What Makes Greenhouse Sense?

Thomas C. Schelling

From Foreign Affairs, May/June 2002

Summary:  The Kyoto Protocol need not be a partisan issue. Climate change needs to be addressed, but the 1997 pact was never going to pass the Senate. By abandoning it, Bush at least avoided hypocrisy. It might take a century to reach a consensus on solving the greenhouse gas problem, but that is no excuse for wasting time getting started.

Thomas C. Schelling is Distinguished University Professor of Economics and Public Affairs at the University of Maryland.

HOT AIR

Emissions trading is popular, especially with economists. Trading means that any nation that underuses its emissions quota (commitment) may transfer its unused quota (the excess of its allowed emissions over actual emissions) to any country that offers financial compensation. The "purchasing" nation then uses its bought allotment to increase its own emissions quota. The idea is to permit emissions to be reduced wherever their reduction is most economical. Countries that have the greatest difficulty (highest costs) in reducing emissions can purchase relief from countries that are comparatively most able to effect emissions reductions.

When 2,000 economists, including some Nobel laureates, circulated a recommendation a few years ago that nations should adopt enforceable quotas for carbon dioxide emissions and allow the purchase and sale of unused quotas, the concept was aesthetically pleasing but politically unconvincing. Although emissions should be reduced in those countries where they can be cut most economically, the economists' proposed trading system was perfectionist and impractical. The problem with trading regimes is that initial quotas are negotiated to reflect what each nation can reasonably be expected to reduce. Any country that is tempted to sell part of an emissions quota will realize that the regime is continually subject to renegotiation, so selling any "excess" is tantamount to admitting it got a generous allotment the last time around. It then sets itself up for stiffer negotiation next time.

Still, the latest version of the Kyoto Protocol, negotiated in November 2001, does contemplate trading and even anticipates who the sellers will be. It conceded carbon dioxide emissions quotas to Russia and Ukraine -- countries that, because of their depressed economies, will keep their emissions relatively low during the Kyoto time period. They will have what is called "hot air" to sell to any Kyoto participant willing to pay to remain within its own commitment. This arrangement may have been an essential inducement to get Russia to ratify the Kyoto Protocol, and countries that were not sure they would meet their commitments on their own saw it as a cheap safety valve.

It requires a sense of humor to appreciate this latest modification of the Kyoto Protocol: respectable governments being willing to pay money, or make their domestic industries pay money, to an ailing former enemy in the guise of a sophisticated emissions-trading scheme. The purpose is to bribe the recipient into ratifying a treaty and providing governments a cheap way to buy out of emissions commitments, with the pretense that it serves to reduce emissions in accordance with the principle of comparative advantage.

PAST AS PROLOGUE

There is remarkable consensus among economists that nations will not make sacrifices in the interest of global objectives unless they are bound by a regime that can impose penalties if they do not comply. Despite this consensus, however, there is no historical example of any regime that could impose effective penalties, at least with something of the magnitude of global warming. But there are historical precedents of regimes that lacked coercive authority but were still able to divide benefits and burdens of a magnitude perhaps comparable to the demands of a global-warming regime. (In this case, cutting emissions is the burden; allowing emissions is the benefit.) There are two interesting precedents outside wartime. Both hold promise.

One is the division of Marshall Plan aid, which began in 1948. The magnitude of the aid, as a percentage of the national income of the recipient countries, is not easy to determine today, because most European currencies were grossly overvalued after the war. But a reasonable estimate places the aid's value anywhere from 5 percent to 20 percent of national income, depending on the recipient country.

For the first two years of the Marshall Plan, the United States divided the money itself. For the third year, it insisted that the recipient countries divide the aid among themselves. Government representatives therefore went through a process of "reciprocal multilateral scrutiny." Each government prepared extensive documentation of all aspects of its economy: its projected private and public investments, consumption, imports, exports, what it was doing about railroads and livestock herds, how it was rationing gasoline or butter, and how its living standard compared to prewar conditions. Each government team was examined and cross-examined by other government teams; it then defended itself, revised its proposals, and cross-examined other teams. More aid for one country meant less for the rest.

There was no formula. Rather, each country developed "relevant criteria." The parties did not quite reach agreement, but they were close enough that two respected people -- the secretary-general of the Organization for European Economic Cooperation and the representative of Belgium (which was not requesting any aid) -- offered a proposed division that was promptly accepted. Of course, the United States was demanding the countries reach agreement on aid. Today, there is no such "angel" behind greenhouse negotiations. Still, the Marshall Plan represents something of a precedent.