Beyond The Paris Climate Meet

Has the time come for a new institutional framework to integrate growth, development and environmental preservation?

The Paris terror attack, days before the COP21 meet, seemed to be the only outlier in the run up to this event. Expectations from the meet were low and procedural, rather than substantive, in terms of doing something concrete and time bound to limit global warming.

There will be a deal…but it will be minimalist…noncontroversial….and most importantly universal…it will not make the commitment or the result legally binding…it will sidestep… review of the INDCs.On additional finance…it will not mention specifics” thereby freeing developed countries from their obligation under the UN Framework Convention on Climate Change to take the first and drastic actions because of their historical responsibility…

Sunita Narain, India’s combative, veteran climate campaigner,November 22, 2015.

The UNFCC (UN Framework Convention on Climate Change) has assessed the Intended Nationally Determined Contributions (INDCs), comprising actions till 2030, submitted by 166 countries as insufficient to hold global temperature increase over pre-industrial levels at the targeted 2⁰C. This is not what signatories to the 1997 Kyoto Protocol intended when they signed on for equitable, differentiated commitments to reduce Green House Gas (GHG) emissions.

The Science Of Climate Change

In the two decades since Kyoto, despite regular conferences of the parties to the UNFCCC 1992, an agreement has been elusive on the timelines and volumes for mitigation actions by specified countries. Adequate finance for mitigations is another problem. Meanwhile GHGs have continued to accumulate and the globe has continued to warm up.

Each of the last three decades has been the warmest since 1880. The global average temperature was 0.8⁰C higher in 2012 than in 1850. The science on what has caused the increase in temperature points to the accumulation of GHG – 78 per cent of which is carbon dioxide emissions from the burning of fossil fuels.

The IPCC (Intergovernmental Panel on Climate Change) in its fifth report in 2014 estimated that the maximum emissions the globe can adjust to, without severe adverse consequences, is around 2900 Giga tons of CO₂. Accumulations by 2011 were already 1900 Gt CO₂ leaving just around 1000 Gt of carbon space for future emissions. With annual emissions at around 50 GtCO₂ in 2010 this leaves just about 20 years (till 2030) to prevent the globe going over the “tipping point”- popularized by the metric of a mean temperature increase of 2⁰C.

The Conundrum

Collective action involving 196 sovereign nations is a gigantic task. Consider how porous the implementation of the Non Proliferation Treaty 1970, banning nuclear proliferation, has been even though it recognizes just five countries as Nuclear Weapon States.

At the heart of the problem of climate change compliance is the long disconnect between irresponsible behavior today and consequences occurring a century later. Corporate entities and nations rarely strategize beyond twenty years. This implies we should budget for crossing the tipping point. The inevitability of this scary scenario is what most nations – developed and developing – seem to be working towards.

Is there still time to do something?

Rapid economic growth in the developing economies is the best solution to even out the existing asymmetry between the capacity of the developed and the developing world to deal with climate change. But it also advances the “tipping point” by filling up the available carbon space. One-third of the world GDP today and nearly one half of incremental GDP added during the period 2000 to 2014 was contributed by low and middle income countries.

The OECD estimates that its trend growth till 2050 will be around 1¾ to 2¼ per cent per year. Compare this with expected growth in non-OECD countries of 7 per cent till 2020 declining to around 5 per cent in the 2030s and to about half that by the 2050s. Today’s developing countries will account for more than 60 per cent of the world’s GDP by 2030. This will still be less than their share of 85 per cent in the world population of 8.5 billion in that year, as assessed by UNDESA (UN Department of Economic and Social Affairs). But the continuing differential in economic growth will empower these new economies.

The Kyoto Protocol arrangements visualized a static world divided into Annex 1 (industrialized) and other countries, with only the former morally obliged to reduce emissions to “pay for the pollution” they had created. This argument – thin as it was even then – has proved impractical in the face of a dynamic and integrated world economy.

The developing world has copied the carbon-intensive path as it has grown richer. A bald per capita comparison of energy consumption across countries hides the fact that elites in developing countries – who are the domestic role models – are at least as energy profligate as people of a similar income level in the industrialized world. Moral outrage at the profligate West is mere rhetoric. But it is also true that the rich have not uniformly stepped up to the plate. In contrast, several “newly emerged economies”, like India, are pulling above their weight.

