Tag Archives: climate policy

Empirical Calibration of Climate Policy using Corporate Solvency

By Ben Caldecott

The fundamental goal of climate policy is to incentivise emissions reductions and the transition to lower carbon processes and technologies. When firms face new costs related to reducing carbon emissions, they may suffer some loss of financial condition as they restructure their businesses.

However, if the firm becomes bankrupt as a result of such policies, not only will this restructuring not occur – possibly causing high-emitting industries to expand in less constrained jurisdictions (carbon leakage) – but social value can also be permanently destroyed in the form of: the dissolution of organisational capital; deadweight losses paid to liquidators; and the incurrence of costs on unemployed workers. Corporate failures, especially if they are unnecessary, add to the social cost of tackling climate change. Reductions in solvency that are less than bankruptcy can also impact the ability of firms to employ people and finance investment.

At present, policymakers do not have a means to accurately and impartially gauge the impact of climate policies on corporate solvency. If they did, policymakers could optimise climate policy so that it delivered the least loss of corporate solvency for any given level of emissions reduction.

In a new paper published in Climate Policy, we propose that existing measures of corporate solvency be used for this purpose. Such measures could act as an objective tool for policymakers. In particular, solvency metrics could be used to empirically calibrate the optimal stringency of climate policies. They could also be used as a way to determine the generosity of any industrial compensation to address losses to corporate solvency.

Financial statistics are currently used in this way to calibrate many other areas of government policy. For instance, policymakers monitor and regulate certain aspects of corporate solvency in the financial industry (such as capital reserve requirements) in order to reduce the risk of bankruptcy while maintaining profitability. Similarly, central banks also consult economic statistics when determining monetary policy.

An ideal solvency trajectory for firms affected by climate change policy would cause corporate solvency to initially decline – approaching but not exceeding ‘distressed’ levels – and then gradually improve to a new ‘steady state’ once the low-carbon transition had been achieved, at which point the carbon-limiting regulation would continue. If any compensation was provided to industry to help offset reductions in solvency, these would also then be gradually phased-out. This sequence is depicted by the U-shaped solvency trajectory below.

An additional advantage of using financial statistics to calibrate environmental policies generally is the fact that this process would be objective. At present, there is considerable potential for industrial outcry and political lobbying to influence policy resulting in negative social consequences. By contrast, a climate change policy partly based on corporate solvency could be adjusted relatively mechanically at each financial reporting period, and would be automatically sensitive to variations in the business cycle.

The question of where the optimal solvency threshold should lie is crucial for the practical application of climate policy calibration. For instance, depending on the regulator’s particular goals the relevant benchmark could be either; (i) an overall average solvency level, (ii) a minimum solvency level for the most financially distressed firm, (iii) or a maximum solvency loss for the most affected firm.

Moreover, the policy goal may not just be solvency for affected firms but also their competitiveness, in which case, depending on the regulations faced by international competitors, the optimal lower bound for solvency may need to be raised in from financial distress to some other higher level. The availability and timeliness of financial data will also influence the optimal threshold. Since the financial position of firms may deteriorate between financial reports, it may be prudent to adjust thresholds upwards to add a margin of safety against rapid solvency losses.

Of course, it would be equally essential to ensure that firms could not ‘game’ their financial statements in order to present an artificially dire picture to sympathetic regulators. It may also be the case that within a given emissions target, it may not be possible to maintain the solvency of all affected firms. In such cases the emissions target may need to take precedence over solvency concerns, but nevertheless the use of policy calibration via solvency could still be an efficient way to minimise the bankruptcy losses that may be necessary in order to achieve a desired emissions goal. Future research could refine this optimal policy threshold.

Our proposals highlight the potential of existing corporate solvency metrics to help policymakers objectively minimise negative social impacts for a given emission reduction target. Failure to take account of (or simply wish away) the social impacts associated with bankruptcy or reductions in corporate solvency resulting from climate policy would be serious mistake. It will increase opposition that could successfully undermine climate action. It would also allow fossil fuel interests to continue misleading policymakers and broader society about how climate action is negatively impacting their businesses. Transparency and objectivity enabled by financial data is already integrated into other areas of policymaking and regulation. It should also be embraced by policymakers concerned with climate change.

