 Thank you very much for a splendid introduction. I'm delighted to be here. I have to confess right off that this is the very first time I've ever been in this wonderful country or this incredibly historic city. I'm here for much too short a time. I arrived at five o'clock this morning and I'm leaving tomorrow morning. But the next time I come I'm convinced that I'll make sure I stay longer. So my plan in talking about the topic of Beyond Kyoto providing you with an economic perspective on climate change policy, my plan is to be very brief, to maximize time essentially for discussion and interaction. And actually I'm going to start because I recognize that not all of you are economists and some of you might be wondering what the heck does an economist have to say about a scientific problem such as climate change policy. So I wanted to start by telling you a story. And that is, I was getting on an airplane a while back and I sat down in my seat. And the gentleman next to me clearly wanted to have a conversation. Maybe you've noticed what I have and that there are two kinds of people that fly, those who like to talk to perfect strangers and then the rest of us. So I'm very much in that second category. I don't like to have conversations on planes. In fact, my wife would probably say if she were here, I don't like to have conversations in general. So I often carry a book, some kind of defensive material to prevent the conversation from taking place. But what he did is he started out the conversation the way Americans anyway do. He said, well, what business are you in? And I did something that was quite foolish. I told the truth. And I said, I'm an environmental economist. And he looked at me and I looked at him and he didn't say anything further. And here is this fellow who clearly wanted to chat, wanted to have a conversation, yet he wasn't following up with anything else. And as I looked into his eyes and he essentially looked into mine, it occurred to me that the reason he wasn't saying anything further is that he had concluded that he had just met a living, breathing oxymoron, an internal contradiction. Because it's either economics or the environment. It's either the economy or the environment. So this very phrase, even, of environmental economics made absolutely no sense to him. So part of my purpose is at least to assert to you, if not to demonstrate that environmental economics is not oxymoronic, it is far from it. And the reason is as follows, is two parts. One is that the causes of environmental problems in a market economy, as we have now virtually in all countries of the world, with the exception of a handful, that the causes are economic. It's the consequence of unintentional byproducts of activities or what economists call externalities. And secondly, the consequences of environmental problems have very important economic dimensions. So surely if the causes are economic, and there are important economic consequences, then an economic perspective, economic analysis, if you will, can be very important to really understand the problems in a way that we will be able to design solutions that are effective, that are economically sensible, and because they're economically sensible, stand a chance of being politically pragmatic and practical. So with that as a basis, I'm gonna turn to looking at the basic economics of the climate change phenomenon, which ties in with certainly where so much of the expertise of this institution lies, and that's the geopolitics of climate change. Because the basic reality of climate change that of course differentiates it from all other environmental problems, except one, stratospheric ozone depletion. The key characteristic of it is that it is a global commons problem, that greenhouse gases, carbon dioxide and the other greenhouse gases that lead to their concentrations lead to climate change, those greenhouse gases uniformly mix in the atmosphere, and it doesn't matter where the gases came from, if they come from New York or Dublin or Beijing, they're still gonna have the same effect. That turns out to be extremely important economically and therefore politically, because that means that any jurisdiction that decides to take action, whether it's a region of the world, it's a single nation, it's a state or province, or it's a city, is gonna incur the cost of its actions, but the benefits of its actions are gonna be spread globally, and that means that it's inevitably the case that for virtually any jurisdiction you can name, except the world as a whole, the benefits of taking action are gonna be less than the costs of taking action, and that's of course the classic free rider problem, and it means it's therefore in the selfish interest of each and every country to let the others go ahead. Now, that means that international cooperation is needed, that unlike dealing with all the other environmental problems virtually that you could think of, where there are different types of air pollution, even trans-boundary problems like acid rain which move from country to country, water pollution, unlike any of those problems, leaving it up to individual nations to take action on their own is unlikely to be sufficient, that international cooperation of some kind is required, and note I say international, I put in italics, not necessarily global, and that's just because of mathematically what the numbers are as you'll see. This is also why the highest levels of effective government should be involved. Now