of low carbon technologies, or emissions reductions achieved. This, rather than automatic sanctions or punishment, may therefore create a way to respond to changing circumstances within one or a few countries without jeopardising the future of the entire framework.

It would be important that these rules were set, monitored and revised by a competent and credible international process, ideally a body independent of government ministries and influence in order to build credibility through reputation1. In the absence of such a body, representation of finance, external affairs and economic ministries in addition to environmental ministries would be important to obtain real buy-in to agreed rules.

Increasing the transparency and comparability of parallel national action is a significant challenge and will require a strong response from existing international institutions to enhance the coherence and cohesion of different policies.

Increasing understanding of action across different dimensions at different levels will build confidence amongst countries regarding the efforts of others and this could strengthen overall effort. Increasing information and monitoring may help to reduce free riding and improve accountability for the provision of public goods.

In the case of climate change, it is already clear that there are a number of dimensions of and a range of overlapping approaches to co-operation. Transparency and a shared understanding of action is required across all these dimensions, including on emissions reductions, the scope and level of carbon prices and policies, investment in innovation, parallel and coordinated approaches to standards and regulation, commitments to international co-operation on the deployment and diffusion of relevant technology, as well as international support for adaptation. The ways in which co-operation are assessed therefore have to be similarly broad, in the same way that the metrics used for organisational performance management have widened in recent years through use of approaches such as the balanced scorecard33.

The task of benchmarking responsible action against other countries is made more complicated in the case of climate change by the competing priorities that can drive similar action. For example, the promotion of biofuels in Brazil, China and the US is often described as an energy security measure; in the EU, it is seen primarily as a response to climate change. Even more complex are the drivers for energy efficiency measures across countries. Therefore the definition of overall commitments for domestic climate change and energy policy also plays an important part in comparing efforts across countries.

The UNFCCC and Kyoto Protocol have already created a strong system for estimating and reviewing emissions according to standard guidelines34. Developed countries report emissions annually under this system. Formal national communications required from all countries also set out at a high level the policies and measures that are being implemented, but they are less frequent (every five years or so) and although there are agreed reporting guidelines, cross-country comparison is difficult.

Other initiatives can provide supplementary information. The G8 countries have agreed to provide annual updates in implementing the Gleneagles Plan of Action on Climate Change, Clean Energy and Sustainable Development, which covers areas including energy efficiency, cleaner power and the use of market-based instruments. The World Resources Institute has begun to develop an informal database of policy measures implemented in developing countries35.

Transparency plays a key role in other areas of economic co-operation. The IMF, OECD, IEA, and many UN organisations systematically collect and compare data across countries on a wide range of economic policy issues36. It may be that a more systematic approach to monitoring economic policy relevant to climate change, including the explicit and implicit prices of carbon across the economy, would require the skills and expertise found in these institutions.

Global public concern and awareness about climate change are growing rapidly. They both influence and sustain international co-operation, national aspirations and private sector leadership on climate change.

As outlined in Chapter 17, individual preferences are subject to change, and public opinion across the world plays a very important role in sustaining co-operation on climate change. As on many other issues, public scrutiny of government policy matters. Public understanding of the challenge of climate change is essential to create the political space for governments to introduce and sustain the policies that are required to make the transition to a low carbon economy. International stakeholder pressure is also relevant, as a result of global investment flows and the responsibilities of multinational companies for their worldwide operations.

The public is influenced by the statements of, amongst others, politicians, scientists, Non- Governmental Organisations (NGOs), religious leaders and businesses, and by the presentation of the issues in the media. There has been a clear recent increase in public concern over climate change. Analysis of the incidence of references to climate change and global warming show that between 2003 and 2006, references in major newspapers doubled. International development NGOs and faith groups have increasingly become concerned about climate change. The UK"s Stop Climate Chaos includes environmental and development NGOs as well as faith groups and trade unions. In the USA, a wide range of groups is campaigning on climate change issues. For example, the Evangelical Climate Initiative (ECI) released a statement signed by more than 85 evangelical leaders calling for action on climate change37.

