Blog Post

The economic debates behind COP21

What’s at stake: France will chair and host the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) at the end of the year. While the scientific community has reached a consensus that climate-warming trends are very likely due to human activities, the discussion about how to address is mired in huge political disagreements.

By: Date: November 23, 2015 Topic: Energy & Climate

Scientific consensus

John Cook et al. examined 11 944 abstracts of peer-reviewed scientific literature published between 1991–2011 on the topics ‘global climate change’ or ‘global warming’. Among abstracts expressing a position on anthropogenic global warming, 97.1% endorsed the consensus position that humans are causing global warming – a rare level of agreement in the world of science!

However, there is controversy about the validity of this result. Richard Tol pointed out that the paper did not meet basic academic standards, although the authors answered this criticism. The debate, more about academic rigor than about the fact that there is a consensus, is still ongoing (see here, here and Figure 1). In fact, Tol wrote:

“There is no doubt in my mind that the literature on climate change overwhelmingly supports the hypothesis that climate change is caused by humans. I have very little reason to doubt that the consensus is indeed correct.”

Figure1: Estimates of the consensus on anthropogenic global warming according to Cook et al. and other studies (Bray, Oreskes, Doran, Anderegg, Stenhouse, Verheggen) as a function of the sample size.

BEBR211115_1

Let us return to the political discussion. In 2009 the COP15 in Copenhagen did not result in a consensus. Parties did not adopt a successor of the Kyoto Protocol. Instead the Doha Conference (Qatar) in 2012 established a second commitment period of the Kyoto Protocol (2013-2020), which concerned only a number of industrialised countries. In December in Paris, the expected outcome is a new international agreement on climate change, applicable to all, to keep global warming below 2°C.

Legal form of the agreement

Ahead of the summit, countries have agreed to publicly outline which post-2020 climate actions they intend to take under a new international agreement. Many of these stated intentions (known as Intended Nationally Determined Contributions, or INDCs) demonstrate a tendency to free riding – leading to a true tragedy of the commons. The solution, as 2009 Economic Nobel Prize Elinor Ostrom documented, always involves reciprocity and trust: “I will commit myself to follow the set of rules we have devised in all instances except dire emergencies if the rest of those affected make a similar commitment and act accordingly.”

Recently US Secretary of State John Kerry announced that the Paris deal will not be legally binding treaty. François Hollande restated, as the European Commission did earlier, and as it had been agreed during the G7 summit, that those commitments should be binding. Robert Stavins and Nicholas Stern argue that those lengthy discussions on the form of a legal agreement are “futile” or “a serious mistake”, because of the extremely limited chances of political viability. (Any binding agreement would need approval from a hostile US senate, which must ratify all treaties). They argue that additional efforts should be invested in the content of the agreement instead.

Feasibility of 2°C

There are only few elements of the discussion where parties are close to a consensus. The 2°C ceiling is one of them, but according to the IEA’s recent publication, the actual pledges made by countries will be more consistent with an increase limited to around 2.7°C.

The Intergovernmental Panel for Climate Change (IPCC) is a multi-disciplinary group of scientists which provides scientific evidence on climate change to the COP officials. Oliver Geden and others argue that 2°C is essentially impossible within the IPCC’s models, as they rely on currently unproven technologies. The IPCC models that are able to hit the 2°C target rely on ‘negative emissions’ – the removal of greenhouse gases from the atmosphere during the second half of the century. This could probably only be achieved through carbon capture and storage technologies, which are still in their infancy.

Pricing Carbon

Carbon pricing is one of the key policies that economists call for, as effective carbon pricing is both welfare-maximising and cost-effective. The roots of the idea go back to 1920, when Arthur Cecil Pigou identified the possibility of “uncompensated or uncharged effects [due to] the consumption of things other than the one directly affected.” He advised states to encourage (or discourage accordingly) those divergences: “The most obvious forms which these encouragements and restraints may assume are, of course, those of bounties and taxes.

Those divergences are also known in the market failure literature as externalities. What Pigou was proposing was late reframed later as a Pigouvian tax, a tax on goods that produce such externalities.

In the climate discussion, the negative externalities faced are greenhouse gas emissions. In 2006, at the initiative of Gregory Mankiw, the Pigou Club advocated higher Pigouvian taxes. It included a long list of economists, such as William Nordhaus, Paul Krugman, Ken Rogoff, Robert Samuelson and Joseph Stiglitz.

