Response to Lipow on Climate Change Policy

1. Caps for All Countries

By only permitting credits to be sold by sources located in countries whose national emissions are capped it is impossible for bogus credits to undermine global emission reductions as long as national governments meet their treaty obligations. Lipow concedes that this is true. I also pointed out that any treaty must induce its signatories to meet their treaty commitments – in this case to meet their reduction quotas – whether or not emission credits are bought or sold. Lipow also concedes that this is true. And finally I pointed out that it is relatively straightforward to measure whether or not a country has reduced its emissions sufficiently, whether or not credits are bought or sold. Which Lipow also concedes is true. So what does his critique amount to? Lipow claims that a government found to be in violation of its treaty obligations is more likely to object and resist paying any penalties if it has certified bogus credits for sale than if it has not certified credits for sale.

Suppose the treaty requires a country to reduce its national emissions to X. Suppose the treaty organization measures its national emissions to be greater than X, putting the country in violation of its treaty obligations. Will the country government challenge the ruling? Will it pay any penalties? Now suppose the government has authorized the sale of bogus credits equal to x. Suppose the treaty organization measures its national emissions to be greater than X – x, ¹ putting the country in violation of its treaty obligations. Will the country government challenge the ruling? Will it pay any penalties? Lipow argues the answer is different in the second case, and the country will be more likely to challenge a ruling and less likely to comply with any penalties. Lipow admits that a rational government would react in the same way in either case, but claims that for psychological reasons governments in these different scenarios would behave differently. This is such a minor issue I am happy to leave matters at that, and let readers judge whether Lipow’s long and convoluted argument about “loss aversion” in this setting is really important enough to worry about. At best, I think his argument would carry very little weight when considering all the pros and cons of different international climate policies, as explained below.

2. National Governments as Policeman

Once emissions are capped in all countries the international community has nothing at stake with regard to the legitimacy of carbon trading because planned global reductions would be secure even if bogus credits were traded. On the other hand country governments would have a powerful incentive to prevent bogus sales by sources within their territory because the treaty effectively requires the government to cover any shortfall the sale of bogus credits creates. That is why I recommended putting national governments in charge of accreditation. ² I did not suggest their job would be easy. I did not pretend national governments would not make mistakes. I did not claim those wishing to sell credits would not pressure the government agency to grant more credits than they should. In fact, in my article I explicitly flagged all these problems that Lipow belabors endlessly. I merely pointed out that national governments have the best incentive to do a good job of certification.

I also pointed out that precisely because policing accreditation is inherently difficult and predictably contentious it would be helpful to relieve the international treaty organization from this burden. International negotiations are difficult enough without getting bogged down in disputes over policing the international carbon market which my proposal made unnecessary. All the controversy over the CDM certification process proved to be a debilitating distraction from the essential tasks of monitoring national compliance and administering penalties for signatories found in violation of their treaty obligations. I also was at pains to point out that any government which did not feel up to the task of certifying credits for sale was free not to do so, and that if citizen groups monitoring certification in their country became sufficiently disenamoured of the results they both could, and should, wage a campaign to shut down certification. I did not propose that every country must certify emission reduction credits for sale, only that they be permitted to do so if they wished.

3. Capping Net Emissions

Lipow apparently does not understand that national gross carbon emissions are always larger than national net carbon emissions since some carbon is sequestered in every country every year, nor that this implies that a given percentage reduction in gross emissions (a larger number) will always require eliminating more tons than the same percentage reduction in net emissions (a smaller number.) Instead Lipow presents what is a logical necessity as an empirical finding that is somehow worthy of note.

Since what matters as far as climate change is concerned is net emissions, I proposed that scientists set a target for how much global net emissions must fall to keep average temperature from rising by more than 2 degrees Celsius, and that something like the Greenhouse Development Rights Framework responsibility and capacity index then be used to distribute this reduction in global net emissions fairly among countries. ³ This is no more difficult than basing policy on gross emissions, and requires no more elaborate calculations. ⁴ Of course all the numbers – starting with the drop in global net emissions needed, on down to the fair drop in national net emissions for each country – would be different than if policy was written for gross emissions. My point was that policy should be written for net emissions, obviously with numbers that are appropriate for net emissions. Lipow wastes pages demonstrating the obvious – that the numbers would be different – but not a single word in response to my reasons for why we should base policy on net rather than gross emissions. Most importantly, capping national net emissions, rather than gross emissions, provides proper incentives for countries to encourage sequestration as well as discourage emissions, and therefore in particular to discourage deforestation, none of which Lipow seems to appreciate.

Lipow voices one concern regarding sequestration others sometimes raise which does deserve a response. He argues that whereas emission reductions are permanent, sequestration increases may not be, and for that reason they may not be equivalent. Obviously exchanging something that is permanent for something that may prove to be only temporary is a bad deal. But it is wrong to assume that only sequestration may prove temporary. Just as a forest conserved this year may be cut next year, oil fields shut down this year because oil prices are low can easily be re-opened next year if oil prices rise. Nor is it true that while emissions are subject to human control, sequestration is not. Just as lower temperature and humidity can decrease sequestration from a forest below what was predicted, an unexpected economic recovery can increase carbon emissions by more than was anticipated when a carbon tax was passed. Neither sequestration nor emissions are completely predictable, nor completely subject to human control.

