Stick with Kyoto

In his critique of the recent Kyoto accord, Richard N. Cooper notes that mitigating climate change will not be easy ("Toward a Real Global Warming Treaty," March/April 1998). He argues that allocating greenhouse gas emissions rights among nations, especially in the developing world, is impractical. Since economists' favorite solution to problems such as emissions is to tax the offending activity, he concludes that a more practical solution would be to have all countries agree on a common carbon emissions tax.

Cooper is right about one thing -- fighting global warming will not be easy. Setting differentiated emissions targets among countries with widely diverse histories and national circumstances will be especially difficult. Indeed, Kyoto is one of those ideas that can easily be criticized -- until you consider the other options. Cooper's alternative is to create an international obligation to impose energy taxes. But his belief that agreeing on such a tax might be easier than setting emissions targets is out of touch with political reality. Even if it could be arranged, an international obligation to tax emissions could not be expected to work well.

REMEMBER EL NINO

Cooper, one of my predecessors in my current position, is skeptical about global warming, referring to it as an "alleged problem." But the matter is serious indeed and requires a concerted international response. Atmospheric concentrations of carbon dioxide, the most important greenhouse gas, are currently about 30 percent above pre industrial levels. Unless we change course, concentrations in 2100 are predicted to reach levels not seen in more than 50 million years.

The authoritative Intergovernmental Panel on Climate Change (IPCC), composed of 2,500 scientists worldwide, warns that global warming will harm human health and cause significant loss of life. Potential problems include a rise in the sea level, the spread of infectious diseases, droughts, and floods. For a preview of the type of severe weather in the warmer, wetter world that climate change would bring, look at the devastation wrought by this winter's El Nino. Without policy intervention, the IPCC warns that average global temperatures will increase between 2 and 6.5 degrees Fahrenheit by the end of the next century. By then, average July temperatures in Washington, D.C., will have risen by 5 to 15 degrees, with greater humidity. By comparison, average global temperatures during the last ice age were only about 9 degrees colder than today.

Many, including Cooper, have noted the significant uncertainties associated with global warming, the impact of which will vary from region to region. What is clear, however, is that unless we take action, we will be conducting an unprecedented experiment with our planet. We risk endangering our children and grandchildren. Rational policymakers do not wait until every doubt is resolved before moving. The Kyoto protocol is like an insurance policy: its modest premiums protect against risks that will cost much more to mitigate if the world waits to act.

A GLOBAL TAX WON’T WORK

Cooper's tax proposal is politically impractical and substantively unsound. The United States fought hard and successfully at Kyoto to avoid mandatory measures like an international tax.

To my knowledge, no international agreement has ever imposed an obligation on countries to tax their citizens. This is hardly surprising. An internationally mandated tax would combine two unpopular ideas: paying more of one's money to the government and surrendering part of national sovereignty to an international body. Moreover, energy taxes are anathema in the United States. It would be hard to find a policy that would face greater political hurdles.

Even putting political reality aside for a moment, a common international tax is a bad idea. Countries with existing energy taxes could reduce them while a new international carbon tax was imposed on countries without preexistent energy taxes. The net effect would be little, if any, reduction in emissions. Assuming such behavior is not prohibited by the international regime, the United States, which has relatively low energy taxes, would face a disproportionately large share of the burden. And even if the international system were to prohibit reductions in energy taxes, countries could offset the impact of a new carbon tax indirectly, through other changes in tax or subsidy policies (say, rebates on specific taxes or increases in highway construction financing), while ostensibly maintaining their existing energy taxes. Distinguishing permissible from prohibited policies would be extraordinarily difficult and could bring unacceptable international scrutiny to domestic tax decisions.

Moreover, Cooper fails to see that a system of tradable permits can be as efficient as a tax. If one firm is able to reduce emissions cheaply while another finds it difficult to do so, the first will be able to sell permits to the second, thereby reducing the overall cost of achieving the environmental objective. According to the 1997 Economic Report of the President, the choice between fees and marketable permits is of secondary economic importance. Over 2,500 economists have signed a letter stating, "In order for the world to achieve its climatic objectives at minimum cost, a cooperative approach among nations is required -- such as an international emissions trading agreement." That is precisely the logic behind, and the promise of, the Kyoto agreement.

KYOTO’S VIRTUES

Kyoto is still the best basis for action, for three reasons. First, the protocol adopted differentiated targets, recognizing that each country must address climate change based on its own national energy profile and circumstances -- a particularly crucial point for developing countries.

Second, Kyoto lets countries pursue their own paths to lower emissions. In one country, that might be an energy tax. In the United States, President Clinton has called for a domestic trading system (to begin by 2008) of the kind that has worked so well, both environmentally and economically, in reducing acid rain.

Third, Kyoto embraces market-based international mechanisms. As noted above, emissions trading is central to achieving Kyoto's goals at modest cost. In addition, the Clean Development Mechanism -- which will allow companies in the industrialized world to invest in "clean technology" projects in developing countries and share the credits from reduced emissions -- has the potential both to lower costs for U.S. companies and to encourage the transfer of environmentally friendlier technology to developing nations.

Cooper argues that the Kyoto approach cannot work without the participation of developing countries, who will not join in because they will agree neither to an allocation of emission rights nor to constraints on their economic growth. He is half right. Kyoto cannot succeed, either environmentally or politically, unless key developing countries participate. Climate change is a global problem and requires a global solution. Indeed, the president has stated clearly that he will not submit the treaty for ratification without participation by key developing countries. But Cooper is overly pessimistic about the chances that developing countries will join in. Despite the difficulties at Kyoto, several key developing countries did indicate an interest in participating. A comprehensive diplomatic strategy will engage still more.

To be sure, winning over developing nations will not be easy, but Kyoto contains several incentives for them. Efforts to mitigate climate change will help address their more immediate pollution problems. Furthermore, developing countries are the most vulnerable to the dangers of global warming and the least able to protect themselves. Perhaps most important in the short run, the worldwide effort to address global warming can help developing countries economically as well as environmentally. Whenever developing countries take on Kyoto commitments, they will be able to participate in the international emissions trading system, reducing costs and perhaps even generating revenue. Kyoto can help developing nations grow sustainably, without constraints, and by a different energy path than that of countries that industrialized earlier. Sustainable economic growth must be environmentally sound.

Global warming is not a problem we will solve in this decade or this generation. The innovative Kyoto framework should be built on, not discarded.