Climate change is a long-term problem. Policy to address climate change faces the challenge of motivating collective action on global public goods in a world with no single international authority. International agreements can nevertheless aim to (1) reduce greenhouse gas emissions, possibly through an international emissions trading system (ETS) like that outlined in the Kyoto Protocol; (2) develop new low-emissions technology by providing incentives for cooperation on technology research and implementation; (3) provide adaptation assistance to countries and populations least able to cope with expected changes in climate.
Anthropogenic climate change presents one of society’s most vexing policy challenges. Because the problem stems largely from the fossil-fueled global economy, the costs of reducing emissions would accrue immediately and are easily quantified. On the other hand, the costs of potential damages are difficult to estimate and will likely be long-term. In addition, governing the global atmospheric commons requires a large number of actors to agree on and comply with a mechanism of self-restraint; otherwise, even the relatively virtuous would tire of the rest of the world’s free-riding. Moreover, understanding the complex risks and uncertainties of climate change is a challenge even for specialists. Communicating this information accurately and effectively to a marginally interested public is harder still.
Large, long-term changes would be required to reduce the risks of climate change. While the absolute amount of greenhouse gases (GHGs) in the atmosphere affects the degree of climate change, the only variable that society can easily control is the rate of GHG emissions. To simply stabilize the absolute amount of atmospheric GHGs, the emission rate must drop to about one-half to one-third of its present levels. Deciding on what concentrations constitute moderately safe levels is challenging, and requires deriving impact estimates (such as temperature change) from possible GHG stabilization levels, as well as from the projected rate of emissions reduction.
An effective international regime to govern climate change policies must balance climate protection goals with the limited enforcement ability inherent in international law.[2-4] Because the atmosphere is a common resource, protecting the climate is in most people’s best interest, but no country will want to burden itself unreasonably burden itself with the excess costs of a climate friendly policy unless it believes that other countries are making equivalent sacrifices. An effective climate regime must therefore minimize free-riding. It must also ensure that the participants are complying with their obligations, which requires systems of monitoring and enforcement. Finally, because of our evolving understanding of the science of climate change and its relationship to human societies, a sound policy must remain flexible enough to incorporate new information as it becomes available, with procedures for regular scientific re-evaluation and regular review of the adequacy of the policy.
CLIMATE POLICY OPTIONS
Addressing climate change requires coordination of domestic and international systems to reduce GHG emissions and assist countries in adapting to climate change. International treaties can set guidelines for action[5'6] that are then implemented via domestic legislation.
Several policy mechanisms can address the free-ridership and overexploitation associated with public goods like the climate. Governments can regulate the common resource directly or stipulate specific technological approaches. This command-and-control approach is relatively simple in that the rules can be set by panels of experts, and it has the appearance of fairness, because everybody must attain the same goals. However, in a diverse economy with differing costs of pollution abatement to firms, it can lead to large imbalances in the cost of compliance.
Alternatively, a governmentally set price on the externality could allow producers more flexibility. This price can be set directly as a tax (for example, $10 per ton of carbon dioxide (CO2)), or indirectly by setting a total emissions limit and allowing entities to trade the rights to emit. These methods—taxes, emissions trading, or a hybrid of the two—can greatly reduce the total cost of compliance with the environmental target. Emissions trading systems come in two forms: in a baseline-and-credit (or permit) system, in which individual projects that result in a reduction of emissions below a pre-agreed baseline are granted credits that can be sold to firms that are not able to meet their reduction obligations. Alternatively, a cap-and-trade system sets an overall cap on emissions and then distributes, free or at auction, the entire amount of emissions allowances out to the producers.
Governments may also implement other policies to address market failures, for example by establishing minimum standards of efficiency or performance, supporting research and development of less-polluting technologies, or even guaranteeing a market for new technologies.
