It is easy to conclude that thirty years of intransigence by more developed countries doom hopes of any effective international agreement, as many climate activists have done. But I believe it is premature to throw in the towel on international negotiations, not only because if they are not eventually successful, we will not avoid cataclysmic climate change, but also because careful examination reveals a silver lining in the pledges countries have already made.

However, let me begin by acknowledging that it is certainly possible to be discouraged by the failure of every more developed country to pledge to do its fair share of greenhouse gas emission reductions given their greater responsibility for having created the problem and their greater capacity to contribute toward its solution, as was once again demonstrated at the latest COP 30 in Brazil. Nor, as justified as their frustration is, unfortunately in my opinion the recent meeting of delegates from less developed countries in Santa Marta Colombia failed to agree on a plan likely to break the deadlock.¹

Global emission reductions

Climate Scientists have told us in no uncertain terms that unless global carbon emissions are reduced by at least 80% by 2050, and, if possible, by even more, humanity is taking a risk no sane person would take. It’s that simple. So why isn’t the solution simply to hold every country responsible for reducing its national emissions by the same percentage, i.e. by at least 80% by 2050?

National “Fair Shares”

Beginning in Rio de Janeiro in 1992, and at every COP meeting since, those assembled have acknowledged the principle that countries’ responsibilities for emission reductions should be guided by different responsibilities for having caused the problem, and different capabilities for contributing to its solution, or what is referred to as common but differentiated responsibilities and capabilities, or CBDRC. However, for decades nobody knew how to make the principle of common but differentiated responsibility operational, that is how to calculate national fair shares of emission reductions. Fortunately, the intellectual problem of how to measure differential responsibility and capability has now been solved by several research groups, and anyone can now use EcoEquity’s Climate Equity Reference Project calculator, https://calculator.climateequityreference.org/, to see if a country is pledging to do its fair share of emission reductions.

When using the calculator one must choose: (1) a “level of ambition,” i.e how much to reduce global emissions, (2) how much weight to put on “responsibility” vs. “capability,” (3) what year to begin when calculating countries’ “historic responsibilities,” and (4) a subsistence income level below which people are not expected to contribute to solving climate change until they have met their minimal economic needs. For the calculations below I chose to use the 1.5 degrees Celsius “standard pathway” for “ambition,” 50% weights for both “responsibility” and “capability,” 1990 as the year to start measuring historic emissions, and a minimal subsistence income of $7,500 per year. If one chooses different weights results will differ, but only rarely will results for a country differ significantly for different choices for weights because when countries began to develop economically, and how developed they now are, not surprisingly turns out to be highly correlated.

What do we find?

• The good news is that by 2022 almost every less developed country had already pledged to reduce its emissions by what it is fair to expect them to do given their lower levels of responsibility and capability. And if all countries would do likewise, we would be within reach of an effective and equitable international climate agreement.
• The bad news is that no more developed country has yet to pledge to do its fair share given their higher levels of responsibility and capability.

For example, the latest United States’ pledge was 16.1 metric tons per capita below its fair share, and the European Union’s pledge was 9.0 metric tons per capita below its fair share. In contrast, South Africa’s pledge was 0.4 metric tons per capita above its fair share. Nigeria’s pledge was 0.4 metric tons per capita above its fair share. Senegal’s pledge was 0.1 metric tons per capita above its fair share. Kenya’s pledge was 0.5 metric tons per capita above its fair share. Mozambique’s pledge was 0.5 metric tons per capita above its fair share. And Egypt’s pledge was only 0.1 metric tons per capita below its fair share.

A Silver Lining

However, a careful examination of more developed country pledges reveals that many more developed countries have already pledged to reduce their domestic emissions sufficiently. As readers can verify for themselves using the Climate Equity Calculator, on three occasions, but only when a Democrat was in the White House, the US has pledged to reduce emissions by amounts that are what it can be reasonably expected to accomplish domestically. What the US has failed to do, however, is to pledge to pay for additional reductions the US should take responsibility for which could be done more cheaply elsewhere. Moreover, this is a common pattern for most MDCs. Put differently, the problem is that more developed countries’ greater responsibility and capability require them to pay for considerably more emission reduction than they can accomplish reasonably cheaply through domestic reductions.

But that need not mean “game over.” Fortunately, more developed countries can make up for the remainder of their fair share of reductions at a reasonable cost if emission sources in more developed countries are allowed to buy “certified emission reduction credits,” or CERs, from sources in less developed countries as I explain below. For example, a recent study by the Political Economy Research Institute at the University of Massachusetts estimates the cost of both domestic reductions and credits purchased for reductions elsewhere for the US to do its fair share would be roughly 1.5% of US GDP… which is far less than the 3.5% of GDP the US currently spends on our military.

