Last November, delegates from almost all of the world's countries met in Buenos Aires to answer a question posed six years earlier in Rio de Janeiro: How to control the emissions of greenhouse gases? At their meeting in Kyoto in December 1997, representatives of the developed countries (plus those from several countries in transition from socialist economies) had agreed to a program for reducing these emissions, the Kyoto Protocol on Climate Change. After Kyoto, however, their governments did virtually nothing to carry out these commitments, and it is fair to say that nothing of consequence took place in Buenos Aires either. The delegates there agreed only to a "plan of action" designed to resolve some uncertainties about how the Protocol could--or even whether it should--be implemented late in the year 2000. Given the closeness of the target date, the high cost of meeting it, and hostile politics in the United States and elsewhere, it is now clear that the Kyoto Protocol will not be carried out as planned.

The concern is the growing concentration of so-called "greenhouse gases"--and particularly carbon dioxide--in the earth's atmosphere. The carbon dioxide concentration, which was 280 parts per million in the pre-industrial era, is now 360 per million and is currently on a path to reach between 600 and 700 by the end of the next century. Experts fear this rise will produce a large, damaging and possibly catastrophic increase in the atmosphere's temperature. In 1995 an eminent group of atmospheric scientists asserted that such a greenhouse-induced effect had probably been detected.

Although this topic is subject to many scientific disputes, given what is at risk politicians should not wait passively for them all to be settled. Doing nothing (except for some token projects) is making a choice, and quite possibly the wrong one. While the extent of the problem is unlikely to be determined conclusively for many years, our interpretation of the evidence leads us to the conclusion that the United States should buy some insurance against a climate catastrophe (even while the form and extent of that catastrophe remain subject to legitimate debate). For what is not in dispute is that this is a quintessentially global phenomenon. No matter where the carbon dioxide is emitted or absorbed, the world's atmosphere is indisputably being altered to a serious extent.

Among the many issues that must be addressed are the costs and benefits of climate changes, what actions should be taken to mitigate them, and how the available remedial policies might properly vary among countries and over time. Location matters, because some places are more vulnerable to possible damage (low-lying islands, cities like New Orleans and whole countries like Bangladesh), while others, like Canada and Russia, might actually benefit from climate changes. Time matters because of the long (but uncertain) lags for various effects to be expressed.

Although the industrial countries presently account for about two-thirds of the world's carbon emissions, their emissions are growing much more slowly than those of the developing countries, and by about 2015 emissions from the two groups will be nearly equal. While the United States is the world's largest source today, with about 23 percent of total emissions, China, which now accounts for roughly 14 percent, will likely be the single largest emitter by around 2020.

These observations typically lead to exchanges of the following character: A spokesperson for China says, "You Americans have put more of these gases into the atmosphere than anyone else and continue to do so. And, besides, you are the richest nation. You have a responsibility to reduce your emissions." An American replies, "But China's emissions are growing faster than anyone else's and you will soon be the world's largest source. If you don't hold down your emissions you will be free-loading on the efforts of others."

There are endless repetitions of such exchanges and not only between Chinese and Americans. The U.S. Senate weighed in on the dispute in July 1997 by voting 95 to 0 against a commitment that did not include "meaningful participation by the developing countries." These countries have refused to make such a commitment, however, though fissures within the group are now emerging (for example, in Buenos Aires the representatives of Argentina and Kazakhstan pledged to adopt emission limits by the next meeting).

What is needed to meet the Kyoto objectives? At that summit, almost all of the developed nations (known as Annex B countries) agreed to limit their collective emissions to roughly 5 percent below 1990 levels by about the year 2010. The size of this task becomes evident when one considers that the Annex B countries are currently on trajectories to emit 20-35 percent more greenhouse gases by that year. Hence, the advanced countries must cut their emissions to 25-40 percent below the levels anticipated for a date that is only a little more than ten years distant. At the same time, emissions by the developing countries, which have made no commitments to reduction, are slated to grow by about 125 percent during the same period. For the Annex B countries, the cost of meeting the commitment made at Kyoto will not be low; most emissions come from burning coal to make electricity and from various uses of oil, two sectors at the heart of most nations' energy economies. The smaller than expected increase in carbon emissions from the United States and China in 1998 has led some people to argue that future ones will be much lower than has been estimated. Our understanding is that the U.S. slowdown was caused by mild weather and incomplete reporting, while the Chinese one was caused by an increase in coal prices. Neither effect is likely to have a large impact on emissions over the coming decades.

