What Makes Environmental Treaties Work?

By Frances Cairncross

illustration ©Dennis Noble/SIS

If the Kyoto Protocol fails, will it be because a badly thought-out treaty? Scott Barrett, a professor at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University, believes the latter. He has spent seven years scrutinizing hundreds of environmental treaties, studying why some work and others don’t. In his recent book*, he pulls the pieces of the puzzle together, and in doing so, he creates an image that we have not seen before. It is not a wholly pleasing picture.

For Barrett, the moment of enlightenment came when he was working on his doctorate at the London School of Economics in 1987. He opened a newspaper one day and saw that 23 countries had agreed in Montreal the previous day to cut by half their production and consumption of ozone-depleting chemicals before the end of the century. That, he now recalls, was “something I thought would never happen.”

The reason for his astonishment was not that every country would benefit from protecting the ozone layer, but that every country would benefit—whether it took part in the treaty or not.

Most of his fellow economists, he remembers, assumed the agreement would fall apart. That is what most past international agreements had done, not just environmental ones such as the International Convention for the Regulation of Whaling, but others such as the Nuclear Test Ban Treaty. But here was an agreement that seemed to work. It entered into force on time, the signatories made the promised cuts in emissions, and further negotiations strengthened its provisions. When Richard Benedick, the chief American negotiator at Montreal, called it “unique in the annals of international diplomacy,” he was right.

Montreal’s success set Barrett to thinking. If it worked, why didn’t others? Were there examples that did? And if so, what could we learn from the past?

Increasingly, the environmental problems that worry us arise partly or wholly beyond our borders. Overfishing, acid rain, depletion of stratospheric ozone, and above all climate change are issues that can be solved only if countries cooperate. And there are treaties in plenty: Barrett counts 300 multilateral agreements, only four of them adopted before 1945. But simply drawing up a treaty means nothing. Barrett’s message is that the treaty has to be enforceable. It must be designed in ways that will make countries stick to its rules.

If countries ignore the obligations they have undertaken, then a treaty is worthless—or worse, since it takes diplomatic time and effort to negotiate. Yet it has become ever harder to create workable treaties, for reasons that need a bit of reflection to understand.

Free Riders

Why did Montreal work when so many other international agreements have failed? There’s a clue in a game that Barrett often gets his students to play. He starts by handing each player a red and a black card, one of which must be returned. Then he tells them that each player will get US$5 for keeping a red card plus US$1 for every red card handed in by any player. If there are 20 players, and every red card is handed in, every player gets US$20. If nobody hands in a red card, every player gets US$5. But if only six players hand in their red cards, those six each get US$6, whereas the players who keep their red cards each get US$11.

In other words, each individual player has an incentive to keep the red card, even though every player is better off if all are generous. Not surprisingly, whenever Barrett has played this game, no more than two-thirds of players (and often fewer) have sacrificed their red cards. So it is, he explains, with what economists call “public goods.” Every player benefits, and none can be excluded from benefiting. Other examples of public goods are clean air, a healthy ozone layer, and uncontaminated wilderness. Generally speaking, all countries benefit from these environmental goods, and none can be excluded. But each has a powerful incentive to let others make the sacrifices required to make the benefit available for all to enjoy.

When Barrett allows players to vote secretly on whether to allow a “government” to confiscate all the red cards and so achieve the most beneficial outcome for all, a majority opts for compulsion. In other words, left to themselves, individual players are selfish, but they yearn for some outside force to make everybody behave better and improve the outcome of the game for all the players.

Now think of the game and its lessons in terms of what happens in an individual country with environmental problems. Left alone, companies pollute the air, and individuals build houses on unspoiled beaches. Behavior that benefits an individual may harm society as a whole. Only the intervention of government can persuade companies to stop polluting or individuals to abide by zoning laws. No wonder national environmental policies are so much tougher and more effective at eliminating free riders than are international policies.

Indeed, Barrett re-cords a telling example of just this point. The 1990 amendments to America’s Clean Air Act to deal with acid rain had almost complete compliance. That is not surprising, given that violators faced enormous financial penalties and a possible prison sentence. In contrast, Barrett argues that international attempts to curb acid rain have persuaded countries to do only what they would probably have done in any case for the sake of their own national woodlands and environment.

Changing the Rules of the Game

The interesting thing about Montreal was that it did not fall apart. To the contrary, as Barrett points out, no other international agreement demands so much from so many parties. Yet it entered into force on time, and the cuts in emissions that its signatories promised have actually been implemented. Even more impressive, the agreement has been extended and toughened. Hardly any country with a working government has not now signed it. And the agreement covers more substances and demands, not the original 50 percent cuts but a total ban on emissions. As a result, the concentration of ozone-depleting compounds in the atmosphere peaked in 1994 and has since been slowly declining.

