On Monday, the Royal Swedish Academy of Sciences awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, aka the Nobel Prize for Economics, to Professor Jean Tirole of the Toulouse School of Economics. Professor Tirole, a game theorist, was awarded for his work on how to regulate markets that are comprised of a small number of large and powerful companies, such as the markets for electricity, credit cards, or cable television.
I admit that when some previous Economics Nobel Prize winners were announced, I hurried to Wikipedia to find out who they were. Not this time. I learned game theory from Professor Tirole’s textbook as a graduate student in 2004 and heard him speak at my alma mater UCSB in 2006. I was sufficiently captivated to devote the first chapter of my dissertation to applying game theory to explain the formation of transboundary national parks in Southern Africa.
Tirole’s wide-ranging work includes research on climate change, environment, and energy (Michael Levi of the Council on Foreign Relations has put together a useful round-up of Tirole’s publications on these topics). International efforts to prevent climate change provide particularly fertile ground for game theory, what with so many carbon polluters trying to free ride off of the mitigation efforts of others. Economists refer to such strategic interactions as games, even if they are not always the fun kind. Tirole assigns names like “brinksmanship” and “raising rivals’ costs” to the not-so-fun games currently being played by actors in international climate negotiations.
Back in 2009, Tirole formulated a five-step plan to fix climate change, which he delivered as a lecture and in blog form in the run-up to the high-stakes global climate summit in Copenhagen. Efforts to come to a global top-down solution on climate at those talks collapsed tragically, as I’ve described previously. Five years later, the world is once again gearing up to agree on climate, with a more bottom-up approach. That is, countries are assembling a grab-bag of “national contributions” that one hopes, with peer pressure, will add up to enough to bend the global emissions trajectory toward a safe and stable climate. This round of negotiations will culminate in December 2015 in Paris, in Tirole’s home country. Let’s take another look at Tirole’s plan, and see how the five steps he proposed five years ago are currently faring.
Step 1: Set a global emissions target for 2050 in conformity with IPCC’s consensus view.
Status: Partially accepted.
Soon after Tirole’s lecture in 2009, countries agreed in Copenhagen to limit the global temperature increase below 2 degrees Celsius. The Fifth Assessment Report of the Intergovernmental Panel on Climate Change quantified the maximum amount of emissions humanity can produce and still have a break-even chance of staying below 2 degrees. Out of an all-time planetary “carbon budget” of about 3.5 trillion tons of carbon dioxide, we’ve already burned through more than half. There’s no international agreement yet to collectively stick within this carbon budget. But expect advocacy organizations to use the “gigaton gap” between national contributions and the IPCC’s carbon budget as a bludgeon to pressure countries toward higher ambitions.
Step 2: Deploy a satellite system able to measure country-level emissions
Status: In progress.
Scientists’ ability to measure and attribute greenhouse gas emissions is making leaps forward as governments launch new satellites for this purpose. Scott Goetz of the Woods Hole Research Center, the lead author of a forthcoming CGD-commissioned working paper on technology for monitoring forest emissions, credits several launches in particular: Japan’s launch of the Greenhouse Gases Observing Satellite (GOSAT) in 2009, the US launch of the Orbiting Carbon Observatory (OCO-2) in 2014, and upcoming installation of LIDAR sensors on the International Space Station. These new technologies add to existing sensors like Landsat, used to annually map all of Earth’s forest losses and gains.
Step 3: Set up a long-term, worldwide cap-and-trade system
Status: Stalled at the top; growing from the bottom.
The cornerstone of Tirole’s climate plan is a worldwide system to cap and trade the right to emit greenhouse gases. His suggestion to put a price on carbon enjoys broad agreement among his fellow economists. As Professor Michael Greenstone of the famously free-market University of Chicago Economics Department put it recently:
The media always reports that there’s near consensus among scientists about the effect of human activity on the climate. What gets less attention is that I think there’s even greater consensus, starting from Milton Friedman and going to the most left-wing economist you can find, that the obvious practical solution is to put a price on carbon. It’s not controversial.
A top-down worldwide cap-and-trade system looks likely to remain in the cocoon through Paris. Still, cap-and-trade systems, and their twin solution, carbon taxes, are advancing rapidly from the bottom up in dozens of countries and states around the world. My colleagues Alice Lépissier and Owen Barder have discussed the relative merits of these two carbon price–based solutions here.
In a bottom-up world, it’s worth remembering the big advantage Tirole sees in a unified worldwide system: a common carbon price. In the absence of international trading to reach a common carbon price, efforts to reduce emissions will remain needlessly low in some countries, and needlessly expensive in others.
Tirole sees another advantage to a carbon price in addition to its cost-efficiency: transparency. According to Tirole, carbon pricing would provide “long-term visibility for those who hesitate to deploy green equipments or to engage in green research and development.”
Step 4. Provide incentives to join the agreement and to abide by it
Status: Shrinking toolkit; growing importance
As a game theorist, Tirole relates the importance of incentives that induce countries to join climate agreements and discourage defection. To induce broad participation in a climate agreement, Tirole recommended addressing distributional issues through the free allocation of emissions permits, which could either be used for development or sold at a premium. In a bottom-up climate world, bringing in and keeping countries in “coalitions of the willing” is more important than ever. But in the absence of a cap-and-trade system, inducement is forced to rely more heavily on transfer payments, which Tirole wrote as having less potential for success, in part due to their greater political visibility.
Tirole’s plan also stated the importance of keeping countries within an agreement. Mechanisms he proposed in 2009 for doing so included “treating countries’ environmental debts as sovereign debt (monitored by the IMF), entering a global trade-environment deal (involving the WTO), and international naming and shaming.” Right now naming and shaming appears the most likely of the bunch.
Step 5: Allocate permits domestically
Status: Happening, for the wrong reasons
Tirole’s plan described a “subsidiarity principle,” in which each country’s rights to emit an allowance of carbon are allocated domestically by that country. Since only a country’s total greenhouse gas emissions matter to the international community, domestic policies can be delegated to political leaders to build a consensus at home.
The good news about a bottom-up climate agreement is that there looks to be little international interference in domestic emissions-allocation and political consensus-building—the part that doesn’t matter to the international community. The bad news is that it looks like there may also be far too little upward peer pressure on countries’ total greenhouse emissions—the part that does matter.
Time for a new five-step plan?
Much has changed between Copenhagen and Paris in the international climate calculus. I hope that Professor Tirole, now Nobel Laureate Tirole, will once again put forward a plan for ambitious international climate action in the bottom-up Paris era, in which game theory is more important than ever.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.