Pew Center polls on changing public attitudes around the world have sought to examine public attitudes to news stories. In a recent poll, awareness of climate change was high in the developed world, but in the developing countries sampled, awareness was generally lower than for a range of other issues. Clear majorities in most countries surveyed were concerned about the problem.

As the science of climate change is widely accepted, public attitudes will make it increasingly difficult for political leaders around the world to downplay the importance of serious action to respond to the challenge.

Box 21.6 Public attitudes to climate change around the world38

A poll by the Pew Center presented a snapshot of attitudes in 2006. Even in countries with limited formal participation in international action, at least half of the population now thinks that climate change matters a fair amount or a great deal.

21.5 Conclusions In this chapter we have examined the conditions for international collective action on climate change. We noted that extensive action has already begun on different levels – from the multilateral to the individual level, but that the scale of action now required demands a response on a much larger scale, involving all developed and developing countries in a collective endeavour to limit and reduce emissions.

Economic analysis can provide some guidance on the directions for effective, efficient and equitable frameworks for co-operation, and the following chapters will consider in more detail how to build key elements of international co-operation on climate change. These include carbon markets, support to developing countries in the transition to a low-carbon economy, international co-operation to accelerate innovation and to support the diffusion of energy efficient and low-carbon technologies, action to reverse emissions from land use change and forestry, and support for adaptation.

Each of these dimensions of action has its own specific challenges. An effective response to climate change requires co-operation in each area, supported by a shared understanding of long-term goals, and transparency about the contribution that each country is making towards them.

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Aldy, J., S. Barrett and R.N. Stavins (2003): 'Thirteen plus one: a comparison of global climate policy architectures'. Discussion Paper. 26, Washington, DC: Resources for the Future.

Barrett, S. (2005): 'Environment & statecraft: the strategy of environmental treaty making'. Oxford: Oxford University Press.

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Bernheim, D. B. and D. Ray (1989): 'Collective dynamic consistency in repeated games'. Games and Economic Behavior, 1(4): 295-326 Birnie. P and A. Boyle (2002): 'International law and the environment', 2nd edn. Oxford: Oxford University Press.

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Chinese Academy of Social Sciences (2006): 'Understanding China"s energy policy: economic growth and energy use, fuel diversity, energy/carbon intensity, and international co- operation'. Background Paper for the Stern Review on the Economics of Climate Change, available from http://www.hm-treasury.gov.uk/media/5FB/FE/Climate_Change_CASS_final_report.pdf. Dasgupta, P. (2005): 'Economics of social capital'. The Economic Record, 81(1): 2-21 Dietz, T., E. Ostrom, and P.C. Stern (2003): 'The struggle to govern the commons'. Science, 302: 1907-1912 Farrell, J. and E. Maskin (1989): 'Renegotiation in repeated games'. Games and Economic Behavior, 1(4): 327-360 Fischbacher, U., S. Gaechter, and E. Fehr (2001): 'Are people conditionally co-operative? Evidence from a public goods experiment'. Economics Letters, 71(3): 397-404 Gaechter, S. (2006): 'Conditional co-operation: behavioural regularities from the lab and the field and their policy implications', Discussion Paper, no. 3. Nottingham: The Centre for Decision Research and Experimental Economics, University of Nottingham.

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22 Creating a Global Price for Carbon

Key Messages A shared understanding of long-term goals must be at the centre of international frameworks to support large reductions in greenhouse gas emissions reductions around the world.

A broadly similar price of carbon is necessary to keep down the overall costs of making these reductions, and can be created through tax, trading or regulation. Creating a transparent and comparable carbon price signal around the world is an urgent challenge for international collective action.

Securing broad-based and sustained co-operation requires an equitable distribution of effort across both developed and developing countries. There is no single formula that captures all dimensions of equity, but calculations based on income, per capita emissions and historic responsibility all point to developed countries taking responsibility for emissions reductions of at least 60% from 1990 levels by 2050.