Another open question is how long it will take for a viable program to be adopted. For its part, the Clinton administration has proposed no legislation for meeting its commitment and will not do so before the 2000 election. That will leave about a decade to pass legislation, set up a domestic control or tax system, create an international institution for the trading of rights to emit carbon (currently required by the U.S. position), and for firms and consumers to adapt to huge cuts in coal and oil production and consumption. Other nations are hardly further ahead of us. To repeat: the probability of the Kyoto schedule being met is vanishingly small.

What Is To Be Done?

The Kyoto Protocol route, which entails making large cuts in emissions without knowing what the bill will come to, is unlikely to be traveled very far. It would be better to rotate the strategy by 180 degrees to one in which the costs are known and we settle for accepting whatever reductions in emissions result from a given level of spending. But before adopting such a view it should be recognized that it is not a cop-out; over the long run serious constraints on emissions will almost certainly be needed.

First, we need to be flexible with respect to the timing of proposed remedies. For it is the cumulative amount of carbon dioxide in the atmosphere many decades hence that concerns us most; it matters little how much enters in any given year. We also must be flexible when deciding which types of gases we wish to devote more attention and resources to controlling and which merit less concern. And, finally, we should be flexible in deciding where to make cuts. Flexibility in this domain can best be achieved by trading "emission rights" (that is, licenses permitting the holder to emit a certain amount of carbon dioxide or other greenhouse gases). The Kyoto Protocol, however, only allows for trading emission rights among the Annex B countries (and the European delegates lobbied to limit even that). Yet, potentially large savings could come in developing countries whose energy uses (largely carbon-fueled) are growing rapidly and who can include technology in new plants at comparatively low costs.

The administration has not told the public the estimated cost of cutting our projected use of carbon in 2010 by 550 million tons per year, perhaps because that commitment implies consuming 40 percent less coal and oil. Instead it prefers to address the much lower cost prospect of paying developing countries to make these cuts. But because these countries have rejected such a course, we need to confront the question of how to meet our goals on our own.

A further question pertains to the best method of control. If we were to institute a top-down command and control structure, of the type usually favored by politicians, a bureaucracy would need to be created and rules devised, all of which would be accompanied by enormous controversy and predictable waste. (Recall price controls in the 1970s and the lines of cars at gas stations.) On the other hand, if we choose the more efficient market route, implying taxes on fuels or tradable permits, other issues arise. For instance, taxes high enough to produce large cuts in carbon emissions would generate tens of billions of dollars a year in revenues. There are many possible uses for such sums, including cutting other taxes, reducing the national debt, or spending them--each course with very different economic and political consequences. Yet if a system of tradable permits were to be established and those permits were then given free to existing firms--a natural instinct of politicians--a struggle over the assignment of rights worth many billions of dollars would surely follow, new carbon-using firms would face a competitive barrier, and the opportunity to reduce distortions from existing taxes would be lost altogether. Moreover, it is not at all certain that in the end the efficiency that was the whole object of the exercise would be achieved.

Still, optimists assert that the Kyoto Protocol goals can be met at low cost. For example, a report by several national laboratories concluded that "the costs to the U.S. economy are estimated to be near or below zero in this time frame." How could this be? Simply by assuming that the U.S. government will act soon and efficiently on the matter; emission cuts will be made via a carbon tax or auctioned, tradable permits; tax revenues will be used to cut the federal deficit or to eliminate existing distortionary taxes; new technologies will be quickly developed and consumers and firms will just as quickly adopt them; and financial markets will adjust promptly and smoothly.

Those with memories of the oil crises of the 1970s will recall similar claims (then about using less energy rather than less carbon). The core belief in both cases is that pervasive market failures lead consumers and producers to neglect valuable energy-conserving technologies. Thus, customers do not demand--and companies do not make--much more efficient automobiles or houses despite their intrinsic worth. Proponents of energy conservation claim that this could be remedied at little cost and quickly, but by and large it does not happen. During the oil crises of the 1970s, for example, people lowered thermostats during the crisis, but in due course turned them back up--much as they bought gas-guzzling sport-utility vehicles as soon as the price of gasoline came down.

The Energy Modeling Forum at Stanford University (EMF) recently compared estimates of the costs of meeting the Kyoto targets made by ten modeling teams from around the world. They show that with no international trading of emission rights, the United States would need to levy a tax on carbon emissions of between $90 and $400 per ton of emissions in 2010 to accomplish its Kyoto objectives; this is equivalent to a tax on coal of $70-$320 per ton (versus its current price of about $25 per ton!). Most of the teams estimate that such a tax would cost the U.S. economy between $45 and $200 billion a year (about 0.5 to 2.0 percent of 2010's GDP). They show similar, or even larger, costs for Europe and Japan.

