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Climate Contracts

Greenhouse Markets after Copenhagen


IGEL Conference-Workshop
March 2010

Eric W. Orts
Guardsmark Professor Director, Initiative for Global Environmental Leadership

From the Dreams of Kyoto to the Crash of Copenhagen

Diagnosis: failure of standard legal and economic policy recommendation that the problem of climate change requires a comprehensive treaty involving all countries.
One leading source (among many): Jonathan B. Wiener, Think Globally, Act Globally: The Limits of Local Climate Policies, Univ. of Pennsylvania Law Review, vol. 155, pp. 1961-79. Classic: Garrett Hardin, The Tragedy of the Commons, Science, vol. 162, pp. 1243-48 (1968).

Reasons for Failure of Comprehensive Solutions

Too many people; too many countries.


Competing national economic self-interests. Ethical claims of justice and fairness:
historical and per capita greenhouse gas emissions

Long-term horizon for climate problems as compared with present economic benefits. Short-term evolutionary wiring of human brains.

Problems Even If a Comprehensive Global Treaty Were Adopted

Accurate monitoring Effective enforcement Leakage

Location leakage: industrial or other sources of emissions relocate from more heavily regulated places (e.g. EU) to less regulated places (developing countries). Market leakage: prices increase for products/services in more heavily regulated places, thus providing market incentives favoring less regulated places.

Second-Best Solutions: Non-comprehensive Climate Contracts

Prescription: private and public solutions at various levels: from global to transactional scales. Best solutions: co-benefits with other environmental problems (e.g., urban air pollution, energy supplies, loss of biodiversity).

Cf. Environmental Contracts (Kurt Deketelaere and Eric Orts eds.) (Kluwer Law International 2001); Michel Serres, The Natural Contract (MacArthur and Paulson trans.) University of Michigan Press 1995).

Prerequisites for Cooperative Climate Contracts

Agreement about need to change behavior and sharing responsibility for the future. Reliable and available information. Monitoring of actual behavior.

Communication among participants.


Elinor Ostrom, A Polycentric Approach for Coping with Climate Change, World Bank Policy Research Paper, Oct. 2009.

Examples of Climate Contracts: From Global to Transactional

Bilateral or multilateral international agreements

e.g., U.S.-China bilateral clean energy agreements

See White House, U.S.-China Clean Energy Agreements, press release, Nov. 17, 2009, http://www.whitehouse.gov/the-press-office/us-china-clean-energy-announcements.

National or regional greenhouse emissions trading, technology subsidies, or taxes (with global harmonizing features)
William D. Nordhaus, A Question of Balance: Weighing the Options on Global Warming Policies (2008).

Examples of Climate Contracts (contd)

Regional, State, and Municipal Agreements

e.g., European Union Emissions Trading Scheme; Regional Greenhouse Gas Initiative (RGGI); Western Climate Initiative

Non-Governmental Organizations (NGOs): agreements with countries and companies

e.g., Pew Center on Global Climate Change, U.S. Climate Action Partnership (USCAP)

Colleges and Universities

e.g., American College and University Presidents Climate Commitment (now over 600 signatories)

Examples of Climate Contracts (contd)

Business Associations and Partnerships

e.g., Carbon Disclosure Project (from 200+ in 2003 to 2000+ in 2008)

Consumer Demand-Side Transactions

life cycle analysis/assessments of products (e.g. Patagonia) eco-labels and carbon footprints for products (e.g. Timberland) green supply-chain management (e.g. Walmart)

Change through Climate Contracts?

No comprehensive guarantee of mutual coercion, mutually agreed upon (Hardin) But unpredictable, long-term leverage for both mitigation and adaptation through:
Normative and behavioral change

Technological innovation
Legal and political developments (including possibility of carbon tariffs with WTO challenges) Consumer pressure (e.g., expression of preferences; possibility of carbon boycotts)

Concluding Illustration: China

Chinas share of global emissions is increasing radically: from 8% (1981) to 14% (2002) to 21% (2007). At least half of Chinas carbon emissions increase is due to net export production to other countries. Who should take responsibility for reducing these emissions?

Sources: Tao Wang and Jim Watson, Who Owns Chinas Emissions? Tyndall Centre Briefing Note, Oct. 2007; Dabo Guan et al., Journey to the Top Emitter: An Analysis of Chinas Recent CO2 Emissions Surge, Geophysical Research Letters, vol. 36 (Oct. 2008) (incl. fig. 2 above).

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