About the Author


Ben Caldecott is the founding Director of the Oxford Sustainable Finance Programme, at the University of Oxford Smith School of Enterprise and the Environment.



Assessing the US Retreat from the Paris Agreement: Backtracking to Kyoto?

By Jonathan Pickering, Jeffrey McGee, Tim Stephens and Sylvia Karlsson-Vinkhuyzen

Perhaps the most widely debated event in global climate policy since the Paris Agreement’s adoption in 2015 was the United States’ decision in June 2017 to withdraw from the treaty, pending possible re-engagement under different terms.


When the announcement was on the cards, some commentators argued that the US would be ‘better out than in’, not least because US absence from talks on implementing the Agreement would reduce its ability to scuttle progress from the inside. Others argued that the net effect of the decision was just as likely to undermine global cooperation as to stimulate action in other countries.

At the annual UN climate talks in November, most parties to the Agreement (now numbering more than 170 countries) put on a brave face, although developing countries added the US decision to their list of reasons for doubting the willingness of developed countries to adhere to the Agreement.

Meanwhile, the US sent mixed messages about its stance: career diplomats on the US negotiating team were keeping a low and relatively non-obstructive profile; a White House adviser sat on a panel extolling the virtues of coal; and US states, cities and businesses were showcasing their ongoing commitment to the Agreement.

In a situation this murky, how can we get a clearer picture of what the US decision means for global climate policy?

How far from Kyoto to Paris?

Until the dust settles, it remains to be seen what the longer-term impact of the US decision will be. In the meantime, one promising way of assessing the implications of the decision to withdraw is to compare it with previous experience, rather than with a counterfactual (and inevitably speculative) decision to stay in. In a new article in the peer-reviewed journal Climate Policy we do just that, by comparing and contrasting US non-participation in the Kyoto Protocol and the Paris Agreement.


The Clinton Administration signed the Protocol in 1998, but in 2001 the George W. Bush Administration announced the US did not intend to ratify it. The Kyoto Protocol did eventually enter into force in 2005, but US non-participation was widely seen as damaging for the Protocol’s effectiveness and legitimacy.

We focus on four key areas that may shape the effects of US treaty decisions for international climate policy

(i) Global Momentum on Climate Change Mitigation

We find that increasing global momentum on climate mitigation since 1997 means that US withdrawal from the Paris Agreement is potentially less damaging than its non-participation in the Kyoto Protocol. But despite the declining US share of global emissions, greater urgency for deep decarbonisation means that the non-participation of a major player such as the US remains problematic for achieving the Paris Agreement’s goals.

(ii) Opportunities to Form Rival Initiatives

US damage to the Kyoto Protocol framework resulted not only from its non-participation, but also from its creation of rival forums for international collaboration on climate policy, notably the Asia-Pacific Partnership on Clean Development and Climate (APP). While the APP ultimately withered on the vine, its presence was enough to cast a shadow over the UNFCCC’s legitimacy for a number of years.

Since our article went to press, news has emerged that the US plans to form a new international alliance to promote burning coal. It is likely that heavy coal users such as India, China, and Australia will be invited to join. With this move, the Trump administration is clearly taking a leaf from the G. W. Bush administration’s climate policy strategy. But in our view it is unlikely that this will prove as destabilising for global cooperation as the APP. There is now increasing global momentum to phase out coal, as reflected in the rival Powering Past Coal Alliance, which numbers around 26 countries (albeit none of the world’s biggest coal users so far).

In a related new article in Climate Policy, Detlef Sprinz and colleagues find that climate ‘clubs’ set up alongside the UNFCCC to accelerate mitigation could function even without the US being on board, although their coverage of global emissions would be modest and some potential members could be dissuaded by US non-participation. Ongoing dysfunction within the US Department of State may also limit the coal alliance’s prospects.

(iii) Timing and Circumstances of the US Decision to Exit

Because the US was not already a party to the Kyoto Protocol, President Bush’s decision not to ratify had immediate effect. But under the provisions of the Paris Agreement, the earliest that the US can formally withdraw is 4 November 2020, which happens to be the day after the next US Presidential election.

