Designing International Environmental Agreements

1. Designing International Environmental Agreements Original slides by Charles D. Kolstad (Plagiarized and edited by Robert Mohr)

2. Two types of transboundry externalities • Regional externalities (acid rain) • Regional treaties • Trade policies (tariffs) • Sanctions • Global public goods • Global, multi-party treaties • This lecture focuses on the contribution to the global public good

3. Some Prominent Environmental Treaties • CITES—Convention on International Trade in Endangered Species (1973) • ICRW—International Convention for the Regulation of Whaling (1946) • Montreal Protocol on Substances that Deplete the Ozone Layer (1987)—a protocol of the Vienna Convention (1985) • Kyoto Protocol (1997) – a protocol of the UN Framework Convention on Climate Change (1992)

4. A Century of Environmental TreatiesNumber by decade of initiation

5. What’s the Issue? • Not a few but MANY environmental treaties • Some succeed; some do not • What makes a treaty work?

6. The Card Game Analogy • Each player is given two cards: one red and one black • Each player will anonymously hand in one card to Center • Payoff to each student after play of game: • 5 Euros for a red card in your hand • 1 Euros for each red card Center holds • Your task: figure out what to hand in to the Center

7. Card Game Strategy • Our class has 12 students. If all students hand red card into the center, then the payoff is €12 per participant. • If all students hold on to the red card, then the payoff is €5 per participant. • The “social good” is served by handing cards to the center. • However, the individual student can do even better than €12, provided that everybody else hands to center. • Maximum individual payoff = (N-1)+5, where N is number of students.

8. Your strategy • Hand in your red card • It yields far more to the group than if you kept it. • Society wants you to hand in your red card • Keep your red card • It is worth far more to you in your hand • Your payoff will be higher; society’s lower

9. Results • This experiment has been run many times • typically ⅓ -- ⅔ of people hand in their red card • When repeated with the same group, cooperation (handing in the red card) tends to decline • Analogous to transboundary environmental problems • Fundamental conflict between individual and group interests • Self-interest diverges from group interest • Powerful incentives to shirk your responsibility • Understanding how to solve card problem gives insight into solving transboundary environmental problems

10. Can an Agreement Solve Problem?

11. Can an Agreement Solve Problem? • What would the agreement involve? • Agree to hand in red card • Needs to involve everyone? Or is subset ok? • What should be in the agreement? • Penalties for cheating (ie, not handing in red card) • Penalties for free-riding (ie, not joining but benefiting from agreement) • Any other characteristics of agreement? • Should be self-enforcing (ie, no appeal to higher authority) • Must create an aggregate gain to participants • Goes into effect when x% of people agree • Agreement must distribute aggregate gain • If people are different, must have side payments • Must be in the self interest of individuals to join

12. Back to the Real World • Card game has lessons for the real world • Goal: identify desirable characteristics of international environmental agreements

13. National vs. International Fundamental Differences in Environmental Regulation

14. Desirable Attributes of a Successful Multilateral Environmental Agreement • Create an aggregate net benefit to participants • overall gross benefits > overall gross costs • Distribute the aggregate gain among participants • For each participant, benefits > costs (individual rationality) • Self-interest important in convincing country to agree • Deter non-participation • Must make it undesirable to remain outside agreement • Trade sanctions most frequently used • Design net benefits in > net benefits out (participation constraint) • Deter non-compliance among participants • Penalties must be credible • Trade sanctions are easiest to use • Deter entry of new non-participants (avoid “leakage”) • Particularly appropriate for common property problems • Saving a fishery increases rents and may induce non-fishing countries to enter

15. Closer Look at Two Major Treaties • Ozone protection in stratosphere – Montreal Protocol • Climate change and greenhouse gas emissions – Kyoto Protocol

16. Montreal ProtocolDesigned for CFC’s leading to Ozone Depletion • Ozone layer is 6-30 miles above earth (stratosphere) • Absorbs harmful UV radiation • CFC’s very stable here, but break down when exposed to UV light in stratosphere. Release chlorine, which reduces ozone • Result: thinning layer & “holes”

17. Montreal ProtocolDesigned for CFC’s leading to Ozone Depletion • Quantitative emission limits for industrial, transition and developing countries • Industrial countries pay for added costs to developing countries • Trade sanctions for non-participants and violators • Initial protocol modest; gradually tightened over 10-year period Projected Stratospheric Chlorine Source: World Met Org

