Global climate policy reached a turning point at the 2009 Copenhagen conference.

Expectations of a binding global climate treaty were dashed; instead, all major countries made unilateral pledges to cut or restrain their greenhouse gas emissions. In reality, that was probably a more significant outcome than a binding, but weak, agreement — what counts is what countries do, not what they sign up to.

The next conference, Cancun 2010, was of value largely because it ratified the 2009 agreement, which, due to the blocking action of a small number of countries, had been noted but not formally agreed to at Copenhagen.

And so the annual climate conference circus rolls on, this year to Durban, South Africa. What should we expect of Durban?

Two points, often overlooked, need to be kept in mind. The first is that we now have an agreement on the way forward for the world to combat climate change. Countries representing 80 per cent of emissions have signed up to emissions control targets, and developed countries have promised billions in assistance to poorer countries for both mitigation and adaptation. There are still details to be worked out (and there always will be), but it is more than the current framework.

The second point is that we now have a way of regularly updating and developing the agreements already in place. For better or for worse — and one can argue the case both ways — the world has decided, at least for the foreseeable future, not to negotiate a new treaty for climate change. Instead, it depends on the less formal, but also less binding, approach of relying on decisions made at these annual meetings, as they are officially recorded and agreed to by all parties.

These two points imply that there will be no major breakthrough at Durban — because there is no major breakthrough to be had. Successful annual climate change conferences would be those which enable further detailing of agreements already in place, and, increasingly, countries to report on efforts aimed at meeting their self-imposed targets. It is a process of building confidence and trust.

The expectations of many in the media and some in politics are very different. There is no shortage of commentators who want to build up Durban, or rather set it up for failure, by saying that it will be a success only if there is a breakthrough.

Although we should not expect a breakthrough, and should not require one in order to judge Durban as a success, this does not mean Durban cannot fail.

The progress over the last few years has only been possible because disagreements on other issues have been set aside. In particular, there is a fault line in the negotiations between those who want to see a second commitment period for the Kyoto Protocol (a so-called Kyoto II), and those who do not. As the first commitment period (that is, the first period in which countries commit to reduce their emissions) expires in 2012, this issue is pressing.

Developing countries, including the powerful BASIC group (Brazil, South Africa, India and China) want to see a second commitment period. They view the Protocol as the cornerstone of international action on climate change, which should be sustained rather than allowed to fade away.

Those who disagree are largely those to whom the first commitment period applied, namely, the rich countries. The US has not ratified Kyoto. Canada, Japan and Russia did, but have already declared they will not take on a second commitment period. That leaves Europe, Australia and New Zealand. They have not ruled out a second commitment period, but their support is conditional on other major emitters also promising to take on legally binding commitments. There is no sign of this happening.

EU climate commissioner Connie Hedegaard stated recently: ‘Some seem to think that if only Europe took a second commitment period, that would make Durban a big success. The world should not fool itself. It’s only interesting to keep Kyoto alive if somebody is following. Europe represents only 11 per cent of global emissions. What will the other 89 per cent do?’

Europe will only sign onto Kyoto II if other countries follow suit, and agree to sign on to a similarly binding agreement in later years. But there is no sign that either the US or the BASIC countries are willing to make such a commitment. Moreover, Europe faces the possibility of severe recession, and there are even fears that Europe might break apart politically. It seems impossible that the EU would promise to sign on to Kyoto II at this point in time. And without the EU, Kyoto II simply will not happen.

China has signalled preparedness to consider a legal framework for developing-country targets at some point in the future. But this is conditional on Kyoto II and the US taking on legally binding targets. And whether China is prepared to go beyond domestic laws to a binding international treaty is still unknown.

All in all, there are so many ifs and buts that an agreement on Kyoto II is not a likely scenario, nor is it the outcome by which Durban should be judged. The real test for Durban is whether the world can continue to entrench and progress its newfound, bottom-up approach to climate change. This requires Durban to avoid an implosion over disagreements concerning Kyoto’s future and its alternatives. Avoiding this will in itself mean success.

Stephen Howes is Director at the Development Policy Centre, the Australian National University. Frank Jotzo is a Senior Lecturer and Director at the Centre for Climate Economics and Policy, the Australian National University.

Earlier versions of this article appeared here on the Development Policy Blog and here in The Australian

1. Measuring the success of Indonesia’s involvement in Durban
2. Durban climate talks bring mixed results for Indonesia
3. The politically possible: How to achieve success in Copenhagen

The founding institution within the World Bank Group is the International Bank for Reconstruction and Development (IBRD).

The only part of the institution that was established by the 1944 Bretton Woods conference, the IBRD is the World Bank’s bank. Importantly, the IBRD is not an aid agency. It borrows on global capital markets — cheaply because of its triple-A credit rating — and passes on the funds, at these cheap but commercial rates, to its member developing countries. The International Development Agency (IDA) is the World Bank’s aid arm: it was created later, in 1960, and gets its funds from rich country tax-payers rather than the capital market.

The IBRD started small, but expanded rapidly in the seventies under President McNamara. There was another surge in the eighties as the Bank started to provide budget support or adjustment lending. But total commitments reached US$15 billion in the mid-eighties, and then stopped growing. The average for 2006-08 was about $13.5 billion.

Stagnant lending in nominal terms meant declining lending in real terms. In the context of a globalising world — with massive increases in everything from remittances to international capital flows and from exports to the size of developing country economies — it meant a less relevant and influential World Bank.

This in turn led to the widespread conclusion that the future of the World Bank was not as a bank. The World Bank, it was argued, needed to expand its role as an aid agency, a global problem-solver, or a multilateral think-tank (a knowledge bank), or some combination of all three.

But not as a bank. The World Bank’s banking role was seen as a legacy from the past rather than a priority for the future. In 2007, leading US development commentators Nancy Birdsall and Arvind Subramanian argued that the World Bank should become ‘a more reluctant lender to governments’. Jessica Einhorn, writing in Foreign Policy in 2006, went further, proposing that the IBRD should be shut down.