Given this delay, it is uncertain that withdrawal will ultimately go ahead. Despite the Trump administration’s continuing reluctance to take domestic action on climate change, the time lag for formal withdrawal from the Paris Agreement tends to diminish the short-term signalling effects of the US decision.

(iv) Influence of Treaty Design on Incentives to Participate and Comply

Differences in the design of the Kyoto Protocol and Paris Agreement suggest that US non-participation is more likely to prompt reluctant countries to stay within the Paris framework but reduce levels of ambition and compliance, rather than to exit the Agreement altogether.

A key reason for this is that the Paris Agreement’s ‘Nationally Determined Contribution’ approach gives countries considerable flexibility in how they frame their contributions to mitigation. This makes it less likely that they will find themselves bound to targets that lack domestic ownership and support. While parties are bound to prepare, communicate and maintain successive NDCs, they are not legally bound to achieve them.

In contrast, parties to the Kyoto Protocol were bound to meet their targets. Canada judged in 2011 that it was preferable to withdraw from the Protocol altogether, rather than risk non-compliance when it became clear that it would overshoot its Kyoto target.

Putting it All Together

Our comparison highlights important ways in which the negative effects of US withdrawal may be less severe under the Paris Agreement than under the Kyoto Protocol. This finding is complemented by another new article in Climate Policy by Johannes Urpelainen and Thijs Van der Graaf. Assessing the US decision from a broader international relations perspective, the authors argue that ‘the Paris Agreement has introduced a new logic of domestically driven climate policies’.

REUTERS/Ian Langsdon

Even so, the negative impacts of US withdrawal from the Agreement could still be significant, so it is hard to be confident that US withdrawal will be better for climate policy than if it had remained. Indeed, our analysis suggests that even now, some of the risks demonstrated by the US withdrawal from the Kyoto Protocol will remain major concerns for the future of the Paris Agreement. Crucially, US non-participation may demotivate other countries at a time when mutual assurance and greater ambition remain critical for a safe future climate system.

About the Authors


Jonathan Pickering is a Postdoctoral Fellow at the Centre for Deliberative Democracy and Global Governance, based at the University of Canberra.



Jeffrey McGee is a Senior Lecturer in the Faculty of Law and Institute for Marine and Antarctic Studies at the University of Tasmania.



Tim Stephens is Professor of International Law and ARC Future Fellow at the University of Sydney Law School.



Sylvia Karlsson-Vinkhuyzen is an Assistant Professor in the Public Administration Policy Group at Wageningen University.






What if Negative Emissions Fail at Scale?

By Alice Larkin (University of Manchester, Tyndall Centre for Climate Change Research)

It is recognised in the climate science community that literature and research informing the Intergovernmental Panel on Climate Change (IPCC) and relevant policymakers is heavily weighted towards Integrated Assessment Modelling (IAM) work. This prioritises emission-cutting solutions that can be more easily characterised and quantified over those that are challenging to evaluate precisely, such as how society may respond to a major policy shift.

Yet putting options into the ‘too difficult to quantify’ box, is a huge mistake, as my co-authors and I argue in a recent paper published in Climate Policy. Coupled with our desire to precisely quantify, and communicate, numbers, it is important to recognise that there appears to be an optimistic bias that assumes future technologies will solve present-day social and environmental problems.

Perhaps in most wealthy people’s minds, this would be the ideal – no need to disrupt ‘normalised’ lifestyles that include frequent flying, high levels of material consumption, an ability to have what we want, when we want. It is then easy to see why Negative Emissions Technologies (NETs) fit neatly into the climate mitigation discourse. They could lead to net negative emissions in future, avoiding a need to invest political capital in more unpalatable areas such as lifestyle change, and reducing consumption.

But what if NETs fail at scale – what then? Our article argues that they are being so heavily relied upon to inform policymakers, that we are losing sight of alternatives. Furthermore, delaying meaningful debate on the demand-side of the equation is at odds with what the climate science is telling us. There is a finite carbon budget for avoiding 2°C, so the sooner emissions are cut, new habits and behaviours established, and infrastructures to support low-carbon lifestyles put in place, the lower the risk of devastating climate change impacts.

