Int. J. Global Environmental Issues, Vol. 3, No. 4, 2003 409
Copyright © 2003 Inderscience Enterprises Ltd.
Global environmental protection: solving the international public-goods problem by empowering the United Nations through cooperation with WTO
Yew-Kwang Ng
Department of Economics, Monash University,
Clayton, Victoria, Australia
E-mail: kwang.ng@buseco.monash.edu.au
Po-Ting Liu
Department of Economics, Monash University,
Clayton, Victoria, Australia
E-mail: dean.liu@buseco.monash.edu.au
Copyright © 2003 Inderscience Enterprises Ltd.
Global environmental protection: solving the international public-goods problem by empowering the United Nations through cooperation with WTO
Yew-Kwang Ng
Department of Economics, Monash University,
Clayton, Victoria, Australia
E-mail: kwang.ng@buseco.monash.edu.au
Po-Ting Liu
Department of Economics, Monash University,
Clayton, Victoria, Australia
E-mail: dean.liu@buseco.monash.edu.au
Abstract:
A significant, if not the major, characteristic of environmental protection is that its effect is largely worldwide. On the other hand, the world consists of hundreds of independent countries and regions. Therefore, an important problem in the protection of the global environment is that of the free-rider or public-goods problem. Pursuing its own interest, each country, state or region has insufficient incentive to safeguard global environment. This paper proposes a solution to this public-goods problem by enriching the United Nations with sufficient funds to subsidise abatement and empowering it with sharp enough teeth (through cooperation with the World Trade Organization) to penalise non-compliance, including the failure to contribute the proposed higher contributions to the United Nations.
Keywords: environmental protection; globalisation; international cooperation; international public good; United Nations.
Reference to this paper should be made as follows: Ng, Y-K. and Liu, P-T. (2003) ‘Global environmental protection: solving the international public-goods problem by empowering the United Nations through cooperation with WTO’, Int. J. Global Environmental Issues, Vol. 3, No. 4, pp.409–417. Biographical notes: Professor Yew-Kwang Ng holds a Personal Chair in economics at Monash University and has been a fellow of the Academy of Social Sciences in Australia since 1980. He has worked in welfare economics, mesoeconomics (a simplified general equilibrium analysis with both micro and macro elements) and welfare biology. He also collaborates with Prof. Xiaokai Yang on an inframarginal analysis of division of labour. He has published a number of books and journal papers as well as commentaries for the popular press.
Po-Ting Liu received both his BS (Engineering) and MS (economics) degrees from National Taiwan University and is currently a Doctoral candidate at the Monash University, Australia. His research interests are in the areas of game theory, public economics and welfare economics.
1 Introduction
The importance of environmental protection has been increasingly understood in recent decades, and it is especially true for global environmental protection after the first international conference on the environment – the United Nations Conference on the Human Environment – was convened in Stockholm in 1972. With the mushrooming ‘green awareness’ worldwide, numerous collaborative efforts were made to address a variety of international environmental issues in many direct or indirect ways. Officially, intergovernmental organisations were created or restructured to handle international environmental issues; examples are OECD, United Nations Development Programme (UNDP), United Nations Environmental Programme (UNEP), World Bank, and so on. International ‘green’ declarations, from the early Cocoyoc Declaration, the 1992 Rio Declaration, to the recent Johannesburg Declaration on Sustainable Development, were announced from time to time to convey, or promote, the consensus on environmental issues. For more substantial measures, hundreds of international environmental agreements (IEAs) were signed or even ratified for enforcement on issues ranging from the conservation of wildlife, desertification, ozone depletion to climate change. Also, with the rapid growth in quantity and quality of non-governmental organisations (NGOs), environmental NGOs are becoming more and more important, as local monitors, opinion leaders, international campaign participants, or even policy executers.
Unfortunately, the problem of global environmental disruption/protection is still far from being sufficiently tackled: “The level of awareness and action has not been commensurate with the state of the global environment today; it continues to deteriorate” [1]. At our current rate of environmental disruption per unit of output, and with the expected rapid growth in world output, global environment will face many crisis points in a matter of decades. This may partly be a problem of insufficient awareness by the public and thus the average willingness-to-pay for the present and future environmental qualities is far below its optimal level. However, even if we assume the willingness-to-pay is at its optimal level, there is still a serious defect in the coordination of actions of countries worldwide. It can be recognised as a commonly seen problem with public goods originating from the anarchic nature of international affairs. We believe this is a significant, if not the major, structural cause for the inefficiency in global environmental problem.
2 Global environmental quality as a public good
Within an economy or country, domestic environmental quality is known as public goods since it affects the welfare of all individuals and everyone is forced to consume the same amount of it. Providing public goods is deemed as one of the most important functions of the government. However, as the frequency and magnitude of human activities rapidly increase, we gradually notice the international dimension of environmental protection. The public-goods nature of the global environmental quality is similar to that of the domestic one if we regard countries as individuals and the whole world as one country: actions performed (pollutants generated) in any country not only affect itself but also that of the peoples of other countries in the world (cross-national borders). For example, global warming phenomenon is equally ‘consumed’ by countries all over the world and the greenhouse gas reduction in any country will definitely affect others.
