Double Dividend to Replace Global Altruism

24 september 2011

The Decline of the Romanticism Era in Climate Policies

Igor A. Makarov is Head of the World Economy program at the National Research University–Higher School of Economics.

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Resume: The human race has entered an era of climate crisis. Right before our eyes the habitat is exposed to a variety of disastrous effects.

The human race has entered an era of climate crisis. Right before our eyes the habitat is exposed to a variety of disastrous effects. The global economy, too, is under the influence of climatic metamorphoses, and they become an essential element of the new reality, to which individual nations and all humanity are forced to adapt their business activities.

International institutions are unable to respond adequately: the paradigm defined under the Kyoto Protocol is in deadlock, leaving no chance for them to effectively deal with climate change. States continue to be driven by national self-interest: while professing the need to give a joint response to the global challenge all countries continue to put their national interests above common humanitarian ones.

The conferences in Copenhagen and Cancun heralded a turning point in the development of the international climate regime: now one can already say with certainty the old Kyoto model has collapsed and there have emerged the contours of a new one, based on national pragmatism. Now countries take measures to combat climate change following their own economic and political interests. This is a new paradigm, in which global climate cooperation will disintegrate into a multitude of national climate policies. This trend will become central to the international climate regime in the next decade.

A CHRONICLE OF THE KYOTO FAILURE

Economic analysts have traditionally viewed climate change as an example of “the tragedy of the commons.” A professor of biology at the University of California in Santa Barbara, Garrett Hardin, coined this term back in 1968. In a same-name article he described a situation where shepherds, who have access to limited capacity pastures, in the pursuit of personal gains, that is, in strict compliance with the neo-classical ideas, increase livestock grazing, which leads to the destruction of pastures. In other words, the conflict between the personal interests of economic agents and the public interest is resolved in favor of the former and inevitably causes resource depletion.

In the context of global climate change the climate system per se has also become a jointly used resource. Countries following their selfish interests (just like the individuals in the pasture-sharing situation Hardin described) emit greenhouse gases, causing a detrimental impact on the resource.

There are two classical approaches to the described tragedy. The specification of property rights in relation to the resource is one: for example, the pasture is split into parts, which then begin to be used as shepherds’ exclusive property. The introduction of penalties or taxes for excessive grazing is the other. Both solutions imply the existence of an institution defending the priority of public interests over private ones and having sufficient legitimacy to do this. In the pasture case the function of such an institution is played by the community or the state, and in relation to climate change, by an international agreement binding on all the participants.

The first step towards it was taken in 1992, when the United Nations Framework Convention on Climate Change was signed. Some experience of such cooperation had already existed by that time – five years earlier the Montreal Protocol on Substances that Deplete the Ozone Layer came into force. Subsequently, in 2003, the then UN Secretary-General, Kofi Annan, would call it “perhaps the single most successful international agreement to date.”

The 1992 UN Conference in Rio de Janeiro, known as the Earth Summit, was the greatest-ever attempt to set humanity towards nature. The participants adopted a Declaration on Environment and Development, the Convention on Biological Diversity, Statement of Land Resources: Deforestation, Agenda 21, and finally, the Framework Convention on Climate Change. Behind the general terms and abstract wording of the document there was the belief that greenhouse gas emissions can be reduced to a minimum, just like the emissions of ozone-depleting substances. The mechanisms of achieving this goal were presented in an agreement, signed in Kyoto five years later.

However, the era of romanticism was over barely before it began, and the Kyoto Protocol, to which many attributed enormous symbolic significance as the first step towards solving the climate problem, was actually a slight movement of the toe, while the humanity’s heel remained on the ground. Already during the protocol’s drafting the global concern over environmental issues started to give way to skepticism, as well as the awareness of the leading countries that the price they would have to pay for emission reductions – after obtaining the mandate of their electorates – would be enormous. The deep division between the developed countries and the developing ones (as well as splits within individual states) showed that there will be no joint resistance to the global threat. Each of the players will take care only of one’s own interests, and nobody else’s.

The global climate change negotiating platform began to resemble a bazaar, where everyone is trying to win as many preferences as possible and to impose as many additional commitments as possible on partners and opponents. At the same time the developing countries were actively using such ethical arguments as the West’s historical responsibility for previous emissions and the inadmissibility of blocking their own development with restrictions on emissions. The U.S. and Australia openly and cynically argued there were substantial threats to their energy-intensive economies and opposed unilateral emission reductions by the developed countries. The European Union was insisting on the conclusion of an agreement at any cost, regarding it as a tool to strengthen integration ties, as well as its own geopolitical victory – after all, the EU was the main initiator of the international climate change campaign.

