The Clinton Administration attempted to address the problem of cost
by developing its own economic assessment of Kyoto, which, not
surprisingly, found the costs to be quite low. But the
administration's analysis was based on several unrealistic
assumptions and, in any event, could not eliminate the uncertainty
stemming from the existence of much higher cost estimates by other
modelers.

Given Clinton's mantra during his first campaign--it's the economy, stupid!--it is surprising that the Clinton Administration failed to endorse a proposal made by several economists prior to Kyoto that would have addressed the cost issue head on, by establishing a cap on how high carbon prices could go.  Under this approach, countries would agree in advance on a "safety valve" price. If emission reductions prove to be cheap, as many environmentalists believe, then the price of carbon would never reach the safety valve price and countries would simply meet their Kyoto targets. But if emissions prove expensive, as many conservatives argue, a country could issue additional permits at the safety valve price. The effect would be to ease the emission target in order to limit compliance costs and provide predictability. Through this mechanism, countries could decide how much they were willing to pay to combat climate change and set the safety-valve price accordingly, with a guarantee that they would not need to pay any more.

The safety valve proposal was known to Clinton Administration officials prior to Kyoto and received support from the President's economic team. Nevertheless, under pressure from environmentalists, the administration ultimately failed to endorse it. Last year, the proposal again received considerable attention both within the administration and internationally in the preparations for the conference at The Hague. Indeed, discussions with European and developing country negotiators suggested that it might have been negotiable as part of a package deal. Again, however, the administration declined to act, fearing a negative reaction from environmental groups immediately before the presidential election.

In developing an alternative to Kyoto, a safety valve approach would provide a convincing response to critics who contend that limiting emissions will prove to be very costly. In doing so, it would help defuse concerns about the economic risks of mandatory emission reductions and thus make a mandatory approach more politically viable.

What Next?

ALTHOUGH AN impressive achievement, Kyoto suffers from the sin of hubris. Whether or not the United States eventually negotiates some arrangement with the Kyoto system, it should consider a more modest, incremental approach to the problem. Rather than negotiate international commitments first and then seek domestic support, the United States should decide what it is willing to do domestically, and then examine ways that the international process can help support these efforts.

A domestic climate policy could take several forms. Although economists tell us that a revenue-neutral carbon tax would probably be the most efficient policy instrument, it would violate the political orthodoxy of "no new taxes" and hence is probably a non-starter. A system of mandatory domestic targets and emissions trading (usually referred to as "cap and trade"), combined with a safety valve to limit the potential costs of compliance, is more viable politically. The level of initial effort could be comparatively modest. What is crucial is not so much the precise level of effort, which could be ratcheted up later if necessary, but a sound architecture that achieves significant buy-in from both industry and environmentalists and hence would not be subject to the vagaries of election cycles or media fads.

Whatever approach is selected, by beginning at the national level, the United States would retain control of its climate policy and be free to design an alternative system that could co-exist and compete with Kyoto. Such an approach would also help repair America's shattered credibility internationally.

International efforts should complement rather than attempt to coerce domestic action. The 1992 UN Framework Convention on Climate Change, to which the United States is a party, provides a solid base on which to build. Among other things, it requires countries to report regularly on their greenhouse gas emissions and on their policies to limit emissions, and establishes an international process to review these national reports. These reporting and review procedures help provide an information base that will be important regardless of what direction the international climate change regime may take. More immediately, they promote accountability by providing international scrutiny of domestic climate change measures.

Nevertheless, while the Framework Convention provides a useful infrastructure for international cooperation, the next step is not necessarily U.S. re-engagement in the Kyoto process. One alternative would be to begin with an agreement at the regional level or among like-minded states that would allow American firms to receive credit for emission reduction projects in other participating countries. Over time, as the Kyoto system gets underway and other countries develop their own national climate change programs, a system of mutual recognition could develop under which the United States, for purposes of emissions trading, would recognize other countries' emission allowances and vice versa. The system would grow from the bottom up, through an increasing integration of national climate programs. Eventually, developing countries might see the benefits of joining, since most can reduce emissions more cheaply than industrialized countries (due to the inefficiency of their energy systems), a comparative advantage t hat they could exploit through an international trading system.

We need to remember that we are dealing with a century-long problem, and that the level of emissions reductions we achieve in the short-term will have only a modest long-term impact. We should not delay-delay merely forecloses options and ultimately raises the overall costs of responding. But we can afford to proceed deliberately, learning from experience and recognizing that we are building an architecture for the long-term. To be effective, climate change policy need not be built in a day.

Daniel Bodansky is a professor of law at the University of Washington. He was the Department of State's Climate Change Coordinator from August 1999 through June 2001.

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