In the last few years, however, the World Bank has become not more but less reluctant to lend. Total IBRD lending catapulted from US$13.5 billion in 2007-08 to US$33 billion in 2008-09 and US$44 billion in 2009-10, before falling to US$27 billion in 2010-11.

Of course the World Bank always lends more in a crisis, as do all of the international financial institutions. Lending from the IMF and the Asian Development Bank, for example, is also up sharply. But the rapid expansion this time round can hardly be satisfactorily explained solely in terms of the global financial crisis. A comparison with the Asian financial crisis of the late nineties is telling. Then IBRD lending also went up but only from that historic average of US$15 billion to about US$22 billion for a couple of years before falling back to average levels. More tellingly, this comparatively small and temporary increase was all in quick disbursing budget support. Project lending, the IBRD’s traditional fare, in fact continued to decline throughout the Asian financial crisis, falling in 1999 to about US$7 billion — the lowest since the mid-seventies.

This time around is very different. Not only is the total increase much bigger (a tripling rather than a 50 per cent increase), but project lending has also gone up dramatically, from US$9 billion in 2007-08 to US$24 billion in 2009-10 and US$17 billion in 2010-11. This suggests a deeper role for the IBRD than simply the provision of liquidity.

What is going on? One obvious explanation is that the IBRD can lend more. It has recently benefited from a general capital increase, the first in over 20 years. The more capital reserves the IBRD has from its members, the more it can borrow and lend.  The developed countries have also encouraged the IBRD to lend as part of a global stimulus strategy.

And developing countries, this time round, are in a better position to borrow. Finding it more difficult to raise private capital, they have turned to the IBRD both for short-term cash and longer-term projects.

Another explanation are the reforms put in place by the World Bank to make it a more attractive source of funds. In the last few years, it has embarked on an effort to reduce transaction costs, as well as margins to borrowers. The World Bank has also shifted power in its governance structure from developed to developing countries.

Perhaps the ideological pendulum has also swung. In the 1990s, public-sector lending for infrastructure was seen as passé, and something which should be the domain of the private sector. No longer.

Another deep change is the adoption by the G20 of the IMF and World Bank. The G20 does not have its own secretariat, and the IMF and the World Bank end up doing a lot of the background work for it. A significant part of the G20’s deliberations are also addressed to multilateral issues. For example, the G20 has driven the recent governance reforms at the World Bank, and also the capital increase.

It is quite remarkable that these two institutions of the old world order, the World Bank and the IMF, the so-called Bretton Woods twins, should now be adopted by the emblematic institution of the new world order, the G20. This must give them a new energy, and a new legitimacy.

It remains to be seen if the recent increase in lending will be sustained. There are also risks. The big scale-up of lending under McNamara came at the cost of quality. But there is also a strong argument that a diminishing role as a borrowing and lending institution was making the World Bank much less relevant to its clients.  Yes, the World Bank has a number of other important functions, from aid agency to think tank, but so do the UN agencies. It is arguably its ability to combine its intellectual firepower with a lending role that gives the World Bank its unique character. From this perspective, the recent revival of the IBRD, the World Bank’s bank, is to be welcomed.

Stephen Howes is Director at the Development Policy Centre, Crawford School of Economics and Government, the Australian National University.

This article was originally published here at the Development Policy Blog.

1. Zai jian – Goodbye – See you again: A look back on China’s progress upon leaving the World Bank
2. Private Chinese firms don’t get bank loans? Think again
3. The removal of Muhammad Yunus from Grameen Bank

The Australia-PNG Ministerial Forum convened today in Canberra after a break of over two years.

And today the prime ministers of the two countries will also meet for the first time (outside of sideline meetings) following this significant interlude.

It is an important set of meetings, and not only because these prime ministers and ministers meet not nearly often enough. PNG has recently had a change in government, and although it will not be long before the country goes to the poll next year, the new O’Neill government has a unique opportunity to get the country back on track after years of an increasingly corrupt and paralysed government under Michael Somare. One of the mistakes the previous PNG government made was not making enough of its relationship with Australia. It is encouraging to see PNG’s new prime minister come to press his country’s case.

What should be on the agenda at the meetings? Here are four suggestions: one big and three small.

The big one is that both governments should declare time on the 1999 PNG-Australia Development Cooperation Treaty. As leaders on both sides of the relationship have recently remarked, the PNG–Australia relationship has become much broader than simply an aid one, so it makes no sense for it to be underpinned only by an aid treaty. As the 2010 PNG Aid Review noted, aid from Australia to PNG and trade between the two countries were about equal at the time of independence; today, trade outnumbers aid ten to one.

The foreign ministers of the two countries already agreed back in July 2010 to ‘explore an umbrella economic cooperation agreement encompassing development assistance, trade and economic cooperation’. Under that agreement, proposals should have been ready for consideration more than a year ago, but progress seems to have stalled. Now is the time to take the next step. The aim should not be a free trade agreement — that could come later. For now, the model should be something like the 1976 Basic Treaty of Friendship and Cooperation between Australia and Japan. The aim should be a broad statement of principles, citing the two countries as partners in growth and development, aspiring to closer integration. An agreement along these lines would be an important signal that the relationship has at last matured beyond that of donor and recipient. But the politics of symbolism can only take you so far. Some practical measures are also needed to move the relationship forward and to tackle real problems on both sides of the relationship.

The first is an agreement on the aid program, which should not be the whole of the relationship — but nor should it be allowed to drift. The PNG Aid Review has been broadly welcomed, and last year the foreign ministers agreed to respond to its recommendations. It should not be hard at this meeting to agree on a set of principles that would guide the aid program in the more focused and practical direction the Aid Review recommended.

