2014 Nobel Prize Economist Argues for Binding GHG Targets
The winner of this year's Nobel Memorial Prize in Economic Sciences argues it is necessary to reach a binding agreement on climate change regulations as soon as possible or emissions of carbon dioxide may become even worse as countries try to get better leverage for target negotiations.
The Royal Swedish Academy of Sciences today awarded Jean Tirole, a professor of economics at the University of Toulouse in France, the 2014 Nobel Prize in economic science for his work analyzing when regulation is necessary to constrain markets dominated by a small number of large firms or a single monopoly and when regulators should step aside.
He studied markets and companies such as banks and Google Inc., and his work has been important to analysis of the 2008 financial crisis, as well as international climate change agreements, pollutants and energy.
In a news conference after receiving the prize, Tirole said that although the world has moved forward on global regulatory cooperation in many areas, "we are not yet there for climate change," according to the online journal MarketWatch.
He also said regulation is a "complex subject" and requires a delicate balance that is not too restrictive as to constrain entrepreneurship, but "at the same time you need to have a strong state which is going to enforce those regulations."
In a 2012 analysis on climate change regulation, Tirole warned that "strategic positioning" by countries will increase the cost of cutting carbon emissions if a binding agreement is not reached by 2020.
The dilemma goes beyond just the classic "free rider" problem because countries may actually back away from green investments they would otherwise make in order to have a better bargaining position in a global climate agreement, according to Tirole's paper for the Economics of Energy & Environmental Policy journal published by the International Association for Energy Economics.
"That is, not only will countries pollute too much in the meantime, but their technological and societal choices will reflect the desire to extract more concessions in future negotiations," Tirole said. "This strategic positioning makes it even more important to reach a binding agreement soon."
Tirole argues that a binding agreement would ensure countries follow through on commitments and that a voluntary agreement leaves no guarantee that any emissions cuts will actually be accomplished, especially because of "leakage" where countries with high emissions ship goods to other countries with low emissions.
A simplified version of the design of a "good agreement," according to Tirole, would include the same price for carbon across all countries and industries, long-term commitment, neutral policies regarding entry and phasing-out decisions for incentives, and no special treatment for any specific sector or industry.
The French economist also said he slightly favors a cap-and-trade solution over a carbon tax because verification is easier since a country's overall emissions can be measured, they can be set for the long term rather than reviewed annually, and allocation of permits "is often an easy and politically less visible way to operate compensation."
But the mechanism of how the targets are achieved is of secondary importance and can be figured out after an agreement takes place, he noted, and "these disagreements among economists have been misused by interest groups that oppose placing any price on GHG emissions."
Tirole has presented similar analyses about global climate change regulation and agreements in previous papers, including criticism for the 1997 Kyoto and 2009 Copenhagen protocols as too weak.
Tirole has also written several papers on the regulation of pollution permits, externalities, competitive electricity markets and transmission rights.
Tirole will receive a $1.1 million cash award for what is officially named the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
A full list of his published work can be found here.
Katherine Ling, E&E reporter
Republished from GreenWire with permission. GreenWire covers the energy and environmental policy news. Click here for a free trial
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