One contentious question in developing a GHG trading system is how to allocate emissions quotas. Until now, all countries have had free access to the atmosphere; setting limits will inevitably lead to argument about who deserves a bigger slice. Three options for allocating these rights illustrate the policy challenge. The first method, usually called grandfathering, allocates permits according to what various countries or industries have emitted in the recent past. This method causes the minimum economic disruption, but it may also reward inefficient resource use and ignore the benefits that have already accrued to polluters. Alternatively, if one views the atmosphere as a universal resource or a life-support commons, then the quota may be allocated on a per-capita basis so that each person is assigned the same right to using the resource. If, on the other hand, one views the atmosphere as an economic input, the quota might be allocated to each country in proportion to its gross domestic product (GDP). The United States, for example, currently produces 24% of the world’s GHG emissions, has 5% of the world’s population, and accounts for 21% of the world’s GDP.
These simple formulae will likely not be used directly, but they do provide bases for negotiating commitments in the international community. One particularly large divide between developing and developed country positions is how to account for the cumulative GHGs emitted since the beginning of the Industrial Revolution by developed countries. This atmospheric debt represents about 80% of the total anthropogenic GHG contribution, and less-developed countries’ contribution will likely not equal that of developed countries until around 2100. These countries argue that richer countries should therefore move first to forestall further emissions. Developed countries often view the situation differently, pointing out that less-developed countries as a group, including China and India, will by 2010 emit GHGs at an annual rate equal to that of the developed world. Indeed China itself will soon be the world’s largest GHG emitter, surpassing even the United States.
Whether generated through capture, biological sequestration, or mitigation, trading emissions requires measurement.1-9-1 The most reliable statistics on GHG emissions relate to the burning of fossil fuels. Most countries, especially the industrialized countries that emit the most, keep detailed records of fossil fuel stocks and flows. Therefore, national emissions from fossil fuels are relatively precise and have a high amount of certainty.
Finally, given that some climate change is at this point inevitable, climate policy must encompass not only policies to reduce emissions of GHGs but also policies to enhance the resilience of countries to the expected changes. Often called adaptation measures, such activities include support for diversifying economies away from vulnerable crops, enhancing physical infrastructure, and bolstering institutional capabilities. Unlike policies focusing on GHGs, moreover, the benefits of adaptation accrue relatively quickly as they can immediately reduce suffering from hurricanes or floods regardless of the cause of these events.[10'11] Discussions about adaptation are often linked to questions about liability for climate damages.
EARLY INTERNATIONAL RESPONSE
Although Svante Arrhenius had postulated the existence of the greenhouse effect in 1896, and significant scientific inquiry re-emerged in the 1950s, public concern about anthropogenic climate change was not significant until the late 1980s. Along with other simultaneously emerging global environmental problems like stratospheric ozone depletion and biodiversity loss, climate change moved quickly into the international arena.
The international community’s first concrete response was to refer the scientific questions to the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP). In 1988, the WMO and UNEP established the Intergovernmental Panel on Climate Change (IPCC), which has since become the major international expert advisory body on climate change. The IPCC divides thousands of experts into three working groups on climate science, impacts of climate change, and human dimensions. It produces comprehensive Assessment Reports every 5-6 years that describe the current state of expert understanding on climate, as well as smaller, targeted reports when they are requested by the international community.
Fig. 1 Historical emissions and Kyoto Protocol target emissions. Historical emissions from the United States Department of Energy (see Ref. 19) do not include land-use change emissions; Kyoto targets are based on net emissions reported to the UNFCCC and include land-use change emissions. Country-specific targets are available in the Kyoto Protocol text and from the UNFCCC Secretariat From UNFCC Secretariat Internet Resources (see Ref. 15) Developing Countries are defined as countries not included in Annex I. Source: From Ref. 15.
THE U.N. FRAMEWORK CONVENTION ON CLIMATE CHANGE
The first international treaty to address climate change was the United Nations Framework Convention on Climate Change (UNFCCC), which entered into force in 1994 and has been ratified by 186 countries, including the United States. Having emerged from the 1992 U.N. Conference on Environment and Development (the “Earth Summit”), the UNFCCC sets broad objectives and areas of cooperation for signatories. As the objective, it states that Parties to the Convention should cooperate to “prevent dangerous anthropogenic interference with the climate system.” Here, dangerous is not defined explicitly but is required to include ecosystems, food supply, and sustainable economic development.
