Will Paris Climate Change Agreement be a Game-changer?

The climate change is one of the most serious problem that the world is confronted with. The greenhouse gases, like the glass of the greenhouse, can not only let sunshine go through it but also prevent the heat absorbed by the ground from being lost, which will cause greenhouse effect. Then global warming occurs along with damage to the ecosystem of the world. The phenomenon can be regarded as a negative externality as it causes a negative effect on the third parties. To solve the problem, the Paris Climate Change Agreement was put forward during the UN Climate Change Conference in 2015 and was adopted by 195 countries in the world 1.

The Paris Agreement was adopted in 2015 and came into force in November 2016 2. The agreement included some measures. Firstly, the governments agreed to peak greenhouse emissions as soon as possible. Also, the aim is to keep global temperature well below 2C above pre-industrial levels and pursuing efforts to limit it to 1.5C. The aim also includes a goal of zero net emission which means removing as much greenhouse as from the atmosphere as is being added to it by the second half of the century 3. The government also agreed to review progress every five years. Last but not least, there will be $100 billion a year to climate finance for developing countries by 2020 and further finance in the future 4.

We can analyse the content of Paris Agreement at three angles. From the perspective of environmental protection, the Paris Agreement sets a clear goal and all countries have to make efforts to pursue it. From the perspective of human development, the Paris Agreement included all countries in the world to let them protect the ecosystem and ensure the human development. The agreement reflects that the societies should share more and take their responsibility to meet the common goal. From the perspective of economy, the countries should change the structure of energy sources, reducing the reliability on fossil fuels. Through the international cooperation to promote contributions of all signatories. According to the logic of Paris Agreement, the preference of global investment will be on green sources, low carbon economy and similar areas in the future 2.

There are various ways for the government to reduce greenhouse gas emission.

The fist approach is the introduction of carbon tax. If the tax is imposed, the cost of the producers will increase, reducing the market quantity to the social optimum. Also, because there are other less polluting resources which emit less carbon, the high cost after taxation lets producers seek the lower-carbon-emission energy sources, which will hopefully result in a decrease in external cost and a higher social optimum quantity. So the carbon tax is aimed to increase marginal private cost to the new marginal social cost.

Another method is government regulations. The government can either limit the pollution emission, or the output of the polluting firms and the government can also force the producers to install equipment that can reduce pollution 5. The direct regulations of government are very easy to implement. Also, regulations make polluting firms reduce pollution directly and effectively.

The other way is to introduce tradable permits. The government can issue the permits to the firms and the permits can be traded in a market, which means that if a firm emitting less pollution than the permitted level, the firm can sell the extra permits to other firms. Similar to carbon taxes, this way creates incentives for firms that can reduce pollution at a lower cost to switch to less polluting equipment since if they do so, they will not have to buy the trade permits. Therefore, tradable permits can reduce the size of negative production externality. For instance, the EU have implemented the EU Emission Trading System. There is a cap set on the level of certain greenhouse gases by the installations in the system. The cap will be reduced gradually to make total greenhouse emissions decrease 6. It is effective as emissions in the EU decreased by 22% between 1990 and 2015 while the economy of EU grew by 50% over that time period 7.

Another way is the Coase theorem which is that as long as the property rights are well defined and the transaction cost is zero or very low, then no matter who gets the property rights, the ultimate result of the market will be efficient. What the government should do is to issue the property rights and protect them 8. So if the property rights are well defined, the market outcome will be negotiated reasonably. However, the conditions are very hard to satisfy.

Countries such as the US, Germany, China, France, the UK and Australia commonly have a high evaluation of Paris Agreement.

However, there are some views doubting the effectiveness of the Paris Agreement. Many countries have promised to make "intended nationally determined contributions"(INDC). In these, countries outlined their plans to cut the greenhouse gas emissions. However, research suggested that the emission reductions outlined in the INDC would only limit global temperature rise by 2.7C 4. So the governments still have to give plans to reduce greenhouse gas emissions further. Therefore, from the figure, we cannot ensure that the agreed limit on global warming will not be breached 3. Also, not all countries are satisfied with the agreement though they signed the agreement as well. For instance, the lead negotiator for Indonesia said that the finance was weak and the deal was not fair. Another example is that South Africa gave the agreement a cautious welcome saying that the deal was not perfect 9.

However, the number, 2.7C, cannot illustrate everything. The Paris deal includes some ways to improve the national pledges in INDC. Countries will have new goals in 2020 and the goal-setting process will take place every five years. Also, the process should be easier as the sources of low-carbon energy become cheaper. The pledges from China and India could also double the world's wind and solar capacity within 15 years. There will also be new technologies in the future, indicating the goal is achievable 3. Also, after the climate conference, ten oil companies announced a one-billion-dollar fund for new sources of oil 10.

The problem of whether the countries will control pollution can be illustrated by game theory 14. We can suppose that there are two countries, one of which is a developed country and the other is a developing country. The industrialised country can choose to help the developing country or not and the developing country can choose to control pollution or not. Assume that the developing country will provide financial help of 10 units, and pollution will contribute economic losses of 9 units and 5 units to the developing country and the developed country respectively. Also, assume that the cost of controlling pollution is 10 units.

developed country/developing country

control pollution 14

no control 14

providing help 14

-10, 10-10

-10-5, 10-9

no help 14

0, -10

-5, -9

From the game theory, we can see that the Nashi equilibrium occurs when the industrialised country provides no help and the developing country does not reduce pollution. For the developing country, the best strategy is not to control pollution (1>0, -9>-10). For the industrialised country, the best strategy is not to provide financial support (0>-10, -5>-15). This is also the reason why the effect of some agreements on controlling pollution is not significant 14.