Pigou’s analysis was accepted until 1960. In his Nobel prize-winning paper “The Problem of Social Cost” Ronald Coase argued that, if the people affected by the externality and the people creating it can easily get together and bargain, taxes and subsidies may be unnecessary. In practice, as Coase himself noted, the assumption of low/near-zero transaction costs is often not satisfied and poorly defined property rights can prevent Coasian bargaining.

In the climate debate, Cap-and-Trade systems take up Coase’s ideas by providing a market to owners of carbon emission permits. To counter the major flaw in his theory regarding the problem of initial allocation of permits, recent literature advises permit auctions.

However, even if economists agree on the necessity of pricing such externalities, there is no consensus about the appropriate tools. Policymakers debate a wide range of options, but Christian Gollier and Jean Tirole say that either cap-and-trade or carbon taxes should be policymakers’ preferred weapon. More political figures agree: Christine Lagarde and Jim Yong Kim made a joint statement in favour of carbon taxes, emissions-trading and the removal of inefficient subsidies.

Cost-benefit-analysis

The standard tool economists use to assess policies is cost-benefit analysis. The positive and negative consequences of a policy are estimated and added together as discounted sum – effects further in the future are assigned a lower weighting. If the benefits prevail, the policy is socially preferable.

Martin Weitzman, an economist at Harvard University, and Gernot Wagner, lead senior economist at the Environmental Defense Fund, argue that the expected loss to society through catastrophic climate change is so large that it cannot be reliably estimated. A cost-benefit analysis cannot be applied here, as even slightly reducing a near-infinite loss is near-infinitely beneficial.

Other economists, including William Nordhaus of Yale University, have examined the technical limits of Mr Weitzman’s argument. Rheinberger and Treich argue that “as the interpretation of infinity in economic climate models is essentially a debate about how to deal with the threat of extinction, Mr Weitzman’s argument depends heavily on a judgement about the value of life”.

The second problem raised by economists is the choice in the discount rate applied when weighting future consequences in the cost-benefit analysis. How much should we value improved climate outcomes in more distant futures? In 2006 the Stern Review on the Economics of Climate Change was released and has been the most widely known and discussed report of its kind. However, it has often been criticised for its use of an unusually small discount rate of approximately 1.4%.

An intense debate emerged at the end of the nineties  (Figure 2) about whether it is socially efficient to use a discount rate for the distant future that is different from the one used to discount cash flows occurring within the next few years. Much of this controversy is now resolved, as a 2012 all-star publication by 13 authors (Arrow, Cropper, Gollier, Groom, Heal, Newell, Nordhaus, Pindyck, Pizer, Portney, Sterner, Tol and Weitzman) converged on one mathematical formula for estimating the discount over long horizons. But the authors still hold differing opinions on how the parameters should be determined.

Those oppositions revisit a long-standing debate about the “descriptive” versus “prescriptive” approach to discounting—the former approach arguing that discount rates should reflect observed behaviour in markets, and the latter that ethical considerations should be used to set the utility rate of discount and the elasticity of marginal utility of consumption.

Figure 2: Histogram of individual estimates of the discount rate among 2160 PhD-level economists

BEBR211115_2

Source: Weitzman, M.L., (1998), Gamma discounting, American Economic Review, 91, 260-271.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Argentina’s troubles

Argentina has abruptly called on the International Monetary Fund for financial help, amid currency pressures. We review recent economists’ position on this.

By: Silvia Merler Topic: Global Economics & Governance Date: May 22, 2018
Read article More on this topic More by this author

Blog Post

200 Years of Karl Marx

May 5th 2018 marked the 200th anniversary of the birth of Karl Marx. We review some economists’ takes on the controversial philosopher’s legacy.

By: Silvia Merler Topic: Global Economics & Governance Date: May 14, 2018
Read article More on this topic More by this author

Blog Post

Did Economics Fail?

The debate about rethinking economics keeps rambling. We summarise newest contributions to this important discussion.

By: Silvia Merler Topic: Global Economics & Governance Date: May 7, 2018
Read about event More on this topic

Past Event

Past Event

Cleaning up Europe's transport sector: which strategies?

