Political Economy of Climate Change

Four big questions asked about climate change are: (1) how much global warming and climate change will occur; (2) how bad will it get; (3) when will all this occur; and (4) what should be done about it. Nicholas Stern provided a detailed analysis of the economic impact by taking into account future generations in a well-defined economic model.[1] His model posits all the future generations with very low discounting (the utilitarian approach). The model has been criticized by a number of economists on various grounds. Weitzman starts with a different approach. He argues that the standard cost-benefit analysis done in economics breaks down while analyzing climate change because there is too much uncertainty about too many parameters of any climate change model (deep structural uncertainty).[2] We will analyze these models in Chapter 6, along with that of Nordhaus, from a political economy perspective—the feasibility of implementing these changes given the real world constraints.[3]

UNFCCC Article 15(3) requires the parties to make every effort to reach agreement on any proposed amendment to the Convention by consensus. If all efforts at consensus have been exhausted, and no agreement reached, the amendment can be adopted by a three-fourths majority vote of the parties present and voting at the meeting, as a last resort. Similarly, WTO decisions are taken by consensus. While the WTO Agreement provides for majority voting, the practice to date has been to take all decisions by consensus. In both cases, a subset of parties can enter into a plurilateral agreement (in the case of the WTO) and a protocol (in the case of the UNFCCC). Multilateral negotiations have been stalled in recent years with respect to the UNFCCC and the WTO Doha Round, in part because of consensus-based decision-making.

As WTO Deputy Director Alejandro Jara has observed, this negotiation paralysis must be considered in the global economic context, which has been characterized by financial crises, economic deceleration and uncertainty. It also reflects a new global reality, in which the rise of major emerging economies has led the traditional economic powers to demand greater concessions and commitments from the emerging economies. These changes in the economic balance are likely to continue, making consensus increasingly difficult to achieve. In turn, the lack of multilateral agreement generates further uncertainty, with respect to both the UNFCCC and the WTO negotiations. In addition, the failure to advance in the UNFCCC negotiations prevents progress at the WTO with respect to the compatibility of multilateral and unilateral policy responses to climate change. Moreover, the climate of uncertainty leads to risk aversion, making it less likely that financing of green technologies will come from the private sector. However, public financing of green technologies will be uneven across countries and could lead to serious market distortions that will create further political and economic instability. As a result, it is important to identify policy issues and options and ways to overcome negotiation obstacles.[4]

One proposal, with respect to WTO negotiations, is to make negotiations less ambitious, by abandoning the rule that “Nothing is agreed until everything is agreed,” and to abandon decision-making by consensus.[5] There are precedents for this approach at the WTO, with negotiations to liberalize specific sectors, such as information technology products[6] and basic telecommunication services.[7] With this approach, once enough Members are on board to cover 90 percent of trade in the sector, the agreement is finalized. The most-favored-nation rule extends concessions to all WTO Members and the resulting agreement is left open for other Members to join. A similar approach could be taken with UNFCCC negotiations, by seeking agreement among the countries that account for the overwhelming majority of emissions, and by leaving it open for other countries to join. Less ambition and more progress may work better than the more idealistic consensus- based approach and the negotiation paralysis at the WTO and UNFCCC.

International politics plays a big role in responses to climate change, just as it does with respect to international economic governance. In both cases, the divergence is not simply between the perspectives of developed and the developing countries. Rather, it depends on how the interests of countries are aligned, which vary with the specific issue. Thus, there may be not just a North-South divide, but North-North and South-South divides as well. International organizations can play a key role in bringing all the parties to the table. The Economics ofEcosystems and Biodiversity (TEEB) Report, released in October 2010, points to some common ground emerging between the developed and the developing countries.[8] However, policy responses that work in developed countries will not necessarily work in developing countries, for example when the effectiveness of those policy responses depends on the maturity of financial markets or the robustness of national regulatory institutions. Thus, differences in levels of economic development influence the design of global solutions both at the negotiation stage and at the implementation stage.

Another consideration is the manner in which international economic and environmental policies are formulated at the national level. For example, the processes and actors differ in China, the European Union, and the United States. In the United States, the private sector has a very significant role in the formulation and implementation of policies that affect their interests. In the European Union, while the private sector has an important role, civil society also has influence, which alters the policy outcomes with respect to the intersection of trade and environment. In China, the politburo determines policy. Thus, the interests of the actors and the processes have to be taken into account in determining the parameters of possible policies, with respect to both international economic relations and international environmental policy.[9] As Bruce Yandle described it, the process of regulating environmental protection can involve Baptist-and-bootlegger coalitions, in which different interest groups favor the same regulatory outcome for different reasons. Just as Baptists and bootleggers were both in favor of alcohol prohibition, domestic industry and environmentalists can both be in favor of environmentally motivated trade restrictions.[10]

Climate change regulation—whether based on regional and multilateral agreements or taken unilaterally—can be designed or implemented in a manner that benefits domestic industry and discriminates against imports or foreign investors. In subsequent chapters, we will examine such measures and the implications of their inconsistency with international trade agreements and international investment agreements. In addition to potential inconsistency with international economic law, regulatory capture of climate change regulation implies a preference for less efficient producers of adaptation and mitigation technology, which raises the cost of addressing climate change. In addition to trade and investment barriers, it is common to structure foreign aid in a manner that favors domestic industry, regardless of whether it is the best or most cost-effective technology.