The fundamental reason for Montreal’s success, despite the fact that it demands so much from so many parties, is that it reversed the incentives to free ride—to keep the red card and play the black one. Only a handful of other treaties have altered the rules of the game and worked in such a self-enforcing way. The North Pacific Fur Seal Treaty of 1911 appears to be one of the most successful international environmental treaties ever negotiated (see p.17).

In the case of Montreal, the treaty offered big gains to the biggest player: the United States, the world’s largest producer (and consumer) of chlorofluorocarbons (CFCs). If America had cut its output of CFCs alone, it would have done well, says Barrett; indeed, the gains in terms of lives saved would have been worth more than a trillion dollars—65 times the costs. That, he points out, is “a figure that would tower over almost every other public investment made by the United States in 1988.”

But America had even more to gain from signing on to a treaty—three times as much, reckoned the Environmental Protection Agency at the time. These huge gains came largely from eradicating the big health risk that ozone depletion entails. The EPA calculated that implementing the Montreal Protocol would prevent 245 million cancers, including more than 5 million cancer deaths, by 2165. Value a life at US$3 million and the benefits quickly add up. In addition, the costs of implementing Montreal were relatively low. Substitutes for most uses of CFCs were in development. Technical advances meant that the substitutes turned out to be less costly than initially predicted.

But two other aspects of the Montreal Protocol helped change the rules of the game and make sure that the agreement stuck. The treaty included both sticks and carrots: punishments for countries that did not comply and rewards for poorer countries that did. Both involved controversial decisions. The aim was to make the treaty self-enforcing. This insight, argues Barrett, was crucial to Montreal’s success.

The threat of punishment came in the form of a ban on trade between signatories and nonsignatories in substances (such as CFCs) controlled by the treaty. It also bans imports of products (such as refrigerators and air-conditioning units) containing these substances. And it leaves open the possibility that signatories may ban the import of products made with these substances, such as computer circuits cleaned with CFCs.

The aim was sensible. Lots of countries that wanted to sign feared that others, who didn’t sign, would become free riders: they would continue to use CFCs in cooling systems and for cleaning computer chips, instead of switching to more expensive substitutes. If they did that, then they would undercut countries that had banned CFCs, but they would still benefit from the recovery of the ozone layer that the actions of others had brought about. That would be unfair, argued the negotiators. Besides, says Barrett, the big CFC manufacturers were worried about the resulting loss of revenue if CFCs were phased out. They wanted trade restrictions to create a larger market for substitutes and so provide a greater incentive to develop them.

But trade restrictions of this sort go down badly with the GATT (General Agreement on Tariffs and Trade) and its successor, the World Trade Organization. They have tended to stop countries from banning trade in goods made by particular processes. Again, this is a reasonable approach. To the eye of the customs official, a free-range egg is identical to one that a battery hen might lay, and tuna caught in dolphin-friendly ways looks and tastes no different from tuna caught in less responsible ways.

But these two reasonable arguments, each designed to deal with a different problem, clashed. In this case, the ban prevailed, and the environment won. So it should, says Barrett: “It would be wrong if trade liberalization always took priority over all other international affairs, just as it is wrong to insist that environmental protection is more deserving than other claims on the international system.”

So the threat of trade bans was the stick. The carrots were “side payments.” If, on balance, some countries gain from an international treaty and others don’t, it may make sense for the winners to bribe the losers to comply. Such payments do not always make a treaty stronger, warns Barrett: in particular, the winners gain less if they have to contribute to the cost. In its early days, Montreal assumed that all industrialized countries did equally well abiding by the treaty. But, as developing countries began to sign up and once the Berlin Wall came down, that was no longer the case. Luckily, the overall gains to some countries were so great that they could afford to set up a special fund from which to pay developing and ex-communist countries some of the costs of participating. Over US$1 billion has been contributed to this fund by rich countries—a small fraction of the benefit these countries would gain from the investment. By making everyone a winner, Montreal’s negotiators ensured that it was a success.

Learning the Wrong Lessons

Many people assumed that Montreal’s success in curbing CFCs could be replicated for other treaties, such as those on biodiversity or greenhouse gases. They were wrong. “They failed,” says Barrett, “to realize that international environmental problems do not come with one-size-fits-all solutions. They also lacked a sense of history.”

“I have been amazed to discover how little many international treaty negotiators know of the experiences of earlier negotiations,” he complains. “It is not just the lack of a theory that explains why negotiations so often fall short of potential. Ignorance of history is also to blame.”

A sense of history might have given negotiators some sense of models that have worked in the past. Over and over again, Barrett comes back to the need for treaties to be self-enforcing. In other words, it must be in the interest of every signatory to stick to the rules. If a treaty does not give countries an incentive to do that, no world government will do the job instead. States are sovereign and will act principally in what they perceive to be the self-interest of
their citizens.