The Kyoto Protocol has established valuable institutions to underpin international emissions trading. There are strong reasons to build on and learn from this approach. There are also opportunities to use the UNFCCC dialogue and the review of the effectiveness of the Kyoto Protocol to explore ways to improve.

Private sector trading schemes are now at the heart of international flows of carbon finance. Linking and expanding regional and sectoral emissions trading schemes, including sub- national and voluntary schemes, requires greater international co-operation and the development of appropriate new institutional arrangements.

Common but differentiated responsibilities should be reflected in future international frameworks, including through a greater range of commitments and multi-stage approaches.

Carbon pricing and other measures should be extended to international aviation and shipping. 22.1 Introduction At a national and regional level, as described in Chapter 14, approaches to mitigation include taxation, emissions trading and regulation. International collective action can build on these national approaches. As we have established in Chapter 23, such arrangements will be most successful if they take into account the underlying interests of the participants.

This chapter explains how international frameworks could be guided by long-term quantity goals and the corresponding global carbon price trajectory, and how they might also allow flexibility for national policy approaches.

The chapter considers how to build on and learn from the experience of the Kyoto Protocol so far. It also examines how the costs of mitigation can be minimised by international coordination and shared equitably, and the role of commitments and quota allocations. Finally we examine the challenges of expanding and linking regional and sectoral markets for carbon, and expanding carbon pricing to aviation and shipping.

22.2 Reducing the costs of mitigation through an efficient international framework Very large reductions in greenhouse gas emissions are required around the world. A shared understanding of long-term goals, including for stabilisation of greenhouse gas concentrations in the atmosphere, is essential. We set out in Chapter 14 the two key requirements for achieving efficiency for climate change mitigation. The first requirement is that greenhouse gas (GHG) emissions are reduced until the marginal cost of abatement1 is equal to the marginal social cost of carbon (SCC) 2 . Defining the social cost of carbon requires a framework built around a shared understanding of long-term stabilisation goals.

A shared understanding of the scale of the challenge for both mitigation and adaptation can lead to a broad consensus on long-term goals for the stabilisation of GHGs in the atmosphere, as well as more medium-term considerations on appropriate pathways for global emissions, such as the depth of emissions reductions to be made by 2050. These goals can help to provide clarity and facilitate the development of national and international policies that minimise the costs and maximise the benefits of mitigation and adaptation. Policy-makers can then adjust national policy to operate in the context of a shared commitment to international collective action. Without this, there are risks that a series of fragmentary or short-term commitments would lead to inconsistent policies that raise the costs of action and fail to make a significant impact in reducing emissions.

It may not be essential to negotiate a single number for a long-term goal. As we have discussed in Chapter 21, declarations by political leaders and scientific and economic authorities can establish strong standards for responsible attitudes to the climate. Recognition of the dangers associated with different stabilisation levels together with an understanding of what is feasible are likely to point to a fairly narrow range of goals for consideration. We argued in Chapter 13 that this range lies between 450ppm and 550ppm CO2e, given that the lower level could impose high adjustment costs in the near term for small gains given where we are now, and the upper level would substantially increase risks of very harmful impacts.

The scientific and economic evidence on climate change will continue to accumulate, including on the potential for dangerous climate change and future technologies. It is important that new information is reflected in international norms for climate protection, and that policy-makers are clear about how they will adjust their goals in the light of new evidence. The Intergovernmental Panel on Climate Change (IPCC) plays a vital part in assessing the scientific evidence and providing clear non-technical summaries that allow the issues to be widely debated. Long-term goals should be regularly revised in the light of the IPCC findings and other robust research.

