Liberalism in International Political Economy PDF

The Liberal Perspective 1 ▪ Liberalism is the most influential perspective in IPE. ▪ Liberals focus on a wide range of actors and levels of analysis. ▪ Liberalism comes in 3 variants: 1. Orthodox liberals: emphasize the freedom of the private sector and the minimal interference of the state on the functioning of the market (John Locke, Adam Smith). 2. Interventionist liberals: see benefits from some government involvement to promote more equality, fairness, and justice in a free market economy (Keynes). 3. Institutional liberals: believe that some outside involvement is necessary to supplement the functioning of the market and favor the development of strong international institutions (e.g., IMF, WTO and the United Nations and environmental regimes (Climate Change regime)) 2 Tenets of the liberal perspective 1. The individual (consumer, firm or entrepreneur) is the primary actor in society. => individuals have inalienable natural rights that must be protected from both private and public collectivities such as labor unions, and the state. 2. Individuals pursue their own political and economic interests. =>the welfare of society and its inhabitants is most likely to be achieved. 3. Individuals are rational. 4. The “invisible hand” (the market) converts the individual’s selfish interest into advantage for society as a whole. 5. The market performs efficiently 3 So, 6. Society can regulate itself best with minimal government interference =>The state is to play a minimal role in a liberal society = state economic planning and state intervention are inefficient, and often associated with vested interests = government should not intervene in the market except where a “market failure” exists or in order to provide a public good Examples: Market failure a) the market mechanism may fail because of externalities in production and consumption which are not captured in the system of property rights (for example, pollution). b) Monopoly itself is seen as an imperfection requiring either the break-up of the monopoly, or state regulation of the private 4 enterprise. The nature and purpose of international economic relations Liberalism: international interactions can be mutually beneficial, if they are permitted to operate freely from government interventions. => the international economic system will function most efficiently if it ultimately depends on the price mechanism and the market (= preoccupied with liberty and efficiency). All states and individuals are likely to gain from international relationships (positive-sum game based on absolute gains= all states can benefit from interdependence and globalization if they follow liberal policies), even if they do not gain equally =>liberals are often less concerned with distributed issues = primarily concerned with aggregate measures of economic performance such as the growth of GDP, trade, FDI, environmental performance 5 The relationship between politics and economics Liberals tend to view politics and economics as basically separable and autonomous areas of activity. Governments should not interfere with international economic transactions because international economic interests are in basic harmony with a state’s national interest. Governments should create an open environment and prevent restraints on competition and free trade and provide public goods to facilitate production and the transport of goods and people => government restrictions should not impede the free exchange of commodities and investment flows. 6 Institutional liberalism Liberals believe that international institutions (international regimes and international organizations) have a significant role in promoting cooperation in issue areas (environment) in which there is a high degree of interdependence among states. Interdependence: “mutual dependence” in which there are reciprocal (although not necessarily symmetrical) costly effects of transactions. Interdependence is not a new phenomenon; it has reached new heights now-days. One view of Interdependence is positive and optimistic, seeing Interdependence as leading toward more and more cooperation among states as they are brought together Another view, points to Interdependence as a constraint on states and therefore as a potentially very important source of conflict7 Interdependence has 2 different dimensions 1. Sensitivity: international actors are sensitive to the behavior of other actors or developments in parts of the system The degree of sensitivity depends on how quickly changes in one actor bring about changes in another and how great the effects are 2. Vulnerability: actors may be vulnerable to the effects of those changes. Vulnerability is measured by the costs imposed on a state or other actors by external events, even if that actor tries to avoid these costs in responding to those effects. Different actors/states are characterized by different levels of sensitivity and vulnerability 8 The liberal approach to cooperation Achieving cooperation in an anarchic world is problematic (there is no centralized international authority to establish and enforce rules for state behavior) Game theory is useful for assessing the prospects for cooperation among states Prisoners’ dilemma Actor B Cooperate Defect Cooperate 3, 3 1, 4 Actor A 4, 1 2, 2 Defect Preference ordering of payoffs: 4 > 3 > 2> 1 9 Prisoners’ dilemma (with IOs) Actor B Cooperate Defect Cooperate 4, 4 1, 3 Actor A Defect 3, 1 2, 2 Preference ordering of payoffs: 4 > 3 > 2 > 1 10 Question? How can states n move from a Pareto-suboptimal outcome (mutual defection) to the Pareto-optimal outcome (mutual cooperation)? According to the liberals, “cheating” by states can inhibit cooperation, but the move to mutual cooperation outcome is often possible if cheating can be controlled 1. The existence of a global hegemon prevents cheating by providing public goods and coercing other states to abide by agreed rules and principles. 2. Institutions such as IOs prevent cheating by bringing states together on a regular basis, i.e., a. Increase the number of opportunities to retaliate. b. Enforce principles and rules to ensure that cheaters will be punished. c. Collect information on each member state’s policies, thus increasing transparency that cheaters will be discovered. d. Contribute to mutual learning process in which states become 11 aware of the mutual gains that result from cooperation. Liberalism and domestic-international interactions Liberals are more likely than realists to focus on the linkages between international and domestic politics (they adhere to the view that domestic societal pressures (domestic structures) affect state policy => a state’s foreign economic policy results at least as much from domestic factors as it does from international factors). International negotiations are viewed as a “two-level game” involving a relationship between 1. a state’s international interests and obligations (level 1: state representatives bargain with each other to reach an agreement), 2. its domestic interactions (level 2: these representatives must bargain with their own domestic constituencies, whose concurrence is needed to arrive at legitimate and effective agreement). => A certain degree of consistency must develop between the international and domestic interests if agreements are to be signed 12 and implemented. Effective international cooperation on climate change ▪ Depends on: 1. The demand for cooperation, which depends on a. The interest in avoiding abrupt (catastrophic) climate change such as rapid sea level rise => All countries will be willing to contribute to avoid extreme dangers b. The capacity of societies to “climate proof” themselves varies => the largest emitters are the ones with the greatest capacity to respond to climate change + the most “climate proof” ) c. The effects of climate change will be felt in the future (high present costs for uncertain future benefits) => LDCs reluctant to trade future environmental benefits for present economic costs d. Effects of climate change will not be felt uniformly across the globe => some countries will gain from an increase in the temperature ==== cooperation is unlikely because i. Dispersion of interests, and ii. Difficulty for collective action 2. The supply of cooperation: numbers Conventional wisdom: global problem requires global solution = broad membership which also confers legitimacy Reality: diverse interests increase transaction costs (negotiation costs) => cooperation is difficult Solution: Small group of important countries (“k group”) to craft the elements of serious cooperation but no theory to suggest the optimal number 14 3. Organizing cooperation: institutions Conventional wisdom: legally binding agreements (treaties) negotiated within the universal framework of the UN facilitate cooperation Reality: a. most legally binding agreements have wide participation and compliance is also perfect but these agreements are shallow b. nonbinding agreements perform better (by allowing flexibility and being less concern with non-compliance, they allow for ambitious targets) Solution: cooperation should emerge from “bottom-up” 15 The Persistence of the Kyoto Protocol: Why did other Annex I countries move on without the United States? 4 possible explanations for the persistence of Kyoto 1. Net Climate-related Gains Despite US’s refusal to ratify, Annex I countries expect the Kyoto Protocol to reduce global warming sufficiently to outweigh the cost of implementing the treaty. But Industrialized countries are less vulnerable to climate change and there is high uncertainty about the costs of the Kyoto Protocol and the gains are unlikely to outweigh the costs =>The net climate-related gains is not a good explanation 16 2. Influencing the behavior of non-parties The Annex I parties, by implementing the treaty, hope to induce non-parties to follow suit 2 possible mechanisms: 1. Example setting (unilateral reductions) 2. Reciprocity and the use Carrot and stick strategies (Tit-for-Tat and Grim Trigger strategies) But unilateral reduction by one country causes an increase in the other country‘s emissions (free riding) and the requirement of reciprocity does not extend to non-parties. => Influencing the behavior of non-parties is not a good explanation 17 3. Institutional momentum Two theoretical aspects: 1. Neo-functionalism (“spillover effects” ) 2. Historical institutionalism (“path dependency”: an inertial tendency for initial policy choices to persist) ▪ Focus on the EU institutions, in particular, on 1. the generation of vested interests among the individuals operating in EU climate policy institutions, and 2. the generation of irreversible investment costs and new market opportunities for private business actors concerned by this policy choice. Once EU climate policies were instituted, it was difficult for the EU to reverse those decisions => Domestic institutions and institutional momentum is a possible 18 explanation 4. The EU leadership ambition Withdrawal of the USA was a great advantage for the EU: «Window of opportunity» for EU leadership : Evidence that the U.S. exit allowed the EU to fulfill its ambitions to become a leader in global climate => EU leadership ambition is a good explanation 19 Regimes 20 ▪ We live in a world of international regimes = international regimes vary greatly in terms of functional scope, area domain, and membership Examples: regimes deal with 1. monetary issues (Bretton Woods system) 2. international trade in commodities (the coffee agreement) 3. managing of the use of natural resources at the international level (the international arrangements for whaling) 4. addressing climate change 5. advancing the cause of conservation (polar bears) 6. controlling armaments at the international level (nonproliferation of nuclear weapons and the partial test-ban system) 7. addressing the management of power within the international community (the neutralization agreement of Switzerland) Regime theory first developed in efforts to explain why international interactions seem to be more orderly in some issue areas than in others. 