Main Challenges of Climate Change Negotiations V

Problem-Solving Versus Negotiating

I want to talk about the, the nature of the negotiating process and more generally, the nature of the problem-solving process of the 193 governments that are party to the UN Framework Convention on Climate Change.

Let’s go back to an earlier picture, really the core of the logic of negotiation itself. Remember we talked about, in the first chapter of this lecture, the idea that negotiations are to improve the situation of all the negotiating parties relative to the business-as-usual.

951It’s to move to what we called a Pareto improving outcome. In this diagram from the business-as-usual point that is lower in possibilities for all countries to the cooperative equilibrium “C” in which both groups of countries shown in this figure are better off, and because climate change is, after all, potentially such a calamity, moving to a situation better than the one that we are facing in business-as-usual terms is evident, evidently possible. And yet, the negotiations have continuously proved to be extraordinarily difficult; that’s why we’re aiming for a real solution at COP21 that we might have thought would come in COP1 in Berlin in 1995 or COP3 as was attempted in Kyoto or COP15 in Copenhagen when it seemed that the world was coming close to making a meaningful breakthrough.

What are the reasons why it has proved so hard to go from that BAU point to the point “C”, the cooperative Pareto improving negotiating outcome?

I think that there are at least eight reasons that make climate negotiations just incredibly hard compared to almost any other kind of negotiation that one might consider, and it is worth it for us to think about those difficulties, those uncharacteristic difficulties making this issue so distinct in order to overcome these obstacles.

The first problem is that going from BAU to “C” is not an immediate process. Sometimes when you negotiate you’re better off when you get up from the table and you say, “ok we’ve made an advance”, but when it comes to climate change we’re talking about a transformation of the economy, of the energy system, of our technologies, of our behaviors stretching over decades, and we’re talking about seeing gains from that that also will show up mostly over decades and so negotiating over a very long-term process is inherently more difficult than negotiating over an outcome that gives the immediate gratification of an improvement relative to the status quo.

There’s a related but distinct second challenge and that is that when it comes to the actual improvements, that is why C is “better” than BAU, we’re not going to see those improvements for a long time, not just that it is a long time to realize the change, but the costs of action will be borne predominantly within the next two or three decades, whereas the benefits will be felt predominantly in decades to come. And so we have the costs up front, the benefits later-delayed gratification; not the simplest thing for humanity in general for any of us and certainly not the simplest thing for politicians to manage. They are immediate gratifiers to the ultimate extent; they want to win an election; they want to stay in power, so they’re looking at the short term. But, we have compressed in that negotiating diagram short- and long-term and saying that going from BAU to C is an improvement is simplifying a much more complicated situation where costs come early and gains are likely to be felt only much later.

A third problem that is obviously fundamental is that in many negotiations when you shake hands and have reached an outcome, you know clearly you’re better off, but when it comes to climate change there are enormous uncertainties, not the uncertainties that justify climate denial–this is pure anti-science—the basic science is overwhelming. But, there are uncertainties about technologies, there are uncertainties about future costs, there are uncertainties about the specific timing of climate events, there are uncertainties about the capacity to adapt to climate change rather than to mitigate climate change.

This is technically, scientifically, socially one of the most complex issues that humanity has ever faced because it’s global scale, because it goes to the heart of the economic system, because it involves a complex planetary dynamic, and these uncertainties, of course, enable doubt to be magnified, to be manufactured as has been said, into paralysis.

Of course, there is uncertainty. This doesn’t mean a failure, that we should fail to act, but it is one of the reasons why it is so difficult to act.952

The fourth element is that with the timeline and the timing and the uncertainties, the transition required in going from BAU to C is not simply stated. It is not self-evident and transparent, nor is it the product of a small number of actions.

We’re talking about transformation of the core of the energy system. We’re talking about changes of land use on a global scale. We’re talking about changes in agriculture that engages hundreds of millions of people around the world. There is nothing simple about this. We’re talking about an enormously complex process of change even if we could agree fully on what needs to be done and how to do it, we would then, and we will, I hope, face the challenge of implementation that itself will prove to be one of the most daunting aspects of this whole issue.

The fifth aspect that makes this so hard is the, the little fib that is shown in the simple diagram of going from BAU to C. I’ve drawn that picture of two symmetric negotiators, and the improvement is also symmetric. The arrow points up on a 45 degree line from, from the origin of the, of this graph. In other words, the countries are sharing equally, and it’s pretty easy to define in this simple diagram what equal means, but there is nothing equal about the status of the countries that are at the table.

There are huge, powerful asymmetries around the table. Some countries are fantastically rich and others are desperately poor. They have very different points of view. The rich countries often think, “we can impose a solution on the poor”, and the poor countries think “why are we even here being asked to do something when the rich have caused the problem and have the means to solve the problem.” There are big differences in how countries are feeling the advent of anthropogenic climate change.

The small island states know, they know in their gut their country could absolutely disappear under the waves. With rising sea levels, countries are threatened with their very survival, the case of some of the small island states.

Some of the big, northern, more temperate zone economies, Canada or Russia, may feel a little bit warmer, well, maybe not all bad; we’re a pretty cold climate much of the year. The sense of peril may not be felt, may not even be as dramatic as is experienced in an island or in a dryland country or in a tropical setting.

Countries really differ by the nature of the damages and harms, though it is absolutely the case no country will be able to stand-alone in a world profoundly perturbed and disrupted by large-scale climate change. Countries also differ, of course, tremendously in the ownership of energy resources, especially fossil fuels. Some countries are fossil fuel-rich, and they are typically saying, “we plan to use those fossil fuels, thank you”. Other countries don’t have fossil fuels; maybe they even have vast renewable alternatives and they’re saying, “stop the fossil fuels. Let’s move to alternative form of energy”. It’s easier for them to say that, more convenient. Not only do they not feel the lobbying pressure from the owners of the fossil fuels, but for countries that don’t have their own fossil fuel resources, the alternatives look more promising and more secure.

This are just some of the very strong asymmetries that make negotiating more difficult, that make defining a fair or focal bargain that says “yes that’s the point on which we should all agree”–a more daunting task.

953This comes to another point, what is fair? If we were all the same and symmetrically placed around the table, fair would be quite obvious. If a group of individuals is dividing the cake, and there’s no other reason, in terms of division, to do otherwise, you try to divide the cake in as close to equal pieces as possible. But, because of the asymmetries, every country has its own standard vision of what’s fair.

Poor countries talk about fairness in terms of wealth and poverty. The highly vulnerable countries, like the small island states, understandably, talk about fairness in terms of impact of climate change. The fossil fuel-owning countries talk about fair in terms of the right to use their own resources. Other countries talk about fair in terms of an equal allocation of the atmospheric space for greenhouse gas emissions, and so on.

These are all aspects of fairness, and the fact that there are so many different perspectives, of course, means that reaching an outcome–not that it’s impossible because countries could all say, “even though we differ in our moral judgments, ethical judgments, sense of fairness, we’re all better off at the following point”, but it does make it harder to find that point.