A broadly similar global carbon price is an urgent challenge for international collective action. A global carbon price can, in theory, be created through internationally harmonised taxation or intergovernmental emissions trading, but neither is straightforward in practice. The second requirement for efficiency discussed in Chapter 14 is that reductions in different countries are carried out as far as possible to the point where the marginal or incremental costs of further abatement across countries are just equal. Although the science tells us that the "social cost" of emitting a tonne of GHGs is independent of where in the world it is emitted, there are currently significant differences in marginal abatement costs around the world, due to differences in rates of output and emissions growth, as well as differences in the structure of economies and energy sectors and levels of technical efficiency and differences in income. If the carbon price across countries is not broadly similar, there will be unexploited opportunities to abate an extra tonne of GHG more cheaply in one country compared with another, so the overall cost of abatement will be higher.

A similar carbon price around the world can be created in a number of ways, including through harmonised levels of net carbon taxes as part of national policy frameworks, intergovernmental emissions trading or expanding the use of private sector emissions trading; and/or using regulation to create an implicit price for carbon3 .

An internationally harmonized emissions tax – where all countries agree to set the same domestic carbon price across their economies – provides one model for an efficient approach to mitigation. Several analysts have argued that taxes have, on balance, advantages relative to quantitative limits at the international level4 .

A co-ordinated tax-based approach has the advantage that countries can take their tax decisions individually. It thus does not require elaborate structures and institutions, the construction of which can take time and effort. It allows compliance and monitoring to focus on the levels of net carbon tax in addition to monitoring of emissions. There are methodological challenges here, in untangling the multiple objectives of existing taxes, levels of direct and indirect subsidy applied and taking account of exchange rates. But they are not necessarily more complex than the existing monitoring of other policy areas carried out by institutions such as the International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OECD) or World Trade Organisation (WTO)5 .

Proponents of an internationally harmonised tax argue that it would also avoid difficulties associated with choosing baselines for trading. Efforts would be judged by the level of carbon tax rather than against an arbitrarily chosen historical base year of emissions. This would eliminate the asymmetry between early and late joiners, and remove the opportunity to create "hot air"6 . It would also avoid exceptionally large international transfers of wealth that could be generated by the initial allocation of emission rights under international trading regimes7 . Under a tax-based approach, developing countries would retain all relevant tax revenue within their own borders. Crucially, any assistance from rich to poor countries would be made through direct public transfers tied to specific policy reform or programmes of action, and would be linked to the incremental cost of the action taken. This was the model for co-operation under the Montreal Protocol for Ozone Depleting Substances8 .

However, the international harmonisation of carbon taxes can be extremely difficult in practice. At a European level countries have previously failed to agree on a common carbon tax. Even the relatively homogenous group of four Scandinavian countries that sought to implement a uniform tax from the early 1990s ended up with a complex patchwork of partial application and exemptions between and within the countries9 . Seeking an internationally uniform tax would preclude national discretion about ways of implementing environmental goals; and this may conflict with national sovereignty and the practical politics of domestic policy formation. There are also practical and political challenges in creating large-scale flows to poor countries, to support an equitable distribution of effort, through public budgets alone.

We argued in Chapter 14 that in the long-term, a global quantity constraint is the appropriate guide for policy-making. A global quantity constraint can be used to drive intergovernmental trading of emissions quotas, and this has already been adopted within the current multilateral framework, the Kyoto Protocol. Moreover, as we explained in Chapter 14, a key benefit of trading schemes for emissions quotas is that they allow the cost-effectiveness (via a common price) and distributional equity of action (via flows based on quota allocations) to be managed separately but simultaneously10 . In a global and comprehensive system of quota trading, the initial allocation of national limits on emissions affects the distributional equity of the scheme, but not the equilibrium distribution of emissions reductions, the market-determined carbon price or the costs of abatement11 . Therefore these allocations represent the overall level of responsibility that each country undertakes, rather than the emissions reductions that are required to physically occur within its borders.

Nevertheless, some countries are currently unwilling to participate in intergovernmental emissions trading – including the USA and Australia, and there are real difficulties in enforcing quota allocations between governments under international law. The lessons of the Kyoto Protocol will be explored in more detail in Section 22.4 below.