Of course, generally the effort made for improving the environmental quality in one country benefits people in that country the most, and hence the effect is not homogeneous across countries. However, as long as there is an important global element in the environmental protection effort of each country, there exist important external costs/benefits that may not be (at least not adequately) taken into account by each country. This makes each country impose insufficient charges/fines on environmental disruption, spend insufficient effort in enforcing these fines, and spend insufficiently on the abatement of environmental disruption and on the improvement of environmental quality. Each country may take the free-rider position and put the burden onto other countries. The publicness externality, similar to that at the individual level in a single economy, is much discussed in the literature since the time of Pigou. The traditional solution to this problem is for the government to impose charges/subsidies in accordance to the marginal damages/benefits. However, the absence of a world government raises the problem of how to make such charges/subsidies effective. And, the Coase theorem does not apply to this issue since the transaction costs, including negotiation costs, are enormous owing to both the large number of countries and the complexity in the diplomatic process. Another possible solution to the public-goods problem is the voluntary provision of public goods. Various IEAs may be categorised as representative examples of this kind. However, how well can IEAs, as a means of the most frequently used solutions to current international problems, solve the global environmental problems?
3 Limitations of international environmental agreements
Although there were some international environmental treaties in the early 20th century, it was not until the 1960s that concerns about the environment led to the kind of binding IEAs that we know today. The first generation of IEAs is often of single issue and sectoral, emphasising the conservation of natural resources. Examples include the 1971 Convention on Wetlands of International Importance Especially as Waterfowl Habitat (Ramsar Convention), the 1973 Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES). After the 1992 Earth Summit, held in Rio de Janeiro, the UN Convention on Climate Change (UNFCCC) and the Convention on biological diversity (CBD) both demonstrated the difficulty of pursuing agreements that affect multiple sectors. These holistic and more integrated agreements involve so many different areas of law, policy and politics that they can engender more conflict and trigger more diplomatic battles than sectoral IEAs. Recently, non-binding instruments like the Rio Declaration and the prominent Agenda 21 have become more and more influential than binding ones. However, their aim is to set out important issues, foster discussion and stimulate new thinking, not to create rigid commitment for physical actions. So far, IEAs are perhaps the most important and the most frequently used means in solving the global environmental problems. The reason is rather obvious: since there is no single public authority existing at a supranational level to enforce the protection actions, we can only rely on whether sovereignty countries would ‘voluntarily’ agree to cooperate. Theoretically speaking, the most serious weakness of IEAs is the incentive of free-riding for countries, both before and after an IEA is signed and enters into force.
Before an IEA is signed, free-riding would undermine the motivation for participating in this agreement. For a specific country, its sweetest dream is to let other countries reduce their emissions and it maintains its level while enjoying a cleaner environment. In addition, after an IEA is signed, free-riding might increase the instability of the cooperation. Even if monitoring activities cost little and other signatories can detect the disobedience correctly, it may still be difficult for them to inflict a substantial and credible punishment on the violators. Although in some researches this double jeopardy of free-riding is indeed partly alleviated by introducing the possibility of side-payment (or transfer), it has not been eliminated.
Carraro and Siniscalco [2] demonstrated that partial cooperative agreements among sub-groups of countries exist when conditions of profitability and stability are satisfied. Gains from such coalitions can be used to expand existing coalitions by inducing other countries to cooperate through self-financed transfers. Even full cooperation can also be achieved without the design of carrot/stick mechanism if about 60% of the world countries ‘commit’ to cooperation. Petrakis and Xepapadeas [3] extended the above research by introducing non-identical countries and informational asymmetries. Here, world countries are identified as environment conscious countries (ENCCs) and less environment conscious countries (LENCCs). ENCCs are assumed to commit to cooperation to protect the environment. Under certain conditions, ENCCs can induce LENCCs to form a global or partial stable coalition through self-financing side-payments.
A mechanism that detects cheating is also developed in order to induce the desired emissions when the rest of the participating countries cannot observe the emission level of an individual country. However, the commitment (ignoring the benefits from free-riding) required from those environmentally pioneering countries in both articles may still be a problem. Although in the real world highly environment conscious countries like northern European countries may serve as candidates to commit, generally most countries in the world are still expected to be self-interest maximisers. As Barrett puts it, “the essential feature of IEAs is that they must be self-enforcing. No country can be forced to sign an IEA, and signatories to an IEA can always withdraw from the agreement”. Based on this essential feature, Barrett [4] explains why IEAs become less effective when the greater is the number of countries involved, which is also an observed fact in reality. He shows that as the number and heterogeneity of countries increase, agreement on the basis of simple rules like uniform abatement levels without side-payments will become very difficult to reach. Even if it can be reached, it may not be sustainable. Because the increase in the number of countries lowers the incentive for signatories to punish non-signatories, and makes free-riding more irresistible. The ultimate goal of IEAs is not the compliance rate of signatories but the effectiveness or benefits brought about from sticking to it. We can easily ‘work out’ many ‘successful’ IEAs by setting a minor target for everyone, despite their minor contribution to the environment. Therefore, Barrett [5] adopts two different models to analyse the effectiveness of IEAs and obtains a consistent result. That is, an IEA may achieve a high degree of cooperation only when the difference between global net benefits under the non-cooperative and full cooperative outcomes is small. Instead, when the difference is large, self-enforcing IEA cannot support a large number of signatory countries. He also examines an actual IEA, The Montreal Protocol on Substances that Deplete the Ozone Layer, which is generally considered to be a substantial achievement of international cooperation. Based on the estimation of Environmental Protection Agency of USA, Barrett claims that USA as well as many countries had an incentive to carry out the terms of the Montreal Protocol unilaterally, making the contribution of Montreal Protocol less significant. Moreover, the agreement may not have achieved as much as is commonly claimed.