Then, as we discussed in the case of the Prisoner’s Dilemma, there’s a huge problem of trust. “Okay, we could agree, but how do I know you’re really going to carry that out. I have to go back to my parliament or my congress or my party and explain what I’ve committed to and they’re going to say, ‘you committed that when the others are not really going to follow through.'”

This is a standard problem of any kind of agreement. In an arms agreement, the peace negotiators may come home to find huge objection by saying, “you have entrusted our country on the basis of a promise that will not be fulfilled by the others.”

So, the whole question of finding a binding solution, one that can be monitored, one that can be verified is a part of negotiations.

Here just as it has long been a major part of arms limitation agreements and other kinds of geopolitical negotiations. And then the eighth point is, of course, very particular, powerful interests. Some of these interests are enormously concentrated. Some of the big oil companies, of course, face almost an existential question, “if we’re going to have a 2-degree C limit, what happens to us?

What happens to our multi-gazillion dollar capitalization in the marketplace? How will investors value us?” What will happen, asks the CEO, to my wealth, to my income, to my pension, to my position? And, put it the other way, some of these interests are extraordinarily powerful. They’re major political powers in their country, and they are able to shape the political discussion and the national negotiations.

And, of course, individual countries around the table also can play that role. It’s probably the case that if there’s a vast consensus about what to do, to unanimity, will not be the rule. But if any of the major countries–China or the United states or India or the European Union–say, “No way!” that makes a deal extraordinarily difficult, and so individual countries can play a pretty decisive role in blocking an agreement even one that has been agreed by dozens and dozens of other countries.

you might say, “that’s pretty exhausting”, and it has been exhausting because we have gone through 19 Conferences of the Parties. We’ll have the twentieth in Lima in December and the twenty-first in Paris in December 2015 and still no breakthrough. But, it may be in part because we have been looking at this whole issue in the not quite correct way.

If the negotiations are viewed as a largely zero-sum game that “I can’t make a concession because you’re going to get the big prize” or “you do more, I do less” or “you pay for it, I don’t pay for it” or “you have your historical responsibility, I don’t have to participate”; when it’s viewed as one versus the other, then all of these problems that I have discussed are brought to the fore.

If, however, the sense of the discussion around the table were somewhat different starting from the point “we are collectively in a mess; it is a horrendous problem facing everybody in the world, and we’re all in this together”, then the spirit of these discussions could be quite different. And I would compare this in the following way. One might view this as a poker game. Each negotiator is holding their cards, looking across the table. The US negotiator is looking at China; “what are they doing? What are they promising?” The Chinese negotiator is looking back at the US and casting a glance over to the European Union. Each side is wondering who is going to take the pot; how are we going to divide this?

But a quite different view would be the same group around the table; the men and women’s sleeves rolled up saying, “My God, what are we going to do? This is a horrendous problem. We’ve got to figure this out.” So it would be less of a poker game and more of an intense brainstorming and problem-solving; the kind of thing you’d see in a movie as world leaders get together pondering what to do about the asteroid coming towards the earth or the alien space invasion that suddenly unites all of humanity into a common force because the problem is external, shared by everyone, and requiring creativity, fortitude, bravery, brainstorming, far-sightedness.

And yet another analogy that I find very important and compelling is the idea of an orchestra; brainstorming, sleeves rolled up and trying to figure this one out. An orchestra is trying to make beautiful music together.

In other words, trying to implement a solution. The solution could be a wonderful symphony or the solution could be deep decarbonization. Now, one might immediately ask, “if it’s an orchestra, if the world’s to make beautiful music together, where’s the conductor? How is this going to be brought about?” And that in recent years is drawn my attention to a phenomenon known as the conductor-less orchestra. Here, you’re looking at Olin conductorless orchestra. They are a chamber orchestra playing beautiful music together; well worth listening to on Youtube. There’s no conductor. There is no single individual. There is, however, a score.

They all have the score in front of them. They’re playing to the same sheet music. That I believe is the closest analogy, at least that I can come up with, to what we ought to be doing. We do have the same sheet music; we have the 2-degree centigrade limit. We know what we need to do in terms of the global performance. We could have in front of everybody’s stand the respective deep decarbonization pathways that each country is playing its music, is pursuing its own designed deep decarbonization pathway. There is no single conductor, but in the aggregate, the music makes sense; it does keep the world safe.

So I believe that we are too much thinking of poker players, too little thinking of the brainstormers or the conductorless orchestra, and when it comes to the poker playing what really worries me is that the players around the table are not only looking at their hands, actually all of their cards are blank. They don’t know what’s on their cards or what’s their national interest.

What can they be doing? They don’t necessarily know because they haven’t made the analysis of a deep decarbonization pathway. They may think they’re defending their national interest, but how can you know the national interest unless you have investigated the real benefits and costs of alternative pathways, and alas, that has not happened. And one of the reasons that has not happened is that the players around the table are not quite the right players. That chamber orchestra would not be quite so interesting if every musician was playing a violin. It’s the mix that’s crucial to get the right music, but who’s at the table? The table is the government.

Of course, it’s the diplomats; they are not technologists; they are not engineers; they are negotiating very much from the point of view “don’t make concessions, have the other country make concessions.” Not, “how are we going to get carbon capture and sequestration working more rapidly?” Who should be around the table for this kind of problem solving and implementation? Well, the politicians should be there; they represent the governments that put the public policy into place but also the technologists, the engineers, the scientists who can say carbon capture and sequestration–this can be done if we can overcome the following technical obstacles. Or look at the possibility for energy storage with this technology if we can just push it over the boundary to commercialization then we’d all have much more running room.

The companies should be there as well. Both the established companies and the startups. Now, you might think if the companies are there that’s all lobbying, but I actually want the companies pulled to the table. What are the oil companies doing outside saying, “This isn’t our responsibility.” Just making huge amounts of money, lobbying behind the scenes perhaps to slow things down but not being at the table. When recently some of the big oil companies, Exxon Mobile and others, said, “We don’t believe in the 2-degree Celsius as a feasible goal.” I think that is pure moral hazard or immoral behavior. It’s not for a company, which is a major emitter and a beneficiary of inaction, to decide by itself what’s feasible or not; it has to be there exercising responsibility and indeed following public policy.

And citizens more generally need to be at the table, and that’s why I am going to emphasize shortly in the final lecture the role of global goals that are clear, that are succinct, that are understandable by everybody; this is not a technocrat adventure; it’s not a political insiders game; it’s not a business deal or a lobbyist’s dream; this is a citizen’s issue of the first-order of importance for the world. In the DDPP itself, in our Deep Decarbonization Pathway Project, as Emmanuel Guerin described to you, we had our own brainstorming and negotiating and thinking and working together across 15 countries, we realized, even as a group of strongly motivated, environmentally conscious, determined to help fight climate change group, it’s not easy to get to 2 degrees C; it’s going to require a huge effort even in the modeling itself, much less in the actual implementation.