In practice, a combination of approaches can achieve a similar price for carbon globally by building on existing national tax, trading and regulatory frameworks, but co-ordination is necessary. Different sectors and countries have differing preferences, institutions and traditions. These affect the choices that governments make between policy instruments such as taxes, trading, regulation, and subsidies, and between mandatory and voluntary approaches. These issues were explored in Chapter 15. A key challenge for international frameworks is to allow for multilateral and parallel action in different countries, to manage and co-ordinate the interactions between different national approaches. This is because if policies adopted in different countries result in different effective carbon prices, the allocation of emission reductions will be inefficient.

The outcomes from using tax or trading schemes that create a price for carbon – such as their effectiveness in reducing domestic emissions – can also be influenced by their interaction with other instruments internationally, even if they are not explicitly linked. This is because, in theory, firms can relocate to different regions and market competition can eliminate high cost products12 . For example, if one country chooses an emissions trading scheme and another a carbon tax, and if relocation is costless and there is perfect product market competition, arbitrage will occur so that the carbon price is capped by the tax rate13 . However, the allocation of revenues will be determined by the quantity of allowances issued. This means that the country with the trading scheme has an incentive to increase the quantity of allowances to obtain more revenue – which can then be distributed to its firms or public. Overall, the environmental effectiveness of the instruments will be reduced.

Even if both countries choose to implement taxes, the tax base can make a difference. If taxes are levied on final goods on the basis of the emissions they produce (which is a relatively complex task), there is no incentive to relocate or benefits to competitors in other countries. However, if taxes are levied on domestic emissions, or on carbon content at the beginning of the supply chain, relocation and competition are more likely. In reality, as suggested in Chapter 11, these kinds of impacts are likely to be substantially mitigated by costs of relocation and many other factors that influence the degree of competitiveness firms face – such as the degree of international exposure, price elasticity of demand for products, as well as market structure.

A uniform carbon price acts as a bedrock to efficient policy. But accommodating a range of dimensions of effort within international frameworks for mitigation is important. We suggested some important caveats to the general conclusion on a single carbon price in Part 4. For example, we acknowledged that a wide set of complementary measures relating to the removal of subsidies, and removing behavioural barriers to energy efficiency can be useful. The process of managing the transition to a stable and predictable framework for carbon pricing may justify additional carefully targeted measures, for a specified duration, to overcome the numerous obstacles to the development and deployment of new low-carbon technologies. Moreover, given the contrast between short-term capital markets and the long-term nature of the climate problem, there may be a case for additional measures that could deter construction of long-lived carbon- intensive stock in favour of lower carbon options. We discuss these issues further in Chapters 23 and 24.

International frameworks designed to recognise and build on diverse national approaches require a shared understanding of long-term goals, and they must also allow countries to benchmark and compare action across a range of dimensions of effort. These include emissions reductions, the scope and level of carbon prices and policies, national investment in R&D and deployment support, approaches to standards and regulation, commitments to international co-operation on the deployment and diffusion of relevant technology, as well as international support for adaptation.

22.3 Sharing the costs of mitigation Securing broad-based and sustained participation in international co-operation to tackle climate change depends upon finding an approach widely understood as equitable. As set out in Part III, any particular long-term quantity constraint can be met by different paths, and the costs involved will be kept down by increasing the flexibility about "what, where and when" emissions are reduced. Scaling up action to reduce GHG emissions will require reductions to take place in both developed and developing countries. Given the ability to bear costs and historical responsibility for the stock of GHGs, equity requires that rich countries pay a greater share of the costs.

Box 22.1 Empirical work shows that perceived fairness is important It is important for any co-operation that those involved feel that the terms agreed are fair. An empirical demonstration of this idea is illustrated by the "ultimatum game". In the ultimatum game, "a proposer" proposes to the other player, "the receiver", how they should allocate $100. If the other player accepts, both parties divide the $100 as proposed by the proposer. If the receiver rejects the proposal, both parties receive nothing. Although it would be rational for the other player to accept low allocations rather than receive nothing, empirical experiments across different cultures have found that players consistently reject allocations below $30 because they believe they are unfair, while proposers tend to offer between $20 and $5014 .

