Assessing the Economics of the Paris Climate Agreement

Recommendations for the United States and the International Climate Regime

Karan Pol

ECON 4150
Environmental Economics
Dr. Thomas McGahee
Executive Summary
The United States and the international community should abandon the Paris Climate
Agreement and adopt regional pollution abatement schemes based on the strategies of the
Montreal Protocol. Without these changes, the international climate regime will continue to be
too broad in scope with too limited enforceability, leading to continued greenhouse gas (GHG)
emissions and resultant climate change. The paper below establishes the state of the climate,
analyzes the text of the Paris Climate Agreement, identifies its shortfalls, and explains the
successes of the Montreal Protocol. The paper goes onto provide policy recommendations to the
United States and the international community at large.
Aware of the political difficulties facing multilateral cooperation, this paper recognizes
that climate solutions must be limited in their scope with an attention to detail and enforceability.
These same aspects are evident in the text of the Montreal Protocol and contribute to the
document’s success. It is evident that the trade restrictions, clear goals, multilateral funding, and
transferrable production quotas render this document a gold standard in environmental
economics, maximizing benefits while minimizing costs.
From a consideration of all these factors, the paper concludes that the United States must
develop the North American Climate Change Commission (NACCC) with neighboring Canada
and Mexico in order to monitor and control regional greenhouse gas emissions, develop a
framework for controlling the trade of GHG producing goods by designating climate change as a
national security threat, and simultaneously levy a tax against producer of GHG producing goods
to account for excess profits under a cap and trade scheme.

Regards,

Karan Pol

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A Changing Climate
The effects of anthropogenic climate change are no longer a question of if, but rather a
question of how soon. As greenhouse gas (GHG) emissions expand rampantly leading to rising
global average temperatures, climate change will come to a point where it negatively affects all
of society. These effects have already been realized in some cases.
Since 1975, Earth has been warming at a rate of 0.15-0.20C per decade.1 While the
values seem minute, they yield devastating effects. For context, a five degree drop nearly 20,000
years ago was enough to bury a large portion of North America.2 Today, the most immediate
threat is to food and water security. Reduced water security on its own is enough to yield climate
refugees, but limited access to water has multi-level effects inhibiting agriculture. Communities
that have disproportionately agricultural economies, generally lower income, will be hit hardest
by these changes.
Agricultural shocks are only one part of the story. Climate change will yield more
extreme weather phenomena, infectious disease spread, and economic inefficiency as the
physical environment becomes increasingly difficult to inhabit. In the short run, these effects will
disproportionately affect lower-income communities unable to adapt to a fundamentally different
environment and economy while the long-run shows these effects likely expanding to the rest of
the population.
Analyzing the Paris Climate Agreement (PCA)
In order to address the impending doom of climate change, the international community
created the Paris Climate Agreement in 2016. This resolution, developed with the United Nations
Framework Convention on Climate Change (UNFCCC), was built on preexisting regulation,
with a big credit to the 1997 Kyoto Protocol.
The PCA’s central goal is to “strengthen the global response to the threat of climate
change,” by limiting global average temperature rise to 2C above pre-industrial levels, this
referring to average temperature circa 1784, the year of the invention of the steam engine and the
precursor to the Industrial Revolution. It intends to accomplish this standard by channel
international cooperation and funding toward pollution abatement, with a focus on developed
nations supporting developing nations.
The mechanism of this fund transfer and development is demonstrated by the PCA’s
nationally determined contributions (NDC). This system recognizes a variable capacity to abate
across states, putting an emphasis on national strategies toward preparing, communicating, and
maintaining efforts toward reaching PCA benchmarks. Along with these domestic efforts, the
PCA calls on developed nations to lead the undertaking with economy-wide abatement targets.

1
“World of Change: Global Temperatures,” Earth Observatory, NASA.
2
Ibid.

