Leadership in the Struggle for Environmental Sustainability and Conservation Brussels December 1, 2006 Joseph E. Stiglitz

Environmental Sustainability: one of key issues of twenty first century Even if we succeed in making economic globalization work, it will make little difference if we do not have a livable planet –One of key messages of my recent book Making Globalization Work –Increasing incomes in the 80% of the world that remains underdeveloped will put enormous strains on the world’s environment –Evident in China, whose economy has been growing at close to 10% for three decades –Entering a stage of development where demands on environment are particularly great In later stages of development, services become more important Housing, cars, roads are all resource intensive –China is approaching income (PPP) where resource intensive consumption levels will increase dramatically –China has already become second largest car producer

The challenge What will happen to the planet if everyone consumes like the U.S. or Europe –Or even approaches that level? Optimists: markets will take care of it all –As demand rises, price will rise –And with higher prices, we will all economize –There will be greater incentives for resource saving innovation –And there will be greater incentives to discover new sources

The reality Markets often do not work well Or do not work at all Especially in areas touching the environment The ‘tragedy of the global commons” –We share a common atmosphere –But no one is charged for using or abusing the atmosphere –It costs money not to pollute –And so firms, households have an incentive to pollute Similarly for global fisheries, our oceans, biodiversity, our scarce habitats

Global and Local Commons The tragedy of the commons: too much or too little markets? Many communities learned how to manage the “local” commons –Regulate usage –Some have argued that the “tragedy of commons” was because of a failure to give clear property rights –But many communities managed to use social controls to solve the problem of the commons –It was with “marketizaton” and the breakdown of these social control mechanisms that the tragedy of the commons appeared. –But even with privatization, there is often a need for government enforcement

Assigning Property Rights—without a social consensus—can make matters worse Property rights are never perfectly assured Depend on legitimacy If they are viewed as illegitimate, a variety of ways that they can be circumscribed But those given control of assets know this, and thus they have an incentive to extract resources as fast as possible—before there are “second thoughts” –Rapid privatizations give rise to rapid depletion and resource abuse

Prices and Incentives When these problems happen on a significant scale, then price signals can go awry –Excessive logging can mean that the price of logs are low and even falling –And that will mean that there will not be incentives to conserve

“Pure Global Commons” The real tragedy of commons is occurring at the global level –Rapid depletion of fisheries –Global warming In the case of the pure global commons, like fisheries and our atmosphere, there is no incentive to conserve –Everyone wants to free ride off of others –Everyone benefits from there not being ozone depleting gases –The world as a whole benefits from avoiding the risk of global warming No one has proposed “privatization of atmosphere” –Though auctioning off global fishing rights, with proceeds used for development and other global public goods, may be able to provide efficient and equitable approach to global fisheries

Global Warming Effects are uncertain But we have only one planet Too risky an experiment Given large non-linearities, time lags, irreversibilities important to take early action

The Need for Leadership Failures of markets, high levels of uncertainty, effects which are far reaching but often distant in the future will mean that leadership will be required –Decisions today will have long lasting effects Power plants last 40 years or more Land use decisions (zoning, road networks) can have effects that last even longer –Decisions will affect every aspect of society Need to see complex relationships Exercises in true creativity in solutions Look for unanticipated impacts, assess impacts on all groups in society

Like so many other aspects of globalization, the poor are more likely to be adversely affected, and are less capable of responding Developing countries face greatest challenges and opportunities They have greater scope for increasing energy efficiency –Would benefit economy as well as environment –Would benefit local environment as well as global environment Much less expensive to plan urban transportation system early in the development of a city than later Making cities livable will be one of great challenges in developing world Should learn from mistakes made elsewhere

Putting Kyoto in Perspective Major achievement in many countries putting aside differences But—3/4 of sources of emissions excluded –U.S. 20% of emissions –Developing countries within 30 years will be responsible for 50% of emissions—no obligations –Avoided deforestation –accounts almost for as much as U.S.

The Impasse U.S. says won’t go along without developing countries –But developing countries ask why should they have fewer permits per capita –Argument for more permits per capita—advanced industrial countries have already used up their share If emission rights are not tradable, then there will be no incentives to restrict emissions for a century If emission rights are tradable, vast redistributions, beyond willingness of advanced industrial countries

Poor U.S. arguments U.S. says mitigation too expensive –America can afford—countries with just as high standard of living with much lower levels of emissions per capita and per dollar gdp –Does give U.S. firms competitive advantage Hidden subsidy U.S. says should rely on volunteerism, technology –Why should we not use market mechanisms in this key area? –Volunteerism won’t work –Technology needs incentives

Leadership Required to getting global consensus –Persuasion—helping people understand consequences of actions Especially important when impacts will not be felt for years to come Especially important when there is a complex system, effects are felt indirectly (as in global warming) Appealing to senses of social solidarity and social justice Requires global solution—without universal participation partial restrictions could make problems worse (leakages)

–Forging reasonable compromises Figuring out true concerns, ways of dealing with them Example: Safety valve –Environmentalists claim that costs of carbon will be low –Businesses worry that price of carbon will be high –Safety valve—issue more permits if price goes above threshold Flexibility—different ways of meeting goals –Importance of Democratic dialogue At every level (community, national, global) Improved information, “ownership” –May have to provide incentives for cooperation carrots and sticks May require taking risks –Need to see big picture Relationship with other environmental problems, other societal problems (making livable cities) Keep economics/environment in perspective

Global Warming: An Example Key issues Avoided deforestation A new global framework—embracing both developing countries and U.S. Ensuring compliance

I. Avoided Deforestation Analysis –Deforestation contributes enormously to greenhouse gas concentration –Kyoto provided no incentives not to deforest –Countries better off cutting down trees and replanting them Inefficient bad for biodversity