How does his thinking apply to conserving biodiversity? Where hunting or overharvesting is the problem, he gives the example of the Fur Seal Treaty (see p. 17), which gave hunting countries an interest in conserving stocks of seals. But the biggest threat to biological diversity, he acknowledges, is habitat destruction, especially the clearance of tropical forests. The Biodiversity Convention tries to tackle this problem. The difficulty is that rich countries value the conservation of biodiversity more than poor ones. But this asymmetry of costs and benefits is the same sort of issue that arose with attempts to curb CFC emissions. Possible answer: payments to the poor by the rich. The Biodiversity Convention acknowledges this issue and suggests side payments as an answer. So far, however, little has been done.

So Why Not Kyoto?

In the case of climate change, there are even more lessons. The most important is the folly of ignoring the need to think right at the start about ways to make the Kyoto Protocol self-enforcing. Only three years after the Kyoto framework was first negotiated did diplomats turn their full attention to this central principle. Until then, their assumption appeared to be that enforcement was a consideration that could follow the framework. This, says Barrett bluntly, was a mistake.

It was particularly a mistake in the case of climate change, he points out, because the balance of benefits and costs is much less favorable than it was in the case of ozone depletion. In the case of climate change, some adaptation to global warming is likely to reduce the damage, as farmers develop new techniques and biotechnology engineers develop new varieties of crop. In addition, agriculture in some countries (such as Canada and Russia, both giant producers of fossil fuels) may benefit from climate change, even if farmers in other lands do worse. (No country benefits from ozone depletion.) Besides, climate change seems unlikely to be as lethal as ozone depletion, and that means its costs (as far as economists can reckon them) are likely to be much lower.

In monetary terms, Barrett argues, the benefits from avoiding climate change are likely to be lower than those from protecting the ozone layer. But the costs of adjustment appear to be much higher: the economies of most rich countries are built around the automobile and around electrical power generated with fossil fuels. No easy substitutes exist to replace fossil fuels in power stations and vehicles.

The result is depressing. The EPA estimated the payoff to the United States, even from unilateral measures to tackle ozone depletion, at 65 times the costs—a wonderful buy. The best study of climate change reckons that the benefits of measures to reduce global emissions by just over 5 percent by 2015 (not in absolute terms, but relative to what would otherwise occur) would be a mere three times the costs. To achieve the targets implied in the Kyoto Protocol, the United States (easily the world’s biggest source of climate-changing gases) would have to cut its output by 30-35 percent in 2008-12, from the business-as-usual level. No wonder President Bush rejected the treaty. Even if Al Gore had been president, the Senate would have been unlikely to ratify such a costly pledge.

But what is the alternative? Barrett describes spending a week alone in the silence of Cape Cod, trying to think up an answer, after the rest of the book was written. His solution is not—absolutely not—to mimic the Montreal Protocol or even the North Pacific Fur Seal Treaty. Remember his insistence that different global environmental problems call for different solutions, all based on the same set of principles: a good treaty will 1) require that more be done to protect the environment than states would otherwise be inclined to do, 2) create incentives for states to participate, and 3) create incentives for parties to comply.

In the case of climate change, his answer is a surprising one for an economist. It is that a successful climate treaty might start again, setting not targets and timetables but rather technological standards. In this it would emulate the International Convention for the Prevention of Pollution from Ships (MARPOL), which came into force in 1983. MARPOL tackled marine pollution that arose when oil tankers flushed out their tanks with ballast water, which they then discharged into the ocean. It insisted that tankers must have segregated tanks to keep ballast water separate from oil residues. Ships that did not comply might be detained in port.

Walking on the shores of Cape Cod, Barrett wondered whether the answer to a workable treaty on global warming might be to set standards on energy-using technologies. Then trade controls, which provided the stick in the Montreal Agreement, could be used to drive self-enforcement. Remember that the rules of world trade do not allow countries to ban imports made with the use of fossil fuels, but countries can restrict imports that do not incorporate environmental standards (which is why countries can restrict imports of cars not fitted with catalytic converters). Such standards would also be easy to administer; the more countries signed up, the bigger the market for benign technologies and the smaller the market for harmful ones. Presto, a mechanism that encourages countries to sign up and stick to the rules and also discourages free riders.

Such a solution raises plenty of questions, such as which standards should be mandated, and by whom? But Barrett says that his ideas have had positive feedback in Washington and elsewhere. It is, at least, an answer based on a clear understanding of the history of international agreements, their lessons and their economic drivers. Sometimes second-best answers are better than no answers at all.

About the Author

Frances Cairncross is on the staff of The Economist in London. From 1989 to 1994, she was the magazine’s environment editor and wrote twobooks on the relationship between the environment, economics, and business: Costingthe Earth published by Harvard Business School Press, and Green Inc.published by Island Press. In October 2004, she becomes head of Exeter College,Oxford.

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