However, if we can establish a credible threat to impose trade sanctions in IEAs, it may be capable of sustaining full cooperation in protecting the environment. Barrett [6] analyses the links between policies aimed at supplying global public goods and international trade in segmented markets. His analysis shows that the credible threat of imposing trade sanctions, accompanied by a minimum participation clause, can sufficiently deter free-riding. Moreover, in equilibrium, no trade is restricted. It means the welfare-reducing property of the sanction is easily compensated by the enhanced provision of the public good. Therefore, if we succeed in finding ‘sharp teeth’, the effectiveness of IEAs will be greatly improved.
From the existing aggravating global environmental problems and the above researches, we know that IEAs cannot eradicate the inherent free-riding problem effectively. Thus, we can conclude that whatever methods we adopt to tackle this issue, a credible punishment mechanism is the key to the deterrence of the free-riding behaviours and to a satisfactory solution. Once this mechanism is established, we can simply return to the adoption of the traditional Pigouvian solution. Hence, in the following two sections, we propose to strengthen the United Nations to carry out the charge/subsidy solutions in global public areas and equip it with the international trade sanction power from the cooperation with the World Trade Organisation.
4 Empowering the United Nations
Among the existing international organisations, the United Nations is the most influential. Up to now, it has 191 member countries (more than 80% of the world countries), a history of 58 years and a family of affiliated organisations dedicated to global services in different areas. Nonetheless, the UN cannot be regarded as a world government since it is not powerful in its relation to the member countries vis-à-vis the government of a typical country in relation to its citizens. A country’s government typically has very strong power of coercion. Even in a very democratic country, the elected government still has the power to pass legislation and undertake actions, impose regulations and taxes, etc. which are enforceable through the coercive power of the state against violation. In contrast, the UN is a looser organisation of its member countries and has much less, or barely any, teeth against violators. It is true that the UN had even sent in troops to certain countries to fight wars or to uphold peace and UN resolutions. However, these are exceptions and require elaborate manoeuvres. To make the UN capable of enforcing environmental protection on a routine basis, the following methods may be adopted.
4.1 First, increase the budget of the UN
The budget of a national government is typically in the order of 20–50% of the GDP. Even if we include only the budget of just the federal or central governments, excluding those of the state or provincial governments, the percentages are still in the order of 10–30%. In contrast, the regular biennium UN budget for 2000–2001 is about 2.5 billion US dollars [7], and the 2000 global GDP is about 43 trillion US dollars. Even if we (414 Y-K. Ng and P-T. Liu) include all the voluntary contributions to UN subsidiaries, the budget of UN is still far below 0.1% of the world GDP! No wonder we have difficulties solving the global problems of environmental disruption, poverty eradication, etc. The financial resources of the UN must be augmented to promote environmental protection at the global level and to promote other global public goods (such as fundamental scientific research). This may be done in a number of ways. We suggest that:
• The contributions from member countries to the UN should be raised by a large multiple. Since the public goods brought about benefit all countries and all individuals in the world, the expenses should also be shared according to a reasonable criterion. The success of enforcing higher contributions depends both on sharp teeth and on convincing member countries that the higher contributions would in fact benefit them when the higher budget is used for the good of the whole world.
• The yet unowned global public resources, including Antarctica, the open seas and oceans, electro-magnetic bandwidth, or even the outer space, may be declared the properties of the UN. The UN may then collect rents for fishing, mineral extraction, satellite communication, and other activities involving these properties. This not only provides a source of revenue for the UN, but also solves the problem of the tragedy of overutilisation of common resources.
4.2 Secondly, authorise the UN to enforce regulations
Members of the UN must come to a consensus on the adoption of the (environmental) regulation upon themselves, and then the UN can be authorised the power to enforce it. It includes charging violators in accordance to the damages imposed on all other countries and subsidising member countries for undertaking environmental disruption abatement and undertaking other desirable global public goods itself. Again, effective compliance enforcement requires sharp enough teeth, which would be discussed in the next section. In a separate paper [8], we show how a hypothetical world government should charge/subsidise the pollution/abatement activities. In particular, it is shown that:
• Where the local effect of abatement is not many times larger than the global effect, the optimal rate of subsidy should be almost 100%. This is so since the global effect is some 200 times larger for the whole world than the local effect.
• A unit of pollution (or any other form of environmental disruption) should be charged at how much it costs at the margin to clear up pollution by one unit. The last point also means that the world government does not have to make difficult estimates of how much marginal damages (which are subjective and may largely occur in the far future) will be imposed by environmental disruption, as required by the traditional Pigouvian taxes.
5 Cooperating with WTO
In the current situation of globalisation, the opportunity to have economic relationships (including trade, investment, and technical assistance/cooperation) is very important to virtually all countries. Therefore, we suggest that the UN cooperate with the WTO to use (Global environmental protection 415) this sanction power as sharp teeth to enforce the above proposed higher contributions and global environmental disruption charges. The probability for more effective protection of the global environment will then be significantly increased without intervening national sovereignties.
The WTO, established on 1 January 1995, is the successor to the General Agreement on Tariffs and Trade (GATT) and the embodiment of the results of the Uruguay Round. The WTO is the only global international organisation dealing with the rules of trade between nations. Although trade sanctions first appear to be discordant with the trade liberalisation principle of the WTO, we must recognise that trade liberalisation is not an ultimate goal itself. The purpose of trade liberalisation is to pursue higher global welfare. Besides, we can still find many supportive remarks in the official WTO documents. The preamble to the Marrakech Agreement Establishing the World Trade Organisation reads “conducted with a view to raising standards of living … allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment…”. Also, we can find some ‘green’ provisions in the WTO agreements dealing with environmental issues. Examples include GATT Article XX, Agreement on Technical Barriers to Trade, Agreement on Agriculture, Agreement on Subsidies and Countervail, and GATS Article XIV. Since our proposal, if adopted, applies to almost all countries (assuming no significant difference between the member sets of the UN and the WTO) in the world, it should not be viewed as trade barriers. It certainly will not contradict the main principles of the WTO, which are ‘trade without discrimination’, ‘freer trade’, ‘predictability in trade conditions’, ‘promoting fair competition’, etc. Meanwhile, trade sanctions, in different forms, have already been adopted in about 20 IEAs, including banning trade in certain products or allowing countries to restrict trade under certain conditions.