Frameworks for international collective action that recognise a global long-term quantity constraint on emissions must distribute responsibility for meeting the overall limit to nation states. Both developed and developing countries can gain from mitigation policy, both because it will reduce the risks of dangerous climate change described in Part II and it because it can be designed to support the range of co-benefits described in Chapter 12. This does not mean that poor countries must bear the full costs of their participation. The incidence of imposing a global price of carbon is ultimately on the consumers of carbon-intensive goods and services, including consumers in rich countries who import those goods and services. Nevertheless, equity requires that poor countries should be compensated for some of the costs that they do bear. Emissions trading and similar mechanisms offer an effective route to achieving this.

In the case of climate change, a system of unco-ordinated national goals will not lead to an efficient or equitable distribution of effort. A major advantage of emissions trading schemes is that they enable efficiency and equity to be considered separately15 . In the absence of trading, the allocation of responsibility for mitigation efforts requires considering efficiency and equity simultaneously.

The UNFCCC contains key principles for an equitable approach to sharing the costs of reducing global GHG emissions that remain relevant to further co-operation on climate change. Concepts of equity suggest taking into account several aspects of a country"s position or actions – which mostly complement each other16 . The United Nations Framework Convention on Climate Change (UNFCCC) established that co-operation on climate change should recognise the "common but differentiated responsibilities" of all countries, based upon their respective capabilities. This principle reflects several aspects of equity. First, it reflects the notion that, on the grounds of ability to pay, wealthier, more developed countries should support poorer countries in their efforts to adjust to climate change. Second, it acknowledges that the largest share of historic and current global emissions has originated in developed countries, and thereby applies historical responsibility or the "polluter pays" principle17 . Third, it accounts for the relative size of per capita emissions in developing countries and the requirement to allow their relative share of emissions to rise to accommodate their aspirations for growth and poverty reduction (as recognised, for example, in the Millennium Development Goals (MDGs))18 . Developed countries therefore took on a range of obligations under the Convention, including showing leadership in tackling their own emissions, transferring technology, supporting capacity building and financing the agreed incremental cost of emissions reductions in poorer nations, and supporting adaptation to the adverse impacts of climate change.

These three arguments all point to rich countries taking a greater share of the costs of mitigation, but they do not necessarily point to the same arrangements or rules for sharing those costs19 . For example, the ability-to-pay approach suggests that the sharing of costs should be directly correlated to GDP or per capita GDP20 . The "growth-needs" approach applied simplistically suggests distribution on an equal per capita basis, whereas the historical approach might suggest that countries with similar economic circumstances have similar emissions rights and responsibilities.

There is no single formula that is likely to capture in a satisfactory way all relevant aspects of an equitable distribution of effort between countries across the various dimensions and criteria21 – but the criteria tend to point in similar directions. The correlation between income or wealth and current or past emissions is not exact, but it is strong. This means that equity criteria tend to lead to fairly similar policy approaches: as Ringius et al note, "we are in the fortunate situation that all the …equity principles to a large extent point in the same direction"22 . This can be demonstrated empirically.

Box 22.2 describes the work of Höhne (2006), who show that the impact of the methodology used to distribute initial mitigation obligations tends to be overridden by the powerful influence of the stabilisation goal on the level of effort required within an international framework for emissions reductions. The results indicate that emissions reductions of 60-90% on 1990 levels by developed countries would be required to meet a stabilisation range between 450 and 550ppm CO2e.

In the end what matters is that total global effort matches the scale of the problem, that the parties perceive the distribution of effort to be fair, the accompanying goal of efficiency is not prejudiced, and public opinion across a wide range of countries is able to sustain co-operation on those terms over a long period.

