The following is a guest column from PPI friend and sometime contributor Robert Stavins, Albert Pratt Professor of Business and Government at Harvard and director of the Harvard Environmental Economics Program. He is attending the U.N. climate change negotiations in Copenhagen.

First things first: Let’s start with Secretary of State Hillary Clinton’s announcement today regarding U.S. funding for developing countries.  The developing countries are asking for truly huge sums in Copenhagen — more than $100 billion to $200 billion annually to pay for their carbon mitigation and climate change adaptation through 2050. The U.S. can play an important role, and it could do so in a way that will not add to U.S. debt and ought not antagonize more conservative elements in the U.S. Congress, but it will not be through direct payments from the U.S. government to governments of developing countries. Let me explain.

Although it is inconceivable that the governments of the industrialized world, including the U.S. government, will come up with sufficient, sustainable foreign aid to satisfy the demands for financial transfers by the developing countries, they can — through sensible domestic and international policy arrangements — provide key incentives for the private sector to provide the needed financing through foreign direct investments.

For example, if the cap-and-trade systems that are emerging throughout the industrialized world as the favored domestic approach to reducing CO2 and other greenhouse gas emissions are linked together through the existing, common emission-reduction-credit system, namely the Clean Development Mechanism (CDM), then powerful incentives can be created for carbon-friendly private investment in the developing world. That would not add to U.S. debt; indeed, it would be good for U.S. private industry.

Clearly the CDM, as it currently stands, cannot live up to this promise, but with appropriate reforms there is significant potential. Of course, problems of limited additionality will inevitably remain. Therefore, what is needed is for the key emerging economies — China, India, Brazil, South Korea, South Africa, and Mexico — to take on meaningful emission targets themselves (even if equivalent to business-as-usual in the short term), and then participate directly in international cap-and-trade, not government-government trading as envisioned in Article 17 of the Kyoto Protocol (which won’t work), but firm-firm trading through linked national and multinational cap-and-trade systems.

Importantly, the private finance approach stands a much greater chance than government aid of being efficiently employed — that is, targeted to reducing emissions, rather than spent by poor nations on other (possibly meritorious) purposes. So, the job can be done, and governments have an important role, but as facilitators, not providers, of finance. Unfortunately that has not been the focus of the Copenhagen discussions.

Moving Past Kyoto

More broadly, the developing countries have insisted that the Kyoto protocol must be the basis for a new agreement. This is a real problem, because the Kyoto Protocol, in particular its dichotomous distinction between the small set of Annex I countries with quantitative emission-reduction commitments and the majority of countries in the world with no responsibilities, is the “QWERTY keyboard” (that is, unproductive path dependence) of international climate policy — the major stumbling block in negotiations here in Copenhagen.

The world has changed dramatically since the 1997 Protocol divided the world in two. More than 50 non-Annex I countries (with no legally binding commitments) now have greater per capita income than the poorest of the Annex I countries (with commitments). So, even if this distinction was appropriate in 1997, it surely no longer is. But updating the list is impossible. Mexico and South Korea, for example, joined the OECD just six months after Kyoto, but they are unwilling to join the set of Annex I parties. Furthermore, updating the list would be insufficient. It is the very notion of a dichotomous distinction between countries with stringent targets and countries with no targets whatsoever that is at the heart of the problem. A more subtle, more sophisticated interpretation of “common but differentiated responsibilities” is needed. More about this below.

The industrialized (Annex I) countries have emitted most of the stock of manmade carbon dioxide in our atmosphere, so shouldn’t they reduce emissions before developing countries are asked to contribute? While this may seem to make sense, here are four reasons why a new climate agreement must engage all major emitting countries — both industrialized and developing:

1. Emissions from developing countries are significant and growing rapidly. China surpassed the U.S. as the world’s largest CO2 emitter in 2006, and developing countries may account for more than half of global emissions within the next decade.
2. Developing countries provide the best opportunities for low-cost emissions reduction; their participation could dramatically reduce total costs.
3. The U.S. and several other industrialized countries may not commit to significant emissions reductions without developing country participation.
4. If developing countries are excluded, up to one-third of carbon emissions reductions by participating countries may migrate to non-participating economies through international trade, reducing environmental gains and pushing developing nations onto more carbon-intensive growth paths (so-called “carbon leakage’’).