In a world of models, this might not seem to be a very high price, but models have limitations. For instance, none of them include the effects of carbon "sinks" (absorbers of gases such as trees) or of possible losses from unemployment or inflation. Nor do they note that, by 2010, about half of our electricity will be coal-fired--most of it consumed east of the Rockies where coal will fuel about 60 percent of electricity generation, with some states, such as Ohio, being almost entirely dependent on that fuel. Meeting our Kyoto obligations, then, could entail cutting the supply of electricity east of the Rockies by upwards of one-fourth. Many electricity-intensive industrial plants (e.g., aluminum and chemical ones) would be shut down. The implied limit on coal would shutter most of our steel industry, with our supply shifting to countries not constrained by the Protocol, which is to say the developing countries. Those developing nations would have to burn coal to make steel to ship to us, so there would be no net reduction in global emissions. More generally, if only the Annex B countries limit their high carbon-using industries, such industries will expand elsewhere, a phenomenon dubbed "leakage." Lest one think this implausible, consider that pollution controls in the advanced countries already lead to the construction of refineries and chemical plants in less fussy, poorer ones.

Relying on less optimistic assumptions than those of the ten modeling teams, the Energy Information Administration of the Department of Energy comes up with a much larger loss of U.S. output--about 3 percent of GDP by 2010 (roughly $300 billion in total, an amount equivalent to $960 per person or $3,800 for a family of four). This is akin to losing a year of economic growth between now and 2010. The loss could be higher still if, as is perfectly imaginable, congressional and bureaucratic micro-managers decide which uses of carbon-based fuels are more or less socially worthy than others.
Properly understood, such conclusions point to the desirability of emission trading. That trading of pollution rights can radically lower costs is shown by the current system that allocates rights to emit oxides of sulfur to American coal-fired power plants. That system has cut costs about 85 percent below those that would be incurred by a command-type, non-trading one.

There are two main proposals on the table for international trading: one dubious, the other constructive. The former involves purchasing Russia's putative excess "rights" to emit. This "right" derives from the vast emissions of the Soviet Union in 1990, a consequence of its then large and inefficient heavy industry. Russia's emissions, however, have greatly shrunken in the interim. Under Kyoto rules, Russia may sell these rights. Unfortunately, though, most if not all of the expected decline in Russia's emissions between 1990 and 2010 has already occurred; buying these rights might not keep a single additional gram of carbon out of the atmosphere from now to 2010 (a possibility that has acquired the felicitous label of trading "hot air"). Moreover, Russia might sell its rights and then renege on limiting its emissions. After all, a country capable of defaulting on tens of billions of dollars of foreign debt is surely capable of defaulting on a commitment not to burn more coal.

A more promising proposal is a global trading system. The EMF models found that, on average, unrestricted global trading lowers permit prices by 80 percent. Janet Yellen, chair of the Council of Economic Advisers, reports similar calculations including cases in which Europe and especially Japan would benefit even more than we would. This observation makes the grousing of the Europeans about free trading of emission rights even odder; apparently they are under the illusion that Europe would not benefit greatly.

The devil definitely lies in the details. For a nation or a firm to sell the right to emit a kilogram of carbon implies agreement on an emission baseline relative to which the right can be bought or sold. This bears on another feature of the Protocol, that of Joint Implementation, according to which, say, a firm in Japan could pay for projects in India, with the resulting cuts in India's emissions credited in part to Japan. But there is a problem: how would the Japanese know that the projects offered by India were not ones that would have been built anyway? For such a scheme to be effective--for it to do any good for the atmosphere--countries will need to accept constraints on their total emissions. These limits will not be easily achieved, nor will they be easily verified. Games will be played; firms and governments will have powerful incentives to bias baselines up and emissions down because rewards and penalties will turn on the differences between them. Associated monitoring and enforcement problems have yet to be addressed, even in principle.

The complexities do not end there. The trading of emission rights, after all, means apportioning them in the first place. On what principle might this be done? Poor countries maintain that fairness requires, in effect, one person, one emission unit. This, of course, would force the industrial countries to reduce their use of energy drastically or to pay large sums to the more populous poorer ones. Rich countries contend, in turn, that current industrial structures (and emissions) must be recognized as the reality and taken as a given in any attempt at a solution. They no doubt would be willing to make some concessions, but how many? As Thomas Schelling has argued, the trillions of dollars involved constitute too large a sum for politicians to commit. And, in the laudable pursuit of the least global cost, huge sums of money would be transferred to less developed countries--but only for energy projects. At the very least, then, the idea of paying others to emit less faces high hurdles.

