Summary of European Stakeholders Meeting: International Climate Policy after 2012

Fondazione Giorgio Cini, Venice, Italy, May 16, 2008

The Harvard Project on International Climate Agreements, together with the Fondazione Eni Enrico Mattei, Fondazione Giorgio Cini, and the Euro-Mediterranean Centre for Climate Change, hosted a workshop of leading thinkers on international climate policy in Venice, Italy, on May 15–16.

The first day consisted of an academic workshop (to view the workshop agenda, click here), in which scholars from Europe, China, India, Japan, and the United States presented preliminary results of their research for the Harvard Project, which is supporting more than 25 research initiatives on aspects of international climate change policy.

On the second day, leaders from business, environmental advocacy, and government, along with the assembled academics, discussed key topics in international climate change policy, including ways to engage developing countries, how to maintain global competitiveness despite diverse national mitigation policies, and proposals for international agreements that could succeed the Kyoto Protocol.

Below is a summary of key items discussed in the second-day stakeholder meeting. We have summarized the comments made by a wide variety of participants who spoke during the sessions, while not attributing remarks to any specific person. This is a sampling of comments and is not meant to imply that everyone who attended the workshop agrees with everything said.

SESSION 1: Post-2012 Carbon Markets and their Implications for Competitiveness

• There is a general perception that climate policies have an impact on international competitiveness, although it is too soon to forecast their world-trade effects.
• There is considerable support for using prices as an element in addressing climate change, and for setting those prices through a market mechanism — most likely a cap-and-trade system, but possibly a carbon tax. This approach entails a fundamental trade-off: raising the price of producing carbon-intensive goods in one country may shift comparative advantage to other countries through so-called "emissions leakage." Carbon prices will certainly affect several sectors, and following the dynamics of carbon prices carbon leakage across sectors and countries is likely to occur. Several key approaches have been proposed and discussed to prevent carbon leakage and enhance competitiveness, including: updating output based allocation, offset allocation, encouraging other countries to take action and mitigate, tax adjustments, sectoral approaches and restructuring of key industries.
• When countries implement policies to mitigate their greenhouse gas emissions, there is a real question of how much that affects the competitiveness of firms.  Studies are mixed on the issue, with some case studies suggesting that there is a large impact on energy-intensive industries, while statistical analyses indicate such competitiveness concerns may be overstated. However, the general perception that emissions commitments will put companies at a competitive disadvantage is a formidable challenge to achieving a climate agreement. 
• A border tax or allowance import requirement — similar to what is currently included in the U.S. Lieberman-Warner bill — may be used to ensure that goods that come from countries without stringent emission mitigation policies do not receive an unfair competitive advantage. However, this has the potential for serious disruption to the world trading regime, and as such is highly controversial. In addition, the design of a border tax adjustment can be quite difficult, being specific to different industries and  also 'within industry'. Other options exist: Competitors outside the regime could take on commitments, thus leveling the playing field. In a cap-and-trade system, the government could use the allocation of allowances to mitigate the impact on highly energy-intensive firms.
• Demand participation may also improve market efficiency; there is room to act on many public policies which affect energy use, for instance by reducing those energy subsidies which make the market for cleaner energy sources less liquid.
• There is a common view that transport, including aviation, is a key sector that should be involved in future carbon markets, but not necessarily under the EU ETS (Emission Trading Scheme)
• There is a general consensus on the idea that a Post-2012 international agreement should provide a stable and reliable framework for climate change mitigation addressing energy efficiency and linking international policies to domestic policies and commitments. Domestic climate policies should be backed up by international policies, within a common environmental legislative framework. A proper diffusion of best practice would be crucial to the design of an effective regime.
• A key challenge of a future climate international agreement appears to be the inter-link between trade and climate change policies. A post-2012 agreement may account for trade provisions, as it is in the Montreal Protocol.
• The Clean Development Mechanism (CDM) is likely to play a role in future international climate policy, but opinions of its effectiveness and usefulness are mixed, and there appears to be considerable room for reform. The CDM, with some changes, could perhaps evolve into the primary means of engaging developing countries in emissions reductions, without asking them to incur high short-run costs. In addition, a sectoral approach could be combined with the CDM to gradually strengthen emissions commitments in developing countries. (See broader discussion of sectoral approaches below).