21 ▪ With the growth of interdependence, states have established some principles, norms, and rules to regulate each other’s behavior Regimes: sets of implicit or explicit principles, norms, rules, and decision-making procedures around which actors’ expectations converge in a given area of international relations. Principles: beliefs of fact, causation, and rectitude. Norms: standards of behavior defined in terms of rights and obligations. => Principles and norms determine how relations are conducted in a specific issue area (in trade regime= reciprocity and nondiscrimination) Rules: specific prescriptions or proscriptions for action =>Rules: refer to the types of behavior that are considered to be permissible and impermissible (refrain from using import quotas and export subsidies in efforts to improve trade balances) Decision-making procedures: prevailing practices for making and22 implementing collective choice. ▪ Regimes may be based on 1. Hard law: has precise, legally binding obligations and delegates authority to implement and interpret these obligations (Kyoto Protocol  effective but it decreases a state’s sovereignty Example: The Montreal Protocol (protect the ozone layer) phased out and forbids the production of a number of substances believed to be responsible for ozone depletion. 2. Soft law: lacks legally binding obligations and does not delegate authority; it facilitates and encourage cooperation => Less effective but it allows states a range of flexibility in implementing commitments (= states remain sovereign) Example: FCCC required minor obligations related to reporting and review. The Kyoto Protocol specifies quantified emissions targets for Annex I countries that can be reached in a flexible manner (emissions trading, join implementation (JI), CDM). 23 Do regimes matter? ▪ Regimes as intervening variables standing between basic causal variables (power, interests, etc) and outcomes and behavior Causal Variables → Regimes → Related Behavior and Outcomes There is no general agreement on whether regimes matter. 24 Three approaches: 1. Conventional structural views the regime concept as useless, if not misleading. Causal Variables → Regimes → Related Behavior and Outcomes Regimes, if they exist at all, have little or no impact (=there are merely epiphenomenal) 25 2. Modified structural suggests that regimes may matter, but only under fairly restrictive conditions. Under circumstances that are not purely conflictual and where individual decision-making leads to suboptimal outcomes (= prisoners’ dilemma and game of chicken situations), regimes may be significant (path b). 26 3. Grotian sees regimes as much more pervasive, as inherent attributes of any complex, persistent pattern of human behavior Patterned behavior reflecting calculations of interest tends to lead to the creation of regimes, and regimes reinforce patterned behavior. 27 Are regimes effective? Effectiveness refers to the regime’s degree of success in addressing the problem that motivated its creation (= problem-solving effectiveness) Problem-solving effectiveness depends on a. Political will b. Knowledge regarding the source of the problem and certainty regarding the available means for remedial action c. Implementation (behavior-changing effectiveness or compliance= to the extent to which an actor’s behavior or the outcomes of that behavior conform to the standards laid out in the treaty) 28 ▪ An effective regime should 1. Consider the full range of reasons for non-compliance 2. Design institutional policies to identify non-compliance 3. Discriminate among the different causes of non-compliance 4. Respond to each in such ways likely to increase positive behavioral change. => Institutional design of the regime should based on a. A rule system to provide obligational clarity (clarify obligations for the parties) b. A compliance information system to provide performance clarity ((self-)reporting, monitoring, verification) c. A noncompliance response system to provide response clarity (sanctions, technical/financial assistance) 29 ▪ Compliance problems in the Kyoto Protocol arise from a. Failure of obligational clarity (who must do what) because of the Kyoto Mechanisms (for example, it is difficult to verify that JI and CDM reduce emissions “additional to any that would otherwise occur) b. Failure of performance clarity (reporting, monitoring and verification of others’ actions and outcomes) because behavior (emit vs sequester) and outcomes are difficult to monitor, formulate. c. Failure of response clarity because no one-to-one correspondence exists between behaviors and environmental outcomes 30 The H Jon Pers istenc ov i, ToraeSof kodthe vinKyoto an d SPro tocolA ndrese n tei nar The Persistence of the Kyoto Protocol: Why Other Annex I Countries Move on Without the United States Jon Hovi, Tora Skodvin and Steinar Andresen* In March 2001 President George W. Bush announced that his administration considered the Kyoto Protocol to be fundamentally awed and that the United States was therefore not going to ratify the treaty. The most important objec- tions were that the science of climate change is uncertain, that the protocol does not impose obligations on developing countries, and that it would be costly to the American economy.1 The declaration came in spite of the fact that Washing- ton played an important part in the development of the climate regime. For ex- ample, the design of the so-called exible mechanisms, which were introduced to limit the economic costs of implementing quantitative restrictions on emis- sions of greenhouse gases, was in large part due to US inuence. Similarly, sev- eral elements in the compliance system, adopted at the seventh session of the Conference of the Parties in Marrakesh, “either derived from US submissions or were supported by the US delegation at some point in the negotiations.” 2 Despite the unwillingness of the United States to embrace the Kyoto Pro- tocol, other Annex I3 countries continue down the road that was pointed out in Kyoto. To enter into force the treaty must be ratied by at least 55 countries, in- * The research underlying this article was supported by the Research Council of Norway. We gratefully acknowledge comments on previous drafts from Matthew Paterson, Andreas Tjernshaugen, Asbjørn Torvanger, Jørgen Wettestad, and three anonymous reviewers. 1. It has been argued that, were the United States to implement Kyoto, this would generate higher energy and electricity prices, hamper growth, raise unemployment, harm the country’s competi- tiveness vis-à-vis developing countries, and lower household income as well as state tax reve- nues (e.g. WEFA 1998). 2. Werksman 2003, 3. 3. In the UN Framework Convention on Climate Change (UNFCCC), the parties that have taken on the commitments dened in Article 4.2 are listed in Annex I of the Convention and are thus often referred to as Annex I countries. In the Kyoto Protocol, the quanti ed commitments of the parties are listed in Annex B of the agreement. Thus, parties that have taken on such commit- ments are sometimes referred to as Annex B countries. The conditions for the Protocol’s enter- ing into force, however, are linked to Annex I countries (Article 25). Except for Belarus and Tur- key, who are included in Annex I but not Annex B, the sets of Annex I and Annex B countries are identical. Thus, for all practical purposes, we do not differentiate between Annex I and Annex B countries, but use the term Annex I to include both. Global Environmental Politics 3:4, November 2003 © 2004 by the Massachusetts Institute of Technology 1 2 The Persistence of the Kyoto Protocol cluding Annex I countries responsible for at least 55 percent of the 1990 CO2 emissions from those countries. So far (September 2003), 117 countries, repre- senting 44.2% of 1990 emissions of Annex I countries, have ratied.4 Whether the Kyoto Protocol will enter into force now depends solely on the ratication by Russia, responsible for 17.4% of 1990 emissions from Annex I countries. The fact that a number of countries have decided to stay on the Kyoto track is somewhat puzzling. After all, the United States is the world’s biggest emitter of greenhouse gases. At the same time, the Kyoto Protocol places no limitations on emissions in China, India, Brazil, or other third world countries. Hence, the countries to which the quantitative restrictions of the Kyoto Protocol actually pertain control less than a third of global emissions. Given that greenhouse gases mix almost perfectly in the atmosphere, meaning that mitigation of global warming is a pure public good, one might therefore reasonably ask why Kyoto has not been abandoned. The purpose of this paper is to review and critically examine some possible answers to this question. When the US ofcially rejected the Kyoto Protocol, there were few remain- ing main players left. While the US accounts for 36% of greenhouse gas emis- sions from Annex I countries, the EU accounts for 24%, Russia 17% and Japan 8%, while Canada and Australia account for (roughly) 3% and 2% respectively.5 However, most of these players worked rather closely with the US within the framework of the so-called “Umbrella group.” 6 In contrast, the EU has been in constant opposition to the cautious US climate policy, favoring a more ambi- tious international climate regime. Also, the EU has, together with the US, been the most dominant player on the scene. To the extent that the Kyoto Protocol could be “saved,” therefore, the EU was the only actor that could be expected to have the will and the ability to do so. This is why we focus mostly on the EU in the following.7 Four main explanations for Kyoto’s persistence are considered. The rst is that, despite Washington’s refusal to ratify, remaining Annex I countries expect the Kyoto Protocol to reduce global warming suf ciently to outweigh the cost of implementing the treaty. The second is that the parties, by implementing the treaty, hope to induce non-parties to follow suit at some later stage. If successful, this could signicantly increase the overall effect of Kyoto. A third hypothesis emphasizes the impact of domestic institutions and internal political processes in current parties. In particular, EU climate institutions have generated an insti- tutional momentum that may have served to restrict EU climate policy options. The nal explanation links the continuation of the Kyoto strategy to a desire by the European Union to stand forth as an international leader in the eld of cli- mate politics. We conclude that the rst two explanations have little explanatory power, but nd the latter two more promising. 4. http://unfccc.int/resource/kpstats.pdf. 5. Cicerone, June 2001, 4. 6. Other members of this informal and rather odd “residual group” of countries were Norway, New Zealand and Ukraine. 