copenhagen outlook

The 15^th United Nations Climate Change Conference takes place this week and next in Copenhagen, Denmark. Politicians will team up with scientists, engineers, and economists to discuss the global issues behind climate change in search of global solutions. There are numerous predictions as to the types of corrective mechanisms and/or international treaties that will result from the conference: carbon tax, pollution permits, tax/permit hybrid, emission reduction targets, etc. In order to better understand the reform that we will optimistically see, let’s first review the science and economics behind climate change.

A few words about the Science

There are certain types of gases that are transparent to ultraviolet light but absorb infrared radiation. These greenhouse gases include carbon dioxide, water vapor, methane, nitrous oxide, and chlorofluorocarbons. When they get up in the atmosphere they act as the glass in a greenhouse letting sunlight come through in the form of UV light that is absorbed by objects on the ground. As these objects become warm they release infrared radiation back into the sky. The greenhouse gases reflect it back to earth and, thus, make the planet hotter.

The concentration of these gases in the atmosphere has been rising rapidly due to human activity. About six billion tons of carbon is added to the atmosphere every year by the use of fossil fuels. Carbon dioxide will stay up there for around 200 years. Ice core studies have shown that between the Industrial Revolution and 1998, carbon dioxide concentration has increased by 30%. Humans haven’t just increased the concentration of CO2. Methane has risen by 150% and nitrous oxide by 17%. Along with the addition of Chlorofluorocarbons, these gases contribute about two-thirds of heat trapping capacity as the increase in CO2.

Current studies predict that the level of carbon dioxide in the atmosphere will double between 2050 and 2100 causing global temperatures to increase by 1.5 to 4.5 degrees Celsius. The uncertainty is greater when attempting to predict how this change will affect life on earth. Sea levels are expected to rise between 9 and 88cm (3.5 inches to 2.9 feet). Polar ice caps melting is not likely to have a drastic effect on sea level as ice will be reduced in Greenland but increase in the Antarctic. If the Greenland or West Antarctic Ice Sheets were to completely melt or become disintegrated we could expect a rise in sea levels of around ten feet. However, this is thought to be very unlikely before 2100.

The Economics and (unfortunately) Politics

Climate change will affect regions and income levels differently. Therefore, any policy that comes from Copenhagen will need to be practical about distributional issues if it is to seek widespread and long-term participation. It has been shown that environmental regulation reduces competition as a barrier to entry. Large firms have the capital to purchase or develop the technology needed to reduce emissions. In the extreme case of a monopoly, emission levels are actually half of what perfect competition would yield: great for the environment, bad for prices and variety. In the midst of the current economic crises, it may be politically difficult to pass legislation that will likely reduce consumer welfare in the market place.

A large part of the debate over the solution has been focused on pointing fingers at industrialized nations for causing this mess. This is true, but a successful policy will also need to recognize that developing countries account for a large and growing portion of emissions. The point is that both industrialized and developing nations will need to be on board with any successful policy. It is unlikely that a treaty will be passed or enforced that requires large transfers of wealth from one part of the world to another.

Enforcement has proven to be extremely difficult. Most of the 37 countries (save UK and Germany) that ratified the Kyoto Protocol will come to Copenhagen this week substantially off track to fulfilling their mandated obligation to reduce emissions to an agreed upon level by 2010. The failures will not be punished. The fact will only be a large polluted elephant in the room.

Economics has brought us some basic market-based solutions to solve the externality problem of emissions. The first, introduced by Arthur Pigou in 1918, is an optimally priced tax. This tax would make polluters pay just enough so they could only afford to emit greenhouse gasses at the socially optimum level. And yes, contrary to some radical environmentalist beliefs, there is a socially optimum level of pollution above zero. This efficient level exists where the marginal social costs of polluting (public health, climate change, etc.) are equal to the marginal benefits of polluting (social welfare through reduce prices, increased consumption, etc.).

The second market mechanism is a bit more modern and owes its popularity to Ronald Coase. He recognized that externalities result because of unclear, or undefined property rights. For instance, if some organization owned the right to a carbon-free atmosphere, they would be able to claim damages. (It just so happens that the damages they would claim would be equivalent to the optimal Pigouvian tax!) After negotiations with the polluter, emissions would find themselves at the social optimum. This is the raw concept behind the cap and trade system. Some governing body (like the UN) will claim ownership to the right to a carbon-free atmosphere and mandate that emissions be capped at some optimal level. Then—to most efficiently allocate existing emission—firms can trade the remaining right to pollute by buying and selling permits to do so.

There are obvious problems with both systems. For instance, the tax requires us to figure out the optimum price that will induce the optimum amount of pollution—both of which are extremely difficult to estimate. The cap and trade mechanism has similar shortcomings in that the amount must be capped at this unknown optimum and is difficult to change once set. Both systems have problems with enforcement because of the international aspects. In a 2002 paper, McKibbin and Wilcoxen explore a hybrid system that creatively incorporates both methods. We will likely see reform with this flavor in the years to come.

So what can we expect from Copenhagen? Most likely: disappointment. Because “all environmental policy is doomed to success” as the Director of the Pardee Center for the Study of the Longer-Range Future, Dr. Adil Najarm, put it. Meaning, countries will not ratify unattainable goals and statisticians can make forecasts dance on their whims. However, the conceding outlook is that, although we won’t see great reform from Copenhagen, we are on our way to it. We can see it in the political fashions around the world. Although Copenhagen will not likely deliver a long-term (2050) sustainable policy, we will likely see it in Mexico City next time around. One thing that we will all hope for is something better and more enforceable than Kyoto.