How to Police an International Carbon Market

I am painfully aware that “carbon markets” have become a virtual bugaboo among climate activists. Nothing disgusts many climate activists more than the idea of selling the right to pollute, and stories of bogus carbon credits awarded in the European Union as well as in the Clean Development Mechanism under the Kyoto Protocol are legion. But the hard truth is this:

It is all but impossible to reduce the cost of deep developed country reductions to levels their governments will accept without permitting sources in more developed countries to purchase reduction credits from sources in less developed countries for less than those reductions would cost them to do domestically.

Fortunately, there is a way to insulate buying and selling CERs from the kinds of loopholes and shenanigans that have plagued ill-designed programs to date. This is all countries need to agree to:

(1) If they wish any country government should be allowed to certify emission reduction credits for emitters within its national territory who apply for credits to sell.

(2) When calculating whether a country has complied with its national pledge to reduce emissions, any emission reduction credits purchased by anyone within the country will be added to the country’s national emission allowance, and any emission reduction credits sold by anyone within the country will be subtracted from the country’s national emission allowance.

A country’s allowance sets a limit on its national emissions, and when set according to differential responsibility and capability allowances will be more restrictive the more developed a country is. Under my proposal a country can meet its emissions cap in two ways:

1. Sources of emissions within the country can reduce their emissions.

2. Or they can pay for reductions to be done elsewhere by purchasing certified emission reduction credits.

When sources in a country buy emission reduction credits this allows the country to emit more domestically than the emission cap the international agreement assigned to the country. When sources in a country sell emission reduction credits this requires the country to emit less domestically than the emission cap the international agreement assigned the country. Because it is generally cheaper for sources in lesser developed countries to reduce their emissions than it is for sources in more developed countries to do so, sources in lesser developed countries would generally be sellers of emission reduction credits and sources in more developed countries would generally be buyers of emission reduction credits under my proposal.

Why This Can Work

But why would this prevent the problem of bogus certification and phantom reductions critics have complained so much about in the past with good reason? It is difficult to determine how many credits to award an applicant for reductions that are additional to what would have occurred in any case. This requires not only verifying if the emission reduction credits which an applicant applies for are real, and not fictitious, which is hard enough for a certification agency to do. It also requires a certification agency to estimate what would have happened in any case, i.e. had the applicant for the credits done nothing. In other words, the certification agency must determine if the reductions are “additional” to what would have happened in any case. As anyone working in the field knows, judging “additionality” is even more difficult than deciding if the reductions an applicant for certification claims a project will yield are realistic and not over exaggerated.

It is because these two tasks are difficult and subject to challenge, and because there are clearly cases where “excessive” and even “bogus” credits have been awarded in various programs to date, that critics have understandably soured on carbon markets. However, while it is admittedly difficult to decide how many credits a particular project deserves, perhaps surprisingly it is relatively easy to measure actual annual national emissions, which must be measured in any case to determine if a country is in compliance with any international agreement. Which brings us to the crucial point:

If a country government makes a mistake and awards more credits than it should, as long as national emissions are capped and compliance with national emissions are enforced, any mistake in awarding credits cannot undermine global reductions. Instead, the erroneous awarding of credits only harms others within the country who will have to make up the difference if the country’s certifying agency awards excessive, or bogus credits.

In other words, as long as any credits sold abroad are added to the amount of emissions a country is required to reduce, and any credits purchased from abroad are subtracted from the amount of emissions a country is required to reduce; global emissions reductions will be exactly what the international agreement called for.² Because this can be difficult to wrap one’s mind around, in chapter 14 of my book, Climate Change Policy: The Eleventh Hour, I provide an example to explain how it would work in which I assume that sources applying for credits may well try to cheat, and government agencies granting credits may well collude with cheaters. To be clear, my proposal does not prevent crimes from being committed, nor eliminate victims. When emitters in less developed countries cheat, and when agencies in less developed countries either make honest mistakes when carrying out what is admittedly a difficult task – awarding reduction credits accurately – or conspire with cheaters, there are victims! But the victims are whoever must reduce emissions by more than they should have had to inside the country where bogus credits are awarded. In short, my proposal does not prevent mistakes from being made, nor eliminate victims. What it does is change who those victims are.

Because victims of cheating are innocent parties I recommend that countries should be allowed to certify emission reduction credits for sale only if they wish to do so. And I point out that countries would be well advised to consider whether they are up to this difficult task. As I explain, it is hard to judge how many credits should be awarded for a project. And there are perverse incentives for applicants and officials who evaluate proposals to cheat. And, when bogus credits are awarded, this will impose hardships on others inside the country, who must then reduce emissions more than they should have had to. So, if a country government does not feel up to this task, it should not certify credits for sale.