SESSION 2: The Role of Developing Countries in International Climate Agreements

• The world has changed since the early 1990s, when the United Nations Framework Convention on Climate Change divided countries into Annex I and non-Annex I — each with its own set of responsibilities. Going forward, it may be preferable to allow for a more variegated menu of mitigation policies from which both developed and developing countries may choose.
• The world can afford to wait for developing countries to join in an international climate agreement, but not indefinitely. Many agree that a future international climate agreement should include a deal on when developing countries will "graduate" to take on binding commitments. Otherwise, those not bound by the agreement will continue to build coal-fired power plants and other long-term energy-intensive infrastructure, or absorb "emissions leakage" from developed countries — pushing up the cost for the entire world later on. While waiting for developing countries to join, it is important to implement smart policies, such as facilitating technology transfer and investing in R&D and technological development.
• For the entire world, delays in accepting binding emissions targets will substantially increase the cost of mitigating climate change, according to research from Fondazione Eni Enrico Mattei. Additionally, the longer that developing countries delay, the higher the costs for developed (Annex I) countries. However, this can be partially offset by allowing developing countries to participate in emerging carbon markets even without binding emission reduction targets (i.e. they can sell permits if their emissions are below their business as usual level). In order to implement an effective international climate agreement it is crucial to agree upon a sound long term emissions reduction target.
• There may be room to engage developing countries by defining "commitments" more broadly — as energy efficiency efforts or contributions of various types, and not strictly as a cap on emissions. One potential first step: An international agreement could recognize the steps that developing countries are already taking, such as China’s goal to reduce emissions intensity by 20 percent. Another idea: look at domestic policies, rather than caps on emissions. If developing countries cannot take on a cap, they potentially could agree in a binding manner to a helpful policy, such as eliminating energy subsidies.
• The co-benefit potential of climate policies can be very high (including health effects). Particularly in developing countries there is the need to link climate policies to sustainable development, identifying and assessing co-benefits of climate policies, as well as potential trade-offs between policies. A first step in this direction could be a preliminary assessment of Sustainable Development Policies and Measures already in place, and a careful monitoring of their evolution and potential inter-play with climate policies. This may help building trust and enhancing a dialogue between developed and developing countries.
• Developing countries’ participation in international climate agreements emphasizes the need to address equity considerations, beyond efficiency and effectiveness. Equity should be addressed not only across countries (or generations) but also within countries, based for instance on the measurement of well-being indicators. On these premises, a careful assessment of the equity implications of market-based instruments, such as a carbon tax, at the country level would be needed also within the broader framework of an international climate agreement.
•  In any future international climate agreement, developed countries are likely to seek out low-cost emissions abatement opportunities within developing countries, and they will compensate developing countries for that in some way — either through a CDM-type mechanism or otherwise. A key question: How to use that money to spur technological development and energy R&D, rather than allowing such funds to fall into the hands of a few politicians? Which channels can be envisaged to effectively redistribute money for technological improvement?

SESSION 3: Alternative Approaches to Post-2012 Global Climate Change Agreements

• In an ideal world, an international climate agreement would include a global price on greenhouse gas emissions, applicable to all countries and all sectors, set by market-based systems such as cap-and-trade or a carbon tax. But the reality is much more likely to be a patchwork of varying systems, with only some countries and sectors participating, at least at first. At the hard core of likely future agreements there is in fact a graduation of national targets.There may be ways to bridge this gap through linkage among systems, and agreements within energy-intensive, trade-exposed sectors.
• All of the policy approaches need to have a basis in sound science and must be credible. For instance if developed countries had to show that low carbon growth is possible, effective carbon markets will deliver substantial financial flows and technology will be accessible and affordable, developing countries should agree on a common target, make a commitment and make a credible action plan to get there, participating in a global market. There was discussion about whether a target — for example, limiting global temperature rise to 2 degrees C — should be negotiated up front, with several strong comments in favor of that approach, but others opposed.
• In order to fill the still existing gap between the developed and the developing world the potential role of regional structural funding programs was advocated.
• The term "sectoral approach" can encompass a range of ideas, from sharing of best practices, to benchmarking across regions and countries, to technological R&D (as outlined in the Bali action plan), to binding international policy coordination.
• Depending on how they are structured, sectoral approaches could address competitiveness concerns within industries, and also potentially could be used to engage developing countries. (If developing counties were not ready to take on an economy-wide cap, they may agree to negotiate sector-by-sector agreements for a few energy-intensive sectors). However, sectoral approaches contain several potential drawbacks — most notably, the difficulty with which such agreements are negotiated and administered, lack of cost-effectiveness, potentially high levels of government regulation, and the potential for politically powerful industries to carve out favorable deals.

Workshop participants:

- Ramgopal AGARWALA - Research and Information System for Developing Countries, India

- Joseph ALDY – Harvard Project on International Climate Agreements and Resources for the Future, USA

- Richard BRADLEY - International Energy Agency, France

- Barbara BUCHNER - International Energy Agency, France

- Jing CAO - School of Economics and Management, Tsinghua University, China

- Carlo CARRARO – Ca’ Foscari University, Venice and Fondazione Eni Enrico Mattei, Italy

- Michael Starbæk CHRISTENSEN - Prime Minister's office, Denmark

- Romain DUVAL - Economics Department, OECD, France

- Ottmar EDENHOFER - Potsdam Institute for Climate Impact Research (PIK), Germany

- A. Denny ELLERMAN - MIT Sloan School of Management, USA

- Christian FLACHSLAND - Potsdam Institute for Climate Impact Research (PIK), Germany

- Fumiko FUKUSHIMA - Nippon KEIDANREN The 21st Century Public Policy Institute, France