Even within a project, therefore, you see that the brainstorming, the idea that we need to find our way, step-by-step together to meaningful solutions applies. And that needs to be the spirit around the table as world leaders from business, civil society, government, academia, technologists help to find a path forward. In the next lecture, I’ll talk about how we could help to make the negotiating process fit that purpose and do so in time for success in COP21.

Main Challenges of Climate Change Negotiations IV

Making an Agreement Stick

In this lecture we’re discussing the concepts of negotiation: how to have a Pareto improving outcome, where all of the parties to the agreement are better off than they would be in the business-as-usual trajectory, how to have an agreement that is efficient, mitigating carbon dioxide and other greenhouse gas emissions at low cost, how to have an agreement that is fair, that allocates the costs and benefits in a fair way, recognizing how many standards of fairness we want to apply, and how to have an agreement that is a true learning agreement, adapting not only to climate change but adapting to new science, new technology, and indeed actively promoting learning of new ways to mitigate greenhouse gas emissions.

In this chapter I want to talk about another specific aspect of negotiations and that’s how to make an agreement stick. What are the problems and challenges when an agreement is reached in enforcing that agreement and again I am going to be discussing this issue at a conceptual level, at an abstract level, because I think that the abstractions are quite helpful. And I will take the most important abstraction of game theory or negotiating theory of the last half century to illustrate the issue, and that crucial abstraction is known as the prisoner’s dilemma: a framework of interaction that will be known to many students but that is important for everybody to have some exposure to.

941So in this framework we talk about strategies of the parties to a negotiation or to an interaction and we model or map those on a 2 by 2 matrix or a 2 by 2 table.

For the rows we have the strategies of the first country, say the developed countries, and they in this simple example can adopt one of two strategies: either to have business as usual energy policy or to have mitigation policy and for country two, those are the columns of this 2 by 2 matrix, and country two, say the developing country group, also has two possible strategies: business as usual or mitigation.

The assumption is that when both parties to this interaction choose to mitigate, they’re both left better off than in the business-as-usual. That of course is the underlying assumption of climate change and the assumption that we have strongly represented throughout this course.

Now in basic game theory or in a representation such as the one you’re looking at, we can use the outcomes for example as a single number to suggest again what happens when various mixes of strategies are followed. And in this two by two box, the first number in each box is the outcome. Call it the gross domestic product for example of country one, or group one, the developed countries. The second number refers to the gross domestic product of the second country, the one whose strategies are represented by the columns of this two by two matrix.

942So look at the box of mitigation, the one that is circled here in which both country one chooses mitigation strategy and country two chooses mitigation strategy. In that case, each has a gross domestic product of 130. Again, an arbitrary number, but for purposes of illustration.

Now go directly northwest to the business-as-usual, business-as-usual box. Where country one has not undertaken mitigation policy and country two has also followed suit and not undertaken mitigation policy. In that case, the gross domestic product of these two countries is a 100 and a 100. They’re worse off by virtue of the fact that they have failed to mitigate CO2 emissions. Well so far so good.

Clearly moving from the northwest box to the southeast box according, down that diagonal is a Pareto improvement.  Both parties are made better off. It’s like the graph that we looked at earlier, depicted in a different way where one moved from the BAU point to point C, the cooperative point.943

And both parties to the negotiation are left better off.

You might say, that’s the end of the story. Unfortunately it’s not quite the end of the story. Consider the situation where both countries have agreed to mitigate and they then go home and plan their national policies. And country one follows through and says, we have a good agreement, we’ll mitigate. Country two says, you know mitigation is pretty expensive actually. And we get some of the benefits of our mitigation, but so does the other part of the world.

It spills over. What would happen if we actually reneged on our promise and we decided that we would carry on with business-as-usual. Maybe we’ll give some nice speeches about the importance of our agreement, but we’ll carry on with the old energy policy?

The outcome is then shown in the lower left-hand side of the box, in the southwest corner. In this case, country undertakes the extra cost of mitigation. Country two does not. And according to the illustration that I’ve made here, country one ends up with a GDP of 80 because it’s made a big outlay of mitigation and the other country has still contributed to wrecking the climate by not undertaking and following through on what it promised to do. The other country is left at a 150.944

Yes it bears the climate damage, but it has not undertaken the added expenses of the deep decarbonization. The outcome from a world point of view is worse. Total output is 230, adding 80 and 150. The world suffers as a whole compared to the 260 gross world product of the all mitigation box in the lower right-hand corner.

But the fact that country two reneges on its commitment has left it actually better off and left country one materially worse off. And so one would say, this is not such a stable equilibrium after all, because once the agreement is struck, if it’s possible for country two to wriggle out of the agreement then we would have as you see, a kind of arrow from the lower right-hand box to the lower left-hand box, from the southeast to the southwest. And country two is made better off.

Ah, but of course it won’t stop there. Country one asks itself a question, I have followed through, we have honored our agreement, country two has not, should we continue to follow through or should we revert to a lower cost strategy? Yes, leading to worse climate outcome, but enabling us to avoid this very heavy and very unfair burden that we’re now bearing. And so country one asks itself, what will happen if we now move to business-as-usual contrary to our agreement? Aha, now it’s true the climate is worse off even more but we also thereby escape this heavy burden of deep decarbonization and so we too are going to move from our mitigation profile to a business-as-usual profile.

And that leads the arrow up from the southwest to the northwest. And where does the world end up once again? In the business-as-usual scenario.

It seems paradoxical. Both countries are worse off than if they had followed through on the cooperation. But this is the essence of the prisoner’s dilemma. If there is no way to enforce an agreement, even a Pareto improving agreement that leaves the world with 260 in world product and leaves countries much better off in both cases compared to the business-as-usual where the gross world product is only 200 and each country is worse off than in the cooperative agreement, nonetheless it doesn’t stick.945

What is said in formal game theory parlance is that the business-as-usual path or decision-making is actually the dominant equilibrium of this game. Country one best chooses business-as-usual, no matter what country two does. Country two best chooses business-as-usual no matter what country one does. And lo and behold, both countries end up with a wrecked world climate and a wrecked national environment.

It’s paradoxical, but it is the paradox of the prisoner’s dilemma. The question therefore in cooperation in many, many circumstances is not only to identify the Pareto-improving pathway, but to insure that countries, once they reach the agreement cannot renege on it.

Now there are many circumstances where this kind of game theory, prisoner’s dilemma structure might apply. And we’ve not been powerless in the face of this challenge. There are examples one can draw in arms control for instance where both countries are better off if both sides agree to limit their armaments. But the tendency is for one country to renege on its arms control promise if the other is reneging. And both end up being driven to a continuing arms race even though both countries would be better off with a firm and solid and enforced agreement of arms control.

Does this mean that arms control is impossible? No, not at all. It means that one needs to add provisions for monitoring, for verification, for checking on interim steps, for transparency, for closing down various options to renege on an agreement, for institutionalizing a pathway of arms control in that instance or of mitigation in our circumstance so that it’s very costly for countries to make a U-turn or they are quickly exposed and quickly denounced, or in certain circumstances, there are penalties.