However, because it would be highly advantageous for emitters in less developed countries with low reduction costs to sell legitimate reduction credits for more than the emission reductions would cost them to emitters in more developed countries with high reduction costs, it would be very helpful if the Intergovernmental Panel on Climate Change (IPCC) offered to provide technical assistance to any government in a less developed country which asks for help to make their certification process as competent as can be hoped for. Under the Koto Protocol the executive board of the Clean Development Mechanism developed considerable expertise in this kind of work. While the absence of caps on less developed country emissions under Kyoto was a fatal flaw, and the backlog of applications also caused problems which critics jumped all over; in many ways the historical record of the Clean Development Mechanism suggests that the IPPC could be of great help to less developed countries asking for its technical assistance in evaluating applications for reduction credits.³

A Hypothetical Example to Explain How This Works

Suppose there is an electric utility in the US. Suppose laws in the US have already induced the US utility to shift from coal to natural gas to reduce its carbon emissions by 1 gigaton. But now US law requires the US utility to reduce its emissions by an additional gigaton, and reducing this second gigaton will be considerably more expensive than reducing the first gigaton was. Suppose there is also an electric utility in India which is still producing all its electricity by burning low grade coal. And suppose that by substituting natural gas for some of the low-grade coal it is burning, it can reduce its emissions by 1 gigaton comparatively cheaply.

If the utility in the US does not reduce the second gigaton domestically but instead buys emission reduction credits for 1 gigaton from the utility in India, and the utility in India truly does reduce its emissions by 1 gigaton, global carbon emissions have been reduced by 1 gigaton. They were simply reduced in India, where they were cheaper to reduce, rather than in the US, where it would have been more expensive to reduce them. And the price the US utility pays the utility in India for 1 gigaton of emission reduction credits simply divides this “efficiency gain” from relocating them from the US to India between the two utilities. At least this is how we economists teach it in our environmental economics classes. But would it really work this way? Let me walk readers through a worst-case scenario where actors with an incentive to cheat get away with cheating — the nightmare scenario that keeps critics of carbon markets awake at night.

What if the certifying agency in India — say India’s Environmental Protection Agency, or EPA — does a terrible job of judging whether the emission reduction credits the electric utility in India is applying to have approved are real? What if the utility in India lies about making reductions? What if it claims it reduced its emissions by 1 gigaton, but in truth it did not reduce its emissions at all — it goes right on producing all its electricity by burning low grade coal and therefore emitting the same large amount of greenhouse gases as before. However, assume the EPA in India certifies that the Indian utility did really reduce its emissions by 1 gigaton, and awards it credits for 1 gigaton. This might be because the India EPA made an honest mistake. As explained above, it is often not easy to ascertain how much emissions will be reduced, much less how much more they will be reduced than they would have been reduced in any case. Or it could be that the India EPA was bamboozled by the India utility’s clever misrepresentation. Or it could be that the officials working for India’s EPA were corrupt, and in cahoots with the utility, and knew they were awarding bogus credits, but did so because the utility bribed them. The important point is that there is clearly what economists call a perverse incentive for the Indian utility to try to cheat, and also a perverse incentive for corrupt officials at the Indian EPA to co-conspire… because the Indian utility is going to get paid for the credits it will sell, and in my example of a worst case scenario, the Indian utility has incurred no expense at all. What will happen?

We have no real reduction of 1 gigaton of greenhouse gas emissions by the utility in India, which continues to burn very low-grade coal just as before. But that utility in India is awarded credits for 1 gigaton by India’s EPA… which the Indian utility sells to the utility in the US… which satisfies its obligation to reduce its emissions by an additional 1 gigaton by turning in the credits for 1 gigaton of reductions it purchased from the utility in India to the US EPA. What is the result?

One gigaton which the US utility would have had to reduce in the US if there were no credits to be purchased is now no longer reduced in the US. But there is no reduction in India, or at least no reduction which would not have taken place in any case. At this point in the analysis, it looks like the nightmare critics of international carbon trading fear and loath, who therefore conclude: “You see? We’re now 1 gigaton of greenhouse gas reduction short. All of us fighting to prevent climate change, and all who suffer when we fail to do so, have been cheated.” However — and this is the key feature of my proposal – despite first appearances, this bogus emission reduction credit scam will not diminish global reductions one iota under my proposal. And this is why: The country of India is still responsible for whatever reductions it was responsible for under the treaty.

It is true that India is a less developed country with low responsibility and capability, so India’s fair share of reductions is low compared to the responsibilities and capabilities of more developed countries like the US. But under the treaty India is still responsible for whatever reductions its responsibility and capability warrant. And when the India EPA certifies 1 gigaton of reductions for the utility in India to sell, now India is responsible for 1 gigaton more than India would have been responsible for had the India EPA not certified the 1 gigaton of bogus credits. Of course, if the reduction by the utility in India had been real, then the real reduction would exactly make up for the additional responsibility. But there was no real reduction. So, what will happen under the treaty I propose?

