World 3.0

by Pankaj Ghemawat

  Figure 6-1: United States air quality

  Source: Creative Methods.

  Other pollution problems have a regional footprint. Acid rain (or more technically, “acid deposition”) results from interactions of emissions containing sulfur and nitrogen with water molecules in the atmosphere, rather than the direct effects of the same pollutants breathed locally. Thus it quite naturally affects a larger area. Downstream effects of pollution released into rivers also tend to have a regional impact.

  Figure 6-2: Distance sensitivity of air pollutants

  Source: National Research Council, The Atmospheric Sciences Entering the Twenty-First Century (Washington, DC: National Academy Press, 1998).

  Regulation of regional pollutants does require cross-border cooperation, but that's not a hopeless requirement. Consider how North America has addressed its regional acid rain problem. Title IV of the 1990 U.S. Clean Air Act established a cap-and-trade program, initially targeted at reducing sulfur dioxide emissions, and later expanded to cover nitrous oxides. In 1991, the U.S.-Canada Air Quality Agreement was set up to address cross-border air pollution problems, again initially focused on the causes of acid rain. With cooperation aligned to the scale of the problem, North American initiatives against acid rain have reduced it by 65 percent since 1976, according to the Pacific Research Institute.25 Many other examples exist of neighboring countries working together to address cross-border pollution problems. That said, we shouldn't fool ourselves into thinking that this makes regional pollution a problem of the past. In other parts of the world, especially developing regions, acid rain remains a serious issue.

  Pollutants that aren't very distance sensitive account for the pollution problems that are truly global. These are fewer in number, but garner more attention since they impact us all. Moreover, such problems are particularly hard to address because of governance gaps that greatly complicate the global coordination that is required. Still, the challenges are not insurmountable, as illustrated by the first global problem to garner serious attention: the discovery in the 1970s that emissions of CFCs (chlorofluorocarbons) were depleting the ozone layer.

  In 1985, the Vienna Convention for the Protection of the Ozone Layer established a framework for multilateral negotiations aimed at reaching an agreement to control ozone-depleting pollution. In 1987, the Montreal Protocol was concluded with binding targets set at different levels for developing versus developed countries and for different pollutants. The protocol also focused on production and trade rather than emissions, threatening trade sanctions against nonsignatories and against signatories that might fail to comply with their obligations. Nearly the whole world eventually signed on, trade sanctions never were levied, and “95% of the production of ozone-depleting sub- stances has been phased out.”26 Global regulation with real teeth to it and sensitivity to cross-country differences effectively tackled a global externality. Former UN secretary general Kofi Annan hailed the Montreal Protocol as “perhaps the most successful international agreement to date.”27

  The Case of Climate Change

  Today, we face an even harder global environmental challenge: the impact of emissions of CO2 and other greenhouse gases. There is now general agreement that such emissions are causing dangerous climate change with potential for significant global warming. Thus, according to the 2010 iteration of Shell's energy scenarios, “stabilising GHG [greenhouse gas] levels in the atmosphere at or below 450 ppm of CO2-equivalent—a level scientific evidence suggests is necessary to significantly reduce the risks of climate change—remains a significant challenge … [but would] limit temperature rises to no more than 2°C above pre-industrial levels”28 And this is Shell's aggressively optimistic scenario! In its pessimistic scenario, “concentration is on a path to a long-term level well above 550 ppm”—which would likely create a climate catastrophe.29

  I take this perspective as a point of departure to start to illustrate some of the principles for global cooperation that apply to World 3.0—in the context of a really difficult problem. Note that global warming would be hard to address even if it occurred within a single country (without any cross-border externalities), because dealing with it involves making significant sacrifices today to avert a future catastrophe. Deferring gratification even on the individual or local level isn't easy, but to get the whole world to do so on a concerted basis is about as hard a challenge as you can find. On top of that, climate change is a global externality: what Sir Nicholas Stern, the author of the Stern Review on the Economics of Climate Change for the British government, called “the greatest market failure the world has seen.”30 That means the sacrifice of some will come to naught if others simply free-ride on their efforts. We need a solid agreement in place, and if we take a World 3.0 approach, we can improve our chances of reaching it.

  While scientific research started earlier, formal multilateral efforts to address climate change date to the Rio Earth Summit in 1992, when the United Nations Framework Convention on Climate Change (UNFCCC) treaty was negotiated. Much good work has been done under the auspices of the UNFCCC, but we still have a long way to go. As I write this, a great deal of disappointment lingers over the failure of the December 2009 Copenhagen Conference of the Parties to reach a binding accord with specific targets for reduction of greenhouse gases.

