Paris, Pittsburgh, And Silver Linings

Let's give Trump the benefit of the doubt about being willing to renegotiate.

Now that President Trump has announced that the U.S. will withdraw from the Paris climate accord, those of us who disagree with the decision need to accept it and regroup.

There are at least two silver linings in the president’s announcement that should capture our attention. Silver linings play an important role in the behavioral approach, because they provide us with something positive to capture our attention in the face of bad news.

The first silver lining is that in suggesting that he is willing to renegotiate the terms of a climate accord, President Trump backed away from his previous ridiculous assertion that climate change is a hoax and the corresponding view that climate scientists are charlatans. More importantly, EPA head and environmental foe Scott Pruitt demurred when asked by the media whether the President still considered climate change to be a hoax.

The second silver lining is that the Paris accord is poorly constructed and structurally flawed. I have argued that it is too similar to a New Year’s resolution in that it articulates desirable behavior, but is too vulnerable to temptation, which is why short-term benefits “trump” the potential for long-term gains. As a general matter, people who expect to live up to a New Year’s resolution when they have abandoned all their previous resolutions exhibit psychologically flawed thinking. President Trump’s preference for Pittsburgh (current jobs) over Paris (the long terms health of the planet) is a metaphor for giving in to the temptation of today by sacrificing the benefits of tomorrow.

This second silver lining can become more than a silver lining. Some of the best economists who study climate change issues have long criticized the incentive structure in climate agreements, and the absence of a global price for carbon. An intriguing edited collection of essays on the topic, entitled Global Carbon Pricing, suggests structures and processes that will lead to better agreements, including the establishment of a global price for carbon, than those achieved in Paris and Kyoto.

There is a message here for an international body known as the Secretariat which oversees The United Nations Framework Convention on Climate Change. The Secretariat served as the coordinator for the Paris climate conference as well as the previous climate conferences in Copenhagen and Kyoto. When the Secretariat was headed by Christiana Figueres , who was executive director from 2010 to mid- 2016, there was reluctance to rely on negotiating a global price for carbon. The executive director of the Secretariat is now Patricia Espinosa. With the disruption caused by President Trump’s decision to withdraw from the Paris accord, and a new executive director, I suggest that the time has come to consider a collective approach focused on achieving a global carbon price.

One economics-based recommendation for establishing a global carbon price involves a collective choice process featuring common commitment, enforcement, and wealth transfers. The solution does not force a choice between Paris and Pittsburgh; and it does not force a quantitative commitment to reduce carbon emissions.

The most novel feature of the recommendation is the proposal to achieve common commitment through the use of clever auction design. All parties to a new accord would submit a maximum price for carbon to which they would commit. However, the auction would select the lowest submission, even if it were zero, as the global price for carbon. Therefore, in theory, as long as all parties agree to commit to the global price, no party will be better off by low balling the maximum price to which they would commit.

The main idea underlying the auction is not new, but dates back at least as far as the mid-1970s with what is now called the Groves-Ledyard mechanism. The Nobel prize committee selected the late William Vickrey for his related work on second price sealed bid auctions, a technique now used to conduct some IPO auctions. That said, the behavioral approach cautions us not to be overconfident that the common commitment recommendation is foolproof. Still, it is a better design than the voluntary structure underlying the Paris accord, and definitely worth considering.

President Trump’s offer to renegotiate the Paris climate accord might have been disingenuous. But suppose we give him the benefit of the doubt about being willing to renegotiate. In that case, we should encourage him to reclaim American leadership in climate change policy, by forging a path based on advice from some of the finest economists in the world. Should that come to be, a silver lining could well transform itself into a successful restraint on carbon emissions.