18. Montreal Protocol: Recent News • Mexico closes Quimobasicos CFC production facilities, the largest manufacturer of CFCs in Latin America. This results in the total elimination of the country’s CFC production (Sept. 2005). • Bhutan becomes the 189th signatory. Will receive technical assistance and support for capacity building to sustain phase out (Aug. 2004). • “The campaign to protect the ozone layer represents an extraordinary success story…” ---UNEP Executive Director Klaus Toepfer

19. Montreal ProtocolDesigned for CFC’s leading to Ozone Depletion • Forecasts indicate that ozone levels should start to improve during this decade. • Recovery to 1980 levels not expected until the middle of this century. Projected Ozone Recovery Source: UNEP

20. Climate Change • Greenhouse gases capture infrared light • Carbon dioxide (CO2) 49% of proportionate effect • Methane 18% • NOX 6% • Water Vapor, CFCs, etc. • Human activity has increased the levels of these gases (compared to pre-industrial levels) • Carbon dioxide +30% • Methane +150% • NOX +17% • CFCs (Original level was 0) • Current increases at about 1.5% per year (overall)

21. Major Carbon Emitters (1999) • USA 25% • Western Europe 17% • China 11% • Other Asia* 8% • Russia 7% • Eastern Europe 6% • Japan 5% • Middle East 5% • India 4% *Other Asia excludes Russia, India, China and Japan Colored text signifies emissions primarily from Annex B countries that have ratified Source: McKibbon and Wilcoxen

22. UN Framework Convention on Climate Change – Kyoto Protocol • Emerged from Rio Conference in 1992 • US signed and ratified UNFCCC • Modeled after Montreal Protocol • Kyoto Protocol (1997) defines emission reductions for Annex I (developed) countries • Developing countries largely exempt • Penalties for noncompliance missing

23. Compare Montreal and Kyoto Adapted from Barrett (2003)

24. Net Benefits to US with and without MontrealBillions of 1985 US$ Source: USEPA (1988), reproduced in Barrett (1999)

25. Does Kyoto Pass the Cost-Benefit Test? • Several prominent studies say no, for USA. • There is no consensus, however. • Cost-benefit analysis differs if done for: • developed countries • developing countries • globally • Example: estimated damages of doubling GHG • 2%-9% of GDP for developing countries • 1%-1.5% of GDP for developed countries • See Barrett, tables 2 & 3

26. Major differences in models Estimates of environmental damages (benefits) • Discount rate • Uncertainty on the scale, timing and distribution of damages. • Catastrophic risk & irreversibility • Ancillary benefits Estimates of control costs • Depend on Speed of adjustment as well as scale • Irreversibility (in technological choices) and learning (abate later) • Capacity & willingness for consumers to substitute technologies • Importance of learning by doing (abate sooner)

27. Emissions and Costs from Kyoto(Estimate – some controversy here) Units: For emissions, billions of tons of carbon; for costs, billions of 1990 US$, NPV Source: Nordhaus and Boyer (2000). Assumes full trading of emission obligations; anthropogenic emissions only.

28. Kyoto Protocol: Recent News • Among the 36 industrialized “annex B” countries, nearly all have ratified. • Australia and USA signaled intent not to ratify. Monaco still in progress. • A total of 154 nations have ratified. • New York Times has this article identifying benefits to global warming. Should these be included in a cost-benefit analysis?

30. Lessons • Montreal has lessons for Climate • Kyoto has ignored most of the important characteristics needed in international environmental agreement • Small net benefits for climate has implications • Strive to reduce economic inefficiencies • Start small • Uncertainties important • Cost uncertainty is a major reason for reluctance

31. Further Reading • Scott Barrett, Environment & Statecraft (Oxford University Press, New York, 2003) • Scott Barrett, “Montreal vs. Kyoto,” in Inge Kaul (Ed), Global Public Goods (Oxford University Press, New York, 1999) [see also other contributors to this volume] • Carlo Carraro (Ed), International Environmental Negotiations (Edward Elgar, Cheltenham, UK, 1997) • Charles Kolstad, Environmental Economics (Oxford University Press, New York, 2000) • W. J. McKibbin and P. J. Wilcoxen, “The Role of Economics in Climate Change Policy,” Journal of Economic Perspectives, 16:2, Spring 2002, pp. 107-130