Unfortunately, the dispute-settlement panels of the GATT, as well as the GATT Secretariat, have condemned the use of trade restrictions by some countries to induce other countries to protect the global environment. The GATT Secretariat recommended that countries rely on ‘carrots’ rather than ‘sticks’ to induce the participation of other countries in IEAs. However, as shown in Chang [9], ‘carrot-only’ systems would create perverse incentives. Under conditions of asymmetric information as likely applicable in the real world, countries may seek to convince others that they bear large costs from pollution abatement by engaging in a great deal of pollution, so that other countries will offer larger carrots to induce abatement. In both ‘pooling’ and ‘separating’ equilibria, carrots encourage greater environmental damages pending a multilateral agreement. We need ‘sticks’ to discourage countries from harming the environment.
Of course, it costs to punish non-compliance, but how much? We wish to argue here that the losses from trade restrictions are not large. First, the losses from trade restrictions in traditional estimates should be discounted in accordance to the analysis of Ng [10]. The basic idea is that private consumption is overemphasised relative to the provision of public goods due to the following considerations: (a) after a biological minimum, private consumption has a large relative-income/consumption effect, making it largely mutually destructive at the social level; (b) consumer preferences are systematically biased towards materialistic consumption as a result of the accumulation instinct and the omnipresent commercial advertising. This argument is supported by evidence on the failure of happiness and quality-of-life indicators to improve significantly with per capita income. In contrast, the quality of the environment does significantly affect the health, happiness, and even the survival of mankind. Moreover, as most people are fairly happy, it is (416 Y-K. Ng and P-T. Liu) certainly worthwhile in terms of expected welfare maximisation to spend a sizeable amount of private consumption (with its insignificant welfare effects) in environmental protection to increase world welfare. Second, the sanction of trade restriction would only be used almost only as a last-resort threat for serious and repeated non-compliance. If restrictions are not imposed or are not in place for very long, then the total economic costs of trade distortions would be rather small. An implicit assumption of the above argument is that the proportion of violators is relatively small (i.e. most countries are obedient), which is reasonable since our focus is on the long run.
6 Conclusion
Faced with the prospect of global warming, a thinning atmosphere, contaminated water or disappearing forest, the idea that we cannot afford the cost of protecting the environment is gradually dominated by the idea that we cannot afford not to protect it. However, the public-goods nature of the global environmental problem together with the lack of effective international (environmental) governance has led to the failures of many attempts and the problem continues to exist. Although some IEAs had and have achieved a certain degree of international cooperation, the outcome is simply not good enough, and it is especially true for most demanding cases. We cannot just rely on IEAs to tackle the present existing and potential or even unknown future global environmental problems. Therefore, we propose to empower the UN, through authorisation and enrichment, to enforce environmental charges/subsidies. And the key to this issue, the deterrence of free-riding, is provided by the trade sanction power of WTO. The proposal of trade sanction might be controversial. However, if we wish to change the behaviours of independent countries without interfering sovereignties, trade might be the only effective resort. Besides, we have also argued the cost of trade restriction is not as high as generally believed.
Our proposal can be further supported by the fact that with deepening interdependences between different environmental issues as well as between different dimensions of human activities, a holistic solution should be adopted to integrate policies in different areas. Policy nullifications and repeated resource investments can be avoided to create synergy and efficiency. With numerous international agreements going on in so many different fields of expertise, the coordination job would be nearly impossible and the resource waste is inevitable.
One may argue the practicability here that both empowering the United Nations and the cooperation from WTO require universal agreement among all member countries and the obstacle is exactly the same one faced when implementing IEAs. Of course, the same difficulty exists, but only for once. If we succeed in reaching the consensus and carrying it out, then we do not have to repeat the negotiation process again and again with respect to different public-goods issues now and then. Since international negotiations are usually costly and time-consuming, the effort saved may be very significant. Then the question now becomes: how can we succeed, even only for once? May be those IEA researches we mentioned above can cast some light on this problem. Furthermore, since it will affect the well being of all the people in the world, it becomes a common issue involving many disciplines, and is of course highly political in practice. Further researches and ideas will be needed to practically develop the strategies for achieving this goal.
References
1 UNEP (2002) Global Environmental Outlook 3, p.xx.
2 Carraro, C. and Siniscalco, D. (1993) ‘Strategies for the international protection of the environment’, Journal of Public Economics, Vol. 52, pp.309–328.
3 Petrakis, E. and Xepapadeas, A. (1996) ‘Environmental consciousness and moral hazard in international agreements to protect the environment’, Journal of Public Economics, Vol. 60, pp.95–110.
4 Barrett, S. (1992) ‘International environmental agreements as games’, in Pethig, R. (Ed.): Conflict and Cooperation in Managing Environmental Resources, Springer-Verlag, Berlin.
5 Barrett, S. (1994) ‘Self-enforcing international environmental agreements’, Oxford Economic Papers, Vol. 46, pp.878–894.
6 Barrett, S. (1997) ‘The strategy of trade sanctions in international environmental agreements’, Resource and Energy Economics, Vol. 19, pp.345–361.