7. For a discussion of the development and future prospects of the climate policies of all these countries, including China and India, see Agrawala and Andresen 2001. Jon Hovi, Tora Skodvin and Steinar Andresen 3 Hypothesis 1: Net Climate-related Gains An immediate and intuitive explanation why other Annex I countries have cho- sen to move on with the Kyoto Protocol without the United States is that these countries are simply genuinely concerned with the potentially signicant nega- tive effects of climate change. Even though climate change is a truly global prob- lem, it is in principle conceivable that a subgroup of states may be able to sus- tain cooperation among themselves, provided that this would benet all of the participating countries.8 For this possibility to have some explanatory power, however, it must be the case that the parties expect Kyoto’s impact on the global climate to offset the costs of implementing the treaty. Is it reasonable to believe that the Kyoto Protocol will have an impact on the climate that outweighs the economic costs of implementation? It is clear that the Kyoto Protocol imposes signicant costs on Annex I countries. For ex- ample, the IPCC report predicts that, without emissions trading, compliance with the Kyoto Protocol would reduce global GDP in 2010 by 0.2 to 2.0 percent compared to a baseline estimate. Granted, these costs are likely to be somewhat reduced by the exible mechanisms.9 The IPCC estimates that, with full emis- sions trading, the global GDP reduction in 2010 will be in the range of 0.1 to 1.1 percent. Moreover, the withdrawal of the US will further diminish the costs of implementing the treaty for the remaining OECD countries, the reason being that the demand for emission permits will be signicantly reduced. This will cause the quota price to decrease, thus beneting buyers of quotas at the ex- pense of sellers.10 Since most OECD countries will be buyers, they benet from a low price on permits. By contrast, most economies in transition will be sellers of quotas, and will therefore suffer a net loss from the withdrawal of the United States. The global cost of fully implementing the Kyoto Protocol is estimated to be more than $700 billion in present value. 11 While any gure of this sort is bound to be highly uncertain, the costs of implementing Kyoto will almost cer- tainly be substantial. Yet, most observers expect that, without the United States as a party, the treaty is going to make little difference for the global climate. According to Scott Barrett, [t]he countries that can trigger Kyoto’s entry into force account for about 56% of global emissions. But the treaty enters into force if countries ac- counting for just 55% of this amount ratify the agreement. This means that the treaty can enter into force when the countries that must actually limit their emissions account for just 31% of global emissions. Of these countries, however, many will not have to reduce their emissions at all. Russia, for ex- 8. Game theory’s celebrated “folk theorem” tells us that any individually rational outcome can be sustained as a subgame perfect equilibrium in an innitely repeated game, provided that future payoffs are not discounted too heavily. 9. Note, however, that these mechanisms were introduced precisely because of the anticipation that implementation of the protocol would imply considerable costs. 10. For example, see Manne and Richels 2001. 11. Nordhaus and Boyer 2001, 93. 4 The Persistence of the Kyoto Protocol ample, emits far less today than it is allowed to emit under the Kyoto Proto- col. The countries for which the Kyoto constraints are binding account for just 19% of global emissions. And these countries are required to reduce their emissions by only a little over 5%. Such a small reduction in emissions by such a small piece of the climate problem over such a short period of time will barely have any effect on the climate. 12 Similarly, Hagem and Holtsmark estimate that compared to a business-as-usual scenario, and without the US, the Kyoto Protocol will reduce global emissions by only 0.9 percent.13 By comparison, with the US as a party, global emissions would have been reduced by 5.5 percent. The explanation for this difference is three-fold. First, in 1990 the US alone was responsible for as much as 36 percent of total emissions by industrial countries. Second, the Kyoto Protocol obligated the United States to reduce emissions by 7 percent, which is well above the aver- age of 5 percent for the industrial countries as a group. Finally, in the business- as-usual scenario, emissions in the United States are expected to increase at a faster rate than in most other industrial countries. It follows that the impact of the Kyoto Protocol on the global climate is likely to be negligible. According to one estimate, the global temperature in 2100 will be less than 0.1°C lower if the treaty is implemented than it would have been otherwise.14 In other words, the impact of Kyoto is virtually zero. Hence, it may not matter very much that cost estimates are highly uncertain. The tiny climate-related gains the treaty might provide are simply unlikely to out- weigh the costs for the Annex I countries.15 This is especially obvious if we as- sume that these countries are motivated by self-interest (in the sense that they attempt to maximize national welfare). After all, relatively few industrialized countries are particularly vulnerable to climate change. But the conclusion seems to hold even if we make the rather optimistic assumption that the poli- cies of the Annex I countries are primarily guided by a concern for the welfare of developing countries. If the Annex I countries really wanted to spend hundreds of billions of dollars to promote the welfare of developing countries, then using it to only marginally reduce global warming hardly seems the best way to do it. In conclusion it is therefore difcult to see that climate-related benets can ex- plain the decision to move on with the Kyoto Protocol. 16 12. Barrett 2002, 38. 13. Hagem and Holtsmark in Cicerone June 2001, 16–18. 14. Weaver Undated, 8. Note that this estimate assumes that the Kyoto Protocol is prolonged, with no further reductions, up to that point. Other estimates indicate a similar effect of Kyoto with- out US participation (personal communication with Bård Romstad and Jan S.Fuglestvedt, CICERO). 15. A possible objection to this conclusion is that Kyoto must be seen as only the rst step in a se- ries of rounds of negotiations. Whether Kyoto can reasonably be seen as a rst step in the sense that it will induce more countries to join at a later stage is the key question addressed in hy- pothesis 2 below. Whether countries already committed to Kyoto will agree to progressively more ambitious targets even if no signi cant new actors join the regime is at best an open ques- tion. Frankly, it is difcult to see why more ambitious (and presumably more costly) targets should lead us to change the conclusion reached above. 16. Granted, this conclusion might change if decision makers in the Kyoto countries believed that implementation costs are close to zero. Occasionally, EU ofcials have indeed claimed that im- Jon Hovi, Tora Skodvin and Steinar Andresen 5 Hypothesis 2: In uencing the Climate Policy of other States Hypothesis 1 sees the parties to the Kyoto Protocol as basically preoccupied with the gains inherent in the protocol itself. By contrast, a second possible ex- planation of the decision to stick by Kyoto draws attention to the behavior and likely responses of non-parties. Even if the impact of implementing the Kyoto Protocol by itself is likely to be small, the effect might increase considerably if other countries can thereby be induced to follow suit—either by joining the treaty at a later stage, or by concluding a separate agreement, or by cutting emis- sions of greenhouse gases on their own. In principle, effects of this kind could arise through at least two possible mechanisms—example-setting and the use of carrot-and-stick strategies. Environmental groups as well as scholars have sometimes argued that a country should unilaterally cut emissions of greenhouse gases. The idea is that, even if such action by itself reduces global emissions only marginally, it might set a good example for other countries. Thus, Ott and Oberthür argue that “credi- ble leadership is most effectively advanced by demonstrating solutions to oth- ers.”17 Allegedly, effects of this kind might induce these other countries either to join Kyoto later, or to cut emissions on their own. In either case, the overall ef- fect of the unilateral action could be signicantly enhanced. In a similar way, one might see the Kyoto Protocol as an attempt by the parties to act as a model for other countries to follow. Grubb et al. argue that, by going ahead, the EU and other industrialized countries “would effectively lay to rest the myth that the EU’s climate commitments are mere lip-service.” Also, “countries going ahead will be able to demonstrate the extent to which emission reductions are economically feasible and benecial and do not lead to economic breakdown.” Finally, “technological developments achieved in Kyoto countries will to a cer- tain extent spill over and spread to non-Kyoto countries including the US.”18 Al- though this is a case of concerted action by a number of countries, rather than a unilateral effort by a single country, the example-setting effect would seem likely to be similar. However, the existing literature offers little support for the conjecture that unilateral efforts are likely to entail reduced emissions in other countries. In a two-country model,19 Hoel shows that a unilateral reduction of emissions by one country induces the other country (which is assumed to be motivated by self-interest) to increase its emissions. The reason for this result is that country 1’s unilateral reduction reduces the marginal benet of emissions reduction for country 2. In addition, Hoel suggests that unilateral action may have an impact on international negotiations to reduce emissions. He shows that a unilateral plication costs are likely to be moderate (see section 3.1). However, these claims could also be seen simply as an attempt to rationalize the decision to move on with Kyoto, while the true mo- tives for this decision lie elsewhere (see hypotheses 3 and 4 below). 17. Ott and Oberthür 1999, 19. 18. Grubb et al. 2001, 49. 19. Hoel explicitly states that “in practice, each ‘country’ may be a group of countries who have co- ordinated their policies.” 6 The Persistence of the Kyoto Protocol reduction may well cause the outcome of such negotiations to imply higher total emissions than if each country acts selshly. In his model, this will always be the case if the countries for some reason restrict their negotiations to equal or pro- portional emissions reductions.20 Similarly, Buchholz et al. demonstrate that unilateral efforts by a single country, or by a relatively small coalition of coun- tries, are likely to be partially or entirely offset by free riding activity by other countries.21 True, these studies ignore the possibility of “no-regret” options for reduc- ing emissions of greenhouse gases. It has been suggested that such options ought to make the leadership role more attractive. For example, Ott and Oberthür claim that “by exploiting the available low-cost potentials for reduc- ing GHG emissions and by investing in strong ecological protection measures that will eventually lead to economic benets, there is much room [for the EU to act] without the US.”22 However, this observation should not lead us to mod- ify the above conclusions. Granted, by exploiting no-regret options a country (or a coalition of countries) might be able to demonstrate to others the value of such measures. But it is hard to believe that knowledge about no-regret options is systematically biased in favor of members of the EU or other countries that remain on the Kyoto road. Furthermore, the Kyoto Protocol is not designed to discover or invent no-regret options. Indeed, many—if not most—no-regret options can probably be implemented without any form of international coop- eration. In any case, the conclusion that costly emissions reductions by a limited subgroup of countries tend to induce free-riding still stands. Another version of this hypothesis sees the decision to move on with the Kyoto Protocol as an attempt to provide incentives of the carrot-and-stick type to non-parties. To assess the possible validity of this explanation it is useful to briey consult the literature on strategies designed to elicit cooperation from an adversary.23 This literature is largely based on the theory of repeated games, typi- cally focusing on the innitely repeated Prisoners’ Dilemma. A number of proposals have been put forward as to what type of strategy may be expected to induce others to cooperate. The most renowned suggestion is probably “Tit- for-Tat,” which proved successful in two famous computer tournaments con- ducted by Robert Axelrod.24 Other celebrated proposals include the “Grim Trig- 20. Hoel 1991, 56. 