The second is the release of the Garnaut-Namilau Report on Higher Education. An initiative of Rudd when he was prime minister, and jointly launched with Somare, this report was completed in 2009 but has not been released. No one can deny that revitalising PNG’s higher education system is critical to the country’s future — but it won’t be an easy task to implement. Commissioning that report was a good first step, but it has since been undermined by an inexplicable delay in the document’s release.

The third quick win would be Australia’s undertaking to review and relax the visa regulations which currently make it so difficult for anyone from PNG to visit Australia, including PNG citizens visiting their Australian relatives. This is making Australia highly unpopular — and for no good reason. These onerous visa restrictions undermine the very goal the Australian government claims to support — closer ties with PNG and the Pacific — and should be overhauled.

Currently, Australia is only just scratching the surface of the potential of its special relationship with PNG, which is closer to Australia than New Zealand, has a bigger population and is growing faster. Australia–New Zealand is the right kind of vision for Australia–PNG. Australia might not get there straight away, but it could eventually if it starts moving in that direction now, through steps both big and small.

Professor Stephen Howes is Director of the Development Policy Centre, Crawford School of Economics and Government, the Australian National University, and was an author of the 2010 review of Australia’s aid to PNG, commissioned by both governments.

A version of this article was originally posted here on the Development Policy Blog.

1. Chinese investment in Iran: One step forward and two steps backward
2. Ross Garnaut at the Australia-China Climate Change Forum
3. Obama’s first steps in Asia

Ever since the 1980s, Australian academics and official reports have called for Pacific Islanders to be given better access to the Australian labour market. To its credit, the Rudd Government introduced the Seasonal Worker Pilot Scheme in August 2008. The scheme allows Pacific Islanders to engage in farm work in Australia for up to seven months a year. Unfortunately, the scheme has never taken off, with less than 100 Islanders participating in the two years since its launch. Theories for its failure abound ranging from excessive red-tape to the prolonged drought.

In stark contrast to Australia, New Zealand has always offered preferential migration treatment to its Pacific neighbours. It has granted citizenship to all residents of the Cook Islands, Niue and Tokelau. The Samoan Quota Scheme set up in 1970 allows up to 1,100 Samoan nationals to become permanent residents of New Zealand every year. And the Pacific Access Category introduced in 2002 allows another up to 750 Pacific Islanders to become permanent residents.

New Zealand also got ahead of Australia in terms of temporary migration, introducing a seasonal workers scheme (the Recognized Seasonal Employer or RSE program) one year before Australia, in 2007. Again in contrast to Australia, this scheme has quickly taken off. In 2009, some 8,000 Pacific Islanders worked in New Zealand under it.

Now World Bank economist David McKenzie and Professor John Gibson of the Waikato Management School in New Zealand have released their long-awaited evaluation of the New Zealand RSE scheme. McKenzie and Gibson note that the scheme has already been evaluated from a domestic perspective, with that study showing little displacement of New Zealand workers, very low overstay rates (1 per cent or less), and only a few isolated cases where concerns about worker exploitation have arisen.

The remaining question for the NZ scheme then is whether it has had a positive development impact in the Pacific. Based on household surveys underway in Tonga and Vanuatu since the scheme’s commencement, McKenzie and Gibson answer this question overwhelmingly in the affirmative. They find that the scheme has led to an average increase of over 30 per cent in per capita household income among participating households in the two countries. Participating households also considered themselves better off. The scheme has strong support from community leaders, and has increased child schooling in Tonga though not Vanuatu.

Overall, the authors conclude that the New Zealand seasonal worker scheme is ‘among the most effective development policies evaluated to date’ and ‘should serve as a model for other countries to follow.’

All of which is good news for the Pacific, and a pat on the back for New Zealand. But it also raises the stakes for Australia. Though more analysis is needed, clearly Australia’s seasonal worker scheme isn’t working, and it needs to be fixed. But we should also look at New Zealand’s permanent migration schemes, which are far more flexible and require less bureaucratic intervention, and which also appear to work well, as a 2007 study showed. Fixing our seasonal workers scheme and opening a Pacific window into our permanent migration program should both be on the development agenda in Australia.

Stephen Howes is Professor of Economics at the Crawford School and the Director of the Development Policy Centre.

This article was first published here on the Development Policy blog.

1. Vanuatu’s recent economic success: lessons for the Pacific
2. Opening Japan to migration?
3. Making the stimulus package work in China

The contrast between the hype in the lead up to last year’s Copenhagen climate change conference and the subdued silence which precedes this year’s conference in Cancun in December could not be starker.  If Copenhagen collapsed under the weight of inflated expectations, Cancun cannot but surprise on the upside, given that expectations of what it might achieve are already so low.

This is just one illustration of the huge shifts which have taken place in the world of climate change mitigation over the last twelve months. The changes are not unidirectional. Some have been for the better, some for the worse, and some are ambiguous. The most important examples in each of the three categories are explained below.

The most promising, as well as surprising, development over the last twelve months is the adoption by major developing countries of self-imposed constraints on the volume of their emissions up to 2020. It wasn’t long ago that leading analysts, such as Jeffrey Frankel and Nick Stern, were of a view that all that could be expected from developing economies was that they might reduce their emissions if they were paid to do so. And, indeed, this is supported by a literal interpretation of the UNFCCC , Article 4.3 of which famously guarantees developing countries that the ‘incremental costs’ of their mitigation efforts will be covered by others. Against this background, to have countries like China, Brazil and Indonesia commit themselves to reducing their emissions – not in absolute terms, but significantly below what they would have otherwise been – is a huge step forward. China’s commitment is completely unconditional: unrelated either to financing or to what other countries do. Indonesia has linked the extent of its abatement to the provision of financial support, but even it has committed to a significant minimum level of abatement, come what may.