Over the last decade, EU’s greenhouse gas emissions have decreased significantly in all sectors with the only exception of transport. This sector is thus becoming a key obstacle to EU decarbonisation and more aggressive policies are needed to decarbonise it. This event discussed the potential strategies to structurally address this issue, also on the basis of Bruegel’s new policy proposal in the field.

Speakers: Maria Demertzis, Francesco Starace and Simone Tagliapietra Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 3, 2018
Read article More on this topic More by this author

Opinion

A new strategy to clean up European cars, and the air we breathe

Transport is the only sector in which Europe's CO2 emissions are now higher than in 1990 and is becoming a key obstacle to the EU meeting its decarbonisation targets, as laid out in the Paris Agreement. The author recommends a three-pronged strategy for a clean-up of the sector: ban diesel and petrol vehicles, reform transport taxation and focus on early-phase technologies.

By: Simone Tagliapietra Topic: Energy & Climate Date: May 2, 2018
Read article More on this topic More by this author

Blog Post

The cost of remittances

Remittances flows are very important for developing countries. In 2009 the G8 pledged to reduce the cost of remittances to 5%, a commitment that was endorsed by the G20 in 2011 and 2014, and included in the UN’s Sustainable Development Goals in 2015. What is the cost today, and what are economists’ suggestions to reduce it?

By: Silvia Merler Topic: Global Economics & Governance Date: April 30, 2018
Read article More on this topic More by this author

Podcast

Podcast

How to reform European transport and tackle rising emissions

The transport sector is the Europe's biggest obstacle to meeting its climate-change targets. But there are several ways in which the EU can take the initiative and lead both its citizens and its automotive industry in a cleaner direction. Bruegel fellows Simone Tagliapietra and Georg Zachmann discuss their research and policy conclusions in this episode of 'The Sound of Economics'

By: The Sound of Economics Topic: Energy & Climate Date: April 24, 2018
Read article More on this topic More by this author

Blog Post

Trade Wars: what are they good for?

Following the US announcements in early March of their intent to impose steel and aluminum tariffs, and the subsequent threats from China to retaliate with their own tariffs, the global trade picture remains uncertain. The IMF and the World Bank Spring Meetings set off amid US-Japan bilateral negotiations and Trump’s hot-and-cold approach to the TPP. This week we review blogs’ views on tensions over international trade and how they can impact world economic growth.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: April 23, 2018
Read about event

Upcoming Event

Sep
3-4
09:00

Bruegel Annual Meetings 2018

The Annual Meetings are Bruegel’s flagship event. They offer a mixture of large public debates, lectures and invitation-only sessions about key issues in European and global economics. In a series of high-level discussions, Bruegel’s scholars, members and stakeholders will address the economic policy challenges facing Europe. The sessions on the first day will be livestreamed […]

Speakers: Richard E. Baldwin, Maria Demertzis, Mariya Gabriel, Bruno Le Maire, Philippe Lespinard, Dominique Moïsi, Jean Pierre Mustier, Emma Navarro, Ana Palacio, Lucrezia Reichlin, André Sapir, Jean-Claude Trichet, Margrethe Vestager, Reinhilde Veugelers, Georg Zachmann and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Brussels Comic Strip Museum, Rue des Sables 20, 1000 Brussels
Read article Download PDF More on this topic

Book/Special report

Developing the EU long term climate strategy

To ensure that EU climate policy is in line with the goals of the Paris Agreement, and takes into account substantial recent shifts in the technical and political framework, the EU needs a new long-term climate strategy that will supersede the 2050 Roadmap that was issued in 2011.

By: Georg Zachmann and Andrei Marcu Topic: Energy & Climate Date: April 18, 2018
Read article More on this topic More by this author

Blog Post

The debate on euro-area reform

A paper jointly written by 14 French and German economists set off a debate about the reform of euro-area macroeconomic governance. We review economists’ opinions about it.

By: Silvia Merler Topic: Finance & Financial Regulation Date: April 16, 2018
Read article Download PDF More on this topic

Policy Brief

Addressing Europe’s failure to clean up the transport sector

The European Union has the long-term vision to reduce its greenhouse gas emissions by 80-95 percent by 2050 compared to 1990 and it adopted in 2014 a binding 40 percent emissions reduction target to be achieved by 2030. Transport is therefore set to become the main obstacle to the achievement of the EU’s decarbonisation goals.

By: Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate Date: April 9, 2018
Load more posts