President Clinton argues that by adopting environment-friendly technologies we "will not jeopardize our prosperity--we will increase it." The new technologies the President has described in glowing terms, such as improved fuel cells for autos and dramatically more efficient appliances, will indeed be needed if emissions are to be cut significantly. Fortunately, a number of firms, anticipating a growing public concern, are investing in greenhouse-related research. It does not take much imagination to foresee attacks by politicians and burdensome government regulations coming down the road. Nevertheless, radically new technologies will not be in wide use by 2010. For instance, the automobile firm doing the most to promote fuel cells, DaimlerChrysler, does not plan to introduce its first model before 2005. There will also be projects that the private sector will not adequately fund because of the well-known inability of private actors to capture all of the benefits from doing research. And there will be political risks; what rational firm, for instance, would try to develop a new nuclear reactor?

Nor have public monies been forthcoming. Congress, for instance, recently cut by half the President's requested funding increase for environmental technology research. The experience with publicly funded R&D has been so poor that one should not rush to criticize Congress on this count. The oil shocks of the 1970s stimulated publicly funded research on non-Middle East energy sources, much of which turned out badly, notably the studies dedicated to the nuclear breeder reactor and synthetic fuels. Yet the correct inference is not to abjure public funds altogether, but for the Congress and administration to pay much more attention to program design. There is no way to avoid government failures altogether, but the incidence could be held down by promoting private consortia, keeping most projects small, and by cost-sharing with the private sector.

The case for a tax on carbon. Given that the Kyoto system will not soon be repaired (if indeed it ever could be), Richard Cooper has proposed that countries simply adopt a common carbon emissions tax. There is merit in imposing a small tax--and keeping the money at home, at least initially. For example, a tax of $10 a ton on fuel-derived carbon would increase the cost of coal in the United States by $8 a ton, and that of oil by $1 a barrel. Although the effect on emissions would be small, the $15 billion a year collected would enable other taxes to be cut, could finance an R&D program, and might be used to compensate laid off coal miners. Given the evidence so far on climate change, the bearing of larger burdens is not to be expected. But there is not much point in aiming for a uniform tax rate, not least because Europe and Japan already tax carbon much more heavily than do the United States and Canada.

Reversing the strategy. Kyoto supporters argue that accumulating evidence on climate change will alter the politics of global warming. That might happen, but more likely the same voices will end up pleading for the Kyoto deadline to be slipped to 2015, and then again to a later date, and so on. They are, in short, advocating the unattainable while neglecting the useful and more feasible. In fact, the strategy of committing to an emissions target and having consumers pay the ensuing bill has things exactly backward. We would be better served by a strategy that identifies useful actions with known costs, and accepting whatever emission reductions result. More R&D, for example, fits this approach, as its budget can be controlled and the new technology would be available for worldwide use. The imposition of a small tax on carbon would also fit. Now, too, is the time to start thinking about a domestic emission trading system (and an international one, provided like-minded partners can be found) as a step toward a global system.

Shouldn't we focus on stabilizing the CO2 concentration in the atmosphere? Brian Tucker has observed in these pages that the physics and economics of climate change support the implementation of moderate remedies over an extended period of time. In that spirit, aiming to stabilize the CO2 concentration at, say, 550 parts per million by the latter part of the next century has merit. Although this level is much higher than the present one, it is much lower than what it is currently heading toward one hundred years hence. That proposal is not guaranteed to avert catastrophe but it would certainly improve the odds of doing so, and the cost would not be prohibitive. Capital stocks will have turned over in thirty or fifty years and there would be time to deploy new technologies. Long before then, China will have become the world's largest carbon emitter and India will be approaching the level of the United States. Both the economics and politics of climate change will be quite different.

With this goal in mind, global carbon emissions could increase from about 6 billion metric tons today to 10-11 billion tons in 2050 (versus 12-15 billion if business continues as usual), and then would come down steadily in the second half of the next century to about 4 billion tons by 2100. On this trajectory, Annex B emissions would peak in about 2030 in order to give developing country emissions room to grow before declining after 2050. Annex B emissions would rise about 25 percent above 1990 levels at their peak, followed by a rate of decrease of only 2-3 percent per year. Meeting this goal rather than the compressed Kyoto one would be far less costly.

The merit of shifting to a longer term goal, then, is that it makes economic sense and accords with much of the climate change evidence. The challenge today is to persuade governments to take low-cost actions now to reduce the rate of increase in their emissions, to invest in new technologies, and to construct a framework for trading emission rights.

The delegates to Kyoto declared victory, but after Buenos Aires their claims ring hollow. Congress will not allow Ohio's electricity supply to be slashed, nor will it soon pay China or India billions of dollars for emission rights. With luck, we will soon drop the Kyoto goals and start taking some modest but nonetheless useful steps.

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