21. Buchholz et al. 1998. 22. Ott and Oberthür 1999, 19. 23. For an early review of this literature, see Patchen 1987. 24. Axelrod 1984. Tit-for-tat prescribes cooperation on the rst encounter and thereafter simply replicates the opponent’s move in the previous round. Axelrod’s fourfold explanation for Tit- for-Tat’s accomplishments was that it is “nice” (never defects rst), “retaliatory” (responds in kind to uncooperative behaviour), “forgiving” (resumes cooperation if the opponent shows re- morse), and “clear” (easily comprehensible). However, subsequent research has also pointed out that Tit-for-Tat has a number of weaknesses. Perhaps the most serious aw is that, even if a situation where both or all players are using Tit-for-Tat is a Nash equilibrium, this equilibrium is not subgame perfect. Another problem is that Tit-for-Tat does not distinguish between justied and unjustied defections. Instead, it retaliates in kind to any defection. A random de- Jon Hovi, Tora Skodvin and Steinar Andresen 7 ger” and “Getting Even” strategies.25 These various proposals differ in important respects, including the proposed response to uncooperative behavior. They also have different strengths and weaknesses.26 However, they have one important factor in common. They all prescribe that cooperation must be based on reci- procity. This is not accidental. In fact, to be able to sustain cooperation as an equilibrium in the innitely repeated Prisoners’ Dilemma, a strategy has to be based on reciprocity. Thus, in a given period of the game, it must instruct a party to cooperate only if (i) the other party (or parties) is (are) also expected to coop- erate, or (ii) cooperation can be expected to induce other parties to cooperate at some later stage. It is not uncommon for international collaboration to be explicitly based on reciprocity. For example, in November and December 2001 OPEC success- fully brokered a deal with ve non-OPEC producers that was explicitly based on reciprocity. The nal OPEC decision to cut production by 1.5 million barrels strongly emphasized the need for “adherence of all producers to their pledged reductions.” 27 Similarly, announcing Norway’s acceptance of the deal on 23 No- vember 2001, Norwegian oil minister Einar Steensnæs said that “the govern- ment has decided that if OPEC and non-OPEC countries carry out cuts, then I have the mandate to carry out cuts of 100,000 to 200,000 barrels a day” (emphasis added). 28 Elements of reciprocity are also found in the Kyoto Protocol. In particular, before the treaty can enter into force it must have been ratied by a minimum of 55 countries accounting for at least 55 percent of the 1990 total carbon dioxide emissions of the industrialized states. This requirement makes each party’s obli- gations de facto conditional upon the (formal) participation of other countries. However, the requirement of reciprocity does not extend to non-parties. For ex- ample, there is no provision in the Kyoto, Bonn or Marrakech agreements sug- gesting that measures taken by the parties to combat climate change may or will be suspended unless (say) the US or major developing countries join in within a fection therefore causes the players to enter a never-ending series of retribution and counter- retribution. 25. Grim Trigger instructs the decision-maker to cooperate until a defection occurs, and to defect indenitely from then on. Getting Even prescribes cooperation unless a party has contributed more frequently in previous rounds than any of the other parties. If it has contributed more fre- quently in previous rounds, it is permitted to “get even.” This is obtained by defecting while the other parties contribute. For example, if all parties have cooperated up to period t, and party j defects in period t1t, then Getting Even instructs j to cooperate and the others to defect in pe- riod t12. From period t13, it instructs all players to cooperate. Hence, the essence of Getting Even is that a defector must “pay compensation” before cooperation can be resumed. 26. For example, if both (all) players use Grim Trigger, then the result is a subgame perfect equilib- rium. A problem with this equilibrium is that it does not satisfy the criterion of “renegotiation proofness.” By contrast, if all players use Getting Even, then the result is a renegotiation proof equilibrium. However, in this equilibrium the maximum number of cooperating parties is ex- tremely limited (Barrett 1999). 27. “OPEC’s oil cuts statement,” http://news.bbc.co.uk/2/hi/business/1732254.stm. 28. Quoted in “Norway output cut boosts oil price,” http://news.bbc.co.uk/2/hi/business/1670892. stm. 8 The Persistence of the Kyoto Protocol given deadline. Nor has Washington offered any indication that it might ratify the Kyoto Protocol at a later stage, depending on the behavior of the parties.29 To sum up, there is little indication that the decision to move on with the Kyoto Protocol will induce the United States or other signicant emitters of greenhouse gases to join the climate regime or, for that matter, take on other binding commitments to combat climate change. Note that we do not deny that the US might take action to combat climate change. What we are saying is that such action is unlikely to be caused by the remaining parties’ decision to move on with Kyoto. 30 Hence we dismiss hypothesis 2 also. Hypothesis 3: Institutional Momentum A third possible explanation of why other Annex I countries have chosen to move on with the Kyoto Protocol without the US may be found in the dynamics that have developed within domestic institutions. In the course of the interna- tional political process on climate change that has taken place in the decade since climate negotiations started in 1991 until the US withdrawal in 2001, na- tional responses to this problem have been developed and institutions for their implementation have been established. The hypothesis we are exploring in this section is that these processes have generated their own momentum and self- reinforcing dynamics, making it difcult for the EU to change course when the US announced its withdrawal from the Kyoto agreement in 2001. Two theoretical perspectives have inspired this hypothesis. First, this type of logic may be found in neo-functionalist approaches to international politics, which suggest that “integration would take place as a result of domestic political pressures to enhance regional institutions (political spillover)” and where in- herent links between issue areas imply that “integration in one necessitate[s] in- tegration in another (functional spillover).” 31 Second, this type of logic may also be found in the institutional perspective that has been described as “historical institutionalism,” in which the basic idea is that “the policy choices made when an institution is being formed, or when a policy is initiated, will have continu- ing and largely determinate inuence over the policy far into the future.”32 This argument has been described as “path dependency”: “when a government pro- gram or organization embarks upon a path there is an inertial tendency for 29. However, Washington has called for an approach that is “based on global participation, includ- ing that of developing countries whose net greenhouse gas emissions now exceed those in the developed countries” (White House press release of 11 June 2002). This emphasis on global participation could be interpreted as an intention to pursue a strategy based on (a particular form of) reciprocity in the eld of climate change. 30. Note also that the alternative to moving forward with Kyoto is not to do nothing. An alternative way for the EU to put pressure on Washington might be to accept that Kyoto is dead, and side with the US in a joint attempt to design a new and more effective climate treaty. See also section 4.3 below. 31. Krasner 1996, 111. 32. Peters 1999, 63. Also see Krasner 1984. Jon Hovi, Tora Skodvin and Steinar Andresen 9 those initial policy choices to persist. That path may be altered, but it requires a good deal of political pressure to produce that change.”33 A natural place to start an investigation of this hypothesis is the EU. In an internal negotiation process that has taken place over the last decade, the EU has developed its policy response to the problem of human-induced climate change and has, in parallel, set up an institutional apparatus for implementing this policy. The EU, moreover, was a key actor in the mobilization of political support for the Kyoto agreement after the US withdrawal. In this section, there- fore, we explore mechanisms that may generate the dynamics suggested above with a particular focus on the EU. 3.1. EU Climate Policy after 1990 EU climate policy has been developed incrementally since the late 1980s. In October 1990 a joint Council of Energy and Environmental ministers agreed to stabilize CO2 emissions at 1990 levels by the year 2000. In 1991, the European Commission designed a package of measures to implement this target, consti- tuted by three main elements: A carbon/energy tax, measures to improve energy efciency and strengthen the development of renewable energy sources, and a monitoring mechanism. A “watered down” version of this package was adopted in 1993.34 While the programs to improve energy efciency and renewables built on existing programs,35 the Commission’s proposal for a community-wide carbon/ energy tax was new. The proposal met strong opposition from European indus- tries and, according to many observers, the proposal was subject to the most fe- rocious lobbying ever seen in Brussels.36 It also met opposition from member states. The UK, in particular, was opposed to the use of scal mechanisms at EU level as a matter of principle.37 The battle over the carbon/energy tax marked the climate policy debate within the EU during the rst half of the 1990s and effectively blocked progress towards a more ambitious and proactive EU climate policy. The energy efciency and renewables programs were more successful, but failed to meet their stated goals. 38 The development of a more ambitious climate policy for the EU picked up momentum towards the latter part of the 1990s, particularly with the burden- sharing agreement that was reached in 1997, before the adoption of the Kyoto 33. Peters 1999, 63. 34. Wettestad 2000. 35. EU initiatives to increase energy efciency date back to the 1970s when increased energy efciency was pursued as a strategy to reduce energy imports (Wettestad 2000). Similarly, the programme on renewables was rst initiated in 1986 (Skjærseth and Skodvin 2003). 