Peter Birch Sørensen, University of Copenhagen, keynote at The Lost Decade conference, March 1, 2019, Aalborg University

1. Peter Birch Sørensen
Keynote lecture at conference on
The Lost Decade
at Aalborg University,
March 1, 2019
Designing
international
negotiations on
climate policy

2. The issues
• What are the key features of an ideal international
agreement on climate policy?
• Why has so little progress been made?
• How can the framework for negotiations be
redesigned to increase the probability of success?
• What can frontrunner countries do?
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3. What would an ideal international
climate agreement look like?
(Imagine that you’re in Nirvana)
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4. Features of an ideal international agreement
An ideal international agreement on climate policy
should
• Attain the target for global warming
• Be cost-efficient
• Be fair
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5. Cost-effectiveness
• Requires equalization of marginal abatement costs
across countries
There are two alternative ways of achieving this:
• A global carbon tax
• A global cap-and-trade system
Both systems allow a cost-efficient reallocation of
abatement efforts
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6. The benefits of trading emission rights:
Costs of meeting the Paris NDCs with and without trade
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Source: Rose et al. (2017).
Equity, Emissions Allowance
Trading and the Paris
Agreement on Climate
Change. Economics of
Disaster and Climate Change

7. Fairness
Fairness criteria: GDP per capita, historical emissions, etc.
• Carbon tax: Revenue distributed according to fairness
• Cap-and-trade: Initial emission rights distributed
according to fairness
• If direct international redistribution cannot be achieved,
rich countries should pay a higher marginal abatement
cost (efficiency sacrificed for the sake of equity)
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8. Why all those lost decades?
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9. Reasons why so little has been achieved (I)
Economic reasons
• Strong incentive for free-riding
• Global warming has different effects across countries
• Abatement costs differ across countries
• Countries differ in their ability to pay for abatement
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10. Reasons why so little has been achieved (II)
Political reasons:
• Different historical responsibilities across countries
• Inequality across countries
• Inequality within countries
• Strong vested interests in the current energy system
• Different degrees of awareness of the climate problem
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11. How could we change
the rules of the game?
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12. The key problem
• An effective cooperative international climate
agreement could yield a huge Pareto improvement
but
• How do we overcome the free rider problem and the
associated problem of carbon leakage?
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13. A carbon tariff to counter free-riding?
Idea: Tariff on carbon content in imports from free-riding countries
Problems:
• Very hard to measure carbon content
• Discrimination against climate-friendly producers in free-riding
countries
• Need to establish a ”climate club” of critical mass
• Risk of trade wars
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14. Ordinary tariffs to counter free-riding? (Nordhaus)
Idea: General tariff on all imports from free-riding countries
Advantages:
• Simple to administer
• Could provide strong incentive to cooperate (next slide)
Problems:
• Discrimination against climate-friendly producers in free-riding
countries
• Risk of trade wars
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15. Incentives to participate in climate club when
non-members are penalized by tariffs
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Source:
Nordhaus (2015)

16. Countering free-riding by negotiating a
minimum carbon price (Weitzman)
Problem with the conventional approach:
• Negotiating the allocation of a fixed carbon budget is
a zero-sum game
Alternative proposal:
• Focus on negotiating a minimum carbon price
• Allow each country to implement the carbon price in
their own preferred way (and to keep the revenue)
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17. How does negotiating a minimum carbon
price counter free-riding?
• The minimum carbon price is binding for all countries
participating in the negotiations
• Each country therefore knows that if it ”votes” for a
higher carbon price, all other countries will have to
implement this higher price if it is adopted
• Hence the risk of loss of competitiveness and carbon
leakage is greatly reduced if a country supports a
higher carbon price
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18. Problem solved?
• The parties to the UNFCCC would have to agree on
shifting the focus of the negotiations to a minimum
carbon price
• Implementation of the minimum carbon price would
have to be monitored
• Unanimity may have to be sacrificed, i.e. climate clubs
may have to be formed
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19. What can frontrunner countries do?
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20. What can frontrunner countries do?
Drop orthodoxy:
• Maximising the domestic contribution to global emissions
reductions requires sector-specific carbon prices differentiated
according to carbon leakage
• Promotion of renewable energy within the European Emissions
Trading System can permanently reduce global emissions
Further measures:
• Spillovers from national R&D
• Climate finance
• Lead by example
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