Aligning Climate and Energy
Energy and climate policies should support each other. But arranging this requires a strategic approach to treaty design. And strategy requires knowing the climate/energy game. The payoff is enormous. China can be won over, OPEC's power curtailed, and the US climate coalition greatly expanded.
Over the last few years, in anticipation of Copenhagen's failure, a new approach, Flexible Global Carbon Pricing, has been developed. It preserves the central carbon-pricing goal of Kyoto, but encourages cooperation by changing the climate game.
Climate externalities have locked the world into a multi-player "prisoners' dilemma" game. The same gaming dilemma gutted the global defense against OPEC in the 1970s. Such games, when repeated, begin with modest levels of cooperation, as in Kyoto. But as players come to better understand the individual advantages of free-riding, cooperation declines, as demonstrated in Copenhagen.
Carbon pricing is not carbon taxing. Instead it requires a commitment by countries to achieve a global target price by using cap and trade, fossil-fuel taxes or feebates. This commitment forms the basis of a self-enforcing treaty, that includes flexible incentives to meet the price target, a Green Fund to compensate low-emission countries, and backup enforcement (rarely used) in the form of trade sanctions. ... more >>
"If we lead, China will follow." That has been the touch-stone of the US national policy agenda. But if we lead, other's have less need to cooperate and indeed have found it advantageous to exhort us to lead more strongly, so they can be paid more for following (since we will buy more foreign offsets).
Jump-starting a treaty requires that it take effect only when a critical mass agrees to cooperate. That reverses the free-riding incentive of the leader-follower strategy. The critical mass could be as small as the US and China (40% of all emissions).
National policy should focus on being ready too cooperate with and ready to reinforce a global treaty. The most likely treaty will require an similar international price commitment from all countries and will have some mechanism for compensating for differences in income and responsibility.
The first national-policy challenge is to put in place a set of mechanisms, cap-and-trade, fossil-fuel taxes, and auto feebates, that can be adjusted to roughly meet a global carbon-price target. The more daunting task may be to find a politically acceptable way to contribute to the Green Fund. ... more >>the answer.