in most parts of the world, that means sovereign states, that means nations, Europe's an exception to that because of the existence of the European Union, which then becomes the appropriate body to be participating in the cooperation because it is a higher level of aggregation, but it's national action that's necessary to fulfill whatever international cooperation decides. So I'm gonna start by saying a few words about an economic perspective on national climate policy action, and then I'll go to international cooperation and spend most of my time there, taking us right up to the negotiations that are forthcoming in December in Durban, South Africa. Now most economists and other policy analysts favor carbon pricing, which might be a carbon tax, it might be a cap and trade system, so carbon pricing is a generic phrase, meaning placing a shadow price on carbon dioxide essentially, and why is it that there's all this support from the analytical community anyway? It's not for ideological purposes, it's not because economists think markets are cool, it's for a set of very practical reasons. The first one is that there is no other feasible approach that can provide truly meaningful emissions reductions because of the pervasiveness in a modern economy of energy, generation, and use. It means that if we were trying to regulate through a conventional means with performance standards or technology standards, we would be trying to regulate hundreds of millions of individual sources, every factory, every store, every home, every car, every motorcycle, every lawnmower, every barbecue grill, on and on and on, completely impossible to do through technology standards or through uniform performance standards of any kind. Now when I say it's for a truly meaningful emission reduction, what is a truly a meaningful emission reduction? Well you could take the Europeans 2020 targets or beyond. In the context of the US, which is what I'm gonna comment on, I'd say that meaningful targets would be what is the official target, aspirational target, obviously not legal mandate of the United States of the current administration, which is an 80% cut in national CO2 emissions below the 2005 level by 2050. Secondly, it's the least costly approach in the short term. The reason why carbon pricing is the least costly approach in the short term is that by placing a shadow price on carbon, it provides an incentive for every source to wind up controlling at the same incremental cost or as economists call it, the same marginal cost. That's very important because the costs very tremendously across sources, not by a factor of two to one, but by a factor of 10,000 to one. So a uniform standard will turn out to be hideously costly because for cost effectiveness, you want those sources who can control cheaply to do a lot, those sources who can, it's very costly, you want them to do less and the costs are very heterogeneous. Thirdly, in terms of the long term, it's clear that for the very ambitious targets that are necessary, that will be necessary, massive amounts of technological change are gonna be required. I'm not talking about diffusion of existing technologies but invention and innovation or commercialization of new ones and for that price signals will be required. It's again impossible to picture it otherwise happening. So for these reasons, I would say that, and I think most all economists and most policy analysts would say that carbon pricing is a necessary component of a sensible climate policy. I put in a parenthesis that it's necessary but not sufficient and I'll explain why in a moment why it's not sufficient. But carbon pricing to turn to politics is a very controversial issue, particularly in my own country but in many other parts of the world, we've seen the debates that are currently taking place in Australia would be a good example of that contemporaneously. And the reason is that it makes the cost transparent. These technology standards are very good at hiding the costs. If you walk down the street in Dublin and you ask people how much fuel efficiency standards that place mandates on automobiles that require them to use lighter materials in effect or require them to use more efficient engines, how much it costs them in terms of the price of a car, they'll say, I don't know, I don't think it costs anything because when I see the sticker in the showroom, it doesn't say anything about that, that's free. So it's very easy to put those in place. On the other hand, if you talk about doubling the price of gasoline, even though that would be more effective, everyone knows that price. So because of the fact that the costs are transparent which is positive from an economic perspective, it makes it very, very difficult politically. Indeed, in the United States, the notion of cap and trade, the mechanism that is used in Europe under the emissions trading scheme, was denigrated as cap and tax and successfully demonized actually that way. So for political reasons in the US, what I've characterized as a meaningful national economy-wide carbon pricing policy is very unlikely to be enacted before 2013 and that's at the very earliest and I won't take time to go through what would be the political chips that would have to fall in place for it to even happen in 2013, but if you wanna talk about it later, we can. So does that mean there will be no US climate policy? No, it doesn't mean that and I think this is something that's not sufficiently understood. The further one