The UNFCCC identifies several important principles for guiding future treaty agreements. First, it endorses international equity. Second, it states that all signatories share a “common but differentiated responsibility” to address climate change. All countries must therefore participate, but they are allowed to do so in a way that depends on their domestic situation and historic GHG contributions. Third, the UNFCCC instructs the Parties to apply precaution in cases risking “serious or irreversible damage.”
The UNFCCC also defined some emissions reduction goals for richer countries. Specifically, it grouped most developed countries into Annex I Parties (Annex I is a designation in the UNFCCC and reproduced in the Kyoto Protocol as Annex B. Annex I countries are: Australia, Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Monaco, Netherlands, New Zealand, Norway, Poland, Portugal, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, U.K., Ukraine, U.S.A.) and urged them to stabilize their total emissions of GHGs at 1990 levels by the year 2000. These targets were non-binding, and in retrospect, most countries did not meet these initial goals. Finally, and most importantly, the Framework Convention established a system of national emissions reporting and regular meetings of Parties with the goal of creating subsequent, more significant commitments.1-16’17-1
Subsequent debates focused, therefore, on negotiating a new treaty (called a Protocol) that could enhance international action. Yet, contentious debate arose over whether developing countries would be required to agree to any reductions in return for caps on Annex I emissions.
Several negotiating blocs were solidified during this period and remain active today. The broadest split between developed and developing countries was already evident in the UNFCCC. Within developing countries, the strongest advocates for action emerged in the Alliance of Small Island States (AOSIS), an association of low-lying coastal countries around the world that are extremely vulnerable to inundation due to sea-level rise. On the other hand, the Organization of Petroleum Exporting Countries (OPEC) has been reluctant to endorse any regulation of their primary export, fossil fuel, which when burned creates the GHG C02.
Developed countries also have several blocs: The European Union (EU), which functions as a single legal party to the convention, has tended to favor strong action on climate change, whereas the United States, Japan, Canada, New Zealand, and Australia have been more circumspect. Russia was never an enthusiastic advocate of action on climate, but the collapse of its economy in the 1990s means that its emissions decreased considerably, allowing it some flexibility in negotiating targets. A 1995 agreement (the Berlin Mandate) adopted by the Parties to the UNFCCC stated that developing countries should be exempt from any binding commitments, including caps on their emissions, in the first commitment period. The U.S. Senate disagreed and, in 1997, declared they would not ratify any Protocol to the UNFCCC that did not call for concrete targets from developing countries.
THE KYOTO PROTOCOL
After two years of preliminary negotiations, delegates to the UNFCCC met in Kyoto, Japan in 1997 to complete a more significant treaty calling for binding targets and timetables, eventually agreeing on the Kyoto Protocol to the UNFCCC. Maintaining the principle of the Berlin Mandate, delegates rejected language that required participation by developing countries, thus damping U.S. enthusiasm. Nevertheless, the Kyoto Protocol entered into force in 2005, having been ratified by EU countries, Canada, Japan, Russia, and most developing countries. The United States and Australia are currently not Parties to the Protocol. The Kyoto Protocol builds on the UNFCCC with specific and legally binding provisions.
First, it set legally binding emissions targets for richer countries. These targets oblige Annex I Parties as a group to reduce their emissions to a level 5.2% below 1990 levels by the target period (Fig. 1). This overall average reflects reductions of 8% for the EU, 7% for the United States, and 6% for Canada; as well as increases of 8% for Australia and 10% for Iceland. Russia, whose emissions had dropped significantly between 1990 and 2000 because of economic contraction, was nevertheless awarded a 0% change, effectively providing an effort-free bonus (often called hot air). The target period is defined as 2008-2012, and countries are allowed to take an average of their emissions over this period for demonstrating compliance.