  Given the economics of global externalities, the UNFCCC's emphasis on binding targets is rightly placed. And the mechanisms that it envisions, such as trading in emissions permits, technology transfer, and financial assistance to developing countries, generally make sense—although there is reason to think that a carbon tax would be superior to a scheme of tradable permits since the latter often degenerates into handouts of valuable permits to heavy polluters. The principle of “common but differentiated responsibilities” (different requirements for developed versus developing countries) is also appropriate since a one-size-fits-all approach is unlikely to work.

  How might the odds of reaching an agreement along these lines be improved? One prescription that fits with World 3.0's focus on cross-country differences would be to go even farther to deal with such differences between countries. For example, while the UN process distinguishes between developed and developing countries, the latter grouping includes large developing countries on track to emit the majority of the world's greenhouse gas emissions (China has already overtaken the United States as the world's largest source), “small island developing states” that face existential threats from global warming, and very poor countries that have yet to see rapid growth and development.

  Two other kinds of cross-country differences that, inevitably, must be accounted for relate to variations in countries' bargaining power and, in negotiations jargon, their best alternatives to a negotiated agreement. Thus, while China and India have significant bargaining power, they also stand to be hit particularly hard—or so most projections imply—by the consequences of global warming. (In contrast, the CIA estimates that Canada and Russia might do relatively well—although they too would experience massive disruptions.)

  Recognizing these national differences and accounting for them as countries focused on their own welfare interact with each other is very different from the usual (World 2.0-inspired) focus in academic exercises of simply optimizing global welfare (with the implicit and improbable assumption that each country will do what makes sense for the world as a whole). Anthoff and Tol illustrate the very large differences this can make in the context of global warming in terms of the carbon taxes that different countries are willing to impose.31 Their calculations also suggest that global warming would be easier to deal with if we placed more weight on the harms inflicted on others. Relatively high weights could even get us to carbon prices high enough to interest industry in general in carbon capture and storage. The broader point, expanded on in chapter 15, is that caring for others is one way of internalizing the kinds of externalities that we have been worrying about.

  A corollary of the points made above is that the emphasis
on consensus in decision making at the UN's large climate change meetings, while admirable, is probably misplaced. One specific alternative involves a two-track approach, with all countries being consulted as well as informed, but with negotiations concentrated among a core group of countries—what Dr. Supachai Panitchpakdi, secretary-general of UNCTAD, described to me in another context as a “G20-plus” approach that might be reasonably inclusive without becoming unwieldy. The core countries in this context, of course, consist of the largest current and future polluters.

  Beyond that, World 3.0 is about multiple parallel efforts and diversity, not single-track uniformity. Although the UN should probably remain the primary venue for fighting climate change, World 3.0's emphasis on cross-country differences also offers lessons about how to make progress outside of the UN process.

  Thus, in addressing global problems, domestic activism and politics still have big roles to play. Probably at least as much effort and money should be expended on convincing governments (and voting publics in democratic countries) at a national level to act, as on international agitation. The most important spur to Chinese efforts to control global warming and pollution more generally seems to me to likely be the deterioration of China's natural environment, and the air quality in its larger cities in particular (thanks to local pollutants). International efforts of less than fully global scale (such as regional efforts like those undertaken by the EU and bilateral negotiations that have taken place between the United States and China) can also prove constructive. Additionally, progress doesn't always have to be channeled by governments; nongovernmental organizations (NGOs) and businesses can also have a large impact, especially now that we see some collaboration across that divide. Businesses and NGOs are, for instance, leading the REDD (Reduced Emissions from Deforestation and Forest Degradation) projects to save rainforests instead of simply sitting around waiting for governments to strike a comprehensive global climate deal.

  The role of business is worthy of additional description, especially because of the rude characterization in the cartoon with which this chapter began. Certainly, business emissions are like all other emissions, candidates for regulation. But the fundamental challenge that we face in relation to a natural environment of limited natural resources and absorptive capacity is that of burgeoning demand. With a 50 percent increase in world population projected for 2050 and a severalfold increase in average per capita income, we're talking not of continuing to generate as much gross world product as today without causing further environmental harm, but about squeezing out maybe five times as much world product by 2050. Because of this massive projected increase in scale, taxation, quotas, and nudges to conserve, while important in reducing the coefficient of the scale effect, are likely to fall far short in reconciling limited supply with burgeoning demand.

  Given this arithmetic, innovation will be needed. It will presumably involve business firms in prominent roles, although maybe as parts of public-private partnerships (the Chinese, in particular, are pursuing more of a state capitalist approach). And businesses' appetite for developing and bringing the necessary innovations to market will depend to an important extent on the world being open rather than closed to trade and investment. That may yet turn out to be the most important link between globalization and the environment.