moves away perhaps from the US. There are some other important climate policy developments that are taking place. The first of all is the ongoing recession. There is a increased interest because of the recession and because of the fiscal realities of budgetary deficits, of looking for new sources of revenue right now that's a polarized debate of Democrats versus Republicans, but it's considered quite possible that there will be a new look at consumption taxes which might be more favorably viewed than income taxes and if one looks at consumption taxes, a natural thing to look at are energy taxes. Energy taxes are not exactly a carbon tax but they're a step of the direction. They're one step in that direction. Secondly, there was the stimulus package in the US. I'm not talking about the new proposal from the president but the one that came in at the very beginning of the Obama administration and within that $890 billion package was $80 billion that was committed for renewables and energy efficiency. Now on the other hand the delays, there have been massive delays in getting that out. There are also new fuel efficiency standards for automobiles which are going out to 2035 which are extremely important. If I didn't put graphs in this presentation but if you saw the graph you'd see how it lowers tremendously the trajectory of emissions increases. There are also other kinds of energy policies that are not targeted CO2 but nevertheless reduce CO2. There's a lot of interest in a so-called national renewable electricity standard even more in a clean energy standard. I'm not gonna define these but if you wanna talk about them we can and then technology policies. So this is where we get to the necessary but not sufficient. The reason is that even if you get the prices right with a carbon tax or a cap and trade system there a big problem remains in this domain and it has to do with research and development which is very important because of needing long term technological change. And that is that when you carry out R&D in your firm basic R&D at your company you pay the costs of it but you don't get all the benefits, right? So Apple did all the basic R&D of the iPhone but a lot of you in this room have a smart phone that is made by a different company. I've got a BlackBerry smart phone. The Storm 2 looks just like the iPhone but Apple's not getting the money. So what happened was a knowledge spillover because information is in the words of economics a phrase of economics a public good. So that means when you carry out basic R&D you get all the costs but you don't get all the benefits even with a perfect system of intellectual property rights even with patents that are perfectly enforced there's tremendous evidence 50 years of economic research of the knowledge spillover from patents legally let alone illegally in the world. So that means that an insufficient amount of R&D would be incentivized by an appropriate carbon tax cap and trade system by the price signals alone and something additional is needed that could take the form of government subsidies better yet from my perspective it would take the form of government funded R&D perhaps in universities and think tanks and the like a lot on the engineering not necessarily the economics. So technology policies and other part of it. There are also other federal regulations that are actually in place around the way in the US there is as you may know a Supreme Court decision on climate change. The administration issued a finding which triggered the Clean Air Act. It's already affected mobile sources. The stationary storage standards are now in process. There are delays they're intentional delays by the administration because of the recession which is not necessarily unwise to slow down regulations for what is a long-term problem when you have a short-term negative downturn in the business cycle. And then there are air pollution regulations five of them are the important ones for other pollutants that have nothing to do with CO2 it doesn't name CO2 and yet they have profound effects on CO2 because they're correlated with CO2 and those are for socks, knocks, mercury, particulates, coal ash and cooling water. And these will have huge effects on investment in new coal, retirement of existing coal and dispatch of coal versus natural gas. So let me skip because of time some of the other things instead go right to the international domain. So that's the pace of what's happening in the US. Europe is obviously vastly further ahead. New Zealand is further ahead. Australia is now as you know in process of moving forward. Canada is sort of sticking with the United States and Japan has slowed down but is moving. But the international discussions are key because it's a global comments problem. So I wanna place the climate negotiations in perspective and we're now finishing up the American baseball season. There's a cliche and when a team, I suspect that you hear the same cliche with football in Europe. And that is when some team has lost its first four games and the reporters go into the locker room at least in the case of baseball see it's a very long season. It's 162 games. So when they've lost the first five or 10 the players say don't worry about it. This is a marathon not a sprint. They're right. That's even more true of climate change policy. It is a marathon not a sprint. It is important to focus on the long term not what's accomplished in the next six months or the next year or even the next five