In addition, an individual country’s emissions are defined as a weighted sum of emissions of seven major GHGs: C02, methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), chlorofluorocarbons (CFCs), and sulfur hexafluoride (SF6). These gases are weighted according to a quantity called global warming potential (GWP) that accounts for different heat-trapping properties and atmospheric lifetimes of the seven gases. For a 100-year time horizon, example GWPs are: 1.00 for CO2 (by definition), 21 for CH4, 296 for N2O, 100-1000 for a wide variety of halocarbons, and 22,200 for SF6. The resulting sum is reported in terms of “carbon-dioxide equivalent” or CO2e. The Protocol allows countries to calculate a net emissions level, which means they can subtract any GHGs sequestered because of, for example, expansion of forested areas.
The Protocol encourages countries to achieve their target primarily through domestic activities, usually called policies and measures. These include improved energy efficiency, increased use of renewable energy, and switching to lower-carbon forms of fossil fuels such as natural gas. In addition, the Protocol allows countries to offset emissions if certain domestic activities serve to absorb and sequester CO2 from the atmosphere, thus reducing their net contribution to climate change.
Allowable carbon sinks projects currently include afforestation, reforestation, forest management, cropland management, grazing land management, and revegetation. Conversely, deforestation is a process that must be counted as a cause of emissions.
The Kyoto Protocol also allows countries to obtain credits from other countries. In particular, it established three market-based mechanisms to provide states with flexibility in meeting their binding emissions reduction targets: emissions trading (ET), joint implementation (JI), and the clean development mechanism (CDM). Despite the different names, these three mechanisms are actually all forms of emissions trading—they create ways to reduce the overall cost of reaching the targets outlined above by allowing lower-cost reductions to be bought and sold on the market. All traded units are denoted in tons of CO2e.
Emissions Trading (sometimes called Allowance Trading) is a cap-and-trade system under which the Annex I parties are assigned a maximum level of emissions (see Fig. 1), known as their assigned amount. They may trade these rights to emit through a UNFCCC registry. Only developed country Parties may participate in ET. Units of ET are termed assigned amount units (AAUs) .
Joint Implementation is a baseline-credit system that allows trading of credits arising from projects coordinated between fully developed countries and countries in eastern Europe with economies in transition. This is a so-called project-based system, under which reductions below an independently certified baseline can be sold into the market. Joint implementation units are termed emissions reduction units (ERUs).
The CDM is another baseline-credit system that allows trading of credits arising from projects in developing countries. Another project-based system, the CDM will allow only projects that contribute both to sustainable development and to climate protection. Furthermore, they must provide benefits that would not have occurred in the absence of the CDM (so-called additionality). Post-Kyoto negotiations determined that acceptable projects include those that employ renewable energy, fossil-fuel repower-ing, small-scale hydroelectric power, and sinks; some projects (e.g., those under 15 MWe) are also deemed to be “small-scale” and enjoy a streamlined approval process. Projects are subject to a process of public participation. Final acceptance of project proposals rests with the CDM Executive Board, which also approves methodologies and designates operational entities—NGOs, auditors, and other private developers—that implement and verify projects. A levy on each project will fund activities that help poor countries adapt to a changing climate. Clean development mechanism units are called certified emissions reductions (CERs).
The allowance assignments and flexibility mechanisms are the most significant elements of the Kyoto Protocol and its associated rules. Other noteworthy commitments include minimizing impacts on developing countries—primarily through funding and technology transfer—and establishing expert teams to develop monitoring, accounting, reporting, and review procedures.
The UNFCCC, Kyoto Protocol, and associated agreements establish three multilateral funds to assist poorer countries. The Adaptation Fund, financed through a levy on CDM transactions, is designed to help countries bolster their institutional and infrastructural capacity to manage changes in climate and damages from weather events. The Climate Change Fund focuses on technology transfer and economic diversification in the energy, transportation, industry, agricultural, forestry, and waste management sectors. Finally, the Least Developed Countries Fund exists to provide additional support in adaptation activities for the very poorest countries. The latter two funds are financed by voluntary contributions.
