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What Makes Environmental Treaties Work?

GIVEN THE WAY THE ENVIRONMENT IGNORES NATIONAL BOUNDARIES, good global treaties are essential to saving it. Yet, it has become ever harder to create treaties that work. Instead of learning from history, we seem doggedly determined to repeat past failures.

Ifthe Kyoto Protocol fails, will it be because George Bush cares more aboutthe oil industry than global warming? Or because it was a badly thought-out treaty? Scott Barrett,a professor at the Paul H. Nitze School of AdvancedInternational Studies at Johns Hopkins University,believes the latter. He has spent seven years scrutinizing hundreds ofenvironmental treaties, studying why some work and others don’t. In hisrecent book*, he pulls the pieces of the puzzle together, and in doingso, he creates an image that we have not seen before. It is not a whollypleasing picture.

ForBarrett, the moment of enlightenment came when he was working on his doctorateat the London School of Economics in 1987. He opened a newspaper one dayand saw that 23 countries had agreed in Montreal theprevious day to cut by half their production and consumption of ozone-depletingchemicals before the end of the century. That, he now recalls, was “somethingI thought would never happen.”

Thereason for his astonishment was not that every country would benefit fromprotecting the ozone layer, but that every country would benefit—whetherit took part in the treaty or not.

Mostof his fellow economists, he remembers, assumed the agreement would fallapart. That is what most past international agreements had done, not justenvironmental ones such as the International Convention for the Regulationof Whaling, but others such as the Nuclear Test Ban Treaty. But here wasan agreement that seemed to work. It entered into force on time, the signatoriesmade the promised cuts in emissions, and further negotiations strengthenedits provisions. When Richard Benedick, the chiefAmerican negotiator at Montreal,called it “unique in the annals of international diplomacy,” he was right.

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

Increasingly,the environmental problems that worry us arise partly or wholly beyondour borders. Overfishing, acid rain, depletionof stratospheric ozone, and above all climatechange are issues that can be solved only if countries cooperate. And thereare treaties in plenty: Barrett counts 300 multilateral agreements, onlyfour of them adopted before 1945. But simply drawingup a treaty means nothing. Barrett’s message is that the treatyhas to be enforceable. It must be designed in ways that will make countriesstick to its rules.

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

Free Riders

Whydid Montreal workwhen so many other international agreements have failed? There’s a cluein a game that Barrett often gets his students to play. He starts by handingeach player a red and a black card, one of which must be returned. Thenhe tells them that each player will get US$5 for keeping a red card plusUS$1 for every red card handed in by any player. If there are 20 players,and every red card is handed in, every player gets US$20. If nobody handsin a red card, every player gets US$5. But if only six players hand intheir red cards, those six each get US$6, whereas the players who keeptheir red cards each get US$11.

Inother words, each individual player has an incentive to keep the red card,even though every player is better off if all are generous. Not surprisingly,whenever Barrett has played this game, no more than two-thirds of players(and often fewer) have sacrificed their red cards. So it is, he explains,with what economists call “public goods.” Every player benefits, andnone can be excluded from benefiting. Other examples of public goods areclean air, a healthy ozone layer, and uncontaminated wilderness. Generallyspeaking, all countries benefit from these environmental goods, and nonecan be excluded. But each has a powerful incentive to let others make thesacrifices required to make the benefit available for all to enjoy.

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

Nowthink of the game and its lessons in terms of what happens in an individualcountry with environmental problems. Left alone, companies pollute theair, and individuals build houses on unspoiled beaches. Behavior that benefitsan individual may harm society as a whole. Only the intervention of governmentcan persuade companies to stop polluting or individuals to abide by zoninglaws. No wonder national environmental policies are so much tougher andmore effective at eliminating free riders than are international policies.

Indeed,Barrett records a telling example of just this point. The 1990 amendments to America’sClean Air Act to deal with acid rain had almost complete compliance. Thatis not surprising, given that violators faced enormous financial penaltiesand a possible prison sentence. In contrast, Barrett argues that internationalattempts to curb acid rain have persuaded countries to do only what theywould probably have done in any case for the sake of their own national woodlandsand environment.

Changing the Rules of the Game

Theinteresting thing about Montreal wasthat it did not fall apart. To the contrary, as Barrett points out, noother international agreement demands so much from so many parties. Yetit entered into force on time, and the cuts in emissions that its signatoriespromised have actually been implemented. Even more impressive, the agreementhas been extended and toughened. Hardly any country with a working governmenthas not now signed it. And the agreement covers more substances and demands,not the original 50 percent cuts but a total ban on emissions. As a result,the concentration of ozone-depleting compounds in the atmosphere peakedin 1994 and has since been slowly declining.

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

Inthe case of Montreal,the treaty offered big gains to the biggest player: the United States,the world’s largest producer (and consumer) of chlorofluorocarbons (CFCs).If America hadcut its output of CFCs alone, it would have done well, says Barrett; indeed,the gains in terms of lives saved would have been worth more than a trilliondollars—65 times the costs. That, he points out, is “a figure that would tower over almost everyother public investment made by the UnitedStates in1988.”

But America hadeven more to gain from signing on to a treaty—three times as much, reckonedthe Environmental Protection Agency at the time. These huge gains camelargely from eradicating the big health risk that ozone depletion entails.The EPA calculated that implementing the Montreal Protocol would prevent245 million cancers, including more than 5 million cancer deaths, by 2165.Value a life at US$3 million and the benefits quickly add up. In addition,the costs of implementing Montreal wererelatively low. Substitutes for most uses of CFCs were in development.Technical advances meant that the substitutes turned out to be less costlythan initially predicted.