Now when two parties make a contract in their economic affairs, a supplier and a buyer for example, and they sign a contract that leaves each better off, perhaps there also would be an incentive for one or the other or both to renege on the contract. But when it’s a commercial contract, typically there’s a court of law in which one party can sue the other party and get enforcement.

And that is a basic mechanism of enforcement s rule of law and a third party enforcer. Perhaps in the end, the sheriff, the prosecutor and a jail sentence for violating a, a contract, or a massive fine.

In the international setting when 193 governments are going to agree on climate terms in Paris, there isn’t a sheriff, there isn’t a prosecutor, there isn’t an international court that can enforce a decision, so we need different mechanisms. What are some of the mechanisms in international treaties, whether it’s arms treaties or climate mitigation treaties?

Well there, there can be penalties imposed in some circumstances. Even financial penalties for example in violating certain trade agreements. There can be opportunities for countries to retaliate. If one country reneges on a promise, the rest of the countries can say, we will not import goods from the country that’s not undertaking climate change mitigation. We’re going to put on border taxes for example. So there are many proposals that are under consideration right now, either for penalties, for forms of retaliation, for trade policy that can help to enforce agreements.

Of course even more important than this typically is the transparency and the reputation of governments and the fact that any kind of U-turn requires a tremendous publicized effort that gives the rest of the world the opportunity to say you must not do that. It’s not foolproof for sure, after all, the United States signed the Kyoto Protocol, though it never ratified it. Other countries that signed and ratified the Kyoto Protocol didn’t live up to it and they were not hauled off to court because there was no court to haul them off.

This is a reality therefore and it is the reason that I want to emphasize that another consideration in addition to efficiency, fairness, adaptability, flexibility is the question of enforceability, reputation, even punishments or retaliation if countries don’t follow through.

We’ll be discussing those options when we talk about these issues in the global online negotiation early next year. It’s not as if there is any ironclad principle in this. But the question of enforcement absolutely will be present because countries will be making so-called legally binding contributions under COP21 and the question is what are they really binding to?


Main Challenges of Climate Change Negotiations III

What is Fair?

We’re discussing climate negotiations, but at an abstract level. The concepts of efficiency, of fairness, of uncertainty, learning, adaptability of the framework.

In this chapter we talk a little bit more about fairness. Fairness is a big important concept and it’s a loaded one because of course fairness is in the eye of the beholder very often.

What’s fair, by what standards? How can we judge? And when it comes to climate there has been no shortage of debate over these concepts.

I suppose the most intuitive and basic standard of fairness that has been presented is that countries should share equally in some sense, perhaps equal per person in the amount of the atmosphere that they fill with greenhouse gases.931

So if we have a carbon budget, that carbon budget should be an equal allocation across countries. We saw in the first chapter of this lecture that as a strict operational guideline, that could be quite problematic, because if each country is imposed upon, to have a very particular level of emissions per capita or an equal level of emissions per capita or an equal budget of rights for emission, the costs of honoring the 2-degree Celsius carbon budget could be extraordinarily high, much higher than they otherwise would be. So we already modified the strict equality of emissions which of course needs a lot of more detailed definition to account for the fact that negotiations should aim in some way to minimize the economic costs incurred in reducing the carbon load, but at the same time there should be side payments from some countries to other countries in order to share the burden in a fair way.

Perhaps some equal sharing per person could be viewed as fair. On the other hand, there are so many footnotes to defining equal emissions that we quickly enter a quite complicated and though well-trodden terrain. For example it was pointed out by the government of Brazil and others many, many years ago that since the greenhouse gases are long-lived, the flow of emissions is not really a measure of allocation, rather the cumulative emissions or the stock of carbon dioxide associated with emissions from one country or another should be taken into account.

932And this means that many countries and I think it’s a, plausible argument though one not accepted on the other side that countries like the United States which historically have been the very large emitting countries is terms of fairness have a historical responsibility that reflects the fact that the U.S. has used up a significant part of the carbon budget in the past. But there are other complications as well.

Today, many of the major emitters are industrialized middle income countries, of course China is the world’s largest emitting country. And one can point to China and say, It’s only fair now for China to cut emissions significantly.

Now this is certainly true from an efficiency point of view because without reductions of China’s emissions there’s no way to stay within the 2-degree Celsius limit. But China has another point in terms of the burden and that is China says, yes we are emitting lots of CO2 when we produce the products that you like so much and that we export to you. Why do you attribute the carbon dioxide of our industrial products that are for your use, to us?

Why not attribute the carbon dioxide from our products to the ultimate beneficiaries of those products? This has given rise to two columns of classification of CO2 emissions, those on the basis of geography of production and those on the basis of end use.

They say that if Americans import an industrial product from China and enjoy that industrial product, the emissions that were part of the process of producing that product should go into the tally of the U.S. column, U.S. responsibility, as, as opposed to China’s column. So already we can see from historical responsibility, physical geography the net trade that countries have somewhat different ideas about what is fair.

Some countries say, look we have no way to undertake this, these emissions reductions because we lack the kinds of renewable energy. Our mitigation curve is very, very steep. Don’t ask us to do much of anything. That may be again, part of an efficiency argument.

What responsibility do those countries have however from a financial transfer point of view? This again shows the difference of who undertakes which technology and systems measures and who pays for them?

That can be two distinct concepts. Many developing countries say, you miss the whole point, this is all very particular and rather arbitrary to judge fairness on the basis of accounting of carbon emissions, whether by production or consumption, historical cumulative or annual flows. We demand in fairness our right to develop. Here are rich countries that are saying we need a more expensive energy system, but we’re poor. And we feel that fairness ultimately is about our right to develop, not our sharing of a particular level of burden of mitigation.933

And there’s also a strong point here and that’s why putting the climate change negotiation within the broader framework of sustainable development and within the broader framework of the sustainable development goals is important because the right to develop is part of sustainable development.

Poor countries need to be assured that the climate negotiations are not slamming the door on their ability to get out of poverty or to narrow the income gaps with the rich countries.

But there are many, many other areas of fairness that need to be considered. What about the fairness between the present generation and the future? You might say that the current generation is being unfair in leaving a very dangerous climate to future generations. There is a lot of truth in that. On the other hand, members of the current generation, that would be us, might say, well why should we undertake all of the costs of emissions for an improved environment for future generations? Let the future pay part of the costs that we incur today. Is that possible that we incur the costs, but the future pays for them? Well it is in part, if we finance some of the mitigation efforts through public debt rather than through current outlays. In that case, future generations through their own taxes will be servicing the debt that was used to finance the current mitigation. So we have a question of fairness between the present and the future which goes in two directions.

The argument about who’s really being fair to whom, or unfair to whom is a very interesting and, and obviously extremely pertinent question.934

There’s another question that’s almost not asked at all by many countries but it’s of great concern to a few and that is what about fairness to countries that produce and export oil or gas or coal? Is it really fair just to close up our market, to crush our economy? Don’t we need some kind of compensation?

