Accounting
Economics
finance
Human ressources
law & economics
marketing
strategy
THE ILLUSIONS OF CLIMATE POLITICS  

Europe has made serious mistakes in climate negotiations. It signalised an overly high willingness to pay for a C02-agreement and made too many unilateral concessions. This harmed Europe and made an international climate agreement less likely.


The 18th Climate Change Conference in Doha, which took place from November 18 to December 8, 2012, was a massive event with reportedly more than 20,000 participants. Doha has (now) become part of a long tradition of environment summit meetings that had its perhaps more hopeful beginnings in 1992 in Rio de Janeiro and has taken place almost annually since 1995. The decisions made can be described as vague at best and the outcome adds to the list of failures of past years in Bali, Poznań, Copenhagen, Cancún and Durban.

Voluntary participation and the formation of coalitions for a climate agreement has been the object of much analytical research, beginning with the theoretical work of the environment economists Carlo Carraro and Domenico Siniscalco around 20 years ago. This work shows impressively: climate negotiations are a difficult matter and a successful agreement between all, or even a large group of countries is difficult to achieve. For international climate negotiations to be successful, more than one hundred states are to enter into an international contract. This contract would have to bind them for decades. Moreover, the nature of the contract would typically be such that each and every signatory would be in a better position should all parties but the respective signatory sign the contract and stick to it. Moreover, the parties who negotiate are sovereign governments that must justify their actions internally. As sovereign decision makers they also keep the right to deny their obligations from the climate agreement or to simply disregard the contract should they desire to do so in later years. These alone are adversities that make success of international climate negotiations unlikely.

Two further aspects are also responsible for the meeting’s failure. A famous paper by the Nobel Prize laureate Roger Myerson and his co-author Mark Satterthwaite shows just how important it is to correctly assess the seller's reservation prices and the willingness of the buyer to pay, if two players are negotiating a sales agreement. Mutually incomplete information about each other’s true preferences is an important reason why negotiations may fail. Applied to climate negotiations: such negotiations fail with high probability if the negotiators each think that the other side wants the agreement at any price. In a recent paper, entitled “Climate policy negotiations with incomplete information”, Kai A. Konrad and Marcel Thum elaborate on this point. The authors analyse bargaining over international climate agreements in a setting with incomplete information about countries’ respective own cost of climate gas emission reductions. They compare bargaining in which one of the countries enters into these negotiations having already made a unilateral commitment to high own contributions to emission reductions, with bargaining in a situation without such unilateral commitment. They find that unilateral commitment is likely to reduce the probability that negotiations will lead to an efficient bargaining agreement. Intuitively, in the negotiations own contributions to emission reduction are an important bargaining chip. When a country offers such own reductions, it offers something that costs the country less than the benefit the reductions generate for the other countries. It has to offer something that is mutually beneficial. Existence of this mutually beneficial trade makes it more likely that they find an outcome that is attractive for all countries at the negotiation table. Unilateral commitment to a given amount of own emission reductions independently of the bargaining outcome removes this bargaining chip from the table and this reduces the likelihood of a successful negotiation outcome.

Several European countries, especially Germany, have made serious mistakes regarding their negotiation strategies. They have allowed the United States, China and poor countries to believe, - and they fostered the belief - that Europe's willingness to pay for a climate agreement is remarkably high. Europe now comes to the bargaining table and meets other country leaders who have these utterly overdrawn expectations. Moreover, Germany and Europe have promised, and in some cases undertaken, unilateral climate emission reduction measures. They have committed themselves to doing something for the climate with or without action from others and, thereby, have effectively presented their most important bargaining chip on a silver platter: their own climate contribution. This happened with practically no reciprocal commitment, trusting that such generosity would be rewarded. This behaviour was not conducive to a potential climate agreement.

The Scientific Advisory Board to the German Federal Ministry of Finance pointed some of these problems out several years ago and stressed that individual states' strategies in the event of climate change are of great importance to climate negotiations. A few weeks before Doha, the National Academy of Science and Engineering in Germany gave the all-clear concerning Germany's adjustment to the potential effects of climate change: Climate change will not cause the same conditions in Germany that will be difficult to overcome elsewhere. One could exaggerate and state: Some parts of Germany may be about as warm as Rome in the worst case scenario. Besides a couple of adjustments in coastal and water protection and in agriculture and forestry, nothing much is on the agenda. In several areas, climate change bears not only bad news for Germany. The adjustments could mean higher crop yields and the higher air-conditioning costs in summer can be balanced against lower heating costs in winter. Many international negotiating partners are far more heavily affected by climate change, yet they commit themselves far less to climate protection targets. If these countries understood that they themselves have a far greater interest in climate protection than Germany, they would reduce their demands towards Germany to a more reasonable level. They would then accept that they themselves must act and that Europe will not act alone to save the climate for them. Such perspectives could spur the success of the climate negotiations at future climate summits.