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Shortfalls in the Agreement
The PCA, as the foundation of the international climate regime, is an extremely stunted
document. It has an insufficient scope with limited enforcement capabilities to ensure adherence
to its standards. Because of this it has achieved limited success in reduced GHG emissions across
its Parties, let alone the global community at large. The following points highlight the core flaws
of the agreement.
Poor Framework for International Abatement Efforts
Under Article 6, the PCA provides for voluntary cooperation efforts toward mitigation
efforts. The key term here is voluntary: nations party to the agreement have no directive or
incentive to engage in international sustainable development efforts. Article 9 establishes a
directive for developed Parties to provide financial resources to developing Parties toward
mitigation efforts, but the language again emphasizes the voluntary nature of this funding. With
no directive built into membership to the agreement, the PCA has limited influence in directing
funds toward international abatement.
Ambiguous and Capability Based Standards
Determining marginal damages and abatement cost curves across states is difficult -it
requires private information that will not be readily available to the UNFCCC. Furthermore, at a
national scale, this level of detail needed to construct these curves will be far too great to analyze
efficiently. As such, the PCA depends on individual states to ascertain their own NDCs, counting
on good faith efforts to do so.
This system, at best, reflects the inefficiencies of technology-based effluent standards
(TBES). The TBES only requires “best-available technology,” which fails the equimarginal
principle as abatement is contingent on available technology and not the maximum tolerance for
abatement costs. As such, the TBES and the NDC systems are both cost-ineffective and
inefficient. While it is true that the NDCs are not uniformly applied, differentiating them from
TBESs, it is likely that the conclusion of inefficiency still stands.
Some may argue that the self-determinative aspect of NDCs allows for marginal
abatement cost discrimination, allowing for the potential for equimarginal abatement. This may
be true in an ideal world where all Parties to the agreement are pursuing maximal abatement.
More likely than not, agreement to the PCA is a political move to signal policy preferences and
gain favor with other states –not necessarily a commitment to emissions reductions policy. This
is mind, a more likely scenario is that a state will overstate the costs to abatement, rendering a
higher acceptable level or emissions. In the worst case, a Party to the agreement will continue to
pollute at pre-agreement levels and benefit from the soft benefits provided by its membership –a
freeriding problem essentially.

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Limited Desire for Domestic Ratification
The PCA has limited international appeal. Even with membership to the agreement,
actual NDCs contributing toward abatement are limited. Following the 2016 announcement of
American exit from the agreement, this trend is further exacerbated as climate policy shift onto
the backburner.
A key issue with the agreement is that it allows for approval without ratification. These
two statuses are worlds apart. Ratification is contingent on the agreement passing through
multiple levels of scrutiny and voting from domestic legislatures. One ratified, the agreement
functions as law within the statutes of a nation’s law. Agreement, the status that the United States
held before 2016, can be performed through unilateral executive action and generally holds no
legal binding. The stringent criteria or ratification, however, is difficult to achieve. With
international trends, there is a limited international demand to further ratify this agreement.
No Enforcement Measures
Under Article 15, the PCA establishes a non-punitive mechanism to facilitate the
implementation of its goals. The issue with the nature of this structure is that the PCA has no
enforcing power. In the context of carrot and stick incentive methods, the PCA provides minimal
benefits in international recognition and reduced damages but high perceived costs to abatement
render those benefits ineffective without an added incentive to enter the agreement.
Some may argue that the lack of enforcement measures reduced the costs of entry and
membership. This is true to an extent, but this also fails to achieve the emissions reductions
necessary to meet PCA benchmarks.
Economics Expectations in Environmental Policy
International environmental
agreements are very quickly
demonstrated in the context of
marginal abatements costs and
damages. In the figure to the right
we can demonstrate some of the
trends in this undefined
international market.
Consider Country A, a state
that is over-polluting. It is marginal
abatement costs and damages are
represented by MACA and MDA
respectively. Assume that that
Country A is part of an unnamed

