Global Policy Forum

By Joseph Stiglitz

This month's international meeting in Bali will set a framework that will attempt to prevent the impending disaster of global warming/climate change. There is now little doubt that greenhouse gases, such as carbon dioxide, are leading to significant changes in climate. Nor is there doubt that these changes will impose huge costs. The question is no longer whether we can afford to do something, but rather how to control emissions in an equitable and effective way.

The US and China are in a race to be the world's worst polluter; America has long won the contest, but in the next few years, China will claim that dubious honor. But Indonesia is number three, owing to its rapid deforestation.

One concrete action that should be taken at Bali is support for the initiative of the Rainforest Coalition, a group of developing countries that want help to maintain their forests. These countries are providing environmental services for which they have not been compensated. They need the resources, and the incentives, to maintain their forests. The global benefits of supporting them far outweigh the costs.

The timing of the conference is not propitious. George Bush, long a sceptic about global warming, and long committed to undermining multilateralism, remains America's president. His close connections with the oil industry make him loathe to force it to pay for its pollution.

Still, the Bali meeting's participants can agree on a few principles to guide future negotiations. These include, first, that solutions to global warming require the participation of all countries. Second, there can be no free riders, so trade sanctions - the only effective sanctions that the international community currently has - can and should be imposed on those not going along. Third, the problem of global warming is so vast that every instrument must be employed.

Better incentives must be part of the solution. But there is a raging controversy over whether the Kyoto protocol's cap-and-trade system or taxes work better. The problem with the Kyoto system is assigning caps that will be acceptable to developed and developing countries. Giving emission allowances is like giving away money - potentially hundreds of billions of dollars.

Kyoto's underlying principle - that countries that emitted more in 1990 are allowed to emit more in the future - is unacceptable to developing countries, as is granting greater emission rights to countries with a higher GDP. The only principle that has some ethical basis is equal emission rights per capita (with some adjustments - for instance, the US has already used up its share of the global atmosphere, so it should have fewer emission allowances). But adopting this principle would entail such huge payments from developed countries to developing countries, that, regrettably, the former are unlikely to accept it.

Economic efficiency requires that those who generate emissions pay the cost, and the simplest way of forcing them to do so is through a carbon tax. There could be an international agreement that every country would impose a carbon tax at an agreed rate (reflecting the global social cost). Indeed, it makes far more sense to tax bad things, like pollution, than to tax good things like work and savings. Such a tax would increase global efficiency.

Of course, polluting industries like the cap-and-trade system. While it provides them an incentive not to pollute, emission allowances offset much of what they would have to pay under a tax system. Some firms can even make money off the deal. Moreover, Europe has grown used to the concept of cap-and-trade, and many are loathe to try an alternative. Yet, no one has proposed an acceptable set of principles for assigning emission rights.

For some, this is not a concern. With developing countries standing to lose even more than developed countries if nothing is done about global warming, many believe they can be cajoled, threatened, or induced to be part of a global agreement. Developed countries need only figure out the minimum price they have to pay developing countries to go along.

But developing countries worry that a new global agreement on emissions, like so many other international agreements, will leave them in a disadvantageous position.

In the end, Realpolitik may rule. But the world today is different from the world of 25 years ago, or even 10 years ago. Flourishing democracies in many developing countries mean that their citizens demand fair treatment.

Principles do matter. The Bali meeting's participants should bear this in mind: global warming is too important to be held hostage to another attempt at squeezing the poor.