Box 22.2 The effect of stabilisation goals and allocation formulae Höhne (2006) has compared the effect of the choice of stabilisation goal against different allocation methodologies on the distribution of quotas for emissions reductions between countries. They consider four allocation methodologies:

Convergence and contraction: Emissions in developed countries contract over time to allow emissions from developing countries to converge to a global equal per capita emissions level. This reflects the "growth-needs" approach.

Common but differentiated convergence: Developed countries" per capita emissions converge to a low level. Developing countries" per capita emissions converge to the same level over the same time period – for example with no commitments or no-lose targets, but decrease after their per capita emissions are a certain percentage above or below the (time dependent) global average. This also reflects a combination of the "growth-needs" and "ability-to-pay" approaches.

Triptych: This takes into account differences in national circumstances relevant to emissions and emission reduction potentials. It was the model used for the EU"s burden sharing agreement. It could be designed to reflect the "growth-needs" approach, but it could equally compensate heavy emitters that might have difficulties in adjusting to mitigation policy.

Multi-stage approach: Countries would start at and move between different types and levels of commitment, depending on indices such as per capita emissions levels, income, and so on. For example, here 4 stages are used: 1) no commitments; 2) incorporating climate change objectives within sustainable development policies, 3) commitments to moderate absolute limits on emissions – e.g. set above the starting year but below business as usual, and 4) absolute reduction limits.

The four graphs below show the results for both developed and developing countries or regions of 450ppm CO2e and 550ppm CO2e stabilisation goals combined with the four methods for sharing out the emissions reductions – here illustrated relative to 1990 levels alongside a reference scenario of business as usual emissions23 . They do not incorporate international emissions trading. The results show that for developed countries, it is the overall stabilisation goal that is the main driver of the effort required – for all developed countries, action to meet a 450ppm CO2e goal would require quotas to be set in line with a reduction in emissions of 70-90% on 1990 levels by 2050, and for a 550ppm CO2e goal the reduction would be at least 60%. It is a similar story for the middle-income economies of Latin America, Central and East Asia and the Middle East, where all methodologies allow for a modest increase or very small decrease over current emissions by 2050. For Africa and South Asia, where both income and per capita emissions are currently very low, the allocation methodology makes a significant difference. Africa and South Asia have the greatest allocation under the methodologies that most closely relate to the "ability-to-pay" equity criterion.

22.4 Putting efficiency and equity together: The experience of Kyoto A global carbon price applied to emissions from all countries and sectors allows for efficient mitigation, and flows between countries allow for an equitable division of effort. Creating a framework that provides for both an efficient and equitable response is an urgent challenge for international collective action. This section explores how economic analysis might guide the development of such a framework for mitigation, starting with an evaluation of the current multilateral framework.

There is much to learn from the experience of implementing the Kyoto Protocol, and important opportunities to go beyond it in designing future international co-operation. The Kyoto Protocol is an innovative attempt to apply emissions trading in the context of international collective action between sovereign states. Participating countries from Annex 1 (developed nations) have agreed to differentiated, legally binding commitments to reducing their overall emissions of a basket of six greenhouse gases by at least 5 per cent below 1990 levels over the first commitment period from 2008 to 2012. As such, an overall quota, or quantity ceiling, has emerged. Within their national limits, countries are free to choose how best to deliver emission reductions nationally.

The Protocol created flexible mechanisms to enable Annex 1 Parties to meet their commitments efficiently. International Emissions Trading (IET) allows trading of national quotas or allowances between countries. The Kyoto Protocol has provided the framework within which the EU has developed its cross-border private sector Emissions Trading Scheme (the EU ETS24 ), allowing over 11,000 energy-intensive installations in 25 countries to co-operate in reducing emissions.

Two further mechanisms, Joint Implementation (JI) and the Clean Development Mechanism (CDM), allow credits from emission reducing projects in one country to be used to meet another country"s Kyoto commitment. Under JI, projects can be hosted in developed countries, and under CDM, in developing countries. Governments in Japan and Europe, for example, are expected to purchase CDM credits, and the EU ETS allows private sector participants to purchase credits generated from CDM and JI activities. In the period to 2012, projects generating credits for over 1 billion tons CO2e are already in the pipeline, meaning the CDM is likely to provide between $5 and $15 billion in additional funding for mitigation in developing countries. CDM finance can also leverage new private and public investment, estimated at 6 to 8 times the amount of CDM finance25 .