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bilateral pollution agreement, such that the international community’s marginal damages are
represented by MDT.
For Country A, the locally efficient level of emissions is at e2, where its local MAC and
MD curve are equal, but this outcome is bilaterally inefficient. Excess damages cause by Country
A’s pollution also affect Country T (the international community in this model). The globally
efficient outcome in this market occurs at e4, where total marginal damages are equal to Country
A’s MAC.
This outcome is locally inefficient for Country A, however, and requires a side payment
to incentivize cooperation. The voluntary nature of the current climate regime would dictate that
these payments occur under the Victim Pays Principle, such that the international community
would pay the additional abatement costs suffered by Country A. At a minimum, the
international community must pay Country A the additional abatement costs shown by the blue
triangle and at most a combination of the blue and green triangles.
When accounting for international trends, many of these curves fundamentally shift. Due
to variable levels of belief in climate change across the international community, one can assume
that there is an understatement to marginal damages, demonstrated by the red curves MDT* and
MDA*. These curves result in an emissions level even further to the right of equilibrium adding a
level of inefficiency that is further modified by enforcement costs, transactions costs, asymmetric
information and so on.
This model, functioning in a bilateral sense, is muddied when accounting for multiple
over-polluters. In a truly multilateral agreement, policy must account for the variable MAC
curves across all Party states to ensure that abatement efforts are pursued equimarginally.
Operating with a single international marginal damage curve, one can analyze the varying MACs
across states and understand that any system put in place must be flexible enough to account for
these differences. A flat tax on all countries won’t be an efficient solution.
A potential solution to these issues is an international cap and trade scheme leveraging
tradable discharge permits between Party states. By limiting the supply of permits, the UNFCCC
could limit pollution, while ensuring that market forces allocate pollution allowances to those
most willing and able to purchase them. This control also allows for the gradual reduction of
pollution as the UNFCCC can slowly reduce the supply of permits over time.
It is important to note, however, that a whole of Earth cap and trade scheme is politically
unfeasible. Multipolar tensions between Russia, China, and the United States are an obvious
undercurrent to international affairs, furthered marred by instability in the Middle East and South
America and the rise of authoritarian fascism in the West.
An Exemplar: The Montreal Protocol
Given the hurdles against international climate agreements, it is valuable to consider the
success of previous environmental agreements. The Montreal Protocol, perhaps, represents the

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highest achievement in international climate policy and may serve as a blueprint for the future
international climate regime. Through its efforts, the regulations have led to the slow recovery of
the ozone layer through its universal ratification.
The Montreal Protocol of 1987 was created to protect the ozone layer by phasing out the
production and consumption of CFCs, HCFCs, and HFCs –ozone depleting substances
previously found in refrigerants, cleaning agents, and so on. The core competencies of this
regulations lay in the development of its multilateral fund, its focus on regional implementation,
transferrable production quotas, and the levying of trade restrictions to enforce its standards.
The multilateral fund of the Protocol was managed by the Executive Committee to the
agreement, implemented by UNEP, UNDP, UNIDO, and the World Bank with clear
differentiation between developed and developing nations. A specific threshold of annual per
capita consumption/production of ozone depleting substances lower than 0.3 kg qualifies a state
for access to the multilateral fund. The PCA, rather, depends on needing states to make requests
for aid and waits for developed nations to provide it at their discretion. The Montreal Protocol’s
model, with a focus on centralized aid management, reduces transaction costs and time lags,
while ensuring that development work is always on mission.
The central action described above was balanced by the decentralized use of transferrable
production quotas. This flexibility absolved the executive committee from directly managing the
phaseout of ozone depleting substances, allowing Party states to determine efficient amounts of
local emissions, in the context of a centrally managed local supply. This system is functionally a
cap and trade scheme that can achieve equimarginal abatement.
The Protocol, furthermore, was far more agile of an operation at its inception. In 1987,
only 27 states were signatories to the agreement. Compared to the initial 55 states to the PCA,
the Protocol had a significantly smaller scope. The benefit of this smaller scale is that the states
that participated in the early stages could test and develop common practices and regulations
before expanding operations to the rest of the international community.
An added benefit of this small operation was the feasibility of export controls. Trade
restrictions were, arguably, the key factor in the success of the Protocol. Trade between
signatories and non-signatories of ozone-depleting substances was restricted under the protocol,
further banning the trade of products that contained these substances. This allowed the Montreal
Protocol to control a significant market share and lead the trends in the ozone depleting market.

