A Planet at Risk Requires Multilateral Action

IMF Blog, December 3, 2018

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The COP-21 Paris Agreement was a major achievement but further action is required as evidence grows that human activity is destabilizing the Earth’s climate and biosphere.
Climate and environment indicators cited:
- "Seventeen of the 18 warmest years on record have occurred since 2000. 2018 is on track to join these ranks."
- The World Wildlife Fund estimates that "sixty percent of vertebrate animals have been wiped out since 1970."
- Rain forests are shrinking; polar icecaps are retreating; coral reefs are disappearing; fertilizer runoff is damaging freshwater and coastal ecosystems; microplastics are entering food and drinking water; insect density is declining in some areas.
Scientists warn of crossing key planetary boundaries and potential tipping points that could be "breached unexpectedly, abruptly, and irreversibly."
The UN Intergovernmental Panel on Climate Change warns "we have very little time left to act to avert climate disaster." Recent national assessments (U.S. National Climate Assessment, U.K. government climate projections) underscore the risks.

Planetary disruptions are framed as negative externalities: businesses and households do not fully account for how their activities harm the environment.
Standard corrective policy instrument: taxes that force households and businesses to pay the costs of their collateral damage to the environment.
Complexity of global environmental externalities suggests a role for a wider array of policies, including regulatory and financial policies.
Because climate and biosphere externalities cross national boundaries, policies should reflect global, not just local, damages—making unilateral national actions unlikely to be sufficient and highlighting the need for multilateral cooperation.

Multilateral cooperation lets countries account for the wellbeing of those outside their borders, with mutual assurances that others are doing the same.
COP-21 reflected this spirit, committing countries under the Paris Agreement to contain the increase in global temperatures above pre-industrial levels to "well below 2 degrees Celsius."
Implementing and strengthening the Paris Agreement requires a shift to a "zero-carbon economy over the next few decades."
Historical multilateral successes cited as precedent:
- Bretton Woods financial institutions, the OECD, and trade liberalization under the GATT and the WTO supporting seven decades of prosperity and substantial income convergence by poorer countries.
- International cooperation on financial stability via the Basel process and the Financial Stability Board (FSB) showing effectiveness of "soft law."
- International health cooperation (eradication of smallpox in 1980; further health improvements under the Millennium Development Goals).
- Agreements limiting nuclear testing and spread to avoid lose-lose outcomes.
- Environmental multilateral successes: 1979 Convention on Long-Range Transboundary Air Pollution (with protocols on sulfur and nitrogen oxides); 1987 Montreal Protocol to phase out ozone-depleting substances, which "now covers 197 parties" and helped reverse Antarctic ozone losses.

Coalitions of the willing or "clubs" that mutually extend benefits (for example, easier intra-club movement of people) in return for stronger agreed environmental action.
Use of existing economic multilateral mechanisms and trade agreements to promote environmental action:
- Several trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the United States-Mexico-Canada Agreement (USMCA), already contain chapters requiring countries to enforce their own environmental laws.
- Plurilateral or critical mass agreements within the WTO could require members to take more ambitious action to reduce greenhouse-gas emissions.
- The EU-Japan trade deal announced in July 2018 was the first to commit its signers to uphold the Paris Agreement.
Financial-sector measures to incorporate environmental externalities into prices:
- The FSB Task Force on Climate-Related Financial Disclosures—set up in 2015 at the request of G20 leaders—aims to increase visibility of climate-related financial risks so markets can price those risks and financial investors can manage them.

Given available staff resources, the IMF could expand its work on surveillance and mitigation of environmental damages.
The Fund could potentially monitor compliance with aspects of international environmental agreements.
The authors call for "much more out-of-the box thinking" and greater multilateral action to address the planetary risk, reflecting William Nordhaus’s long-standing warnings and emphasis on multilateral solutions.

Source: A Planet at Risk Requires Multilateral Action; Signe Krogstrup, Maurice Obstfeld; December 3, 2018.

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