At the other end of the spectrum, the most worrying climate change development this year has been the failure of the US Congress to commit the US either to an emissions target or to a carbon price. The famous cry at the 2007 Bali climate change conference was that if the US wasn’t going to lead, it should at least get out of the way. This might work for international negotiations, but it won’t for domestic action, as inaction by the US inevitably has a huge discouragement effect on other countries. There is no doubt that if the US had put a carbon price in place, then Canada would have one, and Australia. And then Japan and then Korea. It would be a circuit breaker. But since it didn’t happen this year, it isn’t going to happen in the near future, with the Democrats set to take a big hit at the mid-term elections, and the Republicans dominated by climate change sceptics. The US isn’t inactive on climate change. Everyone seems to love renewable energy. And the President has some powers under the Environmental Protection Act to regulate carbon dioxide emissions. But the fact that the US has now gone completely through the electoral cycle – from Clinton to Bush and back to Obama – and been unable to seriously commit itself to climate change mitigation must give us deep pause for thought.

Somewhere in the middle, but hard to know exactly where, the most confusing development over the last year has been the evolving shape of the international climate change regime itself.  Copenhagen found a way forward on many issues, but came unstuck on the issue of how to deal with the legacy of the failures of the past. Essentially, China wants a second commitment period for the Kyoto Protocol. The US will have nothing to do with this. Other developed countries are less implacably opposed, if Kyoto is part of a broader deal, but given how hard it was to get Kyoto I ratified without the US, a Kyoto II agreement and ratification seems to be mission impossible. Recall that the US at least signed on to Kyoto I, which it certainly wouldn’t for Kyoto II. Lack of common ground on this issue led to the most glaring omission in the Copenhagen Accord , namely any mention of a timetable, or even an intention, to translate the Accord into some sort of more elaborated and formal agreement. That this is still a problem to which we have no solution is confirmed by the recent clash between US and Chinese negotiators. Perhaps movement by the US Congress would provide China with the grounds to adopt a more forgiving attitude and drop its demand for a second commitment period for Kyoto, but, as we have just seen, that sort of circuit-breaker now seems highly unlikely.

Since there is this permanent block in the way of an international treaty, a move to a more ‘bottom-up’ approach to climate change is inevitable. The United States has already signalled that it no longer views a ‘legally-binding’ treaty as a priority. The response of analysts to this shift is not surprisingly divided. Some decry the inadequacy and ineffiency of the bottom-up world. Others embrace it. Others are resigned to it as the only alternative left on the table. I put myself in this third camp. To me it seems clear that, for better or worse, the world has moved decisively in the direction of a bottom-up approach to climate change mitigation.

Given these various changes – good, bad, and unclear – it is next to impossible to make a summary judgment as to whether overall we are moving forward, standing still, or drifting backwards on the international climate change mitigation effort. The slow and uncertain pace of progress is immensely frustrating: we are surely not doing enough, but only history will be able to judge how far from adequate our effort is.

More important than presiding in judgment over the net direction of international climate change efforts is to understand the implications of what has happened at the international level for national strategy. There are (at least) three.

On the domestic front, in a more ‘bottom-up’ world, countries will have both more freedom and more responsibility to define the mitigation problem as suits them. There will be both fewer rules and fewer international structures to support and direct the mitigation effort. This will, for example, give us in Australia greater room to explore biosequestration options for mitigation. But it will also require us to define how, if at all, we will finance mitigation overseas through both the carbon market and government. We can no longer sit back and expect the UN system to develop a market or offset a system for us.

On the international front, a strategy is needed to deal with America’s intransigence on climate change. It isn’t easy to think of one. No country will probably have more impact on action in America, than China, but China will only act decisively if it is not acting alone. Perhaps a coalition of the willing, comprising the EU, Japan, and the major developing countries, not only the BASIC countries (Brazil, South Africa, India and China), but also Indonesia, Mexico, and newly-developed economies such as Korea and Taiwan could find common cause, and push ahead together, not to sign a new agreement, but, in a bottom-up sort of way, to introduce carbon pricing and other policies which would put strong downward pressure on emissions. This in turn would put pressure on America, at least to follow, since it will not lead. Whether such a strategy could work, and whether Australia would join such a coalition is, at this stage, far from clear.

Finally, in a bottom-up world it will be more difficult for each country to judge what others are doing, since countries will tend to pursue different policies and measure impacts with different metrics. In such an environment, not only will governments need to engage in peer review, but academics and analysts will have a special responsibility to deepen dialogue and understanding on this complex set of issues across countries.

This last point makes the upcoming Asia Climate Change Policy Forum timely.  The Forum, at the Australian National University on Wednesday 27 October,  is sponsored by the East  Asia and South Asia Bureaus of Economic Research. It will bring together leading advisers and academics from Australia, China, India, Indonesia, Japan and Korea, as well as the United States and Europe to discuss and analyze recent international developments and national initiatives in relation to climate change mitigation. Forum presentations will be posted on East Asia Forum in the coming weeks.

Professor Stephen Howes is Director of the Development Policy Centre at the Crawford School of the ANU, and a convenor of the Asia Climate Change Forum.

1. US: Waxman-Markey Bill changes the landscape of international climate change negotiations
2. Climate change: Where are we at globally now?
3. An important international climate change funding proposal from China

Recent media reporting suggests good progress by China in relation to its target of reducing the energy intensity of its economy (energy consumed over output produced) by 20 per cent by 2010 relative to 2005.

With China’s announcement in the run-up to Copenhagen of a 2020 target to reduce emissions intensity (carbon dioxide emissions over output produced) by 40-45 per cent over 2005 levels, this 2010 energy intensity target has assumed greater prominence.

A recent China Daily article reported Premier Wen Jiabao as saying that China’s energy intensity had fallen by 14.38 per cent between 2005 and 2009, which would put the country on track to come close to if not hit its 20 per cent target with a year still to go.