Buttwo other aspects of the Montreal Protocol helped change the rules of thegame and make sure that the agreement stuck. The treaty included both sticksand carrots: punishments for countries that did not comply and rewardsfor poorer countries that did. Both involved controversial decisions. Theaim was to make the treaty self-enforcing. This insight, argues Barrett,was crucial to Montreal’ssuccess.

Thethreat of punishment came in the form of a ban on trade between signatoriesand nonsignatories in substances (such as CFCs)controlled by the treaty. It also bans imports of products (such as refrigeratorsand air-conditioning units) containing these substances. And it leavesopen the possibility that signatories may ban the import of products madewith these substances, such as computer circuits cleaned with CFCs.

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

Buttrade restrictions of this sort go down badly with the GATT (General Agreementon Tariffs and Trade) and its successor, the World Trade Organization.They have tended to stop countries from banning trade in goods made byparticular processes. Again, this is a reasonable approach. To the eyeof the customs official, a free-range egg is identical to one that a batteryhen might lay, and tuna caught in dolphin-friendly ways looks and tastesno different from tuna caught in less responsible ways.

Butthese two reasonable arguments, each designed to deal with a differentproblem, clashed. In this case, the ban prevailed, and the environmentwon. So it should, says Barrett: “It would be wrong if trade liberalizationalways took priority over all other international affairs, just as it iswrong to insist that environmental protection is more deserving than otherclaims on the international system.”

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

Learning the Wrong Lessons

Manypeople assumed that Montreal’ssuccess in curbing CFCs could be replicated for other treaties, such asthose on biodiversity or greenhouse gases. They were wrong. “They failed,” saysBarrett, “to realize that international environmental problems do not comewith one-size-fits-all solutions. They also lacked a sense of history.”

“Ihave been amazed to discover how little many international treaty negotiatorsknow of the experiences of earlier negotiations,” he complains. “It isnot just the lack of a theory that explains why negotiations so often fallshort of potential. Ignorance of history is also to blame.”

Asense of history might have given negotiators some sense of models thathave worked in the past. Over and over again, Barrett comes back to theneed for treaties to be self-enforcing. In other words, it must be in theinterest of every signatory to stick to the rules. If a treaty does notgive countries an incentive to do that, no world government will do thejob instead. States are sovereign and will act principally in what theyperceive to be the self-interest of their citizens.

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

So Why Not Kyoto?

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

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

Inmonetary terms, Barrett argues, the benefits from avoiding climate changeare likely to be lower than those from protecting the ozone layer. Butthe costs of adjustment appear to be much higher: the economies of mostrich countries are built around the automobile and around electrical powergenerated with fossil fuels. No easy substitutes exist to replace fossilfuels in power stations and vehicles.

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

Butwhat is the alternative? Barrett describes spending a week alone in thesilence of Cape Cod,trying to think up an answer, after the rest of the book was written. Hissolution is not—absolutely not—to mimic the Montreal Protocol or even theNorth Pacific Fur Seal Treaty. Remember his insistence that different globalenvironmental problems call for different solutions, all based on the sameset of principles: a good treaty will 1) require that more be done to protectthe environment than states would otherwise be inclined to do, 2) createincentives for states to participate, and 3) create incentives for partiesto comply.

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

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

Such a solution raises plenty of questions, such as which standards shouldbe mandated, and by whom? But Barrett says that his ideas have had positivefeedback in Washington and elsewhere. It is, at least, an answer based ona clear understanding of the history of international agreements, their lessonsand their economic drivers. Sometimes second-best answers are better thanno answers at all.

THE NORTH PACIFIC FUR SEAL TREATY

The recent history of attempts to save vanishing species is depressing. But a century ago, the North Pacific Fur Seal (Callorhinus ursinus) was saved from extinction by an international agreement that worked.

Fur seals are border-crossing creatures: they spend about half the year at their breeding grounds and half in the open sea. In the late eighteenth century, a Russian sailor discovered that fur seals bred on a chain of small islands near the Aleutian archipelago, between Russia and North America. Russia claimed the islands and regulated the slaughter of the seals for fur. When the United States acquired the islands in 1867, Americans first slaughtered the seals indiscriminately and then imposed controls. But seal numbers plummeted with the growth of sealing at sea, mostly by Canada, which was part of the British Empire. When Canada and the United States agreed to some restrictions on sealing, Japanese sealers stepped in aggressively to take their place. In 1867 there had been up to two million seals; by 1909 there were fewer than 150,000. The creature seemed doomed.

In 1911 the four sealing countries—the United States, Japan, Russia, and Canada (represented by Great Britain)—drew up the North Pacific Fur Seal Treaty. It banned seal killing at sea—in no-man’s-land, as it were—and, as a result, gave governments the power to control seal killing on lands that they owned. In addition, the four countries agreed to share the gains from permitted kills, partly in the form of skins and partly in the form of money. The United States agreed to pay Japan and Britain each US$200,000 and to supply them with a share of the annual harvest. The other three countries also agreed to share their harvests with each other.

As a result, each country was better off with the agreement than it would have been without it. But to succeed, the treaty also required the participation of all four countries. It therefore provided that, if one country dropped out, the entire treaty could be terminated.

The agreement was an extraordinary success. By 1940, the number of fur seals in the North Pacific was again more than two million. The treaty, with its acute manipulation of costs and benefits, punishments and incentives, “stands as a remarkable example of how international cooperation can succeed,” says Barrett.

Does it give hope for other threatened creatures? Probably not. Most extinction problems occur within countries rather than across borders. But the governments of countries where creatures are most threatened are often corrupt and either cannot or will not impose the discipline on hunters that the four signatories to the 1911 treaty were able to impose, and they fail to prevent the habitat loss that destroys biodiversity. Local institutional reform, says Barrett, may be just as important here as better multilateral treaties.

About the Author

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