36. Skjærseth and Skodvin 2003. Also see Ikwue and Skea 1994. 37. Skjærseth and Skodvin 2003. For an overview over the fate of the carbon/energy tax, see Wettestad 2001. 38. Wettestad 2000. 10 The Persistence of the Kyoto Protocol Protocol, and renegotiated and nally agreed upon in June 1998.39 The shift in focus from taxes to burden sharing took care of the most controversial element in EU climate policy. It served to integrate a set of diverse interests and thus rep- resented a solution design model for the EU on the climate issue.40 On the basis of the agreement reached on burden-sharing, the Commis- sion launched the European Climate Change Programme (ECCP) in 2000 to “drive forward EU efforts to meet the targets set by the Kyoto Protocol.” 41 In June 2001, a year after the ECCP was established and only months after the US announced its withdrawal from the Kyoto agreement, the rst phase of the pro- gram was summarized in a published report. Forty-two possible measures were identied that could lead to twice the emissions reductions required in the rst commitment period of the Kyoto Protocol at a cost lower than 20 per tonne CO2 equivalents. 42 In October 2001, following the status report from the ECCP, the Commis- sion brought forward a package of three broad measures to deal with climate change.43 In addition to an Action Plan for the ECCP and emissions trading, a core target in the Commission’s package was EU ratication of the Kyoto Protocol. This brief summary shows that there is a lot going on in the EU in climate policy terms. Whether this activity actually will produce the GHG emission re- ductions required by the Kyoto commitment, however, still remains to be seen. In 2002, a progress report issued by the Commission suggested that the EU would not reach its 8% reduction target with existing measures.44 The development of an EU climate policy has taken place over a relatively long time period, it is the result of a complex internal negotiation process, and the process has, at least in periods, been characterized by a relatively high level of conict. Thus, the climate position the EU has today has been hard fought and rests on a delicate balancing of diverging interests. Are there mechanisms at work in this process that may have generated an institutional dynamic that in 39. The burden-sharing agreement—often referred to as the “EU bubble”—allocated differentiated emissions reduction targets to all EU member countries. The agreement allows some member countries to increase their GHG emissions (as compared to 1990 levels), while it requires other member countries to implement higher emissions reductions than the overall EU Kyoto target. With the EU’s ratication of the Kyoto Protocol, both the EU and member states have legally binding targets and share the responsibility for meeting them. The allocation of emission tar- gets for individual EU countries can be found in European Commission 2001a. See also Ringius 1997. 40. See, for instance, Underdal 1983; and Ringius 1997. 41. ECCP 2001, 3. 42. ECCP 2001, 7. This may also indicate that European decision-makers operated with a moderate cost estimate for climate measures. Whether this reects their true perceptions of costs or whether it can be seen as a way of rationalizing a climate policy whose true motive lies else- where is difcult to determine (see also hypothesis 2). 43. Source: http://europa.eu.int/comm/environment/climat/eccp.htm. Accessed: 01.04.2003. 44. See EU Press release by Commissioner Margot Wallström, 10 December 2002. Source: http:// www.europa.eu.int/comm/environment/climat/home_en.htm. Accessed: 16.09.03. See also Wettestad 2001. Jon Hovi, Tora Skodvin and Steinar Andresen 11 turn has served to limit the EU’s climate policy options when the US withdrew from the Kyoto agreement? Empirically, it is very difcult to identify and “measure” the impact of in- stitutions on policy choice and several mechanisms may be assumed to generate the type of dynamics suggested here. In this analysis we explore two possible mechanisms: the generation of vested interests among the individuals operating in EU climate policy institutions, and the generation of irreversible investment costs and new market opportunities for private business actors concerned by this policy choice.45 3.2. Bureaucratic Vested Interests When policies are embedded in institutions, the individuals stafng these insti- tutions have vested interests in them. That is, the institutionalization of a partic- ular policy choice generates vested interests among the individuals operating within these institutions, which generate a feedback effect that may serve to limit policy options at a later stage. Within the EU decision making system, the Commission is the Union’s ex- ecutive authority: The Commission initiates and ensures the implementation of new legislation. Legislative authority within the EU, however, rests with the Council of Ministers and the European Parliament. In the development of EU climate policies, the Commission has often represented an important driving force. For instance, the Commission launched the ECCP, currently the main in- strument for driving EU climate policy forward. The ECCP was organized in six technical Working Groups, with at least seven sub-groups. A seventh technical Working Group started its work in March 2001. Through the ECCP Steering Committee, the Commission is responsible for the general co-ordination of the program. The Commission is also active as a facilitator in the different Working Groups.46 Thus, it seems safe to assume that within the Commission itself, there are a number of individuals that have worked long and hard for the current EU position on climate change and thus have a vested interest in the maintenance of this policy. EU environmental regulation, moreover, has been characterized as an “ex- tremely complicated and constantly evolving multilevel governance structure.”47 45. A third mechanism might be linked to the authoritative force of the institutions within which a policy choice is embedded. That is, it seems reasonable to assume that when a policy choice is institutionalized in the form of (new) legislation the feedback effect is likely to be stronger than when the policy choice is not transformed into legislation. While (new) EU legislation covering a broad set of issue areas linked to climate change is in the pipeline, the legislative process— with the adoption of legislation by the Council and the European Parliament—was not com- pleted by March 2001 when the US withdrew from the Kyoto agreement. EU climate policy, therefore, was only to a very little extent institutionalized in the form of legislation when the US withdrew and this mechanism is not, therefore, explored any further here. 46. ECCP 2001. 47. Jordan 1998, 19 (emphasis added). 12 The Persistence of the Kyoto Protocol It is determined by three main elements: “competition between the govern- ments of the member states; the pro-environment agenda of supranational enti- ties and pressure groups; and the ability of national and subnational actors to make modications at the implementation stage.” 48 Therefore, EU climate pol- icy, including the decision to ratify the Kyoto Protocol without US participation, involves all decision-making levels of the organization. A number of observers see the development of a “pro-climate alliance” across all decision-making lev- els of the EU system as an important factor that makes the current EU climate policy difcult to reverse.49 This may also indicate that there are individuals with vested interests in the current EU climate policy at all decision-making levels of the EU regulatory system, from company/industry level and all the way up to the European Parliament. The ECCP, for instance, is reported to be “a challeng- ing exercise bringing together Commission services, industry, NGOs, and na- tional experts, and driving forward implementation of the climate change re- search agenda.” 50 While we cannot draw strong conclusions on the basis of this brief discus- sion, it nevertheless seems to indicate that there may have been mechanisms at work that have served to generate vested interests in the maintenance of EU cli- mate policy among a signicant number of individuals across decision-making levels. In turn, this may have generated a self-reinforcing dynamic that has in- creased the cost and reduced the political feasibility of reversing these policies when the US announced its withdrawal from the Kyoto agreement in 2001. The generation of EU climate policies and measures has been a long, cumbersome and highly conictual process that has concerned key national interests. This may have served as a reinforcing mechanism in the sense that precisely because the compromises of which EU climate policies consist have been so hard fought, actors at the various decision-making levels may be more reluctant to re- open discussion on these issues, thus generating new bureaucratic pressures. On this basis, we conclude that there are indications that vested interests may have contributed to limit the EU’s climate policy options when the US withdrew from the agreement.51 3.3 Irreversible Investments and New Market Opportunities The institutionalization of a particular policy choice also tends to initiate a pro- cess of adaptation in concerned industries and businesses. In particular, invest- ments are being made, and these investments may be lost if the policy is altered. At the same time, new market opportunities are created for concerned indus- tries. These market opportunities may be de-linked from the cost-effectiveness 48. Jordan 1998, 19. 49. Personal communication with Jørgen Wettestad, Fridtjof Nansen Institute, April 2003. 50. ECCP 2001, 4. 51. There may be similar mechanisms at work within each individual EU member country. Jon Hovi, Tora Skodvin and Steinar Andresen 13 of the policy itself. That is, even if a policy entails increased costs for central gov- ernments, it may nevertheless be associated with new market opportunities and (a potential for) increased prot for businesses and industries. In both cases, the institutionalization of a particular policy choice may generate increasing returns for the business actors concerned. Such dynamics may thus serve to limit policy options at a later stage.52 Many of the proposals issued by the Commission and the ECCP involve industries and imply more or less costly adaptation processes. In 1998 and 1999, for instance, the Commission adopted voluntary agreements with the as- sociations of European, Japanese and Korean automobile manufacturers (ACEA, JAMA and KAMA) to reduce CO2 emissions from new passenger cars.53 Other measures are not only associated with the investment costs of adaptation, but also offer more or less signicant (new) market opportunities. The two most important measures of this kind included in the ECCP program are measures to increase the role of renewable energy sources, and a community-wide scheme for CO2 emissions trading.54 The provision of incentives for the development of a European market for renewable energy has been a central aim of EU energy policy for some time. In 1986, the Council listed the promotion of renewable energy among its energy objectives. With the adoption of the Alterner program in 1992, the Council adopted a specic nancial instrument for renewables promotion.55 On the ba- sis of a Green Paper issued in November 1996, the Commission adopted a strat- egy and action plan directed towards the goal of having renewable energy sources cover 12 percent of the EU’s gross inland energy consumption by 2010.56 In February 2000, the European Parliament decided to extend the Alterner pro- gram in the establishment of Alterner II. The nancial framework for the imple- mentation of the program for the period 1998–2002 was set at 77 million.57 This may have been the political signal the European-based oil industry needed to initiate its own investments in renewable energy.58 For instance, the White Paper in which the 12 percent target was adopted remarkably parallels the Shell Group’s establishment of a fth core business area—Shell Interna- tional Renewables in 1997—in which the company planned to invest some USD 0.5 billion over a ve-year period. 