The published data, however, seem to tell a different story. The National Statistical Bureau’s recently released 2009 Statistical Communique puts energy consumption for 2009 at 3.10 billion tons of standard coal equivalent up from 2.25 billion in 2005 (from China’s 2008 Statistical Yearbook). That’s growth of 37.97 per cent. The same 2009 Communique gives GDP growth for 2009 and 2008 at 9.6 per cent and 8.7 per cent respectively, and the previous year’s 2008 Communique gives 2007 and 2006 GDP growth at 13 per cent and 11.6 per cent. These annual figures give cumulative GDP growth  of 50.24 per cent from 2005 to 2009.

So GDP grew 12.27 percentage points faster than energy between 2005 and 2009. The reduction in energy intensity is equal to this difference divided by 1 plus GDP growth, which, after rounding, is 8.2 per cent. This implies that China is less than half way towards its 2010 target with only one year out of five to go.

2009 was always going to be a difficult year because of the fiscal stimulus and all-out effort for growth. The 2009 Statistical Communique reports that energy intensity fell in 2009 by only 2.2 per cent. But the record for 2005-2008 doesn’t look too good either, with a cumulative reduction in energy intensity over these three years of only 6 per cent, much lower than earlier estimates.

Note that while I’m using the latest numbers in the public domain, they have been released at various times. Pehaps there have been some subsequent revisions of the earlier numbers. Still, its hard to imagine that any revisions would be of a magnitude to close this puzzling gap.

To conclude, while there is some uncertainty, the published data suggest that China is well off-track from meeting its 2010 target. Of course, China deserves credit for at least having a serious emissions reduction target, unlike either the United States or Australia, for example. But the world will be closely watching China’s performance against its announced targets. At a minimum, the derivation of the 14.38 per cent claim needs to be explained, and the apparent discrepancy with the published data resolved.

Stephen Howes is Professor of Economics in the Crawford School of Economics and Government at Australian National University and worked on the international dimensions of the Garnaut Climate Change Review.

1. An assessment of China’s energy conservation and carbon intensity
2. How might China achieve its 2020 emissions target?
3. ‘Green’ China needs to rethink its energy and carbon policies

In the second assessment report of the International Panel on Climate Change (IPCC), back in 1995, the scientists of the world concluded only that the ‘balance of evidence’ supported a link between human action and global warming. This was the slender basis on which the Kyoto Protocol was negotiated.

In the IPCC’s third assessment report of 2001, the scientists were more confident saying that it was ‘likely’ that there was a link: they even attached a probability assessment to this statement – 60 to 90 per cent. The fourth IPCC assessment report of 2007 increased this probability to ‘very likely’: greater than 90 per cent.

Projections of temperature increase for the century are also being revised upward. Early emission forecasts ignored Asia’s rapid coal-based economic growth. The Garnaut Climate Change Review took better account of this, predicting, in the absence of climate change mitigation, a likely temperature increase for the century of 5.1 degrees Celsius, above the IPCC fourth assessment report likely range of 2.5 to 4.3 degrees.

Temperature increases are also now seen as more damaging. Climate change is increasingly seen as a direct economic and strategic threat to the continued prosperity of rich countries, and to the development prospects of poorer ones.

With the warning bells ringing more loudly, more countries are taking action to reduce emissions. Countries of the Asia-Pacific region, once laggards behind Europe, are now catching up. Australia has adopted a renewable energy target of 20 per cent by 2020, and is on the verge of introducing an emissions trading scheme. The United States is debating the introduction of an emissions trading scheme: some of its states have already adopted one. China has renewable energy and energy efficiency targets and policies, and has announced it will adopt a carbon intensity reduction target. India has just announced a range of policy measures. Indonesia has stated that it will reduce emissions by 26-41 per cent below business as usual, depending on the degree of international support it gets. Korea has set out a range of emission targets for 2020. These countries are still not doing enough, but they are certainly doing more.

Hopes of agreement on a comprehensive Copenhagen protocol to replace the Kyoto protocol are now greatly diminished. The G20 September Pittsburgh Summit failed to find agreement on climate change financing, despite trying. Media reports from the October Bangkok negotiations indicate that negotiators from China and South Africa walked out of a negotiating session to signal their disagreement with the directions of talks.

Why is it that we were able to conclude agreements in the 1990s – the United Nations Framework Convention on Climate Change (UNFCCC) in 1992 and the Kyoto Protocol in 1997 which implements the Framework Convention – when the science was more tentative, and when there was little if any domestic action, but that now, when there is so much more global concern and action, we find an international agreement so elusive?

It is so difficult to reach an agreement this time around essentially because the first time we tried, we failed. The extent and speed of international cooperation on climate change in the 1990s looks remarkable from today’s vantage point. Some 40 developed countries came together and agreed to bind themselves to emission targets under the Kyoto Protocol in 1997.  Unfortunately, that consensus was smashed in the same year that the Protocol was finalized when the US Senate signaled its preemptive rejection of the Protocol. Australia followed America’s lead to become the second country to sign the Protocol but then refuse to ratify it. Other rich countries ratified the Protocol, but, discouraged by the US pull-out, overall have made a less than convincing effort to achieve their targets. Outside Europe, emissions have risen not fallen.

Kyoto was the world’s Plan A for dealing with climate change. It didn’t work. The world is now engaged in the search for a Plan B. It is never easy to build on failure.

Plan B asks more of poor countries. The division of the world into rich and poor has been fundamental to the international climate change architecture. Under Plan B, poor countries are not asked to submit to binding, economy-wide targets since this, it is judged, would be treating them in the same way as rich countries which in turn would violate the core UNFCCC principle of ‘common but differentiated’ responsibilities. However, the better-off and larger among the poor countries such as China and Brazil are being asked to commit to and implement policies and measures to reduce emissions below what they would have otherwise been. This is the hybrid compromise that has been on the table since the Bali Conference of 2007.

Asking poor countries to do more makes sense, but it also smacks of bad faith. The rich countries agreed to go first, then didn’t, and are now asking more from the poor countries. Not surprisingly therefore, the negotiations over how the burden of mitigation will be shared are difficult and acrimonious.