If you say, that the world can all benefit from climate mitigation, what about us in the Arabian Peninsula where we have an economy that depends on oil and gas? Or what about Australia or Canada or the United States? Or Venezuela? Or Angola? Or Mozambique? Or other fossil fuel producing and exporting countries, should there be fairness for them? Or should the mitigation efforts which will limit the demand for fossil fuels and thereby lower their market price, at least in tendency, just leave those countries worse off, maybe even crushing their economies? Or should fairness also apply to the balance of gains enjoyed by the consuming countries and the producing countries? When we allocate rights as it were per person, we’re not taking into account that issue at all. And many oil exporting countries say, no thank you.

They’re also saying by the way, we’re not even going to agree on this unless there is a Pareto improving outcome of the negotiations. Why should we absolutely suffer massively for the sake of other countries? Let’s enjoy the spirit of global cooperation where we can all benefit. So this is a kind of fairness that typically is not being discussed. What about the fairness regarding companies? We have a couple of dozen oil, gas and coal giants that are responsible for a huge proportion of the emissions in terms of the fossil fuels that they 935produce.

They’re often just on the sidelines. What is the fairness vis-á-vis Exxon Mobil? What’s the fairness vis-á-vis Chevron? What’s the fairness vis-á-vis any of these big companies, BHP Billiton or Peabody Coal and others? Don’t they have responsibilities? Isn’t it fair for them, these companies that have reaped huge profits over past decades, vast shareholder wealth, but imposing huge costs, or at least their products are imposing huge costs to bear some of the burden? It could turn out even to be a legal burden, not only a moral negotiating burden.

Often companies that have products that cause large damages, say the asbestos companies in the end face huge liabilities. These cigarette companies have paid huge damages, rightly so, it’s a killer product. And they’ve ended up paying very large taxes as what’s deemed to be both efficient in reducing cigarette smoking and fairer in terms of allocating the costs and compensating some of those who have had family members die as a result of smoking addiction or lack of awareness and, and so forth.

So the questions of fairness also come in at the individual country level. And poor countries have a different position on fairness. Their argument is we’re poor, we need help. There is a lot of merit in that. I would say every great religion in the world for 2,000 years or more has emphasized the moral commitment to help the poor. And here we have a challenge of higher costs or additional efforts needed to have a cooperative global agreement. The poor countries need help, the rich countries have acknowledged this. They’ve already promised a $100 billion dollars per year by 2020 in transfers from the rich countries to the poor countries, but they haven’t said yet, how, in what way, what specificity.

And interestingly, recent, in a recent meeting a delegate from China said in the context of negotiations, well many countries are calling for legally binding commitments on mitigation, what about legally binding commitments on financial transfers? Isn’t that also part of the fairness? So you can see that that also adds of course a, a huge layer of complexity.

Now if you are the Philippines or Haiti or Honduras or other parts of the world in the line of fire of tropical cyclones, hurricanes, typhoons, or if you are a country like Syria or, which has faced human disaster, geopolitical disaster, ecological disaster, because of increased drought frequency, all this talk about fairness limited to who is emitting what and who is mitigating what also seems beside the point. What about the damages? What about the costs? Some countries will face costs that are rather modest. Other parts of the world will face enormous costs, even within a 2-degree Celsius limit.

And that’s why at COP19 in Warsaw at the end of 2013, governments said that part of fairness is compensation for losses and damage. But they haven’t defined the mechanisms and the specificity. All of this is to suggest that when we enter into the hardcore negotiations that are coming up and we’re looking at efficient ways to stay within the 2-degree Celsius limit, we’re looking at effective ways to learn, to adapt, to develop new technologies and we are looking for standards of fairness.

We’re going to have to keep an open mind because fairness has many different dimensions, many different aspects. It includes the right to development, it includes the right for compensation of losses and damages. It includes responsibilities of companies, not only countries. It includes historical responsibility. It includes the obligation towards the poor. And all of these aspects of fairness are legitimate, they’re part of the global discourse and they will absolutely be part of the negotiations in the coming year up to COP21

Main Challenges of Climate Change Negotiations II

Basic Principles of a Global Agreement

We’re talking about the concepts of the climate change negotiations. It’s a more abstract lecture than the others. The numbers that I’m giving are made up. Of course I’m trying to use numbers that are illustrative but they’re mainly illustrative of concepts. And though it’s somewhat abstract, I think these concepts are important.

921We discussed in chapter one the concepts of Pareto improving negotiations, the concepts of efficiency and of fairness or equity as distinct aspects or gauges of a negotiating agreement.

I want to review many of what you could call as the headings or the chapter titles of a negotiation agreement. Again, not in the literal sense of how the negotiations will be written down, that we’re going to do in the global online negotiations next semester, but more in the conceptual sense.

What are the headings that negotiators need to be attentive to to reach a fair, efficient, meaningful agreement?

So let’s start with the essence of this course. The agreement has to move the world to deep decarbonization. Our theme is that when one looks at the costs of mitigation and the benefits of mitigation, staying under the 2-degrees Celsius limit is absolutely imperative. The damages of going beyond that are so great, the risks are so high that the marginal benefits of mitigation drive us to ensure that we stay within the limit.

And the technologies that we have available and that we can develop to reduce carbon emissions are sufficiently good that it makes sense for the world to negotiate on the basis of its commitment to 2-degrees C as absolutely the upper bound, the limit of climate safety. A second standard which we introduced in last lecture is efficiency. And that is that if we’re going to undertake deep decarbonization, this should be done in the least cost way.

The world shouldn’t waste resources arbitrarily in reducing carbon emissions, it should find the way to move from the business-as-usual to a safe, deep decarbonization pathway in an overall, least cost manner.

But we also discovered that simply applying a naive efficiency criterion alone isn’t enough because efficiency might leave the burden of adjustment unfairly on one particular group of countries.

So we need to introduce concepts of fairness alongside concepts of efficiency.

Efficiency think of as low cost, least cost, but fairness is who actually bears that cost in the end? And since countries can make financial transfers to each other, that’s one way of reallocating across countries some of the economic costs associated with climate mitigation.

Now a phrase that has been central to these negotiations from the very start of the U.N. Framework Convention on Climate Change is common but differentiated responsibilities.

This is the concept that the world as a whole has a shared responsibility of climate safety. All countries signed onto that from the poorest to the richest. But these are differentiated responsibilities and CBDR, (common but differentiated responsibilities) conveys within it not only different capacities, different marginal costs of mitigation, but also fairness, that countries have different responsibilities to justice, globally.

Rich countries have more financial capacity, more economic capacity, more historical responsibility and therefore they should pay their fair share. That’s not the end of the negotiations.

If this were a one-time exercise, one moment of negotiating, say a purchase and sale of a house, we might stop there, what’s efficient, what’s equitable?

But we’re talking about a complex process over many, many decades and therefore it’s not surprising that there are other headings of the negotiations. One key concept is that what we know about what to do and how much to do and the ways to do it will evolve over time.

Our understanding of the science, our understanding of the risks and crucially our technological options are going to evolve over time.