The Protocol has also established the institutional basis for monitoring, reporting and verifying emissions, as detailed in Box 22.3. It also has a formal compliance mechanism to discourage free-riding, containing three specific sanctions to be enforced by all Parties to the Protocol. First, there is a requirement to make up the amount required by the first commitment and incur a penalty of an additional 30% limit on top of their second commitment – this is essentially an interest rate on borrowing. Second, there is a requirement to develop a compliance plan of action – which provides an opportunity for international and national scrutiny of the adequacy of policy measures in place to identify ways of coming back into compliance in future periods. Third, there is suspension of eligibility for trading – which makes it harder for a country to meet its objectives in a cost-effective way, and may create difficulties for governments where businesses have invested in trading and parliamentary majorities are in favour of action to reduce emissions.

Box 22.3 The institutions and processes set up under the Kyoto Protocol

? The Kyoto Protocol provides for detailed reporting and accounting for emissions and emissions allowance allocations within Annex I, and less onerous reporting and review obligations for non-Annex I parties.

? Prior to each "commitment" period over which emissions reductions will be made, parties are required to submit initial reports establishing their "Assigned Amount" – the emissions a country will be expected to emit over that period. If they exceed this they will have to purchase credits (allowances) from others that have emitted less than their assigned amount. Establishing an emissions inventory is crucial for this. International review teams review the reports and fix the amounts.

? Annex I parties must submit detailed annual emissions data on an annual basis in national inventory reports, with supplementary information on allowance holdings and transactions. Failure to submit annual reports and inaccuracy in reports can lead to suspension of eligibility to participate in the Kyoto mechanisms.

? Allowance holdings and transactions are monitored in real time by an electronic registry system comprising national registries, which are required to hold and record assigned amount information, as well as enforce detailed trading rules. Registries are linked to an international transaction log, which enforces transaction rules, and may suspend the operation of registries where consistent breaches of the rules have occurred. The CDM registry accounts for credits from projects in developing countries. Reports of the international transaction log are available to review teams in reviewing assigned amount information.

? At the end of the commitment period, following review of the inventory report for the final year, parties have a period of 100 days to ensure their assigned amount matches their emissions during the commitment period. Information on reconciliation, compilation of annual emissions and assigned amounts are forwarded to the compliance committee for final assessment.

The Kyoto Protocol has been criticised on several grounds. However, Kyoto has, to its credit, established an aspiration to create a single global carbon price and implement equitable approaches to sharing the burden of action on climate change. Criticisms of the multilateral approach adopted through Kyoto can be organised around three particular issues – incentive compatibility, the time horizons and ambition of commitments, and limited participation.

Analyses of international collective action, including those discussed in Chapter 21, point to the weakness of international law in enforcing obligations between sovereign states26 . Governments can, if they choose, easily renege on their commitments, and they are more likely to do so if these commitments are not in line with widely adopted norms of international behaviour and with the commitments of key trading partners. International agreements that are not compatible with the underlying incentives of the participants are unlikely to succeed in creating significant changes in national action.

The Kyoto Protocol has a number of specific sanctions for non-compliance, but these are enforceable only where a government chooses to remain within the framework of the Protocol27 . A country that exceeds its quota of emissions in the first commitment period can be suspended from eligibility for trading, and is required to make up its commitment and pay a penalty within the following commitment period. The suspension of eligibility to trade would be a significant concern for countries that wish to remain within the trading system and have a small variance from their limits to account for28 . However, the second sanction creates an incentive for those countries that are not in compliance with their first phase limits to seek an alternative basis for any arrangements for future action29 . Furthermore, the ratification threshold for the Kyoto Protocol is sufficiently high that a very small number of key countries can block the agreement of a second commitment period.