It is not uncommon for humans to be optimistic about what technology can deliver and by when. Carbon capture and storage – even without biomass– is a good example. And with most modelling work being done by those of us in privileged positions in terms of wealth, it is unsurprising that lifestyle change is low down our priority list.

My problem with this optimistic techno-centric approach is that we (wealthy people in high emitting countries calling the shots on climate change) are not only choosing climate change futures on behalf of ourselves, but we are making choices on behalf of others. Whilst we may well be able to adapt to early climate impacts by making marginal adjustments to our everyday living, by installing more air conditioning, moving away from low-lying coastlines, paying insurance companies to repair our homes after floods etc., that isn’t a luxury that most people in the world will have.

Furthermore, with globalised social media, those who will be most impacted by climate change are able to observe us continue as is, while they struggle to adapt, fund and cope with changes in their climates. Global social media lifts the lid on inequalities we are not prepared to address, as this paper highlights.

If big emitting countries, and the big emitters within those countries, are prepared to put in place stringent polices aiming to significantly reduce absolute fossil fuel consumption, even for a few years while establishing low-carbon infrastructure, there would be a much better chance of achieving the 2°C goal. While many industrialising nations will be trying to transition their own energy systems away from fossil fuels, and may well put more industrialised countries to shame in terms of the pace of change, they will still need space for economic growth, and therefore a near-term rise in emissions, to improve standards of well-being.

A meaningful, deep and an equally large body of work focusing on how to build systemic change around energy demand and material consumption is urgently needed. As long as IAMs dominate climate literature, a more balanced perspective of opportunities on the demand side will be overlooked, and time is running out.

Air travel is an example that brings this clearly into view. As academics, we are not prepared to look at the evidence that air travel is one of the most difficult sectors to decarbonise, with constraints on demand needed here more than anywhere (see also my paper All Adrift: Aviation, shipping and climate change policy, also published in Climate Policy). Yet I doubt the number of flights attributable to climate change research activity is declining. The reality of taking a carbon budget perspective, is that one flight taken by me this year, removes a chunk of the budget available for someone in a developing country to heat or cool their home. We are all part of the system – my behaviour here changes the climate impacts others experience elsewhere.

I have a background in climate science, and climate modelling, and I’m certainly not against modelling contributions, but it is essential that we are not blinded by precise quantification to the extent that we overlook the full possibility space. This is particularly important when basing decisions on models that combine the laws of physics with the ‘understandings’ (and certainly not laws) of economics. Not everything can be quantified in a way that is appropriate and useful for policymakers. Other ways of looking at the world are essential and need to contribute to the debate. If we don’t start to make a concerted effort to do that soon, we may well have missed our chance to demonstrate real intelligence in tackling climate change.

About the Author


Alice Larkin is Head of the School of Mechanical, Aerospace and Civil Engineering and a Professor of Climate Science and Energy Policy in the Tyndall Centre for Climate Change Research, University of Manchester.


Fairness in the Eyes of Parties to the Paris Agreement. What Explains Divergences?

By Håkon Sælen (CICERO) and Vegard Tørstad (EUI, Florence) 

The question of how to differentiate efforts fairly has always been central and controversial in UN climate negotiations. The UN Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol, and the Paris Agreement include different formulations and compromises relating to the distribution of efforts between parties.

In a new study published in Climate Policy, we show how disagreement over fairness principles prevailed in the discussions leading up to the Paris Agreement, and suggest an explanation for why the parties have been unable to reach consensus on the question of fairness.

Broadly, three different understandings of how mitigation burdens should be distributed fairly have been frequently invoked in debates in the climate negotiations:

  1. The principle of Responsibility demands that climate change should be solved by those who have caused it. In other words: the polluters must pay.
  2. The Capability principle emphasises that all those who have the capacity to mitigate climate change have an imperative to do so.
  3. The Rights (needs) principle suggests that an actor is either entitled by right to emit a given amount of greenhouse gases, or that it needs to be exempted from undertaking provisions.