So one heading of the negotiations is about updating. We have to go into these negotiations understanding that this is a dynamic process, it’s an adaptive process. Adaptive not in the sense of adapting to climate change, but in the sense of adapting to change in global realities more generally, new information, new technologies, new awareness, new science, new understanding of what should be done. So we need systematic updating.

As the climate science changes, we may come to understand that 2-degrees centigrade is too much. Maybe we really have to aim for one and a half degrees Celsius for the true margin of safety. This is something that climate science might reveal to us in the coming years. Alternatively, we may find that 20 billion tons of CO2 emission relative to the baseline per year is too low because wonderful breakthroughs occur in solar or wind power and electric vehicles or in carbon capture and sequestration or fourth generation nuclear power that allows us to go even farther than that.

And so we need that kind of updating, resolution of uncertainties, learning and investing in new knowledge, especially investing in new technology.  And a technology blueprint process, creating a roadmap and investing in the research and development and the demonstration and the diffusion of these improved technologies will be a crucial part of any successful agreement.

More generally the parties to the Framework Convention talk about the means of implementation. They say, okay, this is all fine concepts. Two degrees no problem. They don’t say, no problem, but they say, yes we understand the concepts, we understand the concepts of sharing the burdens. But what are the real means of implementation? What do they mean by that?

They mean first, what policy instruments are going to be chosen? Will there be common worldwide instruments? It’s been a dream of some, not one that I share, but it’s been a dream of some that there should be one global market of emissions permits. And that that would set one social cost of carbon and that would drive an efficient, low-cost solution. That is an example of trying to put one single policy instrument inside the negotiating framework perhaps to reach a desirable outcome.

921Another example that’s suggested is a single price on carbon in the form of a carbon tax. Or it could be a single regulatory standard which says, no country shall engage in the construction of new coal fired power plants unless they are fully equipped with carbon capture and sequestration technology.

So policy tools are one part of implementation. Leave them to the countries or have them at a global scale.

A second of course is financing, who’s going to pay for all of this? What’s going to happen with the poor countries? How can countries that need technologies that are owned by businesses in other countries access those technologies? Do they have to pay large royalties? Do they have to pay monopoly rents to a monopoly holder of such technologies?

Then another aspect of implementation, absolutely central is of course developing the technologies that enable us to stay below the 2-degree C limit as Emmanuel Guerin has emphasized and put into tremendous detail in earlier lectures. There’s also the question of capacity building which has been part of all of the agreements.

Some countries simply need help technologically, not in the form of what’s embodied in machinery, but in the form of training of local engineers, local regulators and so forth in order to be able to implement a program or a new system or a new technology of low-carbon energy. And then finally one needs to remember that these negotiations cover not only mitigation, not only moving from the business-as-usual trajectory to the 2-degree centigrade limit, but also must cover all of the challenges of adaptation. Increasingly the treaty has incorporated concerns of adaptation. How to help countries adapt to the ongoing climate change? How to become more resilient? How countries can be insured in a way for losses and damages that they incur when they’re hit by a massive tropical cyclone or a massive inundation, or a terrible drought that, whose frequency and intensity is being increased by the ongoing climate change?

So the adaptation agenda is another chapter of the full agreement. You see we have the hands full, with all of this countries are asking what does this mean for us? What are we going to have to do? What burdens are we signing up to? Can we actually meet those responsibilities technically, legally, economically? And who’s going to pay for all of this? Just ourselves? Will we get help? What’s the basis for that kind of sharing of the economic and the financial costs? We now turn in more detail in the next chapter to this question of fairness.


Main Challenges of Climate Change Negotiations I

Efficiency & Fairness

Where I want to talk about the concepts of negotiation. We’re entering a negotiation among the parties to the U.N. Framework Convention on Climate Change, the 193 parties. A few are very decisive parties to the convention, the largest economies, the largest emitting countries. They’re going to be bargaining with each other. And the question is what is the nature of that bargaining? What are the problems, the challenges, the obstacles? What’s the right way to reach a cooperative agreement? What are the barriers to reach cooperation? That’s the subject of this lecture.

I’m going to ask you to bear with me as we introduce some economics style diagrams. You’ll have a chance to practice those in some assignments and some special problems to hone your skills on these kinds of diagrams that are standard for economic analysis.

The lecture is about the, two crucial concepts of negotiation, efficiency and fairness. And it’s important to keep these concepts distinct. And I’m going to use a lot of examples to highlight the differences of efficiency and fairness.

911We’ll start with a, an economist’s diagram that links the amount of mitigation that’s undertaken, that is the reduction of CO2 emissions shown on the horizontal axis and measures for any given level of emissions, the cost of an incremental increase of mitigation or an incremental reduction of a ton of CO2.

What you see here is a rising curve, essentially drawn as a line. The more mitigation that’s undertaken, that is the more reduction of CO2 emissions compared to business-as-usual, the higher is the cost of each incremental tone of carbon dioxide that is pulled out of the emissions or sometimes it’s called the marginal cost of the emissions. And when you see a rising curve or a line such as this, it means that the marginal cost of mitigation is increasing.

The first few billion tons of CO2 that are reduced compared to baseline don’t cost very much, maybe it’s a bit of insulation in, in the homes, a bit of energy efficiency, turning off the lights when they should have been turned off in the first place. Improving some of the efficiency of industrial operations.912

But if you want to get deeper reduction of CO2, you have to introduce new technologies, maybe not just efficiency but substituting coal fired power plants by wind or solar plants. Now those can be cleaner, they can be environmentally safer of course, but maybe they’re more expensive to implement than a standard baseline traditional coal fired power plant. And so to implement that next stage of emissions reduction or that incremental mitigation of emissions, it’s going to cost more to reduce that extra ton of CO2.

If you continue and we want to drive carbon emissions way, way down, perhaps using really very fancy technologies, the direct air capture of carbon dioxide in the air and then sequestering it geologically, at least with the technologies we have right now, each ton of carbon dioxide that is removed from emissions using that technology would be very expensive, perhaps hundreds of dollars per ton of carbon dioxide reduced.917

The result is this upward sloping schedule or curve as we would say in economics, linking the extent of mitigation on the horizontal axis with the cost of each incremental ton of carbon dioxide removed from emissions compared to the baseline. Those are the costs. What about the benefits of doing this?

Well that’s a different kind of curve. Again, we put on the horizontal axis, the extent of mitigation compared to a business-as-usual trajectory and on the vertical axis we measure in dollars per ton of carbon dioxide reduced emission, now much benefit there is.

Now why is there a benefit of lower emissions of CO2? Well that’s what we’ve been talking about for many lectures now. The climate will be safer. And the idea is that at a low level of mitigation compared to baseline, we would have a huge increase of temperature. The baseline, the business-as-usual remember is an increase of temperatures of maybe four or even six degrees Celsius. So at that point, incremental warming is disastrous. We’re already suffering massively and any further warming adds to the disaster. That means that the benefits of mitigating carbon dioxide, of reducing emissions are very, very high. That’s why the curve is at a high vertical point at low levels of mitigation.