However, if the developed country can supervise the developing countries, the situation may improve. In this model, the industrialised country can choose to supervise the developing countries and the developing country that accept the financial help can choose to control pollution or not14. Keeping the assumptions of the model above, suppose that the cost of supervision is 1 unit and the punishment for the develop country if it does not control pollution is 2 units.

developed country/ developing country

control pollution 14

no control 14

Supervision 14

-10-1, 10-10

-10-5-1+2, 10-9-2

no supervision 14

-10, 10-10

-10-5, 10-9

If the developed country supervises, the strategy of the developing country is to control pollution (1>-1) and if the industrialised country does not supervise, the strategy of developing country is not to control pollution. For the developed country, if the developing country chooses to control pollution, the developed country will not supervise and if the developing country does not control pollution, the developed country will supervise. So there is no Nashi equilibrium and the situation improves 14.

Looking through the details of the agreement, we can see that the agreement provides a clear long term temperature limit for the world and a clear way of achieving the goal. The governments also agreed to provide money for developing countries to adapt and there is a clear review system to see the progress 4. The agreement was supported by nearly 200 countries in the world, indicating that the countries want to cooperate with each other to protect the environment and tackle the problem of climate change, which is positive for environmental protection.

The agreement requires all countries to take action although the action could be different according to different situations of different countries. Also, the agreement put forward a review system which helps countries to determine their action and whether the policies implemented are effective. Furthermore, the financial problem, which is an important point for developing countries as there is a conflict between reduction of carbon emissions and economic growth, is also reflected in the agreement since the industrialised countries should provide financial support for developing countries according to the agreement 11.

However, there still should be improvement on Paris Agreement. Firstly, the Paris Agreement is the arrangements aimed to reduce the greenhouse emissions after 2020. Though the action before 2020 was included in Paris Agreement, the content emphasised more about the moral way to reduce the carbon emissions instead of making it compulsory. Also, the details of new mechanisms should be set in detail. The new technology framework, transparency framework and the standard of INDC should be designed in detail and the way to set them appropriately relies on the experience of the implement of Paris Agreement. For example, developing countries hoping that there should be a schedule of the distribution of $10 billion provided by the industrialised countries 12. To ensure the implement of Paris Agreement, countries still have to work towards it. A few countries should also design relevant ways to reduce carbon emissions such as carbon taxes and introduction of tradeable permits 13.

Anyway, the Paris Climate Change Agreement represents the first time that every country in the world has signed up to try to solve the problem of global warming although it was not perfect as many people said 10. The Paris Agreement could be a game-changer and the governments will reduce the greenhouse gas emissions as the problem of climate change should be solved and the agreement provides an effective way. The implement of Paris Agreement still have to be improved according to the future experience, while as long as all the countries can cooperate with each other, the goal can be achieved and we will have a better world.

References

1Anonymous (2016) Paris Agreement - climate action - European commission. Available at: http://ec.europa.eu/clima/policies/international/negotiations/paris_en (Accessed: 12 February 2017).

22017 Baidu (2016) The Paris Agreement. Available at: http://baike.baidu.com/subview/102488/19525111.htm#7 (Accessed: 12 February 2017).

3the Economist (2015) ‘The Paris agreement on climate change: Green light’, the Economist.

4 BBC (2015) COP21 climate change summit reaches deal in Paris. Available at: http://www.bbc.com/news/science-environment-35084374 (Accessed: 12 February 2017).

5 Tragakes, E. (2011) Economics for the IB diploma [With CDROM]. 2nd edn. Cambridge: Cambridge University Press.

6Anonymous (2016) The EU emissions trading system (EU ETS) - climate action - European commission. Available at: http://ec.europa.eu/clima/policies/ets_en (Accessed: 12 February 2017).

7Anonymous (2016) Progress made in cutting emissions - climate action - European commission. Available at: https://ec.europa.eu/clima/policies/strategies/progress_en (Accessed: 12 February 2017).

82017 Baidu (2016) Coase Theorem. Available at: http://baike.baidu.com/item/%E7%A7%91%E6%96%AF%E5%AE%9A%E7%90%86#17 (Accessed: 12 February 2017).

9Clark, P. and Stothard, M. (2015) COP21: Paris agreement formally adopted. Available at: https://www.ft.com/content/8677562c-a0c0-11e5-8d70-42b68cfae6e4 (Accessed: 12 February 2017).

10Shukman, D. (2016) Will Paris deal tackle climate change? Available at: http://www.bbc.co.uk/news/science-environment-37874108 (Accessed: 12 February 2017).

11Xie Zhenhua: the Paris Agreement is a Milestone in the face of Climate Change (2015) Available at: http://money.163.com/15/1224/11/BBJL5FS000253B0H.html (Accessed: 12 February 2017).

12Lv Jiang. (2016). Paris Agreement:New arrangement of rules, uncertainty and Chinese Choice. International Review(3), 92-104.

13 Cao Mingde. (2016).The Paris Agreement, could the fulfilment of promise be ensured?. Environmental Economy(Z1), 40-41.

14Sun Weidong, William J.Lawrence, (2010). Research on Sustainable Development Issue in the Vision of Game Theory. [online] Available at: http://www.ixueshu.com/document/de8aea1ef117b911318947a18e7f9386.html

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