years. Why? Scientifically first of all it's a stock not a flow environmental problem. It's the accumulated greenhouse gases in the atmosphere the concentrations that matter and they have a very long lag time decades to centuries depending on the gases of leaving the atmosphere and essentially going into the oceans. Then economically the cost effective path from any analysis I've seen except one. So I've seen maybe 150, 200 economic analyses from both sides of the Atlantic Ocean and both sides of the Pacific. And all but one would say that the cost effective path is a gradual ramp up of target severity because it's a long term problem and we want to avoid unnecessary capital stock obsolescence. I'm not gonna confiscate your I don't want a policy that confiscates your car and tears down your house and tears down that coal fired power plant tomorrow. What I do want is to provide you incentives or laws and regulations if you prefer it with command and control that the next time you buy a car you move in the right direction that the next time the factories rebuilt you move in the right direction that the next time a power plant is built it moves in the right direction rather than rendering the capital stock obsolete unnecessarily for what is a long-term problem. And then economically I said technological change is key that is a long-term phenomenon. And finally administratively what many of you know better than I do is that the creation of durable international institutions is essential. This is a problem that is certainly as challenging because of the global commons nature of it as the reconstruction of Europe and trying to put together a sensible international monetary system following World War II. And when the people sat down in Bretton Woods at the end of after World War II they had some short-term goals but think about how long it took to build up the institutions eventually leading to the World Trade Organization just in that one dimension of a trade and here the same applies new institutions will be required that's gonna be essential. So for all those reasons I see the international climate negotiations as an ongoing process much like trade talks are an ongoing process no one says well in the next round are we gonna solve all trade problems forever? Of course not it's an ongoing negotiation climate change will be the same way that doesn't mean we should sit back and relax but it does mean not to focus on a particular negotiation as solving the problem or not. Indeed the sensible goal for negotiations is progress on a sound foundation for meaningful action in the long term not a quest after an immediate solution which I've been saying for years. So with that what actually happened then in the most recent international negotiations which were in Cancun, Mexico in December of 2010. Now some of you how many of you were there with me? Okay so then were you also in Copenhagen the year before? Oh good so I think that you'll agree that with this that the first thing we can say is that there was organizational success in Cancun and consensus was achieved. Both contrast tremendously with Copenhagen. Copenhagen the one great thing about having gone to the conference COP 15 in December of 2009 in Copenhagen was that whenever I go to a conference of any kind for the rest of my life it will never be the worst organized one. So it's good that helps with some perspective. Cancun as I'm gonna comment on at the end when I give credit to the Mexicans in particular people in the foreign ministry it was brilliantly organized. Now partly because they had just seen the disaster in Copenhagen and they knew exactly what to do in some cases to improve it but there was organizational success and there was consensus achieved. In fact there was consensus achieved on something called the Cancun agreements which unlike the agreement or the accord which came out of Copenhagen that was two to four pages long. This is 32 pages long. So it's and it puts some meat on what had been done in Copenhagen to some degree. The first thing is that it includes emission targets and actions at this point for more than 80 countries. Most of these targets and actions were submitted as part of a process initiated by the Copenhagen Accord actually. Importantly all the major economies are included. This is extremely important because if you're not a climate change aficionado you may not realize that the way international climate policy operates is that a list that was put together at the time of the signing of the Kyoto protocol the list that was put together classifies countries as either having responsibilities that are quite serious or having no responsibilities whatsoever. The annex one countries which are pretty close to being the OECD countries but not exactly have responsibilities targets and timetables. The non annex one countries which people used to call the developing world don't have responsibilities. Of those countries that are non annex one and have no responsibilities 55, 55 of them have higher per capita income than the poorest of the annex one countries. So even if that list was appropriate then which it was not because of the structure it's wholly out of date. So this distinction that is within the Kyoto protocol the existing international agreement of the annex one non annex one distinction. This is to me an anchor that is dragging on the floor of the ocean that is stopping progress of a ship of international climate policy progress. That's the anchor. And