As a result, European taxpayers became the main sponsors of the Kyoto agreement. It entered into force without the imposition of quantitative emissions reduction commitments on the developing countries. Neither the United States nor Australia were ready to ratify this version of the protocol (the latter did that eventually in 2007), so the agreement covered less than half of all emissions worldwide, proving a farce in terms of environmental effectiveness.

The largest beneficiaries of the Kyoto agreement were the developing countries (primarily China and India), which receive an impressive amount of Western investments under the emissions reduction projects within the framework of the Kyoto Protocol’s Clean Development Mechanism (CDM). Its terms and conditions are extremely favorable for the countries of Eastern Europe, where the economic downturn of the 1990s resulted in lower emissions – far beyond the norms set by the Protocol. These states suddenly had an opportunity to sell the unused quotas, as well as draw investments into Joint Implementation projects. The Gulf countries, opposed to any agreement, were satisfied with the document on the whole, as it was not a serious threat to the steady flow of petrodollars.

In general, the international climate control system, built on the Kyoto Protocol, was a compromise option that suited all, except for the champions of real, not simulated, resistance to climate change. But even they were persuaded that a relatively modest first step will certainly be followed by others. The system of international climate regulation gained balance. However, as early as in the mid-2000s a new stage began due to several factors.

First, climate change skepticism again gave way to alarmism: there emerged concerns over the possible consequences of climate change. The third and, especially, fourth assessment report of the Intergovernmental Panel on Climate Change (IPCC), released in 2001 and 2007 respectively, show that the problem of global climate change is more serious than it had been anticipated. Apocalyptic climate disaster forecasts were gaining popularity and even got into Hollywood (The Day After Tomorrow). Al Gore richly filled the book and documentary film An Inconvenient Truth with scare stories and, together with experts from the IPCC, received the Nobel Peace Prize. Climate change was quick to acquire the status of global problem number one.

Second, the tectonic shifts in the global economy, above all the drift of economic strength towards Asia, resulted in an utter discrepancy between the Kyoto Protocol and the modern realities. On the one hand, some Asian countries (South Korea, Taiwan and Singapore) have joined the club of the developed countries, while remaining aloof from the international efforts to fight climate change. On the other, India and China have become world leaders as to the size of emissions, or are approaching them in terms of accumulated emissions. Their scant involvement in international climate control not only reduces its value to zero, but can no longer be excused by the principle of “common but differentiated responsibilities” that places the bulk of the blame for climate change on the developed countries.

Third, technological advances, especially those in the field of manufacturing equipment, renewable energy, construction, water management, waste management and processing, etc., have significantly reduced the costs of climate control and transformed it from an obstacle into a powerful engine of economic development. The old argument of the developing world – “decline in the consumption of fossil fuels denies us a chance to make progress” – is no longer relevant. Reduction of fossil fuel consumption and its replacement with other sources of energy is one of the key features of present-day development.

Finally, new global challenges have been gaining strength, in particular, scarcity of water and food, loss of biodiversity, deforestation, and growing damage from natural disasters. Take a look at any of them and you can easily detect “a climate trace” (for instance, there have been more frequent droughts harmful to crops, changing conditions for the existence of plants and animals, an increasing number of forest fires and natural disasters, etc.). For the public mind the climate threat – until just recently a hypothetical future risk – is now a tangible reality.

In a situation like this preparations are underway for a new agreement, which would replace the Kyoto Protocol in 2012. The climate conferences in Copenhagen in 2009 and Cancun in 2010 were aimed at formulating a document that would considerably correct the Kyoto Protocol’s flaws. The developed countries are expected to make much greater emission reductions as compared with the Kyoto commitments, and the developing countries, to participate fully in international cooperation. Despite these two major modifications a yet-to-be signed agreement is in line with the old paradigm of “global solutions to global problems.” The failure of the Kyoto Protocol, as well as the setbacks that accompany the formation of a new binding agreement provided a convincing illustration of this paradigm’s ineffectiveness.

