The Paris Agreement – for three main reasons – will shape the future of climate and energy policy.
First, the long-term aim has been sharpened from 2°C to “[h]old[ing] the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C”. At first sight, this is a major victory for the environmental movement. However, the previous target of 2°C is widely believed to be unfeasible. The rate of decarbonisation of the world economy would need to increase the current 1% per year to 5% or 6%, and we would need a public programme – comparable in size to health care – to subsidise bioenergy, as well as carbon capture and carbon storage on a massive scale (Clarke et al. 2014). In Paris, this near-impossible goal was replaced by a more ambitious one. Like contestants at a beauty pageant telling the jury that their deepest wish is world peace, political leaders pleaded for the most stringent target they could think of. And why would they not? Pleas like this placate environmentalists. But it is cheap talk.
To see why this is cheap talk, we need to consider the second key development. From COP1 in Berlin 1995 to COP15 in Copenhagen 2009, the climate negotiations aimed at legally binding targets for greenhouse gas emission reduction. This seemed successful for a while, but in the end the 1997 Kyoto Protocol only bound the EU and Japan to doing what they planned to do anyway – its effect on emissions is barely significant (Aichele and Felbermayr 2013). After the failure of Copenhagen, binding targets were abandoned. In Paris, countries agreed that each country should implement climate policy as it sees fit – the only obligation is to deposit national plans with the United Nations. There are no sanctions for missing targets, and no meaningful mechanism to ensure that national ambitions add up to the global aspiration.
As economists, we should be pleased with this outcome. It was predicted that a global agreement on emission reduction is not feasible (Carraro and Siniscalco 1992), that a single coalition is ineffective (Barrett 1994), and that multiple coalitions cannot provide the public good either (Osmani and Tol 2010). It is good to see predictions come true. As science communicators, however, we failed – despite stark warnings (Nordhaus and Boyer 1999), policymakers tried the impossible for 15 years. As taxpayers, we should be concerned by the cost of it all.
There is a subplot to the negotiations. Because the Paris Agreement does not impose any meaningful obligations on developed countries, developing countries lost their leverage. Developing countries no longer need to approve of emission reduction in developed countries, so the latter no longer need to bribe the former. The Paris Agreement is thus the first to keep the promises of climate aid at their previous level.
The third key development comprises two major announcements on energy research. Mission Innovation is an agreement between 20 countries to each double, over five years, public research and development in clean energy. The countries include the big and relevant ones – the US, Brazil, the UK, France, Germany, Saudi Arabia, India, China, South Korea and Japan. Many of these countries already invest quite heavily in renewables research and development – so far without much to show for. It is unclear whether this would have a positive effect on innovation. Five years is too short to double the number of researchers with an aptitude for renewable energy. More likely, the new moneys will be used to drive up wages and finance duds. Some of the countries involved have strict austerity programmes. More money for renewables research will mean less money for other research.
Mission Innovation includes the Breakthrough Energy Coalition. It is a private initiative, aiming to complement venture capital and angel investments in renewable energy and energy efficiency. This makes sense at first sight – lead times in energy are much longer than in information technology or pharma, so extra-patient capital is welcome. Then again, the energy sector does not lack innovation. Progress has been particularly remarkable in shale oil and gas. The problem with renewables is that demand is limited without government support. Keeping start-ups going for longer will not solve that. Only driving down the cost of renewables will. It is not clear that the billions of dollars put on the table in a new supply-push will be enough. After all, the International Energy Agency reckons that the investment needed is measured in trillions rather than billions (IEA 2014), while the Paris Agreement implies that the demand-pull for renewables will be weak. The close ties between Mission Innovation and the Breakthrough Energy Coalition – the latter’s money will only be used to complement the former’s investment – suggest that this is an innovation in rent-seeking rather than renewable energy.
All in all, the Paris Agreement marks a sharp departure from the past. After decades of being away with the fairies, international climate policy has returned to Earth. The focus should now be on policies that reduce greenhouse gas emissions – instead of policies that create rents for political allies. Unlike in fairy tales, time has passed and the climate problem has grown worse. While international climate policy was slowly finding its feet, coal-fired electricity expanded rapidly, with many more power plants under construction, and shale oil established itself. As a next step, national climate policies should be subjected to the same sort of scrutiny as other public policies.
Aichele, R and G Felbermayr (2013), "The Effect of the Kyoto Protocol on Carbon Emissions", Journal of Policy Analysis and Management 32: 731-757.
Barrett, S (1994), "Self-Enforcing International Environmental Agreements", Oxford Economic Papers 46: 878-894.
Carraro, C and D Siniscalco (1992), "The International Dimension of Environmental Policy", European Economic Review 36: 379-387.
Clarke, L., K Jiang, K Akimoto, M H Babiker, G J Blanford, K A Fisher-Vanden, J C Hourcade, V Krey, E Kriegler, A Loeschel, D W McCollum, S Paltsev, S Rose, P R Shukla, M Tavoni, D van Vuuren, and B van der Zwaan (2014), "Assessing Transformation Pathways" in O Edenhofer, R Pichs-Madruga and Y Sokona (eds.), Climate Change 2014: Mitigation of Climate Change - Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge: Cambridge University Press.
IEA (2014), "World Energy Investment Outlook. Paris: International Energy Agency".
Nordhaus, W D and J G Boyer (1999), "Requiem for Kyoto: An Economic Analysis of the Kyoto Protocol", Energy Journal Special Issue on the Costs of the Kyoto Protocol: A Multi-Model Evaluation: 93-130.
Osmani, D and R S Tol (2010), "The Case of Two Self-Enforcing International Agreements for Environmental Protection with Asymmetric Countries", Computational Economics 36: 93-119.