Interim strategies till 2030

Some more scientific clarity please

Much of the resistance to spending more on adaptation and mitigation relates to the uncertainty with respect to the timing and magnitude of the impact and the credibility of mitigation options. Diluting the uncertainties can greatly enhance the willingness to invest in green options for growth.

360⁰ strategy for sustainable development

Global climate concerns need to be built into local development strategies. Working bottom upwards rather than the more usual top down approach can pay rich dividends in resolving the presumed trade-off between development and the environment.

Take sea level rise – that most dramatic of adverse effects – which is expected to force people in small islands and low lands to migrate. A Climate Central Research Report estimates that a 3⁰C increase in temperature is expected to result in a rise in the sea level between 4.7 to 8.2 meters and induce displacement of between 255 to 597 million people based on 2010 population levels.

China has the most to lose from habitat disruptions followed by India, Bangladesh, Vietnam, Indonesia, Japan, the United States, Philippines, Egypt, Brazil, Thailand, Myanmar and the Netherlands, in descending order. Land use and building regulations can regulate further construction in the areas to adapt infrastructure to the likelihood of being inundated. But as the recent Chennai disaster shows, government and citizens are not sensitized to this threat.

Taxing land use appropriately can boost local government revenues whilst also optimizing land use, resulting in more energy efficient cities and villages. A 360⁰ approach to sustainable development, as embedded in the Sustainable Development Goals adopted earlier this year, is the way to go.

Compensate for the conservation of natural resources

Just as forests are a carbon sink, coal or oil reserves, left unexploited in the ground, are also voluntary economic sacrifices. Compensating the public or private owners could incentivize conservation. Of course there are political economy issues associated with compensatory transfers. Natural resource rich countries may be non-democratic and dictatorial. Some oil rich regimes in West Asia use oil wealth to indirectly support the political use of terror. Empowering such governments with fiscal transfers may cross humanitarian and security “red lines”. But the principle can be applied selectively to freeze the threat of incremental carbon emissions.

New institutional arrangements

Effective institutions raise the benefits of cooperative solutions or the costs of defection, to use game theoretic terms

Douglass C. North, Nobel Laureate and Institutional Economics Guru.

Institutional change imposes costs. But it can be the game changer for getting results by aligning incentives with outcomes. We would do well to recall this central thesis of Nobel Laureate Douglass C North, Institutional Economist, who passed on last month. Changing the institutional framework within which foreign aid works and international cooperation arrangements are structured can have similar outcomes.

Incentives for improving cooperation

Unless shifts in the international economic fundamentals are explicitly recognized and factored into the architecture for cooperation, useful outcomes become prisoners to the asymmetry between intent, capacity and authority of individual countries. Implementation of the long sought for reforms in the governance of multilateral institutions could be one option to signal the need for emerging economies to play a more substantive role.

Going beyond voluntary pledges of finance

Additional finance is critical for mitigation. The existing arrangements seek to funnel additional funds provided by developed countries into the Green Climate Fund. But only $10.2 billion has been pledged against the targeted annual receipt of $100 billion by 2020. Dwindling growth, ageing populations and a reducing share of the rich countries in the world GDP are unlikely to create the political economy drivers for making them more generous.

A universal “carbon tax” is an alternative, straight forward approach. But it raises implacable issues of equity based on differential natural endowments and differential access to technology across countries.

Show me the money!

A better proxy of wealth to tax is cross-border investment. Imposing a tax on international capital flows, at a time when liquidity needs to be enhanced, does not make intuitive sense. But the distortionary impact can be minimized by keeping the tax at low levels making it too fractional to inhibit individual transactions.

The annual flow of cross-border private investments (debt, portfolio and foreign direct investments) has reduced significantly since the downturn of 2008 but the IMF still estimates it at US$ 4 trillion. Capital exporting countries also tend to be those which are growing well. Green bonds are already in the market. One driver of cross-border investments is the search for higher returns abroad or risk diversification. These drivers are unlikely to be diluted by a marginal tax on private capital outflow. The green tax could be a significant and buoyant source of green finance.

Time is running out. The existing clunky climate arrangements are broken. A new institutional framework is needed to integrate growth, development and environmental preservation. Improving the science of climate change is critical for a nuanced least-cost assessment of the balance between mitigation and adaptation. “Value for money” must replace today’s environmental theology to make people willing to pay for change.