913But suppose we’re successful, we have deep Decarbonization and a lot of carbon dioxide is reduced from the emissions flow because of a successful change of the energy system? Suppose that we reduce carbon dioxide enough so that the temperature increase is held even to one degree Celsius or one and a half degree Celsius, a very deep decarbonization of the energy system? What would the gains be of a further reduction of carbon dioxide at that point? Well maybe because the climate is already stable, if there has been a lot of mitigation, an incremental reduction of yet another ton of CO2 wouldn’t really get too much benefit for world society. And so the amount of benefit shown on the curve for a high level of mitigation, that is the marginal benefit of an extra ton of carbon dioxide removed through further mitigation would be a quite low level.

That’s why a marginal benefit curve or schedule as is sometimes said in economics would be downward sloping. At low levels of mitigation, in other words, being close to business-as-usual, every ton of CO2 is really a burden for society.

914But for very high levels of mitigation, so that the climate is already in the safety zone, further extent of mitigation would not add so much benefit. Now the trick of economics always is to put a cost and a benefit schedule on the same graph as is done here.

And the miracle of economics is where the two curves cross. Why is that? Again, on the horizontal axis we have the extent of mitigation, on the vertical axis, the costs and benefits of an incremental ton of carbon dioxide removed.

Whenever the benefit curve is above the cost curve, which is towards the left-hand side, it means that the cost of removing one more ton of carbon dioxide is less than the benefit that society enjoys by that carbon dioxide being pulled out of emissions.

915In other words, the climate safety that is the result is worth more than the direct extra costs of undertaking that mitigation through some kind of deep decarbonization program. On the right-hand side, where the cost curve is above the benefit curve, it means that further units of carbon dioxide reduction are more costly per ton than the benefits that society enjoys by having that extra ton of CO2 pulled out of the emissions stream.

916Everything measured compared to the business-as-usual. Well  What is the social optimum? What is the optimal extent of mitigation? It is where the marginal benefit of removing an extra ton of carbon dioxide equals the marginal cost of removing the extra ton. And that’s shown in this case at a level of mitigation of 20 billion tons of CO2.

Think of that as the reduction in the flow of carbon emissions, say in the year 2050 and on the vertical axis, that cross occurs at a level of $50 per ton of CO2. What does that $50 signify?

917It signifies that in terms of the cost of mitigation that is the cost incurred for that last bit of mitigation undertaken at a level of 20 billion tons CO2 removed and it signifies that the benefit of removing that CO2 is the same, also $50 per ton when you factor in how much climate damage is avoided by having that extra ton of CO2 removed.

Now we give a name for that equilibrium point. That is called the social cost of carbon dioxide. It is the measure both of the benefit of removing that ton of CO2 and in a social optimum policy, it is also the cost, because you want to go just to the point where the extra benefit and the extra cost or I should say, the benefit of the extra ton removed and the, and the cost of the extra ton removed are just equal.

Now does society benefit from undertaking that level of mitigation? It sure does, because for that level of mitigation effort, removing 20 billion tons of CO2 per year, the costs of removing that CO2 is less than the benefit, unit by unit, just up to the last ton of CO2 that’s removed.

918And you can compare the benefit level for an incremental unit of mitigation on the upper curve with the cost of reducing that level of CO2 on the lower curve and that vertical distance is the net social benefit, the benefit minus the cost of undertaking that level of mitigation.

Well if you add up all of those units of mitigation effort up to the 20 billion tons removed, each one of them has a benefit level higher than the cost level. Add up all of those and you get the area between these two lines.

When you take the total area, as we would in basic geometry, you can say, that’s the sum of society’s gains from this mitigation effort. And in the particular diagram that I have here, that would add up to one trillion tons, that’s the area of the triangle shown as the difference between the marginal benefit line and the marginal cost line. So far so good.

This is the basic economics of why we want to undertake deep decarbonization in the first place, because the benefits of the safer climate, unit for unit of emission reduction or emission mitigation are higher than the costs, unit by unit of CO2 emission reduction.

919Now comes the big issue for negotiations. If we were just one person or one country, we’d probably work out more easily, okay, let’s have a 20 billion tons reduction, our society is going to benefit and we’ll undertake these costs, the benefits will be bigger than the costs and we’ll figure out how to do that.

But now suppose we have two countries, or two regions or the developed world and the developing world. Of course it’s even more complicated. We have a 193 countries that are party to this negotiation, it’s a little hard to draw with 193 countries, so I’ll stick with just two negotiating countries. Think of them as the developed countries and the developing countries. And think of these on the horizontal axis for the moment as country one or region one.

And on the vertical axis is country two or region two. And for simplicity, think about this as the income or the well-being of these two groups. Now before we undertake the optimum deep decarbonization, there’s a certain level of income of country one and country two on the baseline or the business-as-usual trajectory. Of course that’s a path of incomes over many years but I’m compressing this to just one point of time, just to give us clarity of the discussion.

And if we graph the level of income of the first country and the level of income of the second country, just on a, a normal plane, we’d have a point which is shown as the business-as-usual point. Now we can do better than the business-as-usual.

That’s the beauty of the fact that at low cost we can reduce carbon emissions and enjoy benefits, for instance, more productivity of agriculture, better human health, more safety as a result of that reduction.

So we can actually have both country one and country two enjoy higher income than in the business-as-usual point. And indeed we can draw all of the potential levels of income of country one and country two on a downward sloping line that says if the world income is allocated all to country two, the point would be on the vertical axis, country two would have all the income, country one would have no income.

That would be pretty miserable for country one. On the other hand, if all the income is allocated to country one, we’d be on the horizontal axis down in the bottom right of that curve. And more normally, both country one and country two would have some level of gross domestic product. And the beauty of climate mitigation is that both of these countries can be better off than they were at the business-as-usual level.

So start at the business-as-usual income point for these two countries and there is a range from point A to point B of what’s possible for how to share the improvement from climate control. And point A, country one is made a lot richer through climate control and country B is left off just as it was in the business-as-usual baseline. At point B, country two reaps all the benefits from climate control and country one is left just as it was in the baseline, the business-as-usual path. Country C is the sweet spot.

It is the cooperative agreement of both country one and country two to say, let’s share the increased well-being that will come from undertaking an optimum global mitigation effort.

We’ll share the burden, we’ll both benefit from a safer climate and we’ll both be left better off than we were in a business-as-usual trajectory. That is what’s called in negotiations, a Pareto improvement. Pareto is the name of a great Italian economist and sociologist at the beginning of the 20th Century, Vilfredo Pareto. And Pareto said, an improvement in a bargaining situation is when all parties of that bargain are better off than they were in the baseline or in the business-as-usual situation. So shifting from BAU to point C is a Pareto improvement.

Now let’s try to understand how this will work at the country level. And we’re going to see a problem now.

I’ll start with a simple case and then we’re going to go to a more complicated problem. Let’s start with a symmetrical situation where these two groups of countries have the same technologies, basically the same income levels, the same potential for mitigation, the same gains from successful climate control.