How will this impasse be broken? The shape of a likely deal is actually pretty clear to see. China is key to any solution. China has recently announced that it will adopt a carbon intensity reduction target. The next steps for China are to put a number to this target and to indicate its willingness to include it as part of an international agreement. The target itself would be non-binding. China would be binding itself to a set of policies which, it would be expected, lead to the target outcome. The same goes for recent policy announcements by India and Indonesia.  If countries such as these were prepared to agree to an international framework which gave their domestic policies international visibility, and if developed countries agreed to be more generous in terms of financing and more ambitious in terms of targets, we could have the makings of a global deal.

What are the implications for individual countries? Many in Australia, including in the opposition for example, argue that we should ‘wait for Copenhagen’ before legislating an emissions trading scheme.

Such an approach, though apparently grounded in hard-nosed realism, is in fact naïve. To wait for Copenhagen is in fact to put domestic climate change policy on hold indefinitely, until an agreement is reached.

This would be a mistake, for two reasons.

First, a treaty on climate change is not a magic bullet. We are yet to discover a treaty structure which would eliminate the prisoner’s dilemma problem. Even if an agreement is reached, it would not remove the incentives for countries to free-ride. Discouraging free-riding by countries will only happen if there is domestic as well as international pressure on governments to act. And domestic pressure will manifest itself in unilateral action.

Second, although we should not wait for an international agreement, we do still need one. There will be more mitigation with an international agreement than without. The stronger the prior domestic action, the more likely and the more ambitious any subsequent international agreement will be.

Rich countries in particular need to improve their negotiating position by demonstrating they in fact take climate change seriously. They need collectively to address what Jairam Ramesh, India’s minister for the environment and a driver behind India’s new and more proactive position, has called a crisis of credibility. Establishing credibility is not only a matter of putting forward targets for the post-Kyoto period but also signaling, through the creation of domestic mechanisms, that this time we are serious about meeting them.

Developed countries as a group put an upper bound on global ambition, and Australia is an influential developed country. Since the EU negotiates as one, we are the fifth largest rich-economy emitter (after the US, EU, Japan and Canada).

The fundamental decision facing all countries in relation to climate change is whether they will be part of a coalition of the willing on the issue. Being part of such a coalition implies both acting unilaterally and supporting an international agreement. Undertaking to do more if there is an agreement is a sensible strategy (the EU and Australia have both tabled unconditional and conditional emission reduction targets), but making an international agreement a prerequisite for domestic action is not.

Stephen Howes is Professor of Economics in the Crawford School of Economics and Government at Australian National University and worked on the international dimensions of the Garnaut Climate Change Review.

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The three main propositions around which the current global climate change negotiations are structured were agreed at the Bali Conference in December 2007. The first is that developed countries should commit to binding emission reduction targets. The second is that developing countries should adopt policies and measures to reduce emissions below what they would otherwise have been. The third is that developed countries should support developing ones, principally by the supply of finance, to reduce emissions and adapt to climate change.

This is a different framework to that of the Kyoto Protocol, which placed obligations only on developed countries. Under the Bali Roadmap, everyone acts, but different metrics are used to measure obligations in developed and developing countries – targets for developed countries, policies for developing countries.

While there is agreement on the three propositions, it extends only to the acceptance that they should constitute the negotiating framework. On the first point, most developed countries have now put forward emissions reduction targets for 2020. My assessment is that the offers made add up to a 10-20 per cent reduction for developed countries over 1990 levels. Developing countries think this isn’t nearly enough. They argue for reductions in the range of 25-40 per cent.

On financing, the third point, there’s also a gulf. Developing countries are asking for hundreds of billions of dollars, and want it delivered through government channels. Developed countries, on the other hand, stress the role of the markets in delivering carbon finance, are reluctant to commit public funds, and overall tend to downplay the need for international funding. In this regard though, a June 2009 speech by the UK Prime Minister, Gordon Brown, is encouraging, and does suggest that there is a belated recognition by the developed countries that they will have to put significant volumes of public funding on the table if they want to see a deal.

I’ve put the second plank, developing country policies, last, because here there is less of a gulf than simply confusion. What sort of policies developing countries might commit to, how their policy commitments would be registered internationally, what these policies might add up to, remains even at this stage, just a few months out from Copenhagen, unclear.

Summing up, the two main challenges in relation to the current negotiations are that developed countries need to commit to do more (in terms of both targets and financing), and that developing countries need to indicate more clearly what they are prepared to do. These two challenges are inter-related: progress on one will require progress on the other.

This is where China could come in. China of course has enormous influence. It is a superpower and a leader among developing countries. It is the world’s largest emitter. It has been responsible for most of the recent global growth in emissions. It already has a domestic policies in place, for reasons that go well beyond climate change, to improve energy efficiency and diversify into renewables and nuclear. And, importantly, China is yet to play its hand in the current negotiations.

China already has a target to reduce its energy intensity (the ratio of energy used to output or GDP) by 20 per cent between 2005 and 2010, and a renewable energy target of 15 per cent by 2020. China is now thinking about targets for the Twelfth Five Year Plan from 2011 to 2015. It appears likely that China will extend its current policy targets. Perhaps China might announce a target of halving energy intensity by 2020. Perhaps China might convert this into an emissions intensity target, a ratio of greenhouse gas or simply carbon dioxide emissions to GDP.

We also already know, from the anticipatory response from the US, that adoption of such a target out to 2015 or 2020 would be seen as ambitious. My own analysis confirms this. It will not be easy for China to halve its emissions intensity by 2020. China hasn’t had much success in achieving its current target of a 20 per cent reduction in energy intensity by 2010. It’s only in 2008 that China’s energy intensity really started to fall, and that was because of the global downturn, which hit energy-intensive industries particularly hard. By my estimation, by the end of 2008, China had only achieved an 8 per cent reduction in energy intensity from 2005, well short of the 20 per cent target, and with only two years to go.

