A climate club
What is that supposed to be?
It is an idea of the American economist recipient of the 2018 Nobel Memorial Prize in Economic Sciences, William Nordhaus. He is a pioneer in environmental economics and has written several books on global warming and climate change (his latest: The Spirit of Green).
Tell me more.
The governments, Nordhaus argues, had used a flawed architecture in their attempts to forge treaties to counter climate change. The problem, according to Nordhaus: The treaties rely on voluntary arrangements.
What’s the problem with that?
By fighting climate change, the so-called free-rider problem occurs. The benefits of reducing emissions that are undertaken in one country will mostly accrue outside its borders. As a result, countries acting in their rational self-interest are incentivised to minimise their mitigation efforts and free-ride on others. In the end, global efforts to reduce climate change are insufficient.
Reality seems to agree with the theory.
The world has not yet peaked. At a time when global emissions need to be falling, they are, in fact, still rising. And if our aim is to limit warming to “well below 2°C” – as is laid out in the Paris Agreement – we are far off-track.
The current United Nations Climate Change Conference in Glasgow, Scotland, also known as COP26, is the 26th (COP1was in 1995 in Berlin, Germany). These conferences helped the climate. The warming scenarios with no climate policies are much worse (expected temperature rise: 4.1-4.8°C) than it is expected with current policies (2.7 – 3.1°C). But they are far from the necessary pathways which are compatible with limiting warming to 1.5°C or 2°C of warming this century. “At the end of this long string of conferences,” Nordhaus wrote in an essay last year, “the world in 2020 is no further along than it was after COP1, in 1995: there is no binding international agreement on climate change.” And: “When an athletic team loses 25 games in a row, it is time for a new coach. After a long string of failed climate meetings, similarly, the old design for climate agreements should be scrapped in favor of a new one that can fix its mistakes.”
What could that be?
Future international climate agreements require a central change referring to the incentive structure, Nordhaus argues. The Paris accord of 2015 is a voluntary agreement. It requires all countries to make their best efforts through “nationally determined contributions.” But since there are no penalties in case countries withdraw or fail to meet their commitments, they withdraw or fail all along. “The key to an effective climate treaty is to change the architecture, from a voluntary agreement to one with strong incentives to participate,” Nordhaus wrote. The architecture of a club has such strong incentives.
Nordhaus explains it this way: “A club is a voluntary group deriving mutual benefits from sharing the costs of producing a shared good or service. The gains from a successful club are sufficiently large that members will pay dues and adhere to club rules to get the benefits of membership.”
How can such a club save the climate?
In such a Climate Club, the participating states would agree to undertake harmonised emission reductions designed to meet a climate objective (such as a two-degree temperature limit). The decisive difference to the current situation is that nations that do not participate or do not meet their obligations would incur penalties.
How could the reduction efforts of club members be implemented in practice?
The focal provision of the agreement would be
- a carbon price that all club members agree on (it could start at €50 per metric ton of carbon dioxide, and it could rise over time) or
- a so-called cap-and-trade mechanism. In such a mechanism, the cap is the firm limit on CO2 emissions allowed to transmit, with the cap getting stricter over time. The trade part is a market for companies to buy and sell allowances that let them emit only a certain amount, as supply and demand set the price.
And what happens to those who don’t want to be part of the club?
They face penalties. This gives the club mechanism its structure of incentives and distinguishes it from all current approaches like the Paris agreement. Important: The penalties must be higher than the costs of protecting the environment for the club members. This creates the incentive to become a club member.
What if non-members refuse to pay the penalties?
The penalties could be levied in the form of customs duties such as tariffs on imports from nonparticipants into club member states.
The non-members would not like that.
Indeed. The club idea is a departure from the agreement idea, of everyone’s consent – or at least almost everyone. Instead, it is about building a coalition of the willing with negative consequences for those who do not participate.
Europe could be a member of such a club.
Together with other countries, Europe would be strong enough to found such a club – a coalition of nations that commit to strong steps to reduce emissions and mechanisms to penalise countries that do not participate.
What are the chances of success?
This is how Nordhaus puts it: “Although this is a radical proposal that breaks with the approach of past climate negotiations, no other blueprint on the public agenda holds the promise of strong and coordinated international action.”