So the first country, we’ll call it the developed country group, has a mitigation, marginal cost curve, like the one we saw that’s shown here. And this is a schedule of mitigation costs up to ten billion tons per year, reduced by the developed countries compared to the baseline. And I’m going to draw this curve backwards for the developing countries.

Now you go from no mitigation in the bottom right-hand origin of this curve. It’s now reversed in direction. And as you move to the left of that diagram, there’s more mitigation being undertaken by this second group of countries, country two,which I’m calling for our purposes, the developing countries.

If I superimpose these two figures and say that the world as a whole is going to undertake the optimum level of CO2 reduction of 20 billion tons, the one we found in the earlier diagram and we superimpose these two symmetric cost curves they meet right in the middle, where the developed country group reduces by 10 billion tons, the developing country group reduces by ten billion tons and the marginal cost of mitigation for each of these countries is the same, $50 per ton of CO2 reduced.

That’s also the social cost of capital in equilibrium for the whole world. So we have a situation where there is one social cost of capital that applies to both negotiating parties.

They each mitigate in this case, half of the total world need. They share the costs. They have equal benefits. And if the world were so balanced, we probably wouldn’t have any difficulty in reaching such a symmetric, balanced, obviously fair equilibrium.

Now here’s a problem. What if the cost curves are very, very different? And different in a way which is, I’m going to put it in a way which some people will object to, but actually could be realistic.

Suppose that mitigation is actually more expensive in the high-income countries and less expensive in the low-income countries? Why would that be? Well the high income countries like the city of New York where I’m sitting right now has an infrastructure that was built 50 years ago or a 100 years ago. To retrofit that is incredibly expensive. We spend billions of dollars to add a kilometer of subway miles in this city, whereas if you’re building a system from the beginning, it’s much less expensive.

For a developing country that is fast-growing, but is building its infrastructure for the first time, it may be much less expensive to build a green field plant that is clean and low emitting than to retrofit an old plant.

The result is peculiar because now we have a steep marginal cost curve of the high income, or the developed countries, that’s shown starting from the left-hand side of the graph and the upward sloping line that is quite steep. And we have a relatively flat marginal cost curve of the developing countries signifying that the cost per ton of carbon dioxide reduced just doesn’t increase all that much for the developing countries.

Now here is the paradox or the problem in terms of fairness and efficiency. What would be for this kind of world, these two blocks of countries with these distinct cost curves the least cost way of reducing total emissions by 20 billion tons?

It would be where the marginal costs for the two groups of countries of mitigation are equal. That’s where these two lines cross. And interestingly, because it’s cheaper and the marginal costs of mitigation are lower in the developing countries, the least cost worldwide formula for reducing 20 billion tons of CO2 emissions is no longer  symmetrical, it’s that the developing countries should do the hard lift.919a

They should do 15 billion of the 20 billion tons of emission and the developed countries, only 5 billion of the 20 billion tons. That way the total cost that the world would bear in reducing the emissions, which comes out to a total cost of $600 billion dollars in this example would be minimized.

But the developing countries would say, are you crazy? That is so unfair. Yes, of course we could do it more cheaply, but take a look Professor Sachs, you’re asking us to bear $450 billion dollars of the $600 billion cost, whereas the rich countries who are richer to begin with would only be bearing a $150 billion. Why should we be the ones to undertake all that mitigation? That’s not fair.

So perhaps developing countries would suggest, even given the asymmetry of costs, a solution like this. Some negotiators might say, look, fair is fair, we’ll each do ten. We’ll do half each. The rich countries mitigate by ten billion tons, we’ll mitigate by ten billion tons and that will be it.

Now if you look closely at this graph, the problem is that this is a very expensive solution for the world as a whole, though it is cheaper for the developing countries. In this case, the rich countries are spending a tremendous amount for those incremental units of mitigation, the amount of mitigation between five and ten billion tons that they are bearing compared to the previous diagram.

In fact, if this equal division is taken then in this case the developed countries would have $600 billion dollars of mitigation costs, the developing countries, $225 billion, the world total cost of undertaking climate change mitigation would therefore be $825 billion dollars compared to what was $600 billion dollars before.

Fairer? Absolutely fairer in some sense, but more expensive? For sure. So not very efficient but perhaps more equitable.

Now the rich countries would say, okay, that’s not equitable, you’re making us pay a tremendous amount for this. Yes, it’s divided 10 and 10, but you understand, we have to retrofit. You have green field, how about if we each bear an equal share of the costs? Well if you get out a pencil and paper and take the specific assumptions and solve a little quadratic equation, it turns out in the example of this diagram that the equal cost sharing would have the developing countries mitigate 13.2 billion tons and the high income countries reduce 6.8 billion tons for that total worldwide reduction of 20 billion tons.

Each of the two groups would be spending about $347 billion dollars or about $695 billion dollars for this total effort, $95 billion more than in the first example where the developing countries do more. So you might say, well that’s fairer. It’s a little bit less imbalanced. I suppose you can see where I’m about to go and that is that in some circumstances it’s possible to eat your cake and have it too. And that is, it’s possible to combine both efficiency and fairness in the negotiations. How can that be done? It can be done through side transfers.

The idea is that countries agree on a deep decarbonization pathway that minimizes the global costs of mitigation, but then countries make side financial payments to share the burden in a fair manner. So if we go back to the low cost solution where the developing countries put in 15 billion tons of mitigation, the developed countries only 5 billion tons, remember that that is the minimum cost solution for the world, 600 billion in total, the least cost all the examples. But since the rich countries bear only a cost in that case of $150 billion and the developing countries, $450 billion, one way to equalize the burden,

I’m not saying it’s the only to judge fairness, but one way to equalize the burden would be for the developed countries to say, let’s do it the least cost way and we will transfer a  $150 billion dollars per year to you, the low cost countries to compensate you for having undertaken the extra heavy lift. And in that case, each country ends up bearing a $300 billion dollar cost. The total costs are equally divided. And the total cost that is shared equally among the two sides is thereby minimized. Here is the bottom line. The bottom line is that because climate change is a disaster for the world, there are benefits, net benefits, economic gains to mitigation.

That’s the whole point of this course and it’s the whole point of the framework convention on climate change. Those benefits should be shared among countries. The idea of Pareto, that these can be benefits in which all countries gain is an important idea. So that every country sees the benefit of moving from the baseline. How do share? Well one can separate two concepts. The efficient mitigation is the way of reducing emissions at least cost for the world as a whole. The fair way is to share the costs appropriately.

We can do both if we’re smart, by having a least cost mitigation strategy worldwide and then having side transfers from rich to poor countries, if the poor countries are bearing an unfair burden in the least cost construction.

This I think I, and I hope gives some sense of the complexity of the challenge but also of the nature of the negotiations.

Countries need to formulate pathways so that we satisfy the 2-degree limit and then they need to formulate financial transfer programs so that the cost of achieving those pathways is fair.