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A Bretton Woods for

the ClimateCrisisFORES Policy Paper 1: 2010

Martin Ådahl

Daniel Engström

Mattias Johansson

Jakob Rutqvist

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The failure of COP15

• Failure of the negotiationprocess

• Failure of the politicalambition of major emitters

• Failure of concreteproblem solving (MRV)

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The fundamental flaws

Prisoner’s dilemma / tragedy of the commons

• Consensus among 194

participants – risk of

spoilers / posturing

• Diplomatic minutiae

• Insubstantiality

• No sanctions, Weak

Compliance Mechanism

What needs to be done:

• Align incentives:

• reward cooperation /

penalize deviation

• internalize external costs

• Reduce complexity by

delegating

• Transparency and

accountability to

establish trust

(MRV)

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Benefits of institutions

• Voluntary containment of options

• Builds norms around common goals

more difficult to deviate increases

reputational costs / reciprocity

internalization of common good (Keohane 1984,

1986; Abbot&Snidal 1998, Ostrom 1996)

• Honest broker – transparency (MRV)

• Reduces transaction costs / complexity(North

1990 , Coase 1960 )

• Pool of accumulated expertise

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Bretton Woods 1944 (Dominguez 1992)

• IMF

• World Bank

• IAT GATT WTO

The mechanisms:

• Gold standard

• Fixedbutadjustable pegs

• Multilateral funding

Durabilitydespite drawbacks:

• Fixed pegs failed – but new

IMF role

• Lowered tradebarriers

• Norms: ”Washington

consensus”

Bretton Woods, New Hampshire, July 1, 1944

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Bretton Woods institutions vs.

UNFCCC

Bretton Woods:

• Governedbyexecuti

veboard with

quotas

• Employees:

World Bank: 10

000

IMF 2 400

WTO 630

Economists and

lawyers

UNFCCC:

• Consensus

decisionprinciple –

one nation onevote

• Employees:

UNFCCC 300

• IPCC experts

about 2000 total

<20 economists

2-3 experts

on markets

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1. Permanent institution:IMF/WTO equivalent for the climate

• Rules set by politicians instead of

discretion

• Practical decisions delegated to practical

experts not diplomats

• Standing army of experts on practical

deployment (markets, economic

instruments)

• Independence as watchdog

• Governing structure reflecting

responsibilities and economic weight

(quotas)

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New “International Carbon Fund”

• Linking emission markets

• Governing reformed Clean

Development Mechanism (CDM)

• Funding mitigation and adaptation

through market mechanism

• Technical assistance

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2. Global emission markets

linkingmechanism

• Linking

emissions

markets

• Aligning

incentives

• Funding

GHG market

GHG market

GHG market

GHG market

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Emission markets(Tientenberg, Stavins etc)

Ca

p

Pric

e

Emission

reductionsTax

Reduction

s

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Existing / proposedmarkets(Damsgaard 2009)

Global emission markets

2009:

7,375 MtCO2

$126.6bn +5.5%

Markets / mechanisms:

• EU ETS

• US: Waxman-Markey /

Kerry-Boxer

• CDM

• JI

• Australia, others

EU ETS Waxman-

Markey /

Kerry-

Boxer

Share of

emissions

(GHG)

40%

(2009) ->

46%

(2013)

67%

(2012)

MtCO2 5 499

(2009)

Value $108 Bln

(2009)

$60bn

(2012)Sources:

Bloomberg, US

EPA, EU

Commission

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Linking markets

EU-ETS

Waxman-Markey / Kerry-Boxer

Global

market

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Linkingequalizesprices(Jaffe& Stavins 2009, Aldy& Stavins 2010, Flachsland, Marschinski&Edenhofer 2009)

Ca

p

Pric

e

Ca

p

Pric

e

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Price convergence when markets link(Dellink 2009)

Prices under a 50% cut by 2050 relative to 1990 levels in each Annex I region prior to linking

and a 50% cut in Annex I as a whole after linking (2050)

0

100

200

300

400

500

600

700

Russia United States Non-EU East. Europe

EU27+EFTA Japan Aust. - NZ Canada Annex I

Carb

on p

rice $

US

/t C

O2

eq

Carbon price after linking

Carbon prices before linking

Source: OECD

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Less costly to reduce emissions(Dellink 2009)

Mitigation policy costs under a 50% emission cut by 2050 in each Annex I region

separately, with and without crediting mechanisms (2020)

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

Canada Australia and New Zealand

Non-EU Eastern

European countries(1)

Russia United States Annex 1 Japan EU27+EFTA

Miti

gatio

n c

ost

(in

co

me

equ

iva

lent

vari

atio

n r

ela

tive

to

b

ase

line,

in %

)

Without crediting mechanism

With crediting mechanism, 20% cap on use of offset credits

With crediting mechanism, 50% cap on use of offset credits

Source: OECD

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Wrongpoliticalincentives (regardless of

instrument)

Ca

p

Pric

e

Ca

p

Pric

e

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An ”exchange rate” betweencaps

”Exchange rate” between

emission markets within the system:

Per capita cap nation / Per capita cap global

(Basic commodity ”climatespace”

instead of emissions)

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Mechanism for correcting

politicalincentives

Ca

p

Pric

e

Ca

p

Pric

e

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Funding for poorer nations

• Incentive to cap / mitigate

emissions

• Compensation for historical

emissions by earlyindustrialized

nations

• Support for nations hit by

climatechange

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Green FundNorwegian/Mexicanproposal

• Contributions:

from all exceptleastdeveloped

based on current and historical emissions,

GDP, population and CO2- intensity

proportion of UN-allowances for

auctioning.

national cap and trade systems

maycontribute

• Developing countriesnetbeneficiaries.

• Governed by high level board

policy guidance of, and accountable to,

the COP

equal representation

developed/developing nations.

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Extendedmechanism for

fundingmitigation and adaptation

• Contributions:

Fraction of all cap-and-

trade systems within

system set aside (instead

of grandfathering)

In relation to historical

emissions

• Developing countries

that

capbeneficiariesaccordin

g to formulabased on

GDP per capita

• Funding for carbon

institutions

29.00%

26.57%

8.62%

8.09%

3.87%

2.38%

2.18%

2.18%

1.11%

1.11%

1.02%

0.90%

0.86%

0.82%

United States

European Union …

China

Russian Federation

Japan

India

Canada

Ukraine

South Africa

Australia

Mexico

Kazakhstan

Korea (South)

Brazil

Share of historical emissions 1850-2006Source:

WRI, IEA

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3. ”Major Emitters Forum”

• Top emitters based

on present MEF

(Major Economies

Forum)

• Clear objective ->

Emission reductions

• Commonpracticewithi

n UN institutions

• Minilateralism -

>Multilateralism

China

USA

EU

RussiaIndia

Others

GHG

emissions

2005

Source::

WRI

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Benefits of major emitters forum

• Higherreputationalcosts(Abbot&Snidal 1998)

• Tighterreciprocity ->Issuelinkages

• No (or fewer) spoilers

• Negotiationtailored to needs

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The proposal

1. A permanent institution

Rulesinstead of discretion

Normative

Expertise

2. A comprehensivemechanism

Linking

Correctingincentives

Funding

3. A Major Emitters Forum