The reasons for this inadequacy are rooted in the fundamental differences between the systems of local, national resources in common use, like Hardin’s pastures, and global ones, where the climate system belongs. In contrast to the community or the state, international institutions do not have the power to ensure a proper degree of priority of public (global) interests above individual (national) ones. Climate change economy classic William Nordhaus called this situation the Westphalian dilemma: in the modern system of international relations, which strictly protects national sovereignty, countries cannot be forced to take any action that is possible in relation to individuals at the national level.

The secret of the Montreal Protocol’s success is the states’ good will, but it manifested itself only because the required steps were relatively cheap and mostly affected one major industry – production of refrigerators, which by that time had began to master new technologies, safe for the ozone layer. For state leaders, the reputation gains from participation in the initiatives to protect the ozone layer often proved greater than the costs of such participation.

As for climate change, it is all very different. Firstly, the cost of resistance to it is not comparable to that of the reduction of emissions of ozone depleting substances – hundreds of billions of dollars a year are involved. Secondly, and most importantly, today climate is at the very center of a bundle of problems and contradictions of global economy development. These are the lack of fresh water; famine and epidemics; natural disasters; migration and development prospects in a number of key sectors – energy, the automotive industry, aircraft building and agriculture. In fact, at stake in climate negotiations is the balance of power in the world, and it will stay in focus for at least decades to come.

It is difficult to imagine a multilateral compromise at a time when the stakes are so high. The Copenhagen Conference made it clear that a strictly binding agreement cannot be achieved. It provided for two possible options: some sort of a lax agreement or no agreement at all. One option was tantamount to hoisting the white flag, and the other, too, looked not very different for a while. However, this view was probably wrong: in reality, only the failure of the Kyoto paradigm was in question. The development of the international climate regime chose the other path.

MANY SMALL SOLUTIONS TO ONE BIG PROBLEM

The way out of the climate impasse is confined to overcoming the “tragedy of the resources in common use” in a mode that will help sidestep Westphalian dilemma difficulties and not require the involvement of a reputable third-party agent. And it looks like a solution to this problem is round the corner.

A concept developed by the laureate of the 2009 Nobel Prize for economics, Elinor Ostrom, may serve as a basis. With reliance on numerous field studies Ostrom, who is not in the habit of broad generalizations and stays firm in her belief there can be no single recipe for every situation, showed that the consumers of resources often need no control from the top. They are able to independently design a system under which the resource will be shared fairly and not depleted for a long time. Moreover, the rules produced at the grass roots level, informal and often based on intuition, are often more effective than formal institutions imposed on actors from above.

Ostrom projected her findings solely to the local resources in common use, but these conclusions are likely to be applicable to inter-country cooperation. Attempts to move from top to bottom and create supranational institutions, providing a centralized and unified approach to fighting climate change, have failed. In the meantime, success is more likely to be achieved if one moves in the opposite direction, from the bottom upwards – towards a solution of global problems on the national and regional level. This is a new paradigm that will replace Kyoto, and some elements of it have already been used in laying the foundation of modern climate control mechanisms.

The key distinction between the old and new approaches is not so much the hierarchy of institutions, as the motives that prompt countries to cut emissions. The Kyoto Protocol used the “stick,” but the mechanisms of its application were inefficient and failed to yield the expected results. Even such a developed and loyal country as Canada ignores Kyoto commitments and general requirements for reducing emissions are observed only by virtue of the transformational economic recession in Eastern Europe.

The new paradigm should mostly employ the “carrot.” It implies that countries reduce emissions not because they have to do so under an international agreement, but because this helps resolve internal socio-economic problems. The driving force that can keep the work for a better climate going is the so-called double dividend technology (or win-win technology) – measures to reduce emissions that also achieve some other results, more urgent from the national standpoint.

Examples of this are many. Number one (in place and importance) is the set of measures in Barack Obama’s anti-crisis plan, signed in February 2009 and called Clean Energy Jobs and American Power Act. The total cost of measures is over U.S $50 billion. The very title makes it clear what is the end and what is the means of achieving it. The emphasis is placed on solving specific socio-economic problems, while the work against climate change is to play only an auxiliary, instrumental role, which, however, does not diminish the importance of environmental improvements to be achieved.