India now must come up with 1 gigaton of reductions it would otherwise not have had to achieve to meet its treaty obligations.Put differently, when the treaty is enforced, India will be found in non-compliance unless someone else in India reduces emissions by 1 gigaton, that is, 1 gigaton of reductions which someone else in India would not have had to reduce had the bogus credits not been certified by India’s EPA and sold to the utility in the US.

In sum: If there is no cheating of course everything works out for the best. The global cost of achieving reductions is reduced by locating them where they cost the least, and both the utility in the US and the utility in India are better off financially than had the utility in the US not been permitted to buy credits from the utility in India. In the second scenario, however, either an honest mistake was made by the India EPA, or crimes were committed by the utility in India who misrepresented their reductions, and/or corrupt officials in India’s EPA who approved bogus credits. And whether it was an honest mistake or a crime, there are victims! But the victims are whoever in India ends up having to reduce emissions by 1 gigaton more than they otherwise would have had to. The International community is not harmed by the crime. Nobody outside India is harmed by the crime. What my proposal does is immunize or insulate everyone outside India from becoming victims of either honest mistakes or cheating by an Indian utility and perhaps corrupt officials working for the India EPA.

As should now be clear, my proposal does not prevent crimes from being committed, nor eliminate victims. When emitters in less developed countries cheat, and when EPAs in less developed countries either make honest mistakes when carrying out what is admittedly a difficult task – awarding reduction credits accurately – or conspire with cheaters, there are victims! But the victims are whoever must reduce emissions by more than they should have had to inside India.

Because victims of cheating are innocent parties inside India is why I recommend that countries should be allowed to certify emission reduction credits for sale, only if they wish, or choose to do so. Countries would be well advised to consider whether they are up to a difficult task. As explained, it is hard to judge how many credits to award for a project. And there are perverse incentives for applicants and officials who evaluate proposals to cheat. And, when bogus credits are awarded, this will impose hardships on others inside the country, who must then reduce emissions more than they should have had to. So, if a country’s government does not feel up to this task, they should not certify credits for sale.

However, because it would be highly advantageous for emitters in less developed countries with low reduction costs to sell legitimate reduction credits for more than the emission reductions would cost them to emitters in more developed countries with high reduction costs, it would be very helpful if the Intergovernmental Panel on Climate Change (IPCC) offered to provide technical assistance to any government in a less developed country which asks for help to make their certification process as competent as can be hoped for. Under the Kyoto Protocol the executive board of the Clean Development Mechanism developed considerable expertise in this kind of work. While the absence of caps on less developed country emissions under Kyoto was a fatal flaw, and the backlog of applications also caused problems which critics jumped all over; in many ways the historical record of the Clean Development Mechanism suggests that the IPCC could be of great help to less developed countries asking for its technical assistance in evaluating applications for reduction credits.⁴

Conclusion

For all the reasons critics have pointed out it is often very difficult to make an honest assessment of how much and when any project will reduce carbon emissions. Moreover, there is every reason to assume there will be two kinds of dishonest actors: (1) Applicants who know full well their project will not reduce emissions by as much as they claim it will. And (2) officials with the power to award credits who can be induced to award more than they know are deserved in exchange for a bribe from the applicant. And finally, whether mistakes are honest or due to corruption, there will be victims! My proposal does not prevent mistakes from being made, nor eliminate victims. What it does is reduce the cost of taking responsibility for their “fair share” of global emission reductions for MDCs, and change who mistakes and cheating victimizes. When bogus credits are sold by emitters in a country whose national emissions are capped, the victims will not be, indeed cannot be those who suffer everywhere in the world from climate change, because the country’s emissions are capped and therefore are not increased. Instead, the victims are others within the country which is awarding bogus emission credits who must make up the difference so the country’s national emissions will still be under its national cap.

1 It is my hope that those who attended the meeting in Santa Marta will consider the proposal I outline below as the most likely way to overcome the deadlock that has plagued international climate negotiations for over thirty years.

2 Because this can be difficult to wrap one’s mind around, I provide an example in chapter 14 of my book, Climate Change Policy: The Eleventh Hour.

3For more on the much-maligned history of the Clean Development Mechanism under Kyoto see chapters 8 and 9 in Hahnel, Green Economics: Confronting the Ecological Crisis, M.E. Sharpe, 2011.

4For more on the much-maligned history of the Clean Development Mechanism under Kyoto see chapters 8 and 9 in Hahnel, Green Economics: Confronting the Ecological Crisis, M.E. Sharpe, 2011.

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