7 UN Press Release Document GA/9695: ‘Statement on United Nations Programme Budget for 2000–2001’.
8 Liu, P-T. and Ng, Y-K. (2004) ‘Global environmental protection: national vs global perspectives’, forthcoming.
9 Chang, H. (1997) ‘Carrots, sticks, and international externalities’, International Review of Law and Economics, Vol. 17, pp.309–324.
10 Ng, Y-K. (2003) ‘From preference to happiness: toward a more complete welfare economics’, Social Choice and Welfare, Vol. 20, pp.307–350.
A significant, if not the major, characteristic of environmental protection is that its effect is largely worldwide. On the other hand, the world consists of hundreds of independent countries and regions. Therefore, an important problem in the protection of the global environment is that of the free-rider or public-goods problem. Pursuing its own interest, each country, state or region has insufficient incentive to safeguard global environment. This paper proposes a solution to this public-goods problem by enriching the United Nations with sufficient funds to subsidise abatement and empowering it with sharp enough teeth (through cooperation with the World Trade Organization) to penalise non-compliance, including the failure to contribute the proposed higher contributions to the United Nations.
Keywords: environmental protection; globalisation; international cooperation; international public good; United Nations.
Reference to this paper should be made as follows: Ng, Y-K. and Liu, P-T. (2003) ‘Global environmental protection: solving the international public-goods problem by empowering the United Nations through cooperation with WTO’, Int. J. Global Environmental Issues, Vol. 3, No. 4, pp.409–417. Biographical notes: Professor Yew-Kwang Ng holds a Personal Chair in economics at Monash University and has been a fellow of the Academy of Social Sciences in Australia since 1980. He has worked in welfare economics, mesoeconomics (a simplified general equilibrium analysis with both micro and macro elements) and welfare biology. He also collaborates with Prof. Xiaokai Yang on an inframarginal analysis of division of labour. He has published a number of books and journal papers as well as commentaries for the popular press.
Po-Ting Liu received both his BS (Engineering) and MS (economics) degrees from National Taiwan University and is currently a Doctoral candidate at the Monash University, Australia. His research interests are in the areas of game theory, public economics and welfare economics.
1 Introduction
The importance of environmental protection has been increasingly understood in recent decades, and it is especially true for global environmental protection after the first international conference on the environment – the United Nations Conference on the Human Environment – was convened in Stockholm in 1972. With the mushrooming ‘green awareness’ worldwide, numerous collaborative efforts were made to address a variety of international environmental issues in many direct or indirect ways. Officially, intergovernmental organisations were created or restructured to handle international environmental issues; examples are OECD, United Nations Development Programme (UNDP), United Nations Environmental Programme (UNEP), World Bank, and so on. International ‘green’ declarations, from the early Cocoyoc Declaration, the 1992 Rio Declaration, to the recent Johannesburg Declaration on Sustainable Development, were announced from time to time to convey, or promote, the consensus on environmental issues. For more substantial measures, hundreds of international environmental agreements (IEAs) were signed or even ratified for enforcement on issues ranging from the conservation of wildlife, desertification, ozone depletion to climate change. Also, with the rapid growth in quantity and quality of non-governmental organisations (NGOs), environmental NGOs are becoming more and more important, as local monitors, opinion leaders, international campaign participants, or even policy executers.
Unfortunately, the problem of global environmental disruption/protection is still far from being sufficiently tackled: “The level of awareness and action has not been commensurate with the state of the global environment today; it continues to deteriorate” [1]. At our current rate of environmental disruption per unit of output, and with the expected rapid growth in world output, global environment will face many crisis points in a matter of decades. This may partly be a problem of insufficient awareness by the public and thus the average willingness-to-pay for the present and future environmental qualities is far below its optimal level. However, even if we assume the willingness-to-pay is at its optimal level, there is still a serious defect in the coordination of actions of countries worldwide. It can be recognised as a commonly seen problem with public goods originating from the anarchic nature of international affairs. We believe this is a significant, if not the major, structural cause for the inefficiency in global environmental problem.
2 Global environmental quality as a public good
Within an economy or country, domestic environmental quality is known as public goods since it affects the welfare of all individuals and everyone is forced to consume the same amount of it. Providing public goods is deemed as one of the most important functions of the government. However, as the frequency and magnitude of human activities rapidly increase, we gradually notice the international dimension of environmental protection. The public-goods nature of the global environmental quality is similar to that of the domestic one if we regard countries as individuals and the whole world as one country: actions performed (pollutants generated) in any country not only affect itself but also that of the peoples of other countries in the world (cross-national borders). For example, global warming phenomenon is equally ‘consumed’ by countries all over the world and the greenhouse gas reduction in any country will definitely affect others.
Of course, generally the effort made for improving the environmental quality in one country benefits people in that country the most, and hence the effect is not homogeneous across countries. However, as long as there is an important global element in the environmental protection effort of each country, there exist important external costs/benefits that may not be (at least not adequately) taken into account by each country. This makes each country impose insufficient charges/fines on environmental disruption, spend insufficient effort in enforcing these fines, and spend insufficiently on the abatement of environmental disruption and on the improvement of environmental quality. Each country may take the free-rider position and put the burden onto other countries. The publicness externality, similar to that at the individual level in a single economy, is much discussed in the literature since the time of Pigou. The traditional solution to this problem is for the government to impose charges/subsidies in accordance to the marginal damages/benefits. However, the absence of a world government raises the problem of how to make such charges/subsidies effective. And, the Coase theorem does not apply to this issue since the transaction costs, including negotiation costs, are enormous owing to both the large number of countries and the complexity in the diplomatic process. Another possible solution to the public-goods problem is the voluntary provision of public goods. Various IEAs may be categorised as representative examples of this kind. However, how well can IEAs, as a means of the most frequently used solutions to current international problems, solve the global environmental problems?