The United States in general has proved a pioneer in the application of double dividend technologies in the fight against climate change. While the European governments and companies racked their brains over how to meet the targets under the Kyoto Protocol, in the United States, which preferred to stay out, companies, states and municipalities one after another announced the creation of their own initiatives to reduce emissions, operating on a voluntary basis. Voluntary agreements by companies formed the basis for the creation of the Chicago Climate Exchange. Ten states of the Northeast and East employed the quotas trading mechanism to establish the Regional Greenhouse Gas Initiative with the aim to reduce emissions by 10 percent by 2018. California created its own system of emission quotas trading. In 2005, Seattle was the first of municipalities to have launched a Climate Program. Over 1,000 cities in the United States have signed the U.S. Conference of Mayors Climate Protection Agreement.

States, companies and municipalities eagerly cut emissions without any coercion for two main reasons. First, the success of voluntary agreements could show that carbon taxes or other mandatory measures are neither necessary nor advisable (and this tactic was justified eventually.) Second, the Bush administration’s rejection of the Kyoto Protocol did not cast doubts on the prospects of carbon markets and carbon neutral technologies, and hence the need to invest in them as soon as possible. There is yet another argument now: being “green” is fashionable. Arnold Schwarzenegger’s governorship of California left a huge budget deficit, but he will be forever remembered for his green initiatives, primarily, California Climate Change Law AB32.

After Barack Obama came to power, the principles of climate policies, formed locally, simply went up to the federal level (although this process was left unfinished due to the rejection of a national system of quotas for greenhouse gases, proposed in the Kerry-Lieberman bill). At the same time, these principles began to be exported: American solutions have been successfully used around the world. Their spread received a particularly powerful impetus in the midst of the financial crisis, at a time most convenient for changing long-term priorities. In Germany, investment into the green sector accounted for 13 percent of all anti-crisis measures; in France, for 21 percent; in China, for 38 percent; and in the EU, for 59 percent. South Korea became the undisputed leader with 81 percent.

In 2008 and 2009, the United States and Europe introduced more new facilities to produce renewable energy than traditional ones. In 2009, the amount of new wind-driven generating capacity totaled 38 GW, and of new solar capacity, 7 GW. The share of ethanol in automotive fuel exceeded 8 percent. In 2007-2009 the super-economical car model Toyota Prius showed record sales around the world, and several other countries launched programs to produce affordable electric cars. More than 85 states developed plans for expanding renewable energy sources by 2020.

Quite different states have been developing green technologies not to confront the climate threat, but because it is profitable. In rich countries, their use can create jobs for the so-called ‘green collar workers’ – the main group of unemployed personnel of low and medium skills. In the poor countries green technologies are an excellent means of attracting foreign investment, in particular within the framework of clean development mechanism (CDM). Renewable energy sources in the U.S., China and the EU contribute to achieving the strategic goal of reducing energy dependence on the Persian Gulf and Russia. Moreover, in most cases their development is cost-effective in the context of high energy prices. Finally, green technologies have a different strategic aspect: their development right now is a clue to technological leadership in the future, and that leadership is to be contested by the United States, China and the European Union.

The entire set of these reasons for which countries are ready to develop green technologies has a tremendous potential of resistance to the climatic threat. Imposed quotas will not make states to reduce emissions, while the light of a double dividend twinkling ahead is already a lucrative incentive for countries to move on in this direction. Every country is looking for its opportunities: the U.S. has major wind power resources in the Midwest; China is focused on energy efficiency and solar power; the EU, on wind resources in the north and solar energy in North Africa and Spain; Brazil, on biofuel; and India, on the thermal energy of the sun.

Green technologies currently include mainly energy, which accounts for the maximum potential of green technology growth. When the “cream” of the energy industry has been skimmed off, the focus will be shifted to the green construction industry and automobile manufacturing. Simultaneously, the green progress will become ever more systemic, moving from the industrial development pattern to the territorial one. For example, it is difficult to name any particular branch of green specialization in California – clean technologies are being developed there at all levels of the economy and in various sectors: renewable energy, public and bicycle transport, energy-efficient construction, garbage recycling, water reuse, etc. Examples of cities demonstrating the systemic development of green technologies are San Luis Obispo in California and Curitiba in Brazil. The systemic approach is more efficient from the environmental standpoint: its use, starting with a focus on economic profit, is gradually changing the lifestyle of the population, and also forms an ecological culture of firms. Everything “green-labeled” becomes fashionable, companies enter into true wars for the consumer, trying to outdo each other in reducing the “ecological trace” of their products, and consumers become more frugal. Economic benefit-driven development of the ecological culture breeds new benefits: an economy that consumes fewer resources becomes increasingly competitive.