If China announces targets for energy or emissions intensity, but resists giving them legal international standing, it will not take us very far. It will make ratification by the US Senate (where a two-thirds majority is required) difficult if not impossible, for the same reason that the Kyoto Protocol was never ratified by the US, namely that it places obligations on the US but not on China. Unwillingness by China to give its policies international standing would also be interpreted as a signal that China is not taking climate change mitigation sufficiently seriously. The US, indeed the world, needs to be able to say that China is also bound in some way to reduce emissions, even if it is not through the ‘targets and timetables’ approach being applied to developed countries.

The real question then is whether China will be prepared to table its policies internationally, as part of a climate change treaty. Would China sign up, say, to an intensity pledge, essentially a commitment to introduce policies with the aim of halving emissions intensity by 2020?

Such a target would be non-binding in the sense that there would be no penalty for not meeting it. So it wouldn’t be very costly for China to sign up, but it wouldn’t be costless either. It would open China up to some sort of international monitoring, and it would be seen as a step along the road to China taking on binding targets at a later stage. However, these costs should be manageable. If the US passes its cap-and-trade legislation, pressure on China will increase. More than anything though, what China is willing to offer will come down to whether it sees an effective global agreement on climate change to be in its interests. There are increasing signs that it does.

The world climate change mitigation regime has languished over the last decade because of a lack of leadership from the United States. Getting the US back in the negotiating room was the first pre-condition for achieving a post-Kyoto agreement. But negotiations are still stuck. Developed countries need to do more, but need to have a reason to do more. China, by virtue of its superpower status and its evolving domestic policy stance, seems to be in a better position than any other developing country to send a positive signal to the developed countries, and so push the negotiations forward beyond the current impasse.

This article also appeared in the APEC Economies Newsletter.

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The Pacific Islands Forum meets in Cairns this week. If the leaders of the Pacific’s island economies want to know what needs to be done to lift the traditionally low levels of economic growth seen in the region, they would do well to ponder the recent growth record of one the Forum’s own members, Vanuatu.

Prior to 2004, Vanuatu, like many other Pacific island countries, had a long-term rate of economic growth little different from its population growth, about 2.5%. But economic growth in Vanuatu took off in 2004, and growth for the 2004-2008 period has averaged 6.6%.

Due to the global recession, short-term growth prospects are uncertain. But so far this year, tourism growth has accelerated, not declined.

Vanuatu’s growth acceleration is important for the Pacific. It dispels the myth that the Pacific island economies cannot grow, and it confirms the range of factors which are important for growth in the Pacific – a dynamic private sector, active land markets, deregulation, and macroeconomic and social stability.

Vanuatu’s recent growth has been led by the private sector, not by foreign aid. Foreign aid is no higher this decade than last.

Tourism and construction have been the two main growth areas for Vanuatu’s private sector. The average annual growth in visitor arrivals by air into Vanuatu was 12.5% in the period 2004 to 2008, compared to only 1.8% in the period 1995 to 2003. Cruise-ship visitors to Vanuatu have doubled since 2003. The private sector is reported to be investing heavily in expanding hotel capacity.

Construction growth increased from 7% in 2004 to 25% in 2008. Vanuatu’s construction boom has been driven by tourism growth, and by expatriates and nationals building houses.

Vanuatu’s upsurge in tourism and construction would not have been possible without an active land market. Customary land in Vanuatu can be leased for periods of up to 75 years. Most of Vanuatu’s main island, Efate, has been marketed under 75-year leases, and the land markets in the outer islands are now becoming active as well. Vanuatu’s land market is not well regulated and disputes over ownership are common. There is also discontent that landowners are not benefiting from subsequent sub-divisions and development. These issues need to be addressed since they raise important questions of equity and may lead to a social backlash, but they are very different issues to those which arise in many other Pacific island countries where the land market is dormant.

Vanuatu has also benefited from deregulation. Its opening up of the telecom sector in 2008 led to an increase in mobile subscribers from 23,000 to 100,000 in the space of just 6 months. Air travel between Australia and Vanuatu grew by 19% the year after Pacific Blue started flying to Vanuatu in 2004 from Brisbane, thereby breaking Air Vanuatu’s monopoly. A further boost to tourism came in October 2008 when Pacific Blue started to provide competition on the Sydney-Port Vila route. Flights from Sydney to Port Vila cost little more than flights from Sydney to Cairns. Vanuatu is now also served by Air New Zealand, Air Pacific, and Solomon Airlines.

Vanuatu has enjoyed macroeconomic stability in recent years, with relatively low inflation and a slight fiscal surplus in recent years. As many Pacific economies have discovered, however, this is a necessary rather than sufficient condition for growth.

Finally, social stability underlies Vanuatu’s recent success. Vanuatu suffered from a fiscal crisis in the late 1990s, two years of negative economic growth in 2001 and 2002, and intense political instability mixed with diplomatic tensions in 2004. Throughout this difficult period, violence was limited. Vanuatu has a tradition of political instability – with nine prime ministers between 1995 and 2004. Perhaps the relative political stability enjoyed since then – with a single prime minister from end-2004 to end-2008 – has helped promote growth.

More fundamentally, Vanuatu’s social stability, and its ability to make transitions of power peacefully – national elections in 2008 resulted in another change of government – have provided a supportive environment for economic activity, including by enhancing the country’s reputation among potential tourists.

Social stability is a key factor behind Vanuatu’s ability to attract and retain expatriates, who bring investment and specialist skills to the economy. Its lack of an income tax is also an attraction for expatriates, though its role as an offshore financial centre seems to have played little role in its recent growth.

Vanuatu, like other Melanesian countries, has traditionally lacked access to foreign labour markets. However, Vanuatu was included in, and in fact is the biggest beneficiary of the Recognized Seasonal Employer program which provides temporary farm employment in New Zealand. Over 1,700 ni-Vanuatu participated in the scheme in its first year in 2008. Vanuatu has also been included in Australia’s Pacific Seasonal Worker Pilot Scheme, which commenced this year.