3 Limitations of international environmental agreements
Although there were some international environmental treaties in the early 20th century, it was not until the 1960s that concerns about the environment led to the kind of binding IEAs that we know today. The first generation of IEAs is often of single issue and sectoral, emphasising the conservation of natural resources. Examples include the 1971 Convention on Wetlands of International Importance Especially as Waterfowl Habitat (Ramsar Convention), the 1973 Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES). After the 1992 Earth Summit, held in Rio de Janeiro, the UN Convention on Climate Change (UNFCCC) and the Convention on biological diversity (CBD) both demonstrated the difficulty of pursuing agreements that affect multiple sectors. These holistic and more integrated agreements involve so many different areas of law, policy and politics that they can engender more conflict and trigger more diplomatic battles than sectoral IEAs. Recently, non-binding instruments like the Rio Declaration and the prominent Agenda 21 have become more and more influential than binding ones. However, their aim is to set out important issues, foster discussion and stimulate new thinking, not to create rigid commitment for physical actions. So far, IEAs are perhaps the most important and the most frequently used means in solving the global environmental problems. The reason is rather obvious: since there is no single public authority existing at a supranational level to enforce the protection actions, we can only rely on whether sovereignty countries would ‘voluntarily’ agree to cooperate. Theoretically speaking, the most serious weakness of IEAs is the incentive of free-riding for countries, both before and after an IEA is signed and enters into force.
Before an IEA is signed, free-riding would undermine the motivation for participating in this agreement. For a specific country, its sweetest dream is to let other countries reduce their emissions and it maintains its level while enjoying a cleaner environment. In addition, after an IEA is signed, free-riding might increase the instability of the cooperation. Even if monitoring activities cost little and other signatories can detect the disobedience correctly, it may still be difficult for them to inflict a substantial and credible punishment on the violators. Although in some researches this double jeopardy of free-riding is indeed partly alleviated by introducing the possibility of side-payment (or transfer), it has not been eliminated.
Carraro and Siniscalco [2] demonstrated that partial cooperative agreements among sub-groups of countries exist when conditions of profitability and stability are satisfied. Gains from such coalitions can be used to expand existing coalitions by inducing other countries to cooperate through self-financed transfers. Even full cooperation can also be achieved without the design of carrot/stick mechanism if about 60% of the world countries ‘commit’ to cooperation. Petrakis and Xepapadeas [3] extended the above research by introducing non-identical countries and informational asymmetries. Here, world countries are identified as environment conscious countries (ENCCs) and less environment conscious countries (LENCCs). ENCCs are assumed to commit to cooperation to protect the environment. Under certain conditions, ENCCs can induce LENCCs to form a global or partial stable coalition through self-financing side-payments.
A mechanism that detects cheating is also developed in order to induce the desired emissions when the rest of the participating countries cannot observe the emission level of an individual country. However, the commitment (ignoring the benefits from free-riding) required from those environmentally pioneering countries in both articles may still be a problem. Although in the real world highly environment conscious countries like northern European countries may serve as candidates to commit, generally most countries in the world are still expected to be self-interest maximisers. As Barrett puts it, “the essential feature of IEAs is that they must be self-enforcing. No country can be forced to sign an IEA, and signatories to an IEA can always withdraw from the agreement”. Based on this essential feature, Barrett [4] explains why IEAs become less effective when the greater is the number of countries involved, which is also an observed fact in reality. He shows that as the number and heterogeneity of countries increase, agreement on the basis of simple rules like uniform abatement levels without side-payments will become very difficult to reach. Even if it can be reached, it may not be sustainable. Because the increase in the number of countries lowers the incentive for signatories to punish non-signatories, and makes free-riding more irresistible. The ultimate goal of IEAs is not the compliance rate of signatories but the effectiveness or benefits brought about from sticking to it. We can easily ‘work out’ many ‘successful’ IEAs by setting a minor target for everyone, despite their minor contribution to the environment. Therefore, Barrett [5] adopts two different models to analyse the effectiveness of IEAs and obtains a consistent result. That is, an IEA may achieve a high degree of cooperation only when the difference between global net benefits under the non-cooperative and full cooperative outcomes is small. Instead, when the difference is large, self-enforcing IEA cannot support a large number of signatory countries. He also examines an actual IEA, The Montreal Protocol on Substances that Deplete the Ozone Layer, which is generally considered to be a substantial achievement of international cooperation. Based on the estimation of Environmental Protection Agency of USA, Barrett claims that USA as well as many countries had an incentive to carry out the terms of the Montreal Protocol unilaterally, making the contribution of Montreal Protocol less significant. Moreover, the agreement may not have achieved as much as is commonly claimed.
However, if we can establish a credible threat to impose trade sanctions in IEAs, it may be capable of sustaining full cooperation in protecting the environment. Barrett [6] analyses the links between policies aimed at supplying global public goods and international trade in segmented markets. His analysis shows that the credible threat of imposing trade sanctions, accompanied by a minimum participation clause, can sufficiently deter free-riding. Moreover, in equilibrium, no trade is restricted. It means the welfare-reducing property of the sanction is easily compensated by the enhanced provision of the public good. Therefore, if we succeed in finding ‘sharp teeth’, the effectiveness of IEAs will be greatly improved.
