What Path Toward Broad International Participation In Climate-Change Policy? Lawrence H. Goulder, Stanford University Prepared for the Danish Conference on Environmental Economics August 27-28, 2015

Developing-Country Participation Is Crucial

Alternative Approaches to Broad Participation Treaty-generated nation-specific quantity targets (Kyoto Protocol) Treaty-generated uniform carbon price, penalties to free riders (Nordhaus) Attractions: Price, not quantity Uniform price - > promotes uniformity in marginal abatement costs Can promote fairness via global redistribution of the tax revenues Concerns: Retaliation? Need an agreement to get an agreement!

Alternative Approaches to Broad Participation Treaty-generated nation-specific quantity targets (Kyoto Protocol) Treaty-generated uniform carbon price, penalties to free riders (Nordhaus) Attractions: Price, not quantity Uniform price - > promotes uniformity in marginal abatement costs Can promote fairness via global redistribution of the tax revenues Concerns: Retaliation? Need an agreement to get an agreement! Domestically-generated nation-specific carbon price (Parry et al.) Claim: significant reductions are in countries’ own interests – ignoring the global climate benefits!

Parry et al. Claims All of the top 20 CO 2 emitters would enjoy net benefits from taxing carbon. (Without accounting for climate benefits.) The net benefits are significant – averaging.2 percent of GDP The global emissions reduction from domestically optimizing carbon taxes would be significant -- 14%. cf. Nordhaus RICE model’s optimal reduction of 15-18% in Like Parry et al., the INDC process leading to this fall’s Paris meeting adopts a “bottom-up” approach.

Alternative Approaches to Broad Participation Treaty-generated nation-specific quantity targets (Kyoto Protocol) Treaty-generated uniform carbon price, penalties to free riders (Nordhaus) Attractions: Price, not quantity Uniform price - > promotes uniformity in marginal abatement costs Can promote fairness via global redistribution of the tax revenues Concerns: Retaliation? Need a new trade agreement before negotiating a climate agreement! Domestically-generated nation-specific carbon price (Parry et al.) Claim: significant reductions are in countries’ own interests – ignoring the global climate benefits! Is non-uniformity of carbon prices a problem?

Revisiting the Widely Endorsed Goal of a Uniform Carbon Price Consider objective of minimizing costs of achieving global abatement target Requirement: equal marginal costs of abatement Uniform price accomplishes this Consider alternative objective of maximizing net benefits of achieving global abatement target Requirement: equal marginal net benefits from abatement Generally will involve differing prices across countries

Will the “Bottom-Up” Approach Work? -- three questions Is carbon pricing really in countries’ own interests? If so, will countries do what’s in their own interest? If so, will the resulting global reduction in greenhouse gases be “deep enough?”

1. Is carbon pricing really in countries’ own interests?

The Co-Benefits Avoided morbidity and premature mortality from air pollution Avoided traffic accidents, road congestion, road damage

Complications The Specific Design Matters!

The Tax-Interaction Effect S0S0 S1S1 D S2S2 nominal wage L 1 L 0 Labor t L2L2

The Tax-Interaction Effect S0S0 S1S1 D S2S2 nominal wage L 2 L 1 L 0 Labor

Complications The Specific Design Matters! Complementarity/Substitutability with Other Goods Matters!

The Tax-Interaction Effect S0S0 S1S1 D S2S2 nominal wage L 2 L 1 L 0 Labor S3S3

The Tax-Interaction Effect S0S0 S1S1 D S2S2 nominal wage L 2 L 3 L 1 L 0 Labor S3S3

Complications The Specific Design Matters! Complementarity/Substitutability with Other Goods Matters!

2. Will countries do what’s in their overall interest?

James Inhofe (US Senator representing Oklahoma): “Global warming is the greatest hoax ever perpetrated on the American people.”

3. Would the overall reduction in greenhouse gases be “deep enough?” Parry et al. Bottom-Up Calculations Nordhaus DICE Model CO 2 Emis. Reductions CO 2 Price ~ 20% 15-18% $57.5 $42

Benefits from US EPA’s Clean Power Plan Middle estimate for year 2030, $billions Climate benefits to US 4 exported to rest of world 16 Co-Benefits (mainly US health-related benefits) 14-34

3. Would the overall reduction in greenhouse gases be “deep enough?” Parry et al. Bottom-Up Calculations Nordhaus DICE Model CO 2 Emis. Reductions CO 2 Price ~ 20% 15-18% $57.5 $42 Full optimum implies much larger values than these

What Path to Broad International Participation? Top-Down or Bottom-Up Approach? There are strong arguments that the Bottom-Up Approach... Is net-beneficial to top-20 emitters Would lead to significant CO 2 reductions globally The non-uniformity of carbon prices under the Bottom-Up Approach is not necessarily a problem

Four Concerns about the Bottom-Up Approach It is an indirect way to address local pollution Its attractiveness depends on countries not sufficiently adopting direct approaches Even if nations maximized their net benefits, the emissions reductions would not be sufficient for global efficiency There are huge impediments to countries implementing what is in their interest. (But all approaches face these impediments!)

Which Path?