what the Cancun agreements do is that they blur that distinction. Unfortunately they don't eliminate it as we'll see at the end. But they blur it. That was significant. Secondly they establish mechanisms for monitoring and verification. Even in a certain way in the key developing countries in particular China this was a huge point of contention. Third a green climate fund was established although whether or not this is actually financed is gonna depend upon the individual countries to put up the money. And the US at this point because of domestic politics combined with the recession combined with budgetary deficits is not about to contribute significant amounts to that. Fourth some initiatives on one small but important part of the story which is deforestation, tropical deforestation some advances were made. And then a structure was established for beginning to develop just a structure some technology transfer issues. So is that a success? Because I didn't say much about emissions actually being reduced. So in order to say whether it was a success let me summarize what I wrote and published before Cancun when I said what would be a success in Cancun since reporters were calling regularly and saying how will we know if it succeeds and this is what I said at the time. Number one is that there are several processes that are going on in addition to the United Nations Framework Convention on Climate Change which is the official UN process that I've been describing. There's also called something called the Major Economies Forum which consists of a small set of countries essentially the OECD countries plus the largest non-OECD country. So China, India, Brazil, Russia, the BRIC countries and then a few others. This small set of countries approximately 20 if we count the EU as one account for 85% of emissions. Getting an agreement among 20 parties is a lot easier than getting agreement among 194 parties. So that's the Major Economies Forum. It has a problem. The problem is that it was founded and is chaired by the United States by a single country and a country that's not held in high regard in terms of international climate policy. So another parallel process is the G20 which has actually addressed climate change although this is the finance ministers and they've got a lot else on their plate obviously now. And then finally the C30 which is essentially the G20 throwing in some of the countries that would suffer most from climate change. And these are countries in the developing world including in sub-Saharan Africa. So the first thing would be I said would be to embrace those parallel processes as input rather than viewing them as in my opinion the previous leadership at the time of Copenhagen of the UNFCCC did, viewed those as competition and denigrated them. And instead I said they should be embraced. Number two was to consolidate tracks. So the negotiations in going into Cancun there were two official tracks within the international negotiations. One is negotiations over a second commitment period for the Kyoto protocol. The first commitment period comes to an end at the end of 2012. The other is for long-term cooperative action LCA and that's for sort of a post Kyoto if you will new kind of architecture perhaps. So there are those two tracks and then there was this Copenhagen Accord that was coming in from the previous negotiations. And I said if you could consolidate the three to two in particular to take the Copenhagen Accord which has some positive aspects to it and make that the core of the long-term agreement discussions. Third to focus on some productive steps within some specific narrow agreements such as deforestation. And then fourth just in general to develop sensible expectations and therefore effective plans instead of thinking that everything was going to be solved. All of that happened in Cancun. All of that happened in Cancun. And it's for that reason that I would call COP 16 in Cancun last December a success. I'm not going to say it was an extremely important step forward. It was a modest step forward but it was a meaningful step forward on this long-term problem. Now why did Cancun succeed? So here we get to I think some specifics about the individuals and the situations. First of all the Mexican government as I said through very careful planning I was involved, lots of others I'm sure in this room were in Mexico City in the year leading up to it working with the various ministries. They were very well prepared and they were extremely skillful in presiding over the talks. You'll recall that in Copenhagen for those of you who were there Danish Prime Minister Lars Lough Rasmussen not the other Rasmussen who's now running NATO the previous Prime Minister but this one who is apparently about to be the previous Prime Minister Rasmussen also. At the end, I hate to say this but I mean it can only be said in demonstrating remarkable incompetence in running a meeting. I don't know what else to say that he allowed the objections of five very unimportant countries Bolivia, Cuba, Nicaragua, Sudan and Venezuela to completely derail the talks and to fail to reach an official agreement. In Cancun the same thing happened from some of the same countries. Mexican Minister of Foreign Affairs Patricia Espinosa took note of the objections. She stated from the chair, consensus which is what this process operates under does not mean unanimity, bang the gavel, the Cancun agreements are adopted, everyone stood up and applauded except for