The awareness of new opportunities has been growing in many countries, which is clearly seen in the huge amount of public investment into green initiatives during the crisis. Governments gave a kickstart to the green leap, but this does not mean that they should step aside in the future. The large amount of capital investment, required at the initial phase, is a powerful obstacle to a wider dissemination of green technologies, especially in countries with underdeveloped venture capital businesses. States should look for new niches, where double dividends are possible, on an equal footing with businesses, and encourage them to fill those niches in their own interests. And some have already been doing this.

But obviously not all. The poor countries, which are a home for half of the world’s population, have too weak institutions to look for and find double dividend technologies. In addition, in situations of poverty priority is given to tactical interests, and not strategic ones, which results in super-exploitation of resources even despite the awareness of how important their conservation is in the long term. Under such conditions, tackling the climate problem from below upwards is impossible because of the numerous difficulties “at the bottom.” In the meantime, deforestation in the poor countries and regions alone accounts for 20 percent of greenhouse emissions in the world. Low-tech agriculture is responsible for approximately another 15 percent.

Assistance to efforts by the developing countries to reduce emissions (especially in terms of stopping deforestation and technological improvements in agriculture) should form the basis for the agenda of international climate cooperation. Under the Kyoto Protocol it was carried out primarily through the CDM. The Copenhagen Conference succeeded in concluding an agreement on additional financial assistance to efforts aimed at combating climate change and the adaptation of developing countries to it (30 billion dollars annually until 2012 with a further increase to 100 billion dollars in 2020), which is one of the few steps forward in promoting the negotiating process in recent years. Further progress in this direction is much more important and more promising than further futile attempts at redistributing greenhouse gas emission quotas – scientifically completely unfounded, but mandatory. Nevertheless, it must be accompanied by tighter control over the efficient use of resources to ensure the emerging green climate fund should not become a mechanism of taking cash from the pockets of poor people in rich countries and putting it into the pockets of rich people in poor countries.

The new paradigm is confined to shifting the climate policy to the national level. Even the international trade in emissions quotas, conceived as a means to establish ties between different countries and to coordinate their efforts, will gradually disintegrate into many effective and expanding national and regional systems of trading in quotas (in the EU, Japan, Australia, New Zealand, and a number of U.S. states), isolated from each other. After Cancun, experts have recognized that creation of a global carbon market is almost impossible. Emission quotas trading as a bridge for international cooperation will gradually give way to international assistance to poor countries, which in the future should contribute to mitigating the climate change problem, and the directly related development problem of those lagging behind.

International cooperation in fighting climate change will finally break up into diverse national climate policies pursuing different objectives and using different instruments. Individual countries will resist climate change not because they will pursue an artificially given external landmark, but because they will have an inner motive to do so, based on an opportunity of obtaining their own benefits. The emerging pragmatic maxim is likely to achieve a far greater cumulative effect than the traditional, altruistic approach.

The failure of Copenhagen and unprecedented national efforts by many countries to develop green technologies are the most vivid illustration of the emerging trend towards a shift of goals and priorities. The latter has a long-term structural nature, as its origins lie in the peculiarities of regulating the resources in common use and the geopolitics of technological progress. In the coming decade the development of the international climate regime will proceed in the context of the paradigm the ongoing changes have set.

* * *

The climate crisis is not only fraught with serious threats, but also offers wide opportunities: changing the course is easiest at the moment of downfall. And the one who is the first to do it will be among the leaders in the future. Aware of this, countries are increasing investment into green development. The winner is the one who gains a double dividend. To succeed in the international arena, Russia should find and use its own.

Russia has a huge potential to reduce greenhouse gas emissions simultaneously with the development of its economy. According to McKinsey (2009), by 2030 cost-effective measures alone (those available today) will reduce greenhouse gas emissions by 27 percent from the 1990 level. The annual benefit will amount to €24 billion by 2030. No other country in the world has such opportunities for the application of double dividend technologies. However, in order to use them, substantial efforts are needed by both business and the government. The latter should abandon the regime of endless regulations and administrative tools in favor of creating an effective system of economic incentives for businesses to cut emissions to the benefit of the future of the world and the present day of the city, the region or the country. A Chinese proverb says: “When the wind changes direction, some build walls, and others, windmills.” The wind has changed and the whole world is building windmills. Time is ripe for Russia to follow suit.

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