National regulatory capture can lead to de facto international regulatory capture when the national government in question has disproportionate influence in international organizations, such as the World Bank, or disproportionate bargaining power in international negotiations, such as trade negotiations at the WTO or in regional trade agreements. The source of the influence or bargaining power may include the percentage of world trade of a country, the size of its market, its spending power with respect to foreign aid, the size and percentage of its monetary contributions to international organizations, and its ability to facilitate membership in a desirable economic group (such as the European Union or the WTO). The degree of bargaining power or influence for the same national government can vary with the context. For example, the bargaining power of the United States is greater in free trade negotiations with small developing countries than it is in the WTO context, where the bargaining power of the United States is offset by the bargaining power of the European Union or other coalitions of influential countries. Where an industry succeeds in capturing the regulatory process of one or more national governments, that regulatory capture can lead to the indirect capture of international regulatory processes, leading to international rules that favor the industry at the expense of global welfare.

Climate change regulation provides evidence of regulatory capture. For example, in the United States, during 2001-2008, the Senators and Congressmen who were elected from the states with big support from the energy lobby were powerful members of the committees that oversaw environmental regulation. This has led to the weakening of many laws (such as the laws governing Superfund sites) and to the failure to ratify international agreements (such as the Kyoto Protocol). These activities have not gone unchallenged. The State attorneys-general challenged in court the Bush administration’s proposal to relax environmental standards for new plants or upgrades of industrial facilities. State attorneys-general have moved to the forefront of social regulatory activism, ahead of state legislatures, piggybacking on the popular product liability movement and their financial success in the tobacco cases.[11]

There is also an equity issue involved when we examine developed versus developing countries. Specifically, there is a clear difference between the developed and the developing countries for the following reason. The countries that were already developed by the end of the twentieth century had undertaken development with scant regard to the environment in the nineteenth and the twentieth centuries. Thus, there is a perception among (now) developing countries that these countries could achieve development relatively “cheaply.”[12] It is perceived that the (now) developed countries are trying to impose restrictions on the development paths of the developing countries by asking them to industrialize with cleaner technologies that are more costly. The developing countries are not willing to bear that cost. Until recently, the developing countries have not mounted any unified effort to deal with these issues. But now there are signs that they are.[13]

  • [1] Nicholas Stern, The Economics ofClimate Change: The Stern Review (Cambridge University Press,Cambridge 2007).
  • [2] Martin L. Weitzman, “Insurance for a Warming Planet” (2010) 467 Nature 784.
  • [3] William D. Nordhaus, A Question of Balance: Weighing the Options on Global Warming Policies(Yale University Press, New Haven 2008).
  • [4] Alejandro Jara, “El Medio Ambiente y la OMC” (2012) 2 Revista de Derecho EconomicoInternacional 5.
  • [5] “Goodbye Doha, hello Bali,” The Economist (September 6, 2012) (accessed March 15, 2013).
  • [6] Information Technology Agreement (accessed October 23, 2012).
  • [7] Results of the basic telecommunication negotiations (accessed October 23, 2012).
  • [8] TEEB, Mainstreaming the Economics of Nature: A Synthesis of the Approach (2010) (accessed March 15, 2013).
  • [9] Aluisio de Lima-Campos, “Polfticas de Comercio y Medio Ambiente: En Busca de un Alinea-miento” (2012) 2 Revista de Derecho Economico Internacional 35.
  • [10] Bruce Yandle, The Political Limits of Environmental Regulation: Tracking the Unicorn (Praeger,New York 1989).
  • [11] Paul Teske, “The New Role and Politics of State Regulation” (2004) 27 Regulation (accessed March 15, 2013).
  • [12] Ross Garnaut etal., “Emissions in the Platinum Age: the implications of rapid development forclimate-change mitigation” (2008) 24 Oxford Review of Economic Policy 377.
  • [13] Mike Goldblatt and Julie Middleton, “Climate Policy Coherence and Institutional Coordination: Clarifying Institutional Responsibilities in South Africa,” Basic-Project Paper 13 (September2007) (accessed March 15, 2013).
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