–Poor countries do not have resources to protect forests (illegal logging) –Poor countries need money from logging—get small fraction of market value –Poor countries providing environmental services to whole world of enormous global value for which they are not being compensated Bio-diversity Carbon sequestration Value of carbon services provided by developing countries greater than the foreign aid that they receive

Including avoided deforestation within Kyoto framework Countries would get “credit” for avoided deforestation, just as they do for planting forests –Need to be able monitor total forestation –Modern technology enables this to be done

Rainforest coalition Countries make overall commitment to reduce carbon emissions But eligible to receive credit for avoided deforestation Incentives—to maintain forests Resources—to protect forests and grow With appropriate design, benefits could reach down to small holders –Costa Rica success –Huge increases in forestation

Certified Lumber Would help by curtailing illegal logging –Giving more resources to developing countries Need to log less Resources to fight illegal logging Important role for consumer groups, investor activists, corporate social responsibility, and government (public policy)

Resistance Cannot “enforce” –Not true with modern technology Magnitude of potential transfers –“non-linear” compensation schedules may be effective compromise—strong incentives at the margin Makes life too easy for developed countries –But efficient reduction in emissions/greenhouse gas concentrations requires dealing with avoided deforestation –Challenges for developed countries still enormous –And reducing cost of compliance with enhance political support What about avoided deforestation in U.S., Russia, etc?

Avoided deforestation proposal Addresses more than one problem –Environment –Development Addresses more than one environmental issue –Carbon sequestration –Biodiversity Addresses more than one objective –Efficiency Efficient reduction in carbon concentration Incentives to maintain forests—to advance global public good –Fairness to developing countries

Avoided deforestation Proposal Of interest to both developing and developed countries –For developed: lowers price of carbon trading –Additional resources for developing country Political strategy –Forging agreements that bring benefits to broad spectrum –Succeeded in getting on post-Kyoto agenda

II. A New Global Framework Kyoto target system at an impasse –No one has put forward proposal, principle that could begin discussion between U.S. and developing countries –Key reason: Magnitudes of distributive consequences too large A globally agreed tax on carbon emissions –Natural solution to problem of externality—making people pay for costs imposed on others –At appropriate rate, would provide efficient market based incentives to reduce emissions which would generate same level of reductions as agreed “targets”

–Eliminates major distributive consequences across countries (other than between countries owning carbon resources and others) Distribution key impediment to an agreement But does not eliminate distributive consequences within countries –Stronger incentives to make better long run decisions—power plants, land usage (transportation systems), innovate, develop biofuels—helping poorest (in agricultural), enhancing energy security (less dependent on middle east oil), saving money, and helping the environment Benefits already evident in Brazil

Increasing support Makes more sense to tax bad things (like pollution) than good things (work and savings) Net cost to any country would be minimal –Particularly if some assistance is given to developing countries

III. Global Compliance Real temptation to be free rider on actions of others Current system gives competitive advantage to U.S. and developing countries –Worse: leakages mean that global reductions may be limited Need to have incentives

Incentives for Compliance Carrots and sticks Countries that do not “comply” should face trade sanctions –Sanctions should be imposed against countries that do not impose sanctions –Trade sanctions worked in case of ozone destroying gases (Montreal convention) –U.S. argued that one has the right to use trade sanctions for sustaining global environment Thai shrimp turtle case Principle upheld Implications for global warming clear If it is permissible to impose trade sanctions to save turtles, it should be permissible to do so to save the world’s atmosphere

Two approaches Direct trade sanctions are those that don’t comply Consumption carbon taxes, with “credits” for carbon taxes paid in production –Beginning of support for this idea –Leveling playing field

Example 2: Water Basic necessity of life But also an economic “good”—limited supply –With growth in economy and population shortages increasing Conflicts in usage –Long standing upstream/downstream Riparian rights –Agriculture, industry, cities –Major cross border conflicts Nile river –Ethiopia denied use of its own waters –In Sudan/Egypt agreement in which it did not participate Middle East Across states in U.S.

Subsidized water contributes to –Water shortage Profligate use Lack of incentive to recycle Lack of incentive to innovate –Global inequities (increased agricultural production in U.S.) Privatization of water has been major source of conflict in many developing countries

Need to find solutions that allow access to water as basic human necessity and provide for more efficient usage –Portfolio of strategies –Price incentives “non-linear pricing”—to ensure access to water by poor –Information—monitoring usage, recycling Reinforcing corporate social responsibility In other areas, shown to be effective –Regulation/standards –Research

Leadership in Sustainability Especially important because impacts will not be felt for long run and temptation to free ride –Individual incentives for doing the right thing missing –Even national incentives for doing right thing missing –Worse, there are often incentives for doing the wrong thing

Needed in every aspect of agenda Research –Identifying most important problems –Identifying possible solutions –Science based policy Community involvement/mobilization –In democracies, nothing will happen unless there is a demand for action from citizenry Especially because some special interests may benefit from current arrangements Disinformation—as in the case of tobacco Discouraging production of information—working against green GDP accounting –Democratic dialogue to forge consensus solutions

Individual actions –Small actions, replicated millions of times, can make a large difference –Projects can provide examples from which we can all learn –Enormous scope for innovation

But volunteerism by itself won’t suffice –Volunteerism is important –But it is not solution –Need political solutions Energy usage a result of public decisions like zoning, road networks Individuals need incentives to conserve Firms need incentives to innovate –Need global solutions Leadership particularly important because of conflicting self- interests Too easy to play to national interests, especially when well- funded by special interests

Our future well being Depends on taking actions now For conservation and environmental sustainability If we lack the leadership from the top, then we must have leadership from below