Kellogg World Alumni Magazine Summer 2010
Kellogg Insight

Timing is everything

Short-term agreements on climate change may be worse than no agreement at all, Bard Harstad finds

By Tim De Chant

"Half of something is better than all of nothing," goes the old adage. And for the past two decades, that is how the world's leaders have approached climate-change negotiations.


From regional accords to the Kyoto Protocol, each agreement has been a baby step toward the more ambitious goal of a long-term global approach to climate change. But while compromises make these smaller agreements possible, the proper duration of a successful global climate treaty may not be open to debate. According to research by Bard Harstad, the Max McGraw Chair in Management and the Environment, a climate-change agreement should be a long-term-or-nothing proposition.

"Short-term agreements can be even worse" than no agreement at all, Harstad says, "because investments may decline if countries anticipate frequent negotiations." His findings were consistently clear: It did not matter whether emissions were restricted by cap-and-trade, caps without trade or a carbon tax.

Harstad says the findings run contrary to prevailing economic thought. "Many economists recommend short-term agreements because you don't know how much is optimal to pollute in the future," he says. Under shorter terms, they argue, countries can adjust their strategies accordingly. But with negotiations continually on the horizon, countries delay investments to improve their bargaining positions, Harstad observes. Those that have invested in clean technologies early will be expected to make further cuts since they have the capacity to do so, placing them at a disadvantage in the next round of negotiations.

Denmark has already been put in this position. At a European Union summit in 2008, Poland, Bulgaria and other Eastern European states called on Denmark — which is heavily invested in renewable energy — and other Western European nations to grant them concessions. Eastern European nations were falling short of their targets due to their reliance on coal. Denmark's lead in renewable energy was an advantage, the Eastern bloc countries claimed, and as a result they argued that Denmark should trim its emissions further.

Denmark's situation highlights the problems posed by short-term agreements, Harstad says. The accord required nations to cut their emissions 20 percent below 1990 levels by 2020 — 12 years from the negotiation date, a mere heartbeat to investors in large capital projects like wind farms and solar installations. Under short-term agreements, such investments may not be worthwhile, since other countries may soon take advantage of the sunk investments and require the investing country to reduce its emissions even further. To avoid a predicament such as Denmark's, countries would need to be committed for a longer time.

The second-best solution, Harstad says, is to adjust the other conditions accordingly. If a long-term agreement cannot be reached, then emissions limits must be tightened. Harstad used his model to determine how stringent terms regarding pollution levels and duration should be to spur adequate investment. In the case of short-term agreements, pollution levels should be almost draconian to have the desired effect. Longer-term agreements could offer more slack, but would still need to be strict enough to encourage sufficient research and development.

The brief duration of current climate treaties is only part of the problem. Agreements that expire without replacement, like the Kyoto Protocol, are also complicit. Here, climate negotiators could learn a lesson from their partners in international trade, who revert to an existing set of agreements when negotiations fail. Climate compacts that retain their authority when new negotiations fail would motivate countries to seek better terms and update the agreement, Harstad maintains.

The best option, Harstad suggests, would be a long-term agreement with renegotiations. Rigorous pollution limits negotiated in the beginning would prod countries to invest heavily early on. Those that do not would find it costly to comply later on. And when renegotiations come around, laggard nations would have very little leverage against the countries that made the proper investments. Rather than suffer this fate, all nations will invest more up front, Harstad points out. Such an agreement would fix both the investment problem and the pollution problem, he says. 

Current News & Events
View all current news
Kellogg School of Management © Kellogg School of Management, Northwestern University.
All Rights Reserved.
Policy Statements | Site Map
Kellogg School of Management
2001 Sheridan Rd.
Evanston, IL 60208-2800