  Toward a More Sustainable World 3.0

  Environmentalists have long called for us to “think global” and “act local.” With increasing focus on global problems such as ozone depletion and global warming, we shouldn't lose sight of the local and national dimensions of caring for our planet. We need to approach ecological problems with responses scaled appropriately to their causes and impacts. In most cases, this still means focusing on problems that lie within our own countries or regions.

  Globalization's environmental impact has been mixed—not entirely positive (especially with respect to CO2 emissions), but not the cause of most of the world's ecological problems. On balance, globalization has probably done more good than bad for the planet, especially if you don't advocate protecting the environment through poverty in developing countries. If all countries maintained their current standards of living without any cross-border trade and investment, the environment clearly would suffer far more. How could we grow all the food we enjoy today without the benefit of trade across climate zones? What about trying to produce fuel cells without the precious metal catalysts that come almost exclusively from South Africa, Russia, and Canada (or hybrid or electric car batteries without those pesky Chinese rare earths)?

  If you still find this hard to believe, please review the ADDING value framework again with an eye to its implications for the environment. You'll find that a lot of globalization's benefits don't get much play in the media, if only because they are a bit more complicated or esoteric. Scale benefits make production more efficient. Trade can reduce costs and improve the product variety—as true for products required to protect the environment as much as for any other products. Industry structures with multinational corporations make it easier for NGOs to go after large targets to clean up messes across many countries—a lot simpler than hunting down small producers around the world.

  Additionally, with some climate change seeming unavoidable, the ability to normalize risk across countries (especially with respect to food production) is especially useful. Last, and perhaps most important, globalization is crucial to the development and dissemination of green technologies. By one estimate, “75 percent of all international technology transfers stem from trade.”32 If every country had to try to figure out how to produce a high standard of living and protect the planet on its own, solutions would be much more difficult and time-consuming to achieve.

  Global warming's seriousness also suggests that what we need is more cross-border cooperation among governments and regulatory authorities, not less. I can't think of a single environmental problem that crosses borders where the right response is to close off interactions with other countries. We do need to remain vigilant against potential harms that globalization could cause, like pollution havens, but the answer isn't to close borders in the name of protecting the environment. We need to work together to preserve the planet for future generations, remaining sensitive to cross-country differences. The mind-set I advocate as part of the shift to World 3.0 can strengthen globalization's positive contributions to sustainability while giving us tools to address environmental harms, regardless of their causes. More on that is coming in the third part of this book.

  Chapter Seven

  Global Risks

  Source: Mike Luckovich

  THE LAST FEW YEARS have provided a startling reminder that we still live in a world full of risks. We've seen recession, stock market gyrations, and unemployment streak between countries like an epidemic. Homes and retirement portfolios have been lost, and those starting off with less have fared far worse. An estimated 100 million more people went hungry in 2009 than in 2008.1 Globalization has been blamed for increasing volatility, and for spreading problems that would otherwise have remained localized.

  Consider how a recent report by Lloyd's, the famed specialist insurance market, put it: “Businesses have reaped unprecedented benefits from global trade. However, at the same time, globalization has introduced new forms of risk, notably systemic risk. Due to the increasing interdependence of global systems, risks now transmit much farther and more quickly than before, jumping from one industry or country into several countries or sectors.”2 The general view that globalization increases systemic risk but is still worth it is basically the World 2.0 position today; few are still willing to spell out the real implication of a flat world—that additional integration poses no risk because everything is already effectively harmonized. Risk-related objections to globalization inspired by World 1.0 take the opposite view of that trade-off between systemic risk and the gains from globalization although, after the global financial crisis, they are usually framed more simply as “I told you so.” And they find a receptive
audience because of a generalized mistrust of foreigners that is fueled by economic difficulties, as discussed later in chapter 11.

  Both strands of discourse, however, underplay the benefits of diversification to reduce risk. Between 1875 and 1919, some 15 to 30 million people died in localized famines in India. What marked the end of this pattern? The extension of railroads throughout the country. When communities were isolated, local weather patterns were a matter of life and death, but as districts got linked up to the railroad, “the ability of rainfall shortages to cause famine disappeared almost completely.”3

  Or take a more modern example. In the 1980s, a U.S. investor holding only domestic stocks would have experienced 30 percent more volatility than an investor with an optimally diversified international stock portfolio (holding returns constant) or accepted 30 percent lower annual returns (holding volatility constant).4 Of course, ex post optimality in this sense requires foreknowledge of stock market correlations. But more recent studies that dispense with this assumption generally suggest that international diversification still yields significant benefits—although they have diminished in recent years.5 Also note that the estimated benefits from international diversification are generally greater for investors from other countries given the relatively high correlation of U.S. and world market indexes. Thus, according to one study, the U.S. ranks in the bottom quintile of more than 50 countries in terms of the risk-adjusted returns to domestic investors from international diversification: gains in the median country, South Korea, are twice as high.6