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A Market Solution to Greenhouse Emissions By: Jagdish Baghwati
AEI.org | Monday, August 21, 2006


Al Gore has been busy returning global warming to centre stage with terrifying warnings of disaster with his bestselling book, An Inconvenient Truth, and the popular companion documentary. Tony Blair, the UK prime minister, has joined--even led--the renewed focus on global warming, charging Sir Nicholas Stern, the economist, with solving the problem. Alongside his successful initiative on Africa, this is to be his sure-fire international legacy as he ends his last term in office.

Getting global warming on the radar screen is only half the game, however. The other half has to be the design of policies to address it effectively. The centrepiece of world action has been the 1997 Kyoto Protocol to the Framework Convention on Climate Change. But while it embodied national obligations on carbon dioxide emission reductions and has now been ratified and approved by more than 160 countries, the US has not done so. So, the Kyoto protocol is dead in the water: you cannot stage Hamlet without the Prince.

Even though Bill Clinton, then president, and Al Gore, then vice-president, were fulsome supporters of the Kyoto accord--Mr Clinton even signed it--they could not get it ratified by the Senate that had united against it by a vote of 95-0 in 1997. When President George W. Bush rejected Kyoto, he was therefore resurrecting a corpse and knifing it, simply to please his anti-environmental constituents. But despite the presence of many who share the alarm over global warming, the unwillingness of the US Senate to sign on to Kyoto cannot be put down to US capriciousness. Rather, it reflects a serious flaw in the design of the protocol. When this is understood, the outlines of a better international assault on the global warming problem, which is both more attractive and likely to bring the US on board, become evident.

The fatal flaw in the Kyoto protocol is that it left India and China out of the emission-reduction obligations. Both are major polluters; India still way behind but China is closing in on the US. The US Senate could not buy into this exemption of India and China. First, the principle of "progressive taxation" that would leave the poorer countries with little obligation no longer has political salience in the US. Second, the image of these two giants long asleep and snoring has shifted to that of giants astir and spewing out significant levels of CO2 into the atmosphere, undermining the credibility of those who would exempt them from burden-sharing. So, why were India and China left off the hook?

The answer lies, as often, in analytical confusion and a political fudge. While the emissions of today are substantial and growing for India and China, the emissions of yesterday are mainly by the rich countries. The accumulated fossil fuel CO2 for 1850-2004 shows the damage attributable to India and China as less than 10 per cent while the European Union, Russia and the US jointly account for nearly 70 per cent.

India and China argued successfully that because they were hardly responsible for the "stock" problem past damage they should be exempted from the "flow" obligation the current damage at least for now. So, the stock problem was addressed by fudging the solution to the flow problem. The political fudge left Kyoto unsaleable. It will remain so unless it is revised to reflect the distinction between the stock and flow obligations and, therefore, the disconnect between the nations that did damage in the past and those that are joining their ranks with a vengeance. How is one to do this?

The stock problem can be addressed by adopting the very technique that the US has used at home to deal with past damage to the environment. Consonant with the American fascination with torts actions, the US enacted in 1980 the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the Superfund. Under it, a tax was levied on the chemical and petroleum industries and, among other actions, liability established for people responsible for the release of hazardous waste at closed and abandoned hazardous waste sites. It established a trust fund (which would also receive the payments for past damage under the act) to provide for "clean-up" when no responsible party could be identified.

This principle for dealing with past damage makes sense and can surely be applied in the international context. The rich nations, which have been responsible for the overwhelming bulk of the release of CO2 into the atmosphere in the past, would have to agree to payment of damages into a global warming superfund. These payments could be assessed for a period of no less than 25 years. The estimated damages could reflect the opportunity cost of reducing the CO2 emissions by a corresponding amount in the next 25 years.

Since "clean-up" does not make sense in the context of global warming, these funds would instead be allocated to researching a variety of CO2-saving technologies, such as wind and solar energy, and to subsidising the purchase of environment-friendly technologies by the developing countries, including India and China. Such subsidies would rebound to the benefit of the rich countries paying into the superfund, since their companies typically produce these technologies. So, aside from the global warming superfund being palatable to the rich countries because it reflects a principle already in domestic practice, business support for it can be expected as well.

On the other hand, the flows need to be taxed, just as in the polluter-pays principle. The existing obligations are based broadly on the half-baked principle of "prevention of significant deterioration", whereby those who pollute more do not have to pay more and only the excess pollution generated by each country is sought to be redistributed more equitably.

Instead, efficiency and fairness require nations to be taxed on their total CO2 discharge annually. China and India would then have liabilities reflecting their net discharges and the US burden would be significantly higher than that of almost all other nations because it pollutes most. Again, funds collected could be partly added to the global superfund for international uses; the rest could be spent on domestic projects for the same purposes. It is hard to imagine the US, the ideological ally of markets, objecting to this application of the market principle: making each nation pay for its total pollution. The tax is only a way like selling tradeable permits for CO2 discharges of creating a missing market.

There will be differences on how much we ought to spend on preventing global warming. But the difficulties posed by the flawed Kyoto design are gratuitous and can be remedied. It is time to correct them.

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Jagdish Baghwati is an adjunct scholar at the American Enterprise Institute.


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