From the existing aggravating global environmental problems and the above researches, we know that IEAs cannot eradicate the inherent free-riding problem effectively. Thus, we can conclude that whatever methods we adopt to tackle this issue, a credible punishment mechanism is the key to the deterrence of the free-riding behaviours and to a satisfactory solution. Once this mechanism is established, we can simply return to the adoption of the traditional Pigouvian solution. Hence, in the following two sections, we propose to strengthen the United Nations to carry out the charge/subsidy solutions in global public areas and equip it with the international trade sanction power from the cooperation with the World Trade Organisation.
4 Empowering the United Nations
Among the existing international organisations, the United Nations is the most influential. Up to now, it has 191 member countries (more than 80% of the world countries), a history of 58 years and a family of affiliated organisations dedicated to global services in different areas. Nonetheless, the UN cannot be regarded as a world government since it is not powerful in its relation to the member countries vis-à-vis the government of a typical country in relation to its citizens. A country’s government typically has very strong power of coercion. Even in a very democratic country, the elected government still has the power to pass legislation and undertake actions, impose regulations and taxes, etc. which are enforceable through the coercive power of the state against violation. In contrast, the UN is a looser organisation of its member countries and has much less, or barely any, teeth against violators. It is true that the UN had even sent in troops to certain countries to fight wars or to uphold peace and UN resolutions. However, these are exceptions and require elaborate manoeuvres. To make the UN capable of enforcing environmental protection on a routine basis, the following methods may be adopted.
4.1 First, increase the budget of the UN
The budget of a national government is typically in the order of 20–50% of the GDP. Even if we include only the budget of just the federal or central governments, excluding those of the state or provincial governments, the percentages are still in the order of 10–30%. In contrast, the regular biennium UN budget for 2000–2001 is about 2.5 billion US dollars [7], and the 2000 global GDP is about 43 trillion US dollars. Even if we (414 Y-K. Ng and P-T. Liu) include all the voluntary contributions to UN subsidiaries, the budget of UN is still far below 0.1% of the world GDP! No wonder we have difficulties solving the global problems of environmental disruption, poverty eradication, etc. The financial resources of the UN must be augmented to promote environmental protection at the global level and to promote other global public goods (such as fundamental scientific research). This may be done in a number of ways. We suggest that:
• The contributions from member countries to the UN should be raised by a large multiple. Since the public goods brought about benefit all countries and all individuals in the world, the expenses should also be shared according to a reasonable criterion. The success of enforcing higher contributions depends both on sharp teeth and on convincing member countries that the higher contributions would in fact benefit them when the higher budget is used for the good of the whole world.
• The yet unowned global public resources, including Antarctica, the open seas and oceans, electro-magnetic bandwidth, or even the outer space, may be declared the properties of the UN. The UN may then collect rents for fishing, mineral extraction, satellite communication, and other activities involving these properties. This not only provides a source of revenue for the UN, but also solves the problem of the tragedy of overutilisation of common resources.
4.2 Secondly, authorise the UN to enforce regulations
Members of the UN must come to a consensus on the adoption of the (environmental) regulation upon themselves, and then the UN can be authorised the power to enforce it. It includes charging violators in accordance to the damages imposed on all other countries and subsidising member countries for undertaking environmental disruption abatement and undertaking other desirable global public goods itself. Again, effective compliance enforcement requires sharp enough teeth, which would be discussed in the next section. In a separate paper [8], we show how a hypothetical world government should charge/subsidise the pollution/abatement activities. In particular, it is shown that:
• Where the local effect of abatement is not many times larger than the global effect, the optimal rate of subsidy should be almost 100%. This is so since the global effect is some 200 times larger for the whole world than the local effect.
• A unit of pollution (or any other form of environmental disruption) should be charged at how much it costs at the margin to clear up pollution by one unit. The last point also means that the world government does not have to make difficult estimates of how much marginal damages (which are subjective and may largely occur in the far future) will be imposed by environmental disruption, as required by the traditional Pigouvian taxes.
5 Cooperating with WTO
In the current situation of globalisation, the opportunity to have economic relationships (including trade, investment, and technical assistance/cooperation) is very important to virtually all countries. Therefore, we suggest that the UN cooperate with the WTO to use (Global environmental protection 415) this sanction power as sharp teeth to enforce the above proposed higher contributions and global environmental disruption charges. The probability for more effective protection of the global environment will then be significantly increased without intervening national sovereignties.
The WTO, established on 1 January 1995, is the successor to the General Agreement on Tariffs and Trade (GATT) and the embodiment of the results of the Uruguay Round. The WTO is the only global international organisation dealing with the rules of trade between nations. Although trade sanctions first appear to be discordant with the trade liberalisation principle of the WTO, we must recognise that trade liberalisation is not an ultimate goal itself. The purpose of trade liberalisation is to pursue higher global welfare. Besides, we can still find many supportive remarks in the official WTO documents. The preamble to the Marrakech Agreement Establishing the World Trade Organisation reads “conducted with a view to raising standards of living … allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment…”. Also, we can find some ‘green’ provisions in the WTO agreements dealing with environmental issues. Examples include GATT Article XX, Agreement on Technical Barriers to Trade, Agreement on Agriculture, Agreement on Subsidies and Countervail, and GATS Article XIV. Since our proposal, if adopted, applies to almost all countries (assuming no significant difference between the member sets of the UN and the WTO) in the world, it should not be viewed as trade barriers. It certainly will not contradict the main principles of the WTO, which are ‘trade without discrimination’, ‘freer trade’, ‘predictability in trade conditions’, ‘promoting fair competition’, etc. Meanwhile, trade sanctions, in different forms, have already been adopted in about 20 IEAs, including banning trade in certain products or allowing countries to restrict trade under certain conditions.