52. Powell 1991. Similar dynamics may also be at work for other domestic actors (both business ac- tors and government agencies). 53. Torvanger and Skodvin 1999; and Torvanger and Skodvin 2002. 54. Skjærseth and Skodvin 2003. 55. European Commission 1997. 56. European Commission 1997. 57. “Community legislation in force, Document 300D0646: Decision NO 646/2000/EC of the Eu- ropean Parliament and the Council of 28 February 2000 adopting a multiannual programme for the promotion of renewable energy sources in the Community (Alterner) (1998 to 2002).” Source: http://www.europa.eu.int/eur-lex/en/lif/dat/2000/en_300D0646.html Accessed: 25.02. 2002. 58. Skjærseth and Skodvin 2003. 14 The Persistence of the Kyoto Protocol In June 1998, the Commission stated that the Community would set up its own internal trading regime by 2005.59 In 2001, the Commission issued a proposal for an EU Directive on a regulatory framework for greenhouse gas emission allowances within the Community.60 The emissions trading scheme was prepared in accordance with the ECCP’s multi-stakeholder approach. Thus in September 2001, a stakeholders’ consultation meeting was convened that included all major business and indus- try organizations. The record of the meeting reveals an overwhelming majority in favor of going ahead with emissions trading.61 The prospects of an internal EU scheme for emissions trading from 2005 sent a strong signal to industry that a new market for CO2 was emerging. Thus, the Shell Group launched its own in- ternal emissions trading system (STEPS) in 2000, the same year that the Com- mission issued its Green Paper on the design of a European emissions trading scheme.62 This policy measure thus seems to generate new market opportunities for the oil industry. It is illustrative, for instance, that over the rst three years in operation, BP’s internal emissions trading system yielded £650 million in extra value for the company.63 Thus, the promotion of renewable energy sources by the EU and the EU emissions trading scheme represent new market opportunities for industry, in which the industry already has made initial investments. The whole point, par- ticularly of the emissions trading scheme, is the implementation of a climate policy to reduce CO2 emissions within the Community. Thus, even though the costs (in relation to the environmental improvement achieved) increase for the EU as such with the US exit, important industries may have something to gain from the maintenance of these policies. Granted, this analysis does not give a complete picture of the interests of all European industries. Counterforces do exist. In the current situation, however, there are clearly European industries reaping benets from the maintenance of current EU climate policies. In sum, the discussion in this section suggests that there are self-reinforcing mecha- nisms at work in the process whereby EU climate policies are developed and in- stitutionalized. All in all we nd some support for the hypothesis that EU climate institu- tions have generated an institutional momentum that, in turn, may have served to restrict EU climate policy options when the US announced its withdrawal from the Kyoto agreement. When the EU rst had embarked upon the develop- ment of an ambitious climate policy, the process took on a dynamic that was difcult to alter. This does not, however, explain why the EU favored an ambi- tious climate policy in the rst place. That is the question we now turn to. 59. Skjærseth and Skodvin 2003. 60. European Commission 2001b. 61. Delbeke 2001. 62. Skjærseth and Skodvin 2003. 63. Planet Ark, Reuter World Environment News: “Emissions trading systems developing as patch- work,” 22.02.2002. http://www.planetark.org Jon Hovi, Tora Skodvin and Steinar Andresen 15 Hypothesis 4: The EU Leadership Ambition We have already established that economic and environmental incentives for re- maining Annex I countries to go alone were weak (cf. hypothesis 1 and 2). Thus, such incentives are unable to explain why these countries nevertheless chose this course of action. On the other hand, the EU has, since the beginning of the climate process, attempted to play a lead role in the drive for international regulatory policies to reduce GHG emissions. In this section, we explore the hypothesis that the US exit in 2001 represented a “window of opportunity” for the EU to succeed in this ambition. 4.1. EU leadership in a Strategic Policy Perspective When the climate issue surfaced internationally towards the late 1980s, it repre- sented a very suitable candidate for EU leadership. Other key actors, most nota- bly the US and Japan, were either outright negative (US) or not very enthusiastic (Japan). The EU’s ambition was to use this opportunity and ll the existing leadership vacuum. The climate issue was seen by the EU not only as a serious environmental problem, but was also perceived in a strategic policy perspective, as a means to project itself as a united leader on the international political scene. Thus, EU climate policy not only represented a strategy to confront the climate problem. It can also be understood as a strategy directed towards the de- velopment and reinforcement of an EU “foreign policy.” The efforts to develop a coherent EU (then EC) strategy towards climate change took place during a period when the EU underwent major political and institutional changes with the development towards European integration and the 1992 Single European Market. The 1992 Maastricht Treaty implied a shift in sovereignty away from separate member states in several issue areas including environmental policy. For instance, the Treaty implies a fundamental change to- wards majority voting on EU environmental policy decisions. This process generated some internal turbulence and controversy espe- cially after the Danish referendum voted against the ratication of the Maastricht Treaty. National resistance against increased monetary and political integration was to some extent directed towards the development of environ- mental policy in the sense that some countries, for instance the UK, targeted this issue area as a particular candidate for repatriation.64 However, despite the con- troversies generated by the integration process, there has been a signicant mo- mentum within the EU towards concerted foreign policy-making. As pointed out by Wynne “the EC member states share a common interest in creating a suf ciently united identity to be recognized as a global power in foreign policy, security and trade agreements in the new, post cold war world order.” 65 The in- 64. Wynne 1993. 65. Wynne 1993, 102. 16 The Persistence of the Kyoto Protocol ternal dimension of this ambition should be noted, however: “in order to fulll ambitions as a credible global actor, the EC needs to secure greater internal in- stitutional and political cohesion.”66 In the beginning of the 1990s, therefore, the EU needed an international issue both to make its mark as a united and strong global actor as well as to reinforce its (internal) institutional and political cohesion. The climate change negotiations offered an opportunity for the emerging European Union to establish such a position: “the international con- cern over climate change provided an opportunity for the EC to develop its own institutional presence in international environmental matters, [and] hence for- eign policy more generally.”67 4.2 EU Leadership Prior to the US Exit: High Ambition— Low Performance The EU adopted its stabilization target in October 1990 and the “rich and green” EU countries even went considerably further in their initial GHG emis- sion reduction ambitions.68 Thus, the EU was perceived by the media, the gen- eral public and environmental NGOs as the main pusher and hence also a leader in the climate process.69 While the pusher image was easily sustained, the EU provided little leadership as climate negotiations got underway. Thus, dur- ing the initial phase of climate negotiations, the EU had high leadership ambi- tions but a considerably lower capability to actually perform this role. One main reason was the high level of internal controversy over EU climate policy during this phase. As discussed above (hypothesis 3), internal strife over the means by which the EU was to implement its reduction target became one main characteristic feature of EU climate policy before 1997. In particular, the EU Commission’s proposal for a carbon/energy tax generated such a level of internal controversy that progress towards a more ambitious EU climate policy was effectively blocked. The handling of this internal controversy, moreover, took most of the energy of the EU and implied the external effect of a passive and not very inno- vative negotiation performance in the climate process. 66. Wynne 1993, 102. 67. Wynne 1993, 108. 68. Among the “rich and green” EU countries (Denmark, the Netherlands, and Germany), Ger- many was most ambitious with its aim of a 25% reduction of GHGs by 2000 (Ringius 1997). 69. In connection with international environmental regimes, leadership is often mixed up with be- ing a “pusher.” The concept of a pusher is straightforward: an actor “pushing” for strong joint commitments. The concept of leadership, on the other hand, is more complex. Basically it con- cerns the relationship between actors within a group; between leaders and followers. The Blackwell Encyclopedia of Political Science denes leadership as “the power of a few individuals to induce a group to adopt a particular line of policy” (1991, 321, cited in Malnes 1995, 92). A number of different modes of leadership have been identied (see Young 1991; Underdal 1991; Underdal 1994; and Malnes 1995). The important point here is that the adoption of ambitious goals may qualify a country as a pusher, but it takes more to be characterized as a leader (Andresen and Agrawala 2002). Jon Hovi, Tora Skodvin and Steinar Andresen 17 For instance, the tax controversy was one cause for the EU’s inability to play a leadership role in the making of the Climate Convention.70 The result of the controversy was that the Environment Commissioner declined to go to the Rio meeting in 1992 and resigned from his position soon afterwards. With the notable exception of the making of the “Berlin Mandate” at the rst Conference of the Parties (COP 1), the EU did not live up to its leadership ambition in the period between the adoption of the Climate Convention in 1992 and the nego- tiations leading up to the Kyoto Protocol at COP 3 in Kyoto in 1997.71 When the tax proposal was abandoned and the burden-sharing agreement was adopted in 1997, one main obstacle for EU leadership in the climate nego- tiations was also removed. The internal burden-sharing agreement gave EU cli- mate policy more credibility internationally and its ambitious position of a 15% reduction of three GHGs72 (by 2010) before negotiations in Kyoto started certainly served to underpin its pusher role. Whether this position can be seen as a leadership role, however, is more uncertain since the economic costs of this goal were modest.73 Moreover, during the Kyoto negotiations, instrumental leadership was demonstrated by the US rather than the EU: “to discover the source of most of the ideas in the Protocol, one only needs to read the US pro- posal of January 1997.”74 Moreover, EU climate policy was still a controversial issue and the EU spent most of the time negotiating with itself: “The coherence of the US administration contrasted with... the unwieldy (and introspective) morass of EU decision making during the negotiating process.”75 Also, the opti- mism created in Kyoto was short-lived and the EU demonstrated no impressive leadership at the next Conferences of the Parties. In fact, it has been noted that the EU was not able to present one single proposal at COP 4 in Buenos Aires in 1998 due to internal strife.76 Still, the EU did make signicant attempts to protect the environmental integrity of the Kyoto Protocol. For instance, the EU fought (but failed) to en- sure domestic action by proposing a cap on emissions trading. Similarly, the EU wanted to minimize the admission to use sinks as a climate measure. These po- sitions generated a strong conict between the EU and the US-led Umbrella Group and ultimately caused the breakdown of the 6th Session of the Confer- ence of the Parties in The Hague in 2000. Before the US withdrawal from the Kyoto agreement, the EU was not very successful in providing an effective leadership role although its ambitions in 70. Wynne 1993; and Bodansky 1993. 