A POST-KYOTO AGENDA FOR ADDRESSING GLOBAL WARMING Joseph Stiglitz Kyoto July 4, 2006

The Achievement of Kyoto Recognition of the importance of global warming A global agreement signed by most advanced industrial countries A slowing of global emissions by the advanced industrial countries

The Failure of Kyoto Enforcement Failure of U.S., the largest polluter, to join Impasse in bringing along developing countries Insufficient progress on deforestation— undoing much of the progress made elsewhere Global warming is too important to rely on goodwill, to just hope a way out of the impasse will be found.

Three Reforms Using WTO as an enforcement mechanism Rainforest initiative—credit for avoided deforestation A common emissions tax

I. WTO as An Enforcement Mechanism Enforcement mechanism is necessary  Avoiding global warming is a public good  There is a danger of a free rider problem  There may even be some countries that could benefit  Yet global costs are enormous  An example of a global negative externality  Especially important given role of special interests in some countries in setting policies  Cannot allow any rogue state to hurt others Damage greater than that of any war

There Are Precedents Principle already established in shrimp-turtle case  Environment trumps commercial concerns  Thai shrimp caught in turtle-unfriendly nets could be barred from U.S. Process mattered Clearly, global warming is a more important global concern Principle used in Montreal Convention on ozone- destroying gases

Underlying Economics WTO tries to create a level playing field Subsidies are illegal Not paying full environmental costs is just as much a subsidy as not paying full labor costs The U.S. has an enormous unfair advantage because its firms do not pay costs of emissions But rest of world is paying consequences

Simply A Matter of Political Resolve Europe, Japan need to bring action Ban energy intensive goods produced in the United States, or impose countervailing duties (to offset emission subsidy) Alternatives: could impose “emissions equivalent tax” on all goods (on emissions embedded in them), with offsetting credits for energy taxes already paid  No net taxes would be due on European, Japanese goods, only on American produced goods

II. Rainforest Initiative Developing countries provide enormous environmental services to developed countries, for which they are not being compensated  Biodiversity  Carbon sequestration  Fair market value of compensation is very large  Costa Rica has shown that such a system can work, delivering benefits to small landowners Major mistake at Kyoto – failure to include avoided deforestation  Magnitude of which is huge  Offsetting much of the gains from Kyoto

Rainforest Coalition South cooperative effort Recognizing global warming as a global problem In which there must be South participation Could make substantial difference for global environment and development of affected countries  Increased supply of carbon credits will lower overall cost of meeting emissions reduction targets

III. A Global Emissions Tax Key problem with Kyoto framework— establishing targets for developing countries  Has to be done in a way they find acceptable  Which means it has to be perceived as fair  But reductions from 1990 base makes no sense: Why should those who polluted more in the past be entitled to pollute more in the future?

Alternative Standards Common standards  Developing countries argue that advanced industrial countries should reduce pollution more because their pollution caused most of the current problem  And besides, the advanced industrial countries can more easily afford pollution reductions A common emission per capita standard  Will not constrain developing countries for decades  But will not likely be acceptable to U.S. A common emissions per dollar GDP standard  Might be acceptable to U.S., but not to developing countries  Why should richer countries be granted larger entitlement to pollute just because they are richer?

An Economics-Based Solution Problem is that polluters do not pay the marginal social cost of pollution—marginal social cost of emissions Solution: force all to pay marginal cost through common tax High enough tax would lead to same level of reductions as in Kyoto

Critique of Emissions Tax Setting targets has more certainty of achievement (if only agreement could be reached and enforced) But tax could be adjusted over time And risk is not related to annual emissions But to overall concentration level So with regular adjustments in tax rates, little additional risk in area of concern

Further Advantage of Emissions Tax Revenues could be used to finance global public goods  Of increasing importance as globalization proceeds Resulting in greater interdependence And therefore greater need for collective action Including the provision of global public goods  Including financing development

Alternatively… Each country could keep its own revenues Which would reduce distributional consequences  Emissions tax substitutes for other taxes (labor, capital)  Taxing “bads” (with corrective, Pigouvian taxes) is preferable to taxing “goods”  For most countries, cost negative  Only difference is between deadweight loss of emissions tax and the taxes for which it substitutes  And distributional consequences relate only to differences in those differences

There Will Be Opposition… There are global distributional consequences from the reduction in the demand for emission- generating activities  But these are the same as would arise in an effective targets-based approach And there will, as a result, be opposition from special interest groups  Especially important in flawed democracies where special interests play large role, e.g. through campaign contributions

Sunk Costs The world has invested enormously in the targets approach  Including creation of emissions trading schemes  Represents major achievement And it is understandable to try to take advantage of political momentum behind it, to make it work But there have been no serious proposals for a way out of the current impasse

Global Warming Is Too Important… Global warming is too important to rely on goodwill, just to hope a way out of the current impasse will be found It is time to begin exploring other ways of reaching a global agreement on what can be done to solve this problem