Seeing REDD on climate change
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The official communiqu from the United Nations climate change conference in Cancun, Mexico, 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 Japan, among others, has withdrawn its support for efforts to extend the Kyoto Protocol.
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 organized. 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 UN 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.
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 Brazil in 1992 but kept deferring their obligations by negotiating.
The negotiations have taken on an increasingly unreal air. Currently, the dispute revolves around how governments will deliver $100 billion annually by 2020 to help developing countries confront climate change, given that even the $10 billion Fast Track Fund cannot be cobbled together without using smoke and mirrors. By failing to make any progress beyond keeping the talks alive, the Cancun climate conference has given the impression that nothing is happening, and that the situation is hopeless.
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