71. The active EU role played in Berlin in 1995 was to a large extent caused by Germany’s generally high prole on the climate issue at the time. 72. The EU proposal was to reduce CO2, CH4 and NOX by 15% by 2010. 73. Most of this reduction would be taken by Germany and the UK, for reasons unrelated to the cli- mate problem. 74. Grubb et al. 1999, 112. 75. Grubb et al. 1999, 112. 76. Tangen 1999. 18 The Persistence of the Kyoto Protocol this regard were evident throughout the process. The US exit provided a new op- portunity for EU leadership. 4.3 Exit the US—Triggering EU Leadership? In line with hypothesis 1, the US exit seemed to mean the end of the Protocol. What was the point in continuing the process when the largest emitter—and the most inuential player—was out of the picture? This may have been exactly what the US had in mind. However, in the EU the Kyoto Protocol was not seen only through economic and environmental lenses. The political lenses were of equal, if not higher signicance. When the US announced that the Kyoto Protocol was fatally awed in March 2001, the other main parties essentially had two choices: (i) to move on with Kyoto and possibly try to get the US back on board, or (ii) to start all over and negotiate a new international climate treaty. Most countries wanted to try to convince the US to rejoin. This was also the ofcial view presented by the EU, but this “co-operative window of opportunity” proved to be closed. The option of starting negotiations on an alternative regime with the US gained some ground in academic circles, especially in the US,77 but in Europe this never emerged as a real policy alternative.78 Here the Kyoto Protocol was the “only game in town”—irrespective of US participation. It was the result of 12 years of intense international diplomacy. Although it was hardly more than a “baby-step” towards solving the problem, it was nevertheless a start. Potential alternatives were regarded as even more uncertain, as well as more time con- suming. When the attempt to bring the US back failed, the EU invested a lot of po- litical energy to mobilize suf cient support for the Protocol among other Annex I parties to enable the Protocol to enter into force even without the US. The cru- cial challenge in this regard was to persuade the reluctant “Gang of Four”— Australia, Canada, Japan and Russia, all previous allies of the US in the climate negotiations—to ratify the agreement. The EU embarked upon a two-pronged strategy. Internally, it set a “good” example by heading for swift ratication. Externally, it sought to persuade the reluctant “Gang of Four” to ratify the Protocol. While the EU’s internal strategy was highly successful, the external strategy was only moderately so. True, Can- ada has ratied the agreement despite signicant domestic opposition, e.g., from the powerful fossil fuel lobby.79 After much hesitation, Japan has also 77. Bodansky 2001. 78. A typical case in point was when the Director of the Norwegian-based climate research institute, CICERO, stated that this might be the best way to move forward, there was uproar within the Norwegian NGO community. Aftenposten, 29.03.2001: “Kast Kyoto-avtalen på skraphaugen” [“Scrap the Kyoto agreement”]. 79. Considering the strong internal opposition it is questionable whether Canada will be able to live up to its commitments. Jon Hovi, Tora Skodvin and Steinar Andresen 19 ratied the Protocol. But Russia’s ratication is still uncertain. At best, the agree- ment will be presented for ratication by the Duma late in 2003. And Australia will not ratify. Clearly, the EU has had more of a leadership role after the US exit than be- fore, particularly in the mobilization of continued support for the Kyoto agree- ment. On the other hand, the EU’s mobilization of support essentially amounted to giving in to the requirements of the “Gang of Four.” Both at the re- sumed COP 6 in Bonn, and at the COP 7 in Marrakesh, considerable conces- sions by the EU were required to reach agreement. Thus, while the result of the resumed COP 6 was a “Kyoto-light” agreement, this result turned into a “Kyoto ultra-light” after the Marrakesh meeting.80 Curiously, the EU now gave conces- sions on issues where it had previously refused to concede to US demands. Thus, the revised Kyoto Protocol came very close to what the previous US ad- ministration had actively worked to achieve. Would the “Gang of Four” have reacted differently in the absence of EU inuence? Needless to say, this counterfactual question cannot be easily an- swered. However, it seems fair to conclude that had it not been for the EU, the Kyoto Protocol might have been dead. Japan and Canada would most likely not have ratied without pressure from the EU. Still, Russia remains the key to suc- cess—or failure—of the EU’s efforts to save Kyoto. The EU has assisted Russia to make it eligible for emissions trading under the Protocol. There are, however, re- maining problems. Russia’s most important incentive to ratify is the opportu- nity to sell “hot air.” But the potential for making good money here is presently bleak. First, the largest potential buyer, the US, is out of the market. Second, the EU has been strongly opposed to buying “hot air.” This implies that there is no strong economic incentive for Russia to enter the agreement. Nevertheless, the desire to gain political goodwill might tip the balance in favor of Russian ratication.81 In sum, the US exit seems to have represented an opportunity for the EU to realize its leadership ambition. It was important that the EU took the lead. Otherwise, the fate of the Protocol would have been far more uncertain. At the same time, it is important to note that the EU’s indulgence in accommodating the requirements of the “Gang of Four” suggests that it was political benets as- sociated with leadership, rather than a sense of responsibility for the global en- vironment, that was the major driving force for this course of action. However, major stumbling blocks remain. One potential stumbling block is Russian ratication. But even if Russia does ratify, and the Protocol enters into force, events at the COP 8 in New Delhi in 2002 may be interpreted as strategic moves to sidetrack Kyoto. In particular, the potential alliance between the US and developing countries may be seen in this light.82 If an alternative approach 80. Andresen 2001. 81. Arild Moe in Cicerone, June 2003, 16–17. 82. See, for instance, Jacob 2002. 20 The Persistence of the Kyoto Protocol centered around the US, China, India, Australia and others is attempted, it will represent a serious challenge to the EU, now the major proponent of Kyoto’s targets and time-tables approach. Concluding Comments Four main explanations for the Kyoto Protocol’s persistence have been consid- ered. The rst hypothesis was that despite the US exit, remaining Annex I coun- tries expect the Protocol to reduce emissions suf ciently to outweigh the costs of implementing the treaty. We concluded that this explanation has little ex- planatory power. The environmental gains are likely to be negligible, while the costs of implementation will be considerable. The second hypothesis was that the parties, by implementing the treaty, hoped to induce the other countries to follow suit at a later stage. We found that this hypothesis has little explanatory power as well. There is little or no indica- tion that the implementation of Kyoto will motivate the US or other signicant countries to cut emissions more than they would otherwise have done. The two nal hypotheses were related particularly to the EU, the only ma- jor actor with suf cient political determination and ability to save the Kyoto Protocol. Looking at the impact of domestic institutions, we did nd some sup- port for the assumption that EU climate institutions have generated an institu- tional momentum that may have served to restrict EU climate policy options af- ter the US withdrawal. Once the EU had embarked on a rather ambitious policy, it was difcult to change course. Finally, we found some support for the assumption that the persistence of Kyoto can be explained by the ambition of the EU to stand forth as an interna- tional leader in climate politics. This ambition was rooted not only in a concern for the environment. It was also as a means to unify and strengthen EU foreign policy more generally. While the EU was not very successful prior to the US exit, this window of opportunity was quite effectively utilized, although at the ex- pense of the environmental integrity of the Protocol. Needless to say, there are a host of factors not explored here that may also help explain the persistence of the Kyoto Protocol. Notably, the perspective adopted in this article has been rooted in the “logic of consequences” rather than the “logic of appropriateness.” 83 In other words, we have focused on expla- nations based on the assumption that Annex I parties’ choice of climate policy is determined by a concern for the consequences of these policies. We have not considered, say, the possibility that decision-makers are primarily motivated by a desire to “do the right thing.” Obviously, including this and yet other explana- tions in addition to the ones discussed above might have enabled us to present a more complete picture. However, doing so would have required more space than available here. 83. March and Olsen 1989. Jon Hovi, Tora Skodvin and Steinar Andresen 21 Are there any more general lessons to be learned from this case? A rst ob- servation is that economic costs and benets do not always determine action in international negotiations. Internal political strategy and institutional dynamics matter as well. Second, economic and environmental concerns are not necessar- ily the only or the most important driving forces, even in climate negotiations. Finally, it is important to recognize that the present climate agreement at best covers some 1/3 of global emissions. The Kyoto Protocol may be a considerable political achievement, but its environmental impact is slim. A more effective re- gime is likely to require the creativity of the US as well as the ambitiousness of the EU. References Agrawala, Shardul, and Steinar Andresen. 