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Recommendations for the United States
The PCA is a severely stunted documented with limited scope. It holds lofty goals but
fails to establish a structure that incentivizes adherence to significant emissions reduction.
Without significant leadership from the international community and American exit from the
agreement made official in 2020, it is reasonable to understand that the PCA is defunct.
The United States hold a large role in the failure of the PCA, but it is important to
understand that the legislation was not comprehensive enough that it would have garnered
meaningful abatement even with American cooperation. The United States should take
advantage of its exit from the agreement to leverage the successes of the Montreal Protocol and
develop a more effective organization on a regional level. As such, the United States must:
1. Develop a Regional Cap and Trade Scheme
The United States should establish a regional cap and trade scheme to limit greenhouse gas
emissions in conjunction with Canada and the United Mexican States. These two nations, as part
of USMCA, are obvious targets for any body of regional collaboration. Furthermore, regional
environmental effects from pollution are likely to spill over between these economies. This body
can be referred to as the North American Climate Change Commission (NACCC).
The U.S. Environmental Protection Agency, Environment and Climate Change Canada, and
the Secretariat of Environment and Natural Resources of Mexico should develop an independent
commission overseeing the production and consumption of GHGs, setting a cap on these levels
and managing the reduction of GHG emissions over time, while ensuring that excess profits are
not realized by producers. These efforts should be supported by a trilateral fund directed toward
sustainable development and mitigation efforts, identical to the framework established in the
Montreal Protocol.
2. Establish Climate Change as a National Security Threat within Export Controls
The United States must redefine climate change as a national security threat and adopt
environmental export controls within the larger umbrella of the Commerce Control List (CCL).
The CCL represents the United States document that falls in accordance with the international
export control regimes on arms and technology, such as the Wassenaar Arrangement, the
Nuclear Suppliers Group, the Nuclear Nonproliferation Treaty, the Missile Technology Control
Regime, and the Australia Group. This shift reflects the trade restrictions levied by the Montreal
Protocol against ozone depleting substances.
By designating goods that produce GHGs as national security threats under a
consideration of climate change, the CCL would be able to control the import and export of these
goods into the United States. This would require folding the U.S. Environmental Protection
Agency into the interagency export control process with the Departments of State, Commerce,
Defense, and Energy. This may increase transaction and enforcement costs slightly but will

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render a more comprehensive compliance and monitoring system necessary to managing the
phaseout of GHG producing goods.
3. Levy a Tax on Producers of GHG Emitting Goods
The United States should levy a tax on producer of GHG emitting goods to ensure that
the excess profits garnered by an artificially restricted supply are transferred back to the
economy. This action reflects steps taken during the Montreal Protocol to ensure that these
excess profits are leveraged to social benefit.
Recommendations for the International Community
Furthermore, the international community should eschew whole-of-Earth mitigation
efforts without managing success with smaller operations. The UNFCC should thus:
1. Focus on Developing and Supporting Regional Pollution Abatement Agreements
The UNFCCC should provide administrative and technocratic support to existing
regional mitigation efforts while supporting the development of new organizations
internationally. The regional focus allows for the respect for national sovereignty, as is required
under the United Nations charter, while ensuring the longevity of mitigation efforts. UNFCCC
agents, in conjunction with the UNEP and UNDP, should develop training modules for countries
and regions interested in developing their own abatement regimes.
2. Allocate Funding from World Bank and UNDP for Sustainable Development
The above specified agents, under the direction of the UNFCCC, should divert
development efforts to focus on the development of clean energy sources, carbon sinks, and
abatement technologies in the states identified as developing by the UNFCCC. The PCA
currently identified 49 Parties, but this will change depending on the number of regional
agreements developed.
Conclusion
The international climate regime faces a very serious collective action problem. The Paris
Climate Agreement attempted to correct this issue, but its insufficient scope and enforcement
capability left the state of the climate no further along than before its inception. By leveraging
the successes of the Montreal Protocol and an understanding of environmental economics, the
above recommendations should be successful in engendering significant GHG emissions
abatement.
Economics, while the study of how markets interact, is also a philosophical consideration
of how markets should interact. By leading markets in specific direction, economic theory can be
levied to incentivize and ensure a society that is universally beneficial and sustainable.

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Bibliography
1. Field, B. C., & Field, M. K. (2021). Environmental economics: An introduction.
New York: McGraw-Hill Education.
2. The Montreal Protocol on Substances that Deplete the Ozone Layer. (n.d.). Retrieved
May 06, 2020, from https://ozone.unep.org/treaties/montreal-protocol-substances-
deplete-ozone-layer/text
3. Paris Climate Agreement. (n.d.). Retrieved May 06, 2020, from
https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
4. “World of Change: Global Temperatures.” Earth Observatory, NASA,
earthobservatory.nasa.gov/world-of-change/global-temperatures.

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