There has been considerable disagreement among parties in the negotiations on how to interpret and weight these principles in discussions of burden sharing. In our research, we were interested in two questions:

  1. Which parties support each of the three fairness principles?
  2. What explains variation in fairness conceptions across countries?

To answer the first question, we used content analysis to count the frequency with which the principles appear in parties’ negotiation documents over a three-year period in the negotiations leading up to Paris. We found that fairness conceptions among key actors in the negotiations are polarised. On one extreme of the fairness spectrum are Australia, Canada, the United States, and Russia, who all refer to Capability in more than 75% of their fairness references. On the other are Brazil, China, India, Saudi Arabia, and certain Latin American countries, who devote the majority of their references to Responsibility.

This polarization of fairness conceptions is bad news for the climate negotiations, because agreements that are based on a common notion of fairness are largely thought to be more effective and durable than those that are not. It is analytically interesting, therefore, to understand what explains these large differences in parties’ fairness conceptions.

The literature often suggests that fairness conceptions in negotiations are determined by parties’ self-interest. However, our regression analysis of more than 160 parties in the climate negotiations showed that several factors often regarded as important to parties’ interests – such as historical emissions and capacity to pay – are not the primary determinants of fairness conceptions in these negotiations. Instead, whether a country is listed in ‘Annex I’ of the UN Framework Convention on Climate Change–—that is, whether it is classified as a ‘developed’ country—is the single strongest predictor.

While the dominance of this variable may seem somewhat surprising, it is nevertheless compatible with an interest-based perspective. The binary Annex-division between ‘developed’ and ‘developing’ countries was the basis for differentiating obligations under the UNFCCC and the Kyoto Protocol. Only ‘developed’ were assigned individual obligations to reduce emissions under the Kyoto Protocol. Therefore, countries classified as ‘developing’–—such as China and India–—benefit from the Annex scheme’s continuation, while ‘developed’ countries–—such as Australia, Russia and the United States–—from its removal.

In this light, it is notable that the Paris Agreement omits any reference to Annex I of the UNFCCC, using instead less clearly defined terms such as ‘developed’ and ‘developing’ or ‘other’ countries. The lack of strict differentiation in the Paris Agreement suggests, firstly, that the Agreement is more favourable than previous agreements towards ‘developed’ countries, such as the United States, and less so towards rising economies such as China and India, which were previously classified as ‘developing’. It is therefore paradoxical that the United States is the only country that has decided to pull out, citing the unfairness of the Agreement as a reason.

Secondly, the lack of reference to the Annex is significant because it affects the fundamental tension over effort-sharing in the negotiations. By removing the Annexes, the dominant variable in explaining past divergences in fairness conceptions has been rendered less relevant. This development may improve parties’ chances for reaching compromise and agreement. However, ongoing negotiations on implementation of the Agreement have already encountered ‘roadblocks’ that partially derive from how the Agreement resolved the issue of differentiation between ‘developed’ and ‘developing’ countries. It therefore appears that negotiators will have to continue to deal with this issue, even though it may take on a new dynamic now that the Annex I division has less force. In doing so, our paper suggests that looking for pragmatic solutions tailored to each substantive agenda point will be more fruitful than discussions at the level of fairness principles aiming for one overarching solution.

The question of fairness in effort-sharing will continue to be relevant also in the future cycle established by the agreement. Parties are obliged to submit nationally determined contributions (NDCs) every five years and are requested to justify their own contribution as ‘fair and ambitious’ – a process sometimes termed ‘self-differentiation’. What is more, a ‘global stocktake’ will assess collective progress every five years, ‘in light of equity’, and shall inform future NDCs. To achieve meaningful self-differentiation, the stocktake (as well as informal assessments by civil society) might be linked to parties’ own fairness conceptions as presented in their negotiation documents, such as NDCs and submissions. For this purpose, stakeholders may find overviews of fairness conceptions – like presented in our new paper – of use.

About the Authors


Håkon Sælen is a Senior Researcher at the Center for International Climate Research (CICERO).



Vegard Tørstad is a PhD Researcher at the Department of Political and Social Sciences, European University Institute (EUI)