- Marzio GALEOTTI – University of Milan and IEFE, Italy

- Giulia GALLUCCIO - Euro-Mediterranean Centre for Climate Change (CMCC), Italy

- Lin GAN - Center for International Climate and Environmental Research (CICERO), Norway

- Boyden GRAY - The United States Mission to the European Union, Belgium

- Fabio GRAZI - Centre Inernational de Recherche sur l’Environment et le Developpement (CIRED) Cedex, France

- Regine GÜNTHER - WWF, Germany

- Jean-Charles HOURCADE - Centre International de Recherche sur l’Environnement et le Développement (CIRED), France

- Michael JAKOB - Potsdam Institute for Climate Impact Research (PIK), Germany

- Charles KOLSTAD - Donald Bren School of Environmental Science & Management, University of California, USA

- Matthias KOPP - WWF Germany, Financial Sector & Energy, Germany

- Ray KOPP - Resources for the Future (RFF), USA

- Alessandro LANZA - Eni Corporate University Spa, Italy

- Gunnar LUDERER - Potsdam Institute for Climate Impact Research (PIK), Germany

- Andrei MARCU - BlueNext and World Business Council for Sustainable Development (WBCSD), Cedex, France

- Giuseppe MONTESANO - ENEL Spa, Italy

- Chris MOTTERSHEAD - British Petroleum, UK

- Helen MOUNTFORD - Climate, Natural Resources and Outlooks Division, OECD Environment Directorate, France

- Richard NEWELL - Nicholas School of the Environment and Earth Sciences, Duke University, USA

- Marcella PAVAN - Italian Electricity and Gas Regulator, Italy

- Ignacio PÉREZ-ARRIAGA - Institute for Technological Research, Comillas University, Spain

- Mattia ROMANI - Stern Team, Office of Climate Change, UK

- Akihiro SAWA - Research Center for Advanced Science and Technology, University of Tokyo, Japan

-Daniel SCHAFFER – TWAS The Academy of Sciences for the Developing World, Italy

- John SCHMITZ - Mayer Brown LLP, USA

- E. SOMANATHAN - Indian Statistical Institute, India

- LeoSCHRATTENHOLZER- Co-Director, International Energy Workshop, Austria

- Robert STAVINS – Harvard Project on International Climate Agreements, Harvard Kennedy School, USA

- Fei TENG – Institute of Nuclear and New Energy Technology, Tsinghua University, China

- Tom VAN IERLAND – European Union

- Jorge VASCONCELOS – former President of the Council of European Energy Regulators and NEWES, Portugal

- Dimitri ZENGHELIS, Stern Team, Office of Climate Change, UK

From FEEM and Harvard:

- Francesco BOSELLO - Fondazione Eni Enrico Mattei (FEEM), Italy

- Valentina BOSETTI - Fondazione Eni Enrico Mattei (FEEM), Italy

- Caterina CRUCIANI - Fondazione Eni Enrico Mattei (FEEM), Italy

- Enrica DE CIAN - Fondazione Eni Enrico Mattei (FEEM), Italy

- Fabio EBOLI - Fondazione Eni Enrico Mattei (FEEM), Italy

- Alice FAVERO - Fondazione Eni Enrico Mattei (FEEM), Italy

- Maddalena FERRANA - Fondazione Eni Enrico Mattei (FEEM), Italy

- Carlo GIUPONNI - Fondazione Eni Enrico Mattei (FEEM) and Ca’ Foscari University Venice, Italy

- Alessandra GORIA - Fondazione Eni Enrico Mattei (FEEM), Italy

- Masako IKEFUJI - Fondazione Eni Enrico Mattei (FEEM), Italy

-Elisa LANZI - Fondazione Eni Enrico Mattei (FEEM), Italy

 - Angela MARIGO - Fondazione Eni Enrico Mattei (FEEM), Italy

- Ughetta MOLIN FOP - Fondazione Eni Enrico Mattei (FEEM), Italy

- Jaroslav MYSIAK - Fondazione Eni Enrico Mattei (FEEM), Italy

- Ruslana PALATNIK - Fondazione Eni Enrico Mattei (FEEM), Italy

- Ramiro PARRADO - Fondazione Eni Enrico Mattei (FEEM), Italy

- Alessandra SGOBBI - Fondazione Eni Enrico Mattei (FEEM), Italy

- Robert C. STOWE - John F. Kennedy School of Government, Harvard University, USA

- Sasha TALCOTT - John F. Kennedy School of Government, Harvard University, USA

- Massimo TAVONI - Fondazione Eni Enrico Mattei (FEEM), Italy

-Elena Verdolini -Fondazione Eni Enrico Mattei (FEEM), Italy

Press

- Edward MCBRIDE - Environment correspondent, The Economist, UK

- Daniel SCHAFFER - Public Information Officer, writer/editor, TWAS - The Academy of Sciences for the Developing World, Italy

- Quirin SCHIERMEIER - German Correspondent, Nature, Germany

- Gerard WYNN - Reuters, London