Climate Finance: Regulatory and Funding Strategies for Climate Change and Global Development

Afterword: Reflections on a Path to Effective Climate Change Mitigation

Climate Finance 311 Afterword Reflections on a Path to Effective Climate Change Mitigation Thomas Heller Professor, Stanford University Key Points • There is a danger that in the international community’s quest for a new climate agreement, we will lock things in too early around a weak arrangement, although the door is open for us to do much more. • Two of the major challenges to reaching an international agreement are: uncertainly about the costs and effectiveness of mitigation efforts ; and the conflict between developed countries that want to have global cap-and-trade and developing countries that do not. There are many challenges along the path to a meaningful climate policy framework, but two stand out as particularly threatening. The first is uncertainty. More specifically, there is a serious risk that nations will not undertake meaningful action because of the persistence of uncertainty surrounding the relative cost and effectiveness of policies designed to mitigate climate change. The second major challenge is the tension between the belief that a global cap-and-trade program is the best policy instrument to limit global greenhouse gas (GHG) emissions and the demand for fairness in allocating carbon caps among states, especially among developing nations. 312 Thomas Heller Unfortunately, the debate has often seemed stuck on this tension, but recent actions by developing nations have pointed toward a different way forward. A growing chorus of voices is arguing that we need to quickly create a framework that will help encourage and finance bottom-up mitigation actions in developing countries even in the absence of caps. Despite the promise of this approach, it remains on the margins of the mainstream climate change debate. In light of these developments, I am perhaps more afraid of a weak climate change agreement than no agreement at all. My fear is that a weak climate change agreement will result in complacency, and shut down efforts focused on building a framework to promote the changes that are already emerging out of the national policies of developing nations. This may be our greatest opportunity to mitigate global emissions reductions early, and we cannot afford to let it pass us by. Uncertainty about Mitigation Benefits and Costs Uncertainty can often have a paralyzing effect on both policymaking and investment. Societies and investors alike are averse to accepting policies with steep price tags when they are uncertain as to whether or not the benefits outweigh the costs. However, the risks of inaction are so great as to justify substantial investment in mitigation now. Recent reports (including the Stern Report) show that the costs of inaction outweigh, by a significant margin, the costs of action; that the current failure of markets to price carbon results in massive inefficiencies; and that the costs of postponing fixing the problem will only increase as time passes. However, the widespread resistance to climate change policies suggests that many politicians and voters do not believe in these conclusions or are afraid of the risk that costs will be much greater than predicted. Obstacles to Global Application of Cap-and-Trade A second fundamental challenge to our ability to limit global emissions in a timely fashion is the conflict between industrialized nations’ drive towards a global cap-and-trade system and developing nations’ resistance to national caps. Afterword 313 Industrialized nations have adopted or are adopting domestic cap-andtrade systems and have reached a consensus that a global cap-and-trade program would be the most efficient and effective means to address climate change. This consensus has emerged out of both scholarly literature and experience with actual policies, including failed attempts at imposing BTU taxes in the US and carbon taxes in Europe, as well as the success of SO2 trading programs in both the US and Europe. This understanding has already been embodied in the cap-and-trade structure of the Kyoto Protocol’s obligations for Annex I countries, as well as in the European Union Emissions Trading System (EU ETS). A major part of subsequent discussions has focused on increasing the participation in international cap-and-trade until it encompasses all nations, or at least all major emitters. However, as is often the case in international negotiations, there is a countervailing principle—common but differentiated responsibility. This principle centers on the recognition that although all nations bear some responsibility to address global environmental problems, the scope of their obligations vary according to a wide variety of legitimate concerns...