How can developing countries participate in an international effort to reduce emissions without incurring costs that derail their economic development? Their emissions targets could start at business-as-usual levels, becoming more stringent over time as countries become wealthier. If such “growth targets’’ were combined with an international emission trading program, developing countries could fully participate without incurring prohibitive costs (or even any costs in the short term). This approach — described in a recent Discussion Paper by Harvard Professor Jeffrey Frankel and Valentina Bosetti of the University of Venice for the Harvard Project on International Climate Agreements — could provide a progressive route forward, breaking the logjam between developed and developing countries, if only the two sides would begin to talk to each other, rather than past each other.

Obama in Denmark

Now that President Obama is on his way to Copenhagen, will his presence and that of so many heads of state provide the needed push for success? Unquestionably the presence of some 100 heads of state and government increases the likelihood that a climate change deal will be reached by the close of business on Friday, but the key question is whether it increases the likelihood that a “meaningful climate change deal” will be achieved. I am of mixed views on this.

On the one hand, the presence of the leaders surely provide impetus to the process in the sense that many of the key countries — including the U.S. — will not want their leaders to fly home without a “success” in hand. For President Obama, two flights home from Copenhagen within a few weeks without success in either would be a substantial political embarrassment. (The international press and Republicans in Congress have not forgotten the failed Chicago bid for the Olympics). Furthermore, as I explained in a Financial Times blog post last week, the very fact that the White House decided to shift President Obama’s trip to Copenhagen from the first week of the conference to its final day suggests that they had good reason to anticipate a successful outcome.

On the other hand, the political incentive that is provided for achieving “success” by the leaders’ presence may be to accept a deal that is less than meaningful (if a meaningful deal cannot be achieved), but one that has the appearance of success.  So, with the heads of state and government present, the incentives could be strong to agree to a climate change deal that is less than meaningful. The key, outstanding question is whether the outcome will be one that provides a sound foundation for meaningful, long-term global action, as opposed to some notion of immediate, albeit highly visible triumph.

It would be unfortunate if the outcome were no more than a signed international agreement per se, glowing press releases, and related photo opportunities for national leaders, because such an agreement would most likely be the Kyoto Protocol on steroids:  more stringent targets for the industrialized countries and the absence of real commitments by the key, rapidly growing emerging economies of China, India, Brazil, Korea, Mexico, and South Africa (let alone by the numerous developing countries of the world). With the promise of $100 billion now on the table in Copenhagen, such an agreement could — in principle — be signed, but it would not reduce global emissions and it would not be ratified by the U.S. Senate (just like Kyoto). Hence, there would be no real progress on climate change.

The Need for a New Mindset

At the heart of the matter is the reality that eventually the negotiations must get beyond what has become the “QWERTY keyboard” of international climate policy: the distinction in the Kyoto Protocol between the small set of Annex I countries with quantitative targets, and the majority of countries in the world with no responsibilities. Various meaningful policy architectures could begin to bridge the massive political divide that exists between the industrialized and the developing world, as we’ve found in the Harvard Project on International Climate Agreements.

For example, it remains possible that a midterm agreement could be reached on an approach involving an international portfolio of domestic commitments, whereby each nation would commit and register to abide by its domestic climate commitments, whether those are in the form of laws and regulations or multi-year development plans. Support for such an approach has been voiced by a remarkably diverse set of countries, including Australia, India, and the U.S.  And comments yesterday from the Chinese delegation suggest that support is increasing for this approach.

Consistent with this portfolio approach, President Obama recently announced that the U.S. would put a target on the table in Copenhagen to reduce emissions 17 percent below 2005 levels by 2020 (in line with climate legislation in the U.S. Congress). In response, China announced that it would reduce its carbon intensity (emissions per unit of economic activity) 40 percent below 2005 levels over the same period of time. Subsequently, India announced similar targets. Given these countries rapid rates of economic growth, the announced targets won’t cut emissions in absolute terms, but they are promising starting points for negotiations.  The key question is not what this approach would accomplish in the short term, but whether it would put the world in a better position two, five, and ten years from now in regard to a long-term path of more aggressive action.

Until we see the final outcome in Copenhagen, I will remain cautiously optimistic, because at least some of the key nations, including the U.S., appear to be more interested in real progress than in symbolic action.