The official communique from the Cancún climate change conference cannot disguise the fact that there will be no successor to the Kyoto protocol when it expires at the end of 2012. Japan, among others, has withdrawn its support for efforts simply to extend the Kyoto treaty.
This sounds like bad news, because it means that there will be no international price on carbon, and, without a market price, it is difficult to see how the reduction of carbon emissions can be efficiently organised. But appearances can be deceiving.
Even as the top-down approach to tackling climate change is breaking down, a new bottom-up approach is emerging. It holds out better prospects for success than the cumbersome United Nations negotiations.
Instead of a single price for carbon, this bottom-up approach is likely to produce a multiplicity of prices for carbon emissions. This is more appropriate to the task of reducing carbon emissions than a single price, because there is a multiplicity of sectors and methods, each of which produces a different cost curve.
The market price of anything is always equal to the marginal cost. When there is a single price, all the various cost curves are merged into one and low-cost projects enjoy large rents. This makes the cost of reducing carbon emissions much larger than it needs to be.
This was amply demonstrated by the working of the Kyoto protocol in practice. The carbon-trading scheme that it established gave rise to many abuses. For example, formerly communist countries earned emission credits at zero cost on the heavy industries that they had to shut down and reaped windfall profits by selling them. So the demise of the Kyoto protocol will be no great loss.
The same applies to the protracted negotiations between developed and developing nations. The developed nations promised to pay reparations for their past sins at the Rio de Janeiro summit in 1992 but kept deferring their obligations by negotiating. Meanwhile, conditions changed with the passage of time: China, following decades of booming growth, replaced the United States as the largest emitter.
The negotiations have taken on an increasingly unreal air. The dispute revolves around how governments will deliver $100bn annually by 2020 to help developing countries confront climate change, given that even the $10bn fasttrack fund cannot be cobbled together without using smoke and mirrors. By failing to make any progress beyond keeping the talks alive, the Cancún summit has given the impression that nothing is happening, and that the situation is hopeless.
That is not the case. Individual countries such as Germany are making binding unilateral commitments that are not conditional on what other countries do, and “coalitions of the willing” are being formed to tackle particular sectors. The Redd partnership (reducing emissions from deforestation and forest degradation), an effort to create financial value for the carbon stored in forests, is the prime example here. Indeed, the greatest progress is now being made where the problem is the most urgent: it is much easier to preserve forests than to restore them.
The case of Indonesia deserves special attention. Indonesia has become the third largest polluter in the world, after China and the US, because much of its forest grows on peatlands. When the trees are cut and peatlands drained, the carbon accumulated over millennia is exposed and oxidised – often in the form of fires that envelope neighboring Singapore and Malaysia in smoke.
Today, half of Indonesia’s peatlands remain intact; if they were exposed, emissions would double. President Susilo Bambang Yudhoyono is determined to prevent this, and he has received financial support for his efforts from Norway. Their partnership has already been joined by Australia, and others will soon follow.
The partnership is path-breaking in several ways. Yudhoyono is introducing a moratorium on the exploitation of peatlands and virgin forests. A Redd agency will be charged with treating rainforests as a natural resource that is to be preserved and restored rather than exploited and destroyed. This will also transform governance and the delivery of official development assistance (ODA).
The Redd agency will have a domestic governing board that will coordinate the activities of all the governmental units concerned with rain forests, and an international board that will authorise and monitor the spending of ODA funds. This means that ODA will support homegrown institutions instead of administering projects introduced from the outside.
These efforts can serve as a prototype for assisting other countries such as Guyana, where the current forest-preservation scheme does not work so well. Eventually, it should lead to the establishment of a global fund for rainforests and agricultural adaptation because the benefits of carbon abatement accrue to humanity as a whole, not to individual countries. The global fund would introduce two prices: one for carbon saving by restoring forests and one for avoiding carbon emissions by preserving them.
This in turn sets an example for other sectors. In this way, carbon pricing will be introduced and international cooperation established from the bottom up, on a sectoral basis rooted in demonstrated results.
Thus, despite the widespread impression that the climate-change agenda has stalled, there are grounds for hope. But realising that hope requires keeping pace with global warming, and that means speeding up the process of putting a price – or prices – on carbon emissions.