Unfortunately, the dispute-settlement panels of the GATT, as well as the GATT Secretariat, have condemned the use of trade restrictions by some countries to induce other countries to protect the global environment. The GATT Secretariat recommended that countries rely on ‘carrots’ rather than ‘sticks’ to induce the participation of other countries in IEAs. However, as shown in Chang [9], ‘carrot-only’ systems would create perverse incentives. Under conditions of asymmetric information as likely applicable in the real world, countries may seek to convince others that they bear large costs from pollution abatement by engaging in a great deal of pollution, so that other countries will offer larger carrots to induce abatement. In both ‘pooling’ and ‘separating’ equilibria, carrots encourage greater environmental damages pending a multilateral agreement. We need ‘sticks’ to discourage countries from harming the environment.
Of course, it costs to punish non-compliance, but how much? We wish to argue here that the losses from trade restrictions are not large. First, the losses from trade restrictions in traditional estimates should be discounted in accordance to the analysis of Ng [10]. The basic idea is that private consumption is overemphasised relative to the provision of public goods due to the following considerations: (a) after a biological minimum, private consumption has a large relative-income/consumption effect, making it largely mutually destructive at the social level; (b) consumer preferences are systematically biased towards materialistic consumption as a result of the accumulation instinct and the omnipresent commercial advertising. This argument is supported by evidence on the failure of happiness and quality-of-life indicators to improve significantly with per capita income. In contrast, the quality of the environment does significantly affect the health, happiness, and even the survival of mankind. Moreover, as most people are fairly happy, it is (416 Y-K. Ng and P-T. Liu) certainly worthwhile in terms of expected welfare maximisation to spend a sizeable amount of private consumption (with its insignificant welfare effects) in environmental protection to increase world welfare. Second, the sanction of trade restriction would only be used almost only as a last-resort threat for serious and repeated non-compliance. If restrictions are not imposed or are not in place for very long, then the total economic costs of trade distortions would be rather small. An implicit assumption of the above argument is that the proportion of violators is relatively small (i.e. most countries are obedient), which is reasonable since our focus is on the long run.
6 Conclusion
Faced with the prospect of global warming, a thinning atmosphere, contaminated water or disappearing forest, the idea that we cannot afford the cost of protecting the environment is gradually dominated by the idea that we cannot afford not to protect it. However, the public-goods nature of the global environmental problem together with the lack of effective international (environmental) governance has led to the failures of many attempts and the problem continues to exist. Although some IEAs had and have achieved a certain degree of international cooperation, the outcome is simply not good enough, and it is especially true for most demanding cases. We cannot just rely on IEAs to tackle the present existing and potential or even unknown future global environmental problems. Therefore, we propose to empower the UN, through authorisation and enrichment, to enforce environmental charges/subsidies. And the key to this issue, the deterrence of free-riding, is provided by the trade sanction power of WTO. The proposal of trade sanction might be controversial. However, if we wish to change the behaviours of independent countries without interfering sovereignties, trade might be the only effective resort. Besides, we have also argued the cost of trade restriction is not as high as generally believed.
Our proposal can be further supported by the fact that with deepening interdependences between different environmental issues as well as between different dimensions of human activities, a holistic solution should be adopted to integrate policies in different areas. Policy nullifications and repeated resource investments can be avoided to create synergy and efficiency. With numerous international agreements going on in so many different fields of expertise, the coordination job would be nearly impossible and the resource waste is inevitable.
One may argue the practicability here that both empowering the United Nations and the cooperation from WTO require universal agreement among all member countries and the obstacle is exactly the same one faced when implementing IEAs. Of course, the same difficulty exists, but only for once. If we succeed in reaching the consensus and carrying it out, then we do not have to repeat the negotiation process again and again with respect to different public-goods issues now and then. Since international negotiations are usually costly and time-consuming, the effort saved may be very significant. Then the question now becomes: how can we succeed, even only for once? May be those IEA researches we mentioned above can cast some light on this problem. Furthermore, since it will affect the well being of all the people in the world, it becomes a common issue involving many disciplines, and is of course highly political in practice. Further researches and ideas will be needed to practically develop the strategies for achieving this goal.
References
1 UNEP (2002) Global Environmental Outlook 3, p.xx.
2 Carraro, C. and Siniscalco, D. (1993) ‘Strategies for the international protection of the environment’, Journal of Public Economics, Vol. 52, pp.309–328.
3 Petrakis, E. and Xepapadeas, A. (1996) ‘Environmental consciousness and moral hazard in international agreements to protect the environment’, Journal of Public Economics, Vol. 60, pp.95–110.
4 Barrett, S. (1992) ‘International environmental agreements as games’, in Pethig, R. (Ed.): Conflict and Cooperation in Managing Environmental Resources, Springer-Verlag, Berlin.
5 Barrett, S. (1994) ‘Self-enforcing international environmental agreements’, Oxford Economic Papers, Vol. 46, pp.878–894.
6 Barrett, S. (1997) ‘The strategy of trade sanctions in international environmental agreements’, Resource and Energy Economics, Vol. 19, pp.345–361.
7 UN Press Release Document GA/9695: ‘Statement on United Nations Programme Budget for 2000–2001’.
8 Liu, P-T. and Ng, Y-K. (2004) ‘Global environmental protection: national vs global perspectives’, forthcoming.
9 Chang, H. (1997) ‘Carrots, sticks, and international externalities’, International Review of Law and Economics, Vol. 17, pp.309–324.
10 Ng, Y-K. (2003) ‘From preference to happiness: toward a more complete welfare economics’, Social Choice and Welfare, Vol. 20, pp.307–350.
