Jean Tirole

Nobel Prize-Winning Economist: No “Waiting Game” for Climate Policy

  • Jean Tirole
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On his recent visit to Taipei for the 2015 Master Forum, Nobel Prize-winning economist Jean Tirole discussed economic tools that could be used to fight climate change. His speech, titled Climate Change and Public Policy, called for an end to the “waiting game” that has trammeled progressive climate policy. To end the standoff, the world’s nations ought to reach some agreement on emissions controls, establish independently operating emissions tracking systems, and open up negotiation for incentives, Tirole argues.

Tirole is the 2014 recipient of the Nobel Memorial Prize in Economic Sciences in recognition of his research in market power and regulation of monopolies. The Royal Swedish Academy of Sciences has called him one of the most influential economists of our time. Distinguished as an expert in industrial organization, game theory, and finance, Tirole has authored over 200 journal papers and 11 books, many the central texts of their field.

As a student of economics, Tirole has been vocal on the problem of climate policy for some time now—ever since the ambitious but non-committal 1997 Kyoto Protocol. He believes that the world’s nations may have presented good intentions to regulate GHG emissions, but the goals set for 2020 are far too limited to be effective. After the Copenhagen meeting in 2009, Tirole found that most of the signing countries lacked enough trust in the other signees to break out of the stalemate condition he calls “the waiting game” where each country prioritizes its own economic interests at the expense of mutual progress.

Tirole gives four primary reasons for the delays in climate accords:

  • The results of assessment, reporting, and verification are limited;
  • Implementation has been ignored;
  • Least-cost abatement is unlikely;
  • Burden sharing has been problematic.

Furthermore, delaying agreements until 2020, he warns, would reduce the incentives for countries to lower their emissions in the near future, and may even give the biggest polluters a stronger position when bargaining in 2020.

Tirole argues from the standpoint of game theory that carbon reduction controls are ineffective. He adds that if the world continues to delay negotiations, merely paying the interest on our climate debts while ignoring the principle, it will mean paying a far more dear price sometime in the future. Thus Tirole remains hopeful for a timely and successful agreement at COP21.

What can be done to incentivize nations to pay their climate dues? Tirole proposes a simple yet effective measure: price coherency. In other words, the price of carbon ought to be same in all countries and all sectors. For example, if carbon abatement is priced at €10/ton in Country A and €100/ton in Country B, a reduction of 2 tons might be achieved in two ways:

  • The “fair” method: each country cuts one ton of carbon, the total cost to society is €110 (A + B)
  • The effective method: Country A cuts 2 tons, the total cost is only €20 (2 x A)

Tirole holds that a carbon trade system could be established that allows Country A to sell carbon permits to Country B; in this situation Country A is ahead €90 and Country B unloads pressure to reduce emissions—a win-win. In Tirole’s suggestion, a uniform market price would be defined for carbon; then countries with lower-than-market reduction costs could sell their permits to countries with higher costs.

Climate science, green tech, and adaptation are unpredictable variables in this equation; thus Tirole reminds us that no matter what kind of trade system we do end up adopting—cap-and-trade or carbon tax or some hybrid formulation—there will be errors in prediction. Thus the need for continual adjusting to fit with previous commitments.

While Tirole is marginally in favor of the cap-and-trade system over other possibilities like a carbon tax or carbon pricing, he says that as the situation stands, cap-and-trade is better than no plan at all.

It is easy to affect good intentions, but the catch is in compliance. Treaties like the Kyoto Protocol were ineffective because the signing parties were not committed to following through with their promises, nor were there any consequences for reneging. Fixing the situation means tracking emissions and building up a global trade-environment deal, perhaps one based on WTO sanctions, says Tirole. If a country fails to comply, they would be prevented from engaging in the carbon trade. He also advocates treating environmental debts as sovereign debt, which again translates the problem into something nations can understand and are forced to deal with. Finally, the social mechanism of naming and shaming, which works, but only up to the point where nations can offer up excuses for inaction.  

Green policy requires that we consider incentives and negotiation. The Green Fund, a deposit of money meant to help developing countries come up to speed on sustainable issues, is one of the ways we can offer incentives to good practices. Another is the balance point between ethics and Realpolitik. Being low-carbon comes with a cost which each country is more or less endowed to pay; also the effects of climate change are felt differently in each country. Thus both politics and equity ought to be considered when negotiating over allocation and responsibility, but overall the wealthy countries should be the ones to take the lead and assist poorer countries develop in a low-carbon environment, a limitation that developed countries never had to worry about.

Tirole ended the talk with his climate change roadmap. The first node on his itinerary is governance: agreeing on a path of emissions, setting a worldwide market price for carbon, and applying carrots and sticks to motivate compliance. Second is an independent tracking system which would measure the actual emissions of each country. Finally, a negotiation process for compensation. In today’s stasis, Tirole believes that implementing as little as these three approaches would be enough to effect substantial change.