EUROPEAN UNION EMISSIONS TRADING SYSTEM
In 2005, the EU implemented what is to date the largest operational emissions trading system (ETS) for GHGs.[20,21] The EU-ETS is a cap-and-trade system for all 25 EU member countries, and it covers approximately 12,000 installations in six sectors (electric power; oil refining; coke ovens, metal ore, and steel; cement; glass and ceramics; paper and pulp). The plan regulates only CO2 emissions until 2007, but thereafter other GHGs will be included. About one-half of the EU’s CO2 emissions will be regulated under the EU-ETS during this first 2005-2007 phase. The initial allocation of credits is based on individual countries’ plans; countries are allowed to auction up to 5% of allowances in the first phase and 10% thereafter.
Notably, the EU-ETS contains more rigorous enforcement provisions than Kyoto. Compared to international law, the EU has far greater leverage to enforce legal provisions, and the EU-ETS imposes a steep fine (€40/fCO2) for non-compliance. The EU-ETS replaces some national-level policies to control GHGs, notably the United Kingdom’s pioneering ETS and other voluntary programs. Accordingly, some facilities that had previously taken action to comply with pre-existing national laws are allowed limited exceptions to the EU-ETS.
Through a linking directive, credits generated through Kyoto Protocol CDM or JI projects may be used to fulfill obligations under the EU-ETS, thereby providing an important market for these offsets. However, because of European concerns about the possible negative consequences of biological carbon sequestration (sinks) projects, CDM or JI credits generated within these categories are ineligible for the EU-ETS. The EU-ETS will thus form, by far, the largest trading program in the world and will likely set the standards for subsequent programs in other countries.
VOLUNTARY AND REGIONAL PROGRAMS
Trading programs outside national government legislation have also emerged. British Petroleum was the earliest major corporate adopter of an internal GHG trading system and, subsequently, has had a large consultative role in drafting both the Kyoto and U.K. emissions trading rules. Although the United States has declared its intention to ignore Kyoto, many large American corporations have also adopted internal targets. The Chicago Climate Exchange has organized voluntary commitments from companies in the hope of establishing a position as the dominant American exchange. Yet voluntary programs, whether they derive from corporate or governmental initiatives, are ultimately constrained: often the most egregious polluters choose simply not to volunteer, and those firms that do participate may still not reduce emissions to socially desirable levels.
Many U.S. states, such as California and Oregon, have also passed or are considering legislation that would curb emissions directly or indirectly. While independent state initiatives are valuable in providing domestic innovation for the United States, they are unlikely to add up to a significant reduction in global emissions. In addition, many of the companies most vulnerable to GHG regulation are asking for some guidance on what they can expect from regulators, and a state-by-state patchwork can never replace federal legislation for regulatory certainty.
International climate policy faces a period of uncertainty, innovation, and evolution over the next decade. The Kyoto Protocol remains the primary international agreement for addressing climate change globally, despite its imperfections and the continued absence of the United States and Australia. Yet, since Kyoto expires in 2012, attention has turned to negotiating a subsequent agreement that could re-engage the United States, involve China, India, and other developing countries more directly, and address concerns about compliance and enforcement.1-26-28-1 Given the difficulties in forging an immediate, broad international consensus, the EU-ETS will likely foster the most institutional innovation and GHG market development in the near term.
The most likely interim solution, therefore, will consist of multiple, overlapping regimes that link domestic-level emissions reductions into one or more international markets. In this model, the United States could, for example, institute a unilateral domestic program that addresses emissions and then allow Kyoto credits to be admissible for compliance as the EU has done. Additional agreements governing, for example, technology standards or adaptation policy may also emerge. From the perspective of energy, this evolving climate change policy will impose a carbon constraint on energy use,[30,31] most likely through a non-zero cost for GHG emissions.