2001. Two-Level Games and the Future of the Climate Regime. Energy and Environment 12 (2 and 3): 5–11. Andresen, Steinar. 2001. The Climate Regime: Results, Consequences and the Role of Norway. In Energy and Environment at a Crossroad, edited by A. Røvik, 13–137. Nor- wegian Research Council (in Norwegian). Andresen, Steinar, and Shardul Agrawala. 2002. Leaders, Pushers and Laggards in the Making of the Climate Regime. Global Environmental Change 12 (1): 41–51. Axelrod, Robert. 1984. The Evolution of Cooperation. New York: Basic Books. Barrett, Scott. 1999. A Theory of Full International Cooperation. Journal of Theoretical Pol- itics 11 (4): 519–541. _______. 2002. Towards a Better Climate Treaty. World Economics 3 (2): 35–45. Bodansky, Dan. 1993. The United Nations Framework Convention on Climate Change: A Commentary. Yale Journal of International Law 18 (2): 451–558. _______. 2001. Bonn Voyage: Kyoto’s Uncertain Revival. The National Interest Fall: 4–55. Buchholz, Wolfgang, Christian Haslbeck, and Todd Sandler. 1998. When does Partial Cooperation Pay? Finanzarchiv 55 (1): 1–20. European Commission. 1997. Energy for the Future: Renewable Sources of Energy. Communication from the European Commission, White paper for a Community strategy and action plan. COM (1997) 599 nal 26/11/97. _______. 2001a. Proposal for Council Decision concerning the approval, on behalf of the European Community, of the Kyoto Protocol to the United Nations Framework Convention on Climate Change and the joint fulllment of commitments there- under. COM. (2001) 579 nal. Brussels, 23.10.2001. _______. 2001b. Proposal for a Directive of the European Parliament and the Council es- tablishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC. COM (2001) 581 nal. Brussels, 23.10.2001. Delbeke, Jos. 2001. Chairman’s Summary Record of Stakeholder Consultation Meeting (with industry and environmental NGOs). European Commission, 4 September 2001. ECCP. 2001. European Climate Change Programme. Report—June 2001. Available at http://europa.eu.int/comm/environment/climat/home_en.htm. Accessed 25.02. 2002. TowardG. David Effective Victor International Cooperation on Climate Change Toward Effective International Cooperation on Climate Change: Numbers, Interests and Institutions David G. Victor* Introduction Arild Underdal’s exposition on the problems of international cooperation is marked by sparseness and clarity. His models are elegant and uncomplicated, his prose disarming in its precision. I ªrst met Arild Underdal through his stu- dents and colleagues, who were my collaborators in a research project at the In- ternational Institute for Applied Systems Analysis (IIASA) in the middle 1990s. They (and soon I) grappled with the implications of Underdal’s “law of the least ambitious program,” a seminal model that explains why so many formal inter- national agreements did little more than codify the interests of laggards.1 Arild Underdal’s “law of the least ambitious program” holds that the effectiveness of an international agreement is limited by the commitment level of the agree- ment’s least interested party. Cooperation schemes (“trade-offs”) can be used in theory to entice reluctant parties; in practice, however, these schemes are likely to be difªcult to construct and monitor and are thus underutilized. Actual levels of cooperation will deviate little from the least ambitious. Some of the most im- portant studies at IIASA were animated by the desire to ªnd ways around the so- ber pessimism of Underdal’s law.2 Many of the remedies involved varying the membership and commitments of countries that participated in the formation and operation of a regime and these countries’ commitments. In other words, we focused on “variable geometry” solutions to problems of international coop- eration—an approach that has been quite successful in the formation of the Eu- * Director, Program on Energy & Sustainable Development, Stanford University. Encina Hall E416, Stanford CA 94305, tel: 650-724-1712, [email protected]. This essay draws heavily on preparatory research with Prof. Thomas C. Heller for a new book on effective strategies to manage the problem of climate change (expected 2006, Cambridge University Press). I thank Tom and also Sarah Joy for discussions and Sarah for research and editorial assistance. 1. Underdal 1980. 2. Andresen 1998; Skjærseth 1998; Stokke 1998; and Wettestad 1998. See also generally Victor et al. 1998. Global Environmental Politics 6:3, August 2006 © 2006 by the Massachusetts Institute of Technology 90 David G. Victor 91 ropean Union—and in those studies we were guided by Arild himself who be- came a key adviser to the IIASA project. In this essay I’d like to revisit Underdal’s law, along with some ªndings from the IIASA project it helped to inspire, to suggest ways to improve interna- tional cooperation on climate change. The time for new thinking is opportune. The Kyoto Protocol is set to run through 2012, yet negotiations on the form and substance of international commitments for 2013 and beyond have just begun. Although the diplomatic community is talented at painting stiff smiles on their client instruments, the situation with Kyoto does not portend well for the planet. The world’s largest emitter, the US, is not a member of the treaty. The second largest emitter, the EU, has joined Kyoto and is making some signiªcant efforts toward compliance, but these barely alter the global trajectory of CO2 emissions. The third largest emitter, China, is a member but faces no limit on its emissions (which will soon surpass those of the EU). The fourth largest emitter, Russia, is a member only because the treaty condones inaction and offers the prospect of proªt from selling surplus emission credits. The ªfth largest emitter is Japan, whose interests are similar to those of the EU, but who is struggling to ªnd ways to adjust greenhouse gas emissions. The sixth is India which, like China, has vehemently protested limits on its emissions. (For a summary of ma- jor emitters, see ªgure 1.) According to Underdal’s law, a treaty negotiated by these emitters (and a host of other countries whose interests are not dissimilar to those of the “big six”) will be nearly devoid of substance. That’s because the interests of these dif- ferent countries diverge—some, such as China and Russia have little ambition for effective cooperation. This prediction accurately describes Kyoto’s fate; the “commitments” being implemented under Kyoto are, in effect, a non-coopera- tive outcome.3 Governments have promised to do what they would have done anyway. The European Union’s efforts reºect that some European governments (especially in the Northern countries with active Green parties and publics who are animated by the dangers of a changing climate) are under intense pressure to address the issue even as other Europeans (notably the ten new entrants as well as most of the poorer nations in the south) are not. The developing coun- tries and Russia are focused on development, not controlling emissions, and thus they have consented to participate in an agreement that requires no efforts whose cost is not compensated. And in a few cases (notably Australia and the US), governments misunderstood or misrepresented what they could deliver and made erroneous promises in Kyoto. Those nations realized their false promises in painful ways and have since withdrawn. The United States, under the Bush administration, has withdrawn in a particularly aggressive and uncon- structive fashion. Crafting a more effective climate change response requires returning to 3. Barrett 1994. 92 Toward Effective International Cooperation on Climate Change Figure 1. Allocation of World Emissions fundamentals, and here I brieºy address three: the demand for international co- operation; the numbers of countries participating and their interests; and the design of the institutions that aim to promote cooperation. For each a wooly conventional wisdom has arisen, but a closer analysis suggests policy choices that vary considerably. And for each we can look to Arild Underdal in part, to chart a path toward more effective international institutions. 1. The Demand for Cooperation Every analysis of international cooperation must begin with the question: who wants to cooperate, and why? The conventional wisdom is that global coopera- tion arises out of the interests shared by all countries, to varying degrees to ad- dress the problem of changing climate. Failures to cooperate, therefore, are the result of some “market failure”—for example, the failure of countries to under- stand their interests, or the transactional difªculties associated with assembling many nations into a cooperative solution. International institutions—such as treaties, organizations, and behavioral norms—aid cooperation by reducing those transaction costs, focusing efforts on particular solutions, creating reputa- tional risks for failure and the like.4 4. Keohane 1984; and Young 1989. David G. Victor 93 The demand for cooperative climate policy, like any matter for interna- tional collaboration, should not be conceived in general terms but through the eyes of particular societies and the governments who serve as their agents. This is the standard rationalist assumption that usually holds.5 The following four aspects of climate damages will affect whether and how nations are likely to mobilize to address the dangers of changing climate. One aspect of this issue is the increasing capacity of societies to “climate proof” themselves. An ever-smaller fraction of economic activity depends di- rectly on the weather and climate; human capacity to adapt to changing weather, such as by building dikes and irrigation systems, has risen sharply in the last century and shows no sign of exhaustion.6 The countries that have the greatest capabilities to respond to changing climate and which are also, in gen- eral, the largest emitters (at least on a per-capita basis) are also those most proofed against vagaries in the climate. A second important aspect of what is known about climate effects is that their time horizons are long. Thus the calculation of reluctant developing coun- tries is, perhaps, entirely rational. Combating global warming would require them to incur possibly a substantial cost in controlling emissions today for quite uncertain beneªts in the future. By contrast, they could invest the same re- sources today in development, which automatically will improve their future capacity to adapt if climate should change (while also achieving many other beneªts from development). This line of logic is rooted in Wildavsky’s famous dictum that “richer is safer.”7 A third aspect of climate science is that in fact some societies might wel- come a dose of new climate—up to a point. The most famous of these is Russia (and more generally the former Soviet Union), where agriculture and forestry— which are the most climate-sensitive of economic activities—probably stand to gain from the longer growing seasons that accompany warmer weather. The fourth aspect of climate damages is that there is one scenario for changing climate that all countries have an unequivocal interest in avoiding: abrupt (or so-called “catastrophic”) climate change, such as would be caused if any of the following were to occur: the sea level were to rise a meter or more over just a few decades; the world’s climate were to “ºip” to a different regime; warming destabilized large amounts of methane currently locked in the perma- frost (which would trigger still

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