a few countries. She knew how to run a meeting. Secondly leading up to that the two most important countries in all of this are of course China and US the two largest emitters and they set a tone of civility for the conference. It was not new for the US the US had already been more or less civil even if they weren't agreeable. China had been less so but this really changed in Cancun. In fact someone I was talking with a lot there described the Chinese as being on a charm offensive. There was also pressure from developing countries because developing countries were worried that if there was failure in Cancun after the perception of failure in Copenhagen that that would cause demise of this UN process itself and the developing countries love the UN process because majority rules in the General Assembly so they've got a majority there and the current structure in this process is the Kyoto Protocol in which they have no responsibilities. So they don't want this process to come apart. And then finally I think we have to give credit to what's changed at the UNFCCC. I won't name the previous leadership but the new leadership who presided for the first time she did over Cancun. She was from Costa Rica, Christiana Figueras who has her feet in both worlds. She's from Costa Rica, has been a minister there. She spent much of her life in Washington DC partly as a diplomat and the result is she has credibility in both worlds, the industrialized world and the developing world. And she recognized that realism should eclipse idealism and that incremental steps in the right direction are probably better than acrimonious debates over what are fundamentally unachievable targets which is what we had been doing to some degree. So finally the path ahead. Where does this take us to and what is likely to be forthcoming? So the next international conference, the 17th conference of the parties will be in Durban, South Africa in December of this year. The first thing will be to define the institutions and the rules that are in the Cancun agreements to continue to put flesh onto it. Although we have to admit that there's been some backtracking by the Chinese in particular in intermediary meetings particularly in Bangkok a few months ago. So that looks, one could be less optimistic about that than one could before. But even more important is that in addition to the discussions on the LCA track, the long-term cooperative action track, there is the Kyoto Protocol track still remains. And the decision on a second commitment period has been punted and punted and punted from one conference to another. And they can't put it off any longer because it's gonna come to an end at the end of 2012. So it's now gonna fall on everyone's laps in Durban. Keeping the Kyoto Protocol going, as I think I've explained, is extremely important to developing countries or let me instead phrase it the non-annex one countries. I mean it includes Singapore which is richer than any of the countries that I've been in lately. So it's not developing countries, the non-annex one. But there's a big question, can there be a second commitment period for the Kyoto Protocol? The U.S. is not gonna participate. The U.S. has stated that and obviously has not even ratified the Kyoto Protocol. Japan, Russia, and Canada have all now officially announced Canada only three or four months ago have announced that they will not participate, will not support a second commitment period. Australia, despite what is taking place now in terms of trying to put in place a carbon pricing regime, I think is very unlikely to take on targets in a second commitment period. So the question then is, is Europe, and I guess I should say Europe and New Zealand, is Europe on its own credible or feasible? That's a decision for Europe to make, not only for the EU, but for the member states to make. Whenever I've been in Brussels and I've met with people from private industry, I've always noticed that they are the greatest enthusiasts in the world for climate policy action in the United States and in countries outside of Europe because they're very worried about the sucking sound harming international competitiveness. Europe went first, thinking that they were gonna bring others along. That obviously hasn't happened and that's a serious issue for Europe to grapple with. So for this reason, I say that Durbin is probably gonna be dominated not by what might be constructive discussions on the LCA track, the Cancun agreement and putting some flesh on that and moving forward, but rather on the contentious issue of a second commitment period for the Kyoto Protocol. And it's for that reason that I would say that despite the weather, Durbin may turn out to resemble Copenhagen more than it resembles Cancun, which is why I'm not sure if I'm gonna go. So I've gone through a lot of material quickly. If you want more information that doesn't come up in our discussion, here's some web addresses. The Harvard Project on Climate Agreements, we bring together 46 research teams from Europe, the United States, China, India, Japan and Australia working on international climate agreement issues, the Harvard Environmental Economics Program, which is 25 professors at Harvard, across the university, I direct that, working on all sorts of issues. And then as Frank Convery, I bet he could say the same thing. Like every academic, everything I've ever written since I was in kindergarten is available as a PDF file at my own website. So thank you very much.