One could say that it is cynical for the rich “Old World” to remove itself in such a way from responsibility. Whoever says that, though, is forgetting two things. The agreement is the target. If this vocal confession of moral responsibility only proceeds to hinder the realisation of an agreement, nothing is won. Incidentally: If the goal really was to help poor countries and fight hunger and disease in the third-world, there have been opportunities enough in past decades and down to the present day to do just that. Perhaps that would be the best climate protection policy for the affected countries. Nobel Prize laureate Thomas Schelling argues somewhat along these lines. Poor countries are especially threatened by climate change because they are poor. It is the ability of a society to adapt to the environment and its changes that is responsible for its prosperity. This ability requires three things. A high level of technical knowledge makes the modes of adaption available. A good education puts a society in such a position that it can capitalise on technical knowledge. Finally, an affluent society has the means to finance these adaption measures.

We must, therefore, also acknowledge that, in climate politics, adaption and prevention do not simply stand beside each other according to the motto: More is better. The two also have conflicting goals and one can use the existing resources only once. Those who would invest in climate change prevention alone, and not in research, education and other investments that enable the world's future prosperity, reduce adaptability and, thereby, possibly squander the most important chance our children have.

 

A shorter version of this article was published in the German daily “Frankfurter Allgemeine Zeitung” on December 17, 2012.

 


Posted October 2nd 2013

 

All Rigths Reserved © RIMEFI
Kai A.
konrad 
max planck
insTitute For Tax LAW AND public finance 

Kai A. Konrad is Director at the Max Planck Institute for Tax Law and Public Finance. He completed his PhD at the Ludwig-Maximilians-University in Munich in 1990. From 1994 to 2009 he was a Professor of Economics at the Free University of Berlin (Freie Universität Berlin) and from 1994 to 2000 he also held a position as Adjunct Professor at the University of Bergen, Norway. From 2001 to 2009, while still a Professor at the Free University, he was also the director of the "Market Processes and Governance" unit at the Social Science Research Centre Berlin (WZB). He has been a member of the Council of Scientific Advisors to the Ministry of Finance since 1999 and was elected chairman of this Council in 2011. He is a co-editor of the Journal of Public Economics. His research findings in the fields of political economy, public finance as well as economic policy are published in top scientific journals like the American Economic Review and Management Science.

RESEARCH INTERESTS

Public Finance 
Political Economy 
Economic Policy  

INSTITUTIONS

Max Planck Institute for Tax Law and Public Finance (Director) 

REFERENCE PAPER

Climate policy negotiations with incomplete information, Konrad, Kai A. und Marcel Thum, Economica (forthcoming).  Available here!

WEBSITE

http://www.tax.mpg.de 

References

Carraro, Carlo, und Domenico Siniscalco, 1993, Strategies for the international protection of the environment, Journal of Public Economics, 52(3), 309-328. 
 
Deutsche Akademie für Technikforschung (acatech), 2012, Anpassungsstrategien in der Klimapolitik, Position, September 2012. 
 
Feld, Lars P., Kai A. Konrad und Marcel Thum, 2011, Umdenken in der Klimapolitik nach dem Gipfel von Cancun!, ifo Schnelldienst, 64(5),  8-11. 
 
Konrad, Kai A. und Marcel Thum, 2011, Climate policy negotiations with incomplete information, Economica (forthcoming). 
 
Myerson, Roger B. and Mark A. Satterthwaite, 1983, Efficient mechanisms for bilateral trading, Journal of Economic Theory, 29(2), 265-281. 
 
Schelling, Thomas C., 1992, Some economics of global warming, American Economic Review, 82(1), 1-14. 
 
Wissenschaftlicher Beirat beim Bundesministerium der Finanzen, 2010,  Klimapolitik zwischen Emissionsvermeidung und Anpassung, Berlin, Januar 2010.