But suppose for the sake of argument that on average sequestration were less permanent and less subject to human control than emissions. If annual caps are set on net emissions then emissions are penalized whenever they occur and sequestration is rewarded whenever it occurs. If a forest is conserved for only a year before being cut, the country is credited for sequestration only during the year when there was sequestration. The country will not receive credit for sequestration in the second year because it did not take place, and will be charged for any emissions released from cutting in the second year. In other words, impermanence – regarding sequestration or emission reduction – poses no measurement problems for the treaty I proposed because countries are penalized and rewarded for what actually occurs, when it occurs, which means the incentives are right for sequestration as well as emissions whenever they take place.

4. Conclusion

Despite its length, Lipow’s article does not address why anyone might consider carbon trading in the first place. I am not talking about why Wall Street or large corporations in the advanced economies facing high reduction costs look favorably on carbon trading, because that is obvious. They are simply looking to profit from something, as always. I am talking about why professional economists who work on climate change policy, and why progressive economists who care about equity, see tremendous advantages in an international carbon market.

Economists who work on climate change have long understood that one of the dilemmas is that while poor countries bear less responsibility for having caused the problem and are less capable of contributing to its solution, it is often far cheaper to reduce emissions in poor countries than in rich ones. At first this seems to imply an irresolvable conflict between addressing climate change efficiently – reducing emissions where it is cheapest – and responding to climate change fairly – requiring richer countries to bear more of the costs of reduction. But as soon as one realizes that just because a reduction is located in a poor country does not mean the poor country must pay for it, a solution to the dilemma appears: make the richer countries responsible for paying for the bulk of reductions, but allow them to pay for reductions wherever they are cheapest, which will often be in poor countries. And that is where international carbon trading comes in.

When national emission caps are set fairly – according to differential responsibility and capability – international carbon trading dramatically reduces the overall global cost of preventing climate change while forcing the advanced economies to pay for those costs. Sources in wealthy countries with low caps and high reduction costs will find it in their interest to purchase emission reduction credits from sources in poor countries with high caps and low reduction costs. In effect there is a large efficiency gain from locating reductions in poor countries, which sources in rich countries benefit from by paying less for those reductions than it would cost them to reduce at home, and sources in poor countries benefit from selling credits for more than it costs them to achieve the reductions. In short, carbon trading locates reductions where they are cheapest, largely in poorer countries, but ensures that wealthy countries pay for them.

This is important for two reasons: it would reduce political resistance in wealthier countries to cutting emissions by enough to avoid disastrous climate change. And it would generate a large flow of payments from sources in wealthy countries to sources in poor countries. Payments for carbon credits from the global North to the global South under a fair and effective treaty would dwarf the size of any climate “reparation payments” Northern countries would ever agree to pay because buying carbon credits is based on self-interest while donating money to a reparation fund is charity motivated by guilt. Moreover, unlike Larry Summers’s infamous suggestion that it is “efficient” to deposit even more toxic wastes in countries where life expectancy is low, since reducing carbon emissions also reduces other pollutants as well, having wealthy countries pay for carbon reduction in poor countries has the additional benefit of lowering exposure to toxic wastes of poor country residents. All of which I explained in my article.

However, you would never know of these potential advantages from international carbon trading from reading Lipow’s article. From his article one would assume only Wall Street and wealthy polluters in rich countries stand to benefit from carbon trading. If this were the case I would agree that even minor problems would be more than enough to tip the scales against international carbon trading. But this is not the case. In fact there are substantial benefits, and Lipow fails to offer a single reason to doubt the benefits I explained at length in the article, summarized above. It is because these benefits far outweigh the problems – not because there are no problems – that international carbon trading in the context I describe deserves support.

Other than Lipow’s farfetched argument about loss aversion, I explicitly acknowledged every problem he raises in my article. My argument was not that accreditation is not difficult, nor that awarding too many credits does not impose unjust burdens on others within countries. I stipulated as much, and counted these consequences as disadvantages. Instead, my argument was that the advantages far outweigh the disadvantages, particularly once we minimize the negative consequences. My argument was that the most serious drawback from trading bogus credits, undermining global reductions, can be eliminated entirely by capping national emissions in all countries, while inequities within countries can be minimized by choosing the right policeman.

However, I am more than willing to leave the question of carbon trading to be decided after we have a treaty that accomplishes the two essential tasks: (1) require an overall global reduction in net carbon emissions sufficient to prevent average global temperatures from rising by more than 2 degrees Celsius; and (2) distribute this reduction to countries according to differential responsibility and capability. Once we have accomplished this I am confident that environmentalists pressing for steeper and more rapid reductions, and governments of less developed countries, will quickly come to see that the advantages of allowing carbon trading far outweigh the disadvantages, and that Lipow’s arguments to the contrary are inconsequential.