Vanuatu’s future is by no means assured. All small island economies are easily destabilized and Vanuatu faces a range of challenges. But it is time to recognize that Vanuatu has good prospects for sustained, rapid growth. For five years, Vanuatu has enjoyed broad-based, private-sector-led and relatively rapid growth in excess of 5.5%. Tourism, construction and seasonal migration will continue to offer opportunities for new employment, not only for Port Vila but the Outer Islands.

There is a lot the Pacific can learn from Vanuatu.

This article draws on the findings of a Pacific Institute of Public Policy brief on Vanuatu written jointly with Nikunj Soni, which can be found here.

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Global mitigation was never going to be easy, but the course of action to date has made it more difficult rather than less. In 1992 (under the United Nations Framework Convention on Climate Change), in 1995 (under the so-called Berlin Mandate) and again in 1997 (under the Kyoto Protocol), the world agreed that the developed countries would be the first to reduce their emissions.

Achievement of the Kyoto Protocol’s 2012 targets would by itself have done little to slow growth in global emissions, but it would have been a sensible first step, and laid the foundations for more comprehensive global mitigation. Unfortunately, the United States and Australia walked away from the Protocol, and emissions have grown this decade in most developed countries. It is not surprising that negotiations to shape the post-2012 climate change architecture are making slow progress. Developed countries continue to call on developing countries to do more, but developing countries respond that they are still waiting for developed countries to take that first step they promised some 17 years ago.

The current impasse has given rise to a proliferation of academic proposals for the post-Kyoto global architecture. Yet, the international system shows enormous inertia. It is easy to critique the existing framework, but far more difficult to find consensus on an alternative. If there is to be a deal done, it will still likely be within the existing framework.

The UNFCCC-Kyoto approach, as most recently articulated in the 2007 Bali Conference can be summarized into three simple propositions: developed countries should adopt national emission reduction targets; developing countries should undertake mitigation actions; and developed countries should provide developing countries with mitigation financing.

Each of these is contested. On the first, my analysis of the emissions targets so far announced by developed countries (the EU, Canada, Australia and now, under its new President, the US) suggest an implied reduction target for developed countries as a group of between 10 and 20 per cent by 2020 over 1990 levels, short of the 25-40 per cent demanded by developing countries.

On the second, there are positive signals from most developing countries that they are prepared now to do more to mitigate climate change. But what they will commit to internationally, if anything is unclear. The language of actions signals that they will not sign up to binding targets. In the best case, they might sign on to one-sided emissions targets, which carry reward for being met or exceeded but no sanction for being violated. Alternatively, developing countries might commit to policy action plans. What these commitments, whatever their form, would add up to is also unclear. A best case might be that per capita emissions of developing countries stay at their 2012 levels. A worst case would be that their emissions continue to grow at business as usual rates.

An agreement for 2020 involving a 20 per cent reduction in emissions by developed countries over 1990 levels and a flattening of per capita emissions in developing countries post-2012 would not satisfy many environmentalists, but would be a real achievement, one which would reinvigorate the global climate change mitigation regime.

Whether such an agreement will be reached depends mainly on the third prong of the current negotiating framework: the provision of financing by developed to developing countries. This is perhaps the most problematic area of all. The Clean Development Mechanism – which provides carbon credits to developing countries for emission-reducing projects – is popular with developing countries, and it is unlikely that the CDM will be abolished. There are various worthwhile proposals for reform of the CDM, but its most important feature cannot be altered.

Any reduction in emissions the CDM delivers in a developing country stands in place of a reduction of emissions in a developed country. Therefore, if the CDM is the only mechanism generating emission reductions in developing countries, global emission reductions will be a function solely of developed country targets. And developed country targets alone are simply not ambitious enough to make a serious dint in global emissions. There need to be constraints on developing country emissions in addition to, not only in substitution of, reductions agreed to by developed countries.

International emissions trading is another financing option, but the uncertainties around trading and the time it will take to develop an international trading system make it inappropriate as a vehicle for kick-starting mitigation in developing countries.

This leaves public funding. Developing countries demand public funding; developed countries counter that funding of the required magnitude can only be mobilized by markets. Yet, if the political appetite for serious international public funding for mitigation is lacking in developed countries, the appetite for the sort of ambitious targets that would make sense of an international-offset approach to financing is completely absent. A mix of market and public funding is required. The Garnaut Review recommended that developed countries commit to an International Low-Emissions Technology Commitment of about $US100 billion a year, of which about half would be expensed in developing countries. This would require, for example, Australia committing to spend $A1.5 billion every year in developing countries to support mitigation. Affordable, not unthinkable, but a different order of magnitude to the tens of millions being committed through the aid program at this stage.

To summarize, while the world has a negotiating framework for climate change mitigation, it is a framework that is largely still to be filled in. Only in first area – developed country commitments to 2020 emission targets – do we have something approaching a clear idea of what a post-Kyoto agreement might look like. This is itself progress. Even if developing countries refuse to participate more fully in a post-Kyoto agreement, it is essential that developed countries move forward with a successor agreement if only to restore their credibility and to incentivize the technology development and deployment that will be vital to the success of global mitigation.

That said, securing fuller developing country participation is obviously of great importance. Developing countries need to reveal what they might be prepared to sign up to. And developed countries need to move quickly to fill both the credibility gap – to demonstrate that they are actually serious about reducing emissions – and the financing gap – by getting realistic about what will be needed to entice developing country participation. Only then will the odds for a comprehensive international climate change mitigation agreement start to improve.

Dr Stephen Howes is at the Crawford School of Economics and Government at the ANU. This analysis draws on a longer article available on his website and forthcoming in the Indian Growth and Development Review. It is also the March instalment of the EABER Newsletter, which may be found here [.pdf].

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