… the Lima Climate Change Conference

Lima, January 2009

Today is the last day of the Lima Climate Change Conference in Lima, Peru. I’ve become fairly convinced that climate change is the most important issue confronting human beings, so I figured I would follow-up on my post a week ago with a wrap-up of the summit.

It seems that the end result of the summit is a commitment by each of the 195 countries in attendance to reduce greenhouse gas emissions. The kicker is that each country will draw up its own commitments. There is no grand total that needs to be reached or higher benchmarks for developed countries to hit. Each country will have until March to submit its plan.

The problem with this is a classic in economics, the Prisoners’ Dilemma:

Two members of a gang are arrested for committing a crime together and are held separately from one another. They are going to be sent to jail for one year for their crime. However, they are both offered a deal. They can testify at the trial of their accomplice, betraying her, with the following possible outcomes:

• If they both betray each other, they will both serve two years in jail
• If only one betrays the other, the one convicted of the crime will serve three years, while the betrayer will be set free and not serve jail time
• If neither of them betray the other they will serve the one year

Rationally, you would expect that neither of them betray each other. By cooperating they effectively minimize their likely jail time. However, given the fear that the other will betray you while you remain quiet, most people in this situation would themselves betray, setting them both up for two years in jail. This is the dilemma. Rationally, we should take one action, but behaviorally we are likely to take another which is not the ideal choice.

In the case of international climate change, the countries of the world are our prisoners. And since each country has to draw up their own greenhouse gas reduction commitments, they can either “cooperate” by reducing proportionally to their share of emissions and warming, or they can “betray,” letting the other countries do all of the heavy lifting. Rationally, all countries should cooperate, but behaviorally we expect them to betray each other, dooming the international climate change treaty to ineffectiveness.

Again, I feel like the key to success is a money transfer from developed to lesser developed countries (LDC’s). Of course, the money transfer would be under the condition that LDC’s do their proportional part in reducing greenhouse gas emissions, the money being used to offset the change in their growth trajectories by converting to more expensive technologies. The problem is, the amount of money to transfer is hard to pin down. In 2009 at the climate accords in Copenhagen developed countries committed $100 billion annually, starting in 2020, to offsetting transfers. However, the United Nations Environmental Program is now estimating that costs may rise to $300 billion a year.

Since each country is now going to be drawing up its own commitments to emission reduction, pinpointing a global, annual transfer amount is all but impossible. If LDC’s fall into the prisoners’ dilemma $300 billion will not be necessary, but they could use the developed world’s refusal to give $300 billion as a reason for not cutting their emissions enough in the first place. On the contrary, if LDC’s are convinced to cut their emissions proportionally, they may want more than $300 billion, which developed countries may not be able to muster.

To me, the clearest way out of this dilemma is to concretely pinpoint how much money will need to be transferred if the global emission reduction benchmark is reached. This will give developed countries leverage in negotiations and can convince LDC’s to cooperate.

… an International Climate Change Treaty

This post is apologetically months and months overdue, but I am glad that I am now completing it and posting it because I am passionate about this subject, and with all eyes on Lima now and Paris next year, it remains vitally important.

Back in October 2010 I wrote a writing sample for a job application called, “The Economics of International Climate Change.” I didn’t get the job, not even an interview, but ironically, I had to drive past the Company every day for my job at Ernst & Young in Tysons Corner that I did wind up taking. Given the attention on climate change in New York this week, I have resurrected the writing sample from the bowels of my external hard drive (an indispensable item for a Peace Corps Volunteer, I assure you) and re-tooled it here for this blog.

Western world leaders have placed great emphasis on climate change. Their contention: if the current accumulation of greenhouses gasses is not allayed then climate change is sure to wreak havoc upon vulnerable populations around the world. However, stemming the accumulation of greenhouse gasses requires a trade off with economic output that many people around the world are not willing to part with. This opposition is led by emerging nations, particularly India, Brazil, and China.

Technically, there is a rather simple solution to preventing climate change. Once environmental scientists reach consensus on what the acceptable level of greenhouse gasses like carbon in the atmosphere is (a consensus which surveys of the relevant literature reveals has been quite elusive) then governments must simply charge a price – either by taxing emitters or issuing tradable emission permits – so that the quantity of emissions is reduced to levels scientists deem appropriate. The economics of this solution is elegant in its simplicity. Sources of greenhouses gasses (electric generation, automobiles, etc.) will “pay the price” until it is cheaper for them to abate the deleterious emission than paying the tax or buying permits. They can achieve this abatement by either decreasing output or producing their products in a way that emits less greenhouse gas. These methods will increase the price of the products, so demand will re-equilibrate to a lower quantity, ensuring that the markets remain efficient while still preventing the advance of climate change.

Clearly the citizens of the world will have to pay for this protection of the environment. High gas mileage vehicles, alternative energy, and other abatement methods are costly for an economy. The institution of a comprehensive international environmental treaty would certainly decrease global output for years to come. Herein lays the heart of the opposition to such an arrangement. Low-income countries which are rapidly expanding their economies towards prosperity would have to languish in poverty for years to come, while high-income countries already enjoy relative prosperity even though they caused the overwhelming majority of greenhouse gas accumulation.

On one hand, the appeal to fairness by countries led by China seems valid [and given recent developments, no one can argue that China is not at least pretending to search for a solution]. Every person in the world has the right to economic prosperity, so countries that already enjoy high standards of living should bear the burden of global environmental stewardship while the rest of the world catches up. But there is something unsatisfying about this approach. It is arguable that knowingly damaging the environment is just morally wrong, so emerging market countries do not have any legitimate base to pollute their way to prosperity no matter the prosperity of others. It is simply unfortunate that developed countries did not know about the harms of greenhouse gas during the Industrial Revolution, because then they would have altered their behavior decades ago and prevented this crisis in the first place.

Despite these fundamental ethical dilemmas, a solution to the international deadlock on a climate change treaty is still feasible from an economic point of view. It would be prohibitively expensive for developed countries to abate all of the environmentally required greenhouse gasses on their own. It is in the economic best interest of the developed world to recruit the support of emerging nations. Therefore, developed nations should offer transfer assistance to developing nations in exchange for abating emissions. Developing nations should be willing to accept aid which exceeds their economic costs of reducing emissions, while developed nations should be willing to pay to the developing world anything less than the cost they would have to bare in order to assuage climate change all on their own. Coming to the terms of this agreement will surely take intense deliberation between nations, but there is nothing fundamentally barring its fruition.

Just to make you feel like I posted this article back when all eyes were on the UN in New York, here are some great pictures I gathered from the climate march that was held concurrently in Manhattan:

Just to take things from 2010 pseudo-academic Eric to nearly 2015 blogger Eric, I want to really quickly boil down my point here. If we want to strike an international global climate change treaty the rich countries will need to pay the poor countries. Just like water, countries take the path of least resistance to prosperity. We did back during the Industrial Revolution, not knowing the harms of the chemicals we were emitting. Now developing countries are doing it to, but they can’t afford to stop. They are poor, and their people need economic growth to achieve quality of life. So the only way to get their leaders to agree to enforce greenhouse gas emission limits is by compensating them for the economic growth that we are asking them to deliberately pare down. How is this deliberate, you may ask? If they want their prosperity to not follow the path of least resistance, they are going to have to go slower and use more expensive technologies.