By Eric Vandenbroeck and co-workers

Fixating on Emissions Won’t Decarbonize the World’s Economy

It’s time for a climate reckoning. Global climate cooperation has been underway for more than three decades, since the UN Framework Convention on Climate Change was signed in 1992. In 2015, governments adopted the Paris agreement to limit average global temperature increase to two degrees Celsius (and, ideally, to 1.5 degrees). Annual meetings of the Conference of the Parties (COP) have focused on making progress toward this goal. Yet as countries prepare to gather in Brazil for COP30, the Paris agreement, and by extension the UNFCCC itself, is teetering on the brink of irrelevance.

In the decade since the Paris agreement, countries have made some progress, including by creating national plans to reduce emissions, a framework for assessing climate adaptation, and a new fund to compensate developing countries for loss and damage caused by climate change. But this progress is still rather thin and is stalling in some areas: only 67 countries have submitted their updated national plans. This year’s COP host, Brazil, is one of the world’s largest oil producers; it has recently weakened environmental permitting rules, which could increase the deforestation of the Amazon, and ramped up oil and gas production. The previous two hosts, Azerbaijan and the United Arab Emirates, are petrostates, and both appointed people with deep ties to the oil industry to oversee the COP negotiations. Meanwhile, President Donald Trump has again ordered the United States, the world’s second-largest carbon emitter, to withdraw from the Paris agreement. Trump, in his second term, is even more hostile than he was in his first to the most basic climate measures. In September, the U.S. Environmental Protection Agency announced that it plans to cease collecting emissions data from major polluters, removing the means to track companies’ compliance with climate policy.

All the while, the drumbeat of the climate emergency grows ever louder. The world has already exceeded average warming of 1.5 degrees Celsius. Extreme weather is increasingly common: last month’s Hurricane Melissa was one of the strongest storms ever recorded in the Caribbean. Even the UNFCCC secretariat, traditionally restrained in its language and conduct, noted last year that “greenhouse gas pollution at these levels will guarantee a human and economic trainwreck for every country, without exception.”

The Paris agreement is failing to reverse these catastrophic trends. Because its goal is to lower greenhouse gas emissions, policies that countries pursue under this framework are geared toward measuring and trading units of greenhouse gas emissions, an approach I call “managing tons.” This approach allows governments to tailor climate policies in ways that maximize economic efficiency and flexibility. But in practice, these policies don’t work very well. They keep the biggest emitters in business while providing firms and governments the convenient political cover to ignore the underlying problem: how national and international policies prop up the fossil fuel economy.

 

Fatal Flaws

Three decades of climate diplomacy have failed to bring about decarbonization at the pace required to avoid the worst effects of the climate crisis. This is because the UNFCCC policies that follow from an emissions-focused “managing tons” approach, such as carbon offsets and carbon pricing, have had minimal effect. Carbon offsets (also called carbon credits) allow firms and countries to meet part of their reduction requirements by paying for emissions-reducing activities elsewhere—for instance, by buying carbon credits from Indonesia to support the protection of its vast rainforests. Carbon pricing works either by requiring an emitter to pay the government a tax per ton of carbon dioxide emitted or by implementing a cap-and-trade system, in which the government sets a cap on aggregate emissions and firms buy and sell carbon allowances to stay under that cap.

Both mechanisms rely on the market to drive decarbonization. And neither is achieving its desired results. Carbon offsets have overpromised and underdelivered since nongovernmental organizations began to use them in the mid-1990s. In some cases, offset projects simply shift emitting activities elsewhere; for example, deforestation may be avoided in one province only to be carried out in another, keeping overall emissions the same. A recent meta-analysis of over 2,000 carbon offset projects found that less than 16 percent of the carbon credits issued since 2005 corresponded to real emission reductions.

Carbon pricing has yielded similarly mixed results. Some basic facts are revealing: 28 percent of global emissions are currently subject to a carbon price, yet emissions continue to rise. The average global price for carbon is a measly $5 per ton, but economists’ estimates of the social cost of carbon—the amount of economic damage incurred from emitting carbon dioxide—range from $44 to $525 per ton. Only under very specific conditions does carbon pricing prove to be a useful tool for reducing emissions. The EU, in a rare success story, devoted substantial regulatory and political resources to creating a well-functioning emissions-trading scheme, even creating a carbon central bank to keep carbon prices up. That approach is often not politically feasible, however. Australia and Canada, for instance, are both wealthy countries and large carbon emitters, but partisan divides over climate policy and concerns about the obvious upfront costs to voters have resulted in years of inconsistent policy.

Both offsets and carbon pricing have near-intractable structural problems. In the case of carbon offsets, everyone involved is focused on making the numbers add up. Sellers, which are often private organizations that develop offset projects, want to maximize the number of credits they can produce. The emitting buyers, for the most part, want cheap credits. And the middlemen—retailers, validators, and verifiers—want to make sure deals go through. Successful transactions take precedence over the actual effect on lowering emissions. The trouble with carbon pricing is different but equally problematic. Cap-and-trade systems in particular tend to have built-in exemptions and free allowances for big emitters to limit damage to their competitiveness. But once these benefits are established, they are difficult to roll back. Thus, even the EU’s system—the oldest, largest, and arguably most successful emissions-trading market—only began removing free allowances in 2024, almost two decades after its creation. As long as the UNFCCC process is employing policies such as carbon pricing and offsets as the solutions to climate change, most countries will fall short of their emissions targets, since they will not adequately address the problem of reducing the supply of fossil fuels.

The UNFCCC process, moreover, is littered with broken promises to developing countries. “Passing the hat” for voluntary contributions from wealthier countries has not proved to be an effective approach to climate financing. In 2009, developed countries committed to providing $100 billion per year by 2020 to help poorer countries decarbonize and adapt to the effects of climate change. They reached that target—two years late—but only by tapping into existing pools of development aid instead of committing new funds. At last year’s COP summit, dubbed “the climate finance COP,” developed countries agreed to raise their contribution to $300 billion annually, starting in 2035; many developing countries, however, say that $1.3 trillion per year by 2035 is needed and denounced the $300 billion commitment as appallingly low.

 

Tax and Spend

There are better ways to jump-start decarbonization than by working through the UNFCCC. To create the conditions that will make the green energy transition possible, firms must find it riskier to own and develop fossil fuel assets, and they must find it more desirable to rapidly develop green energy. The balance will shift only when the entrenched power of fossil asset owners is reduced and renewable energy companies, solar panel manufacturers, and other green asset owners gain greater market share and wider political influence. Enabling that shift will require curtailing the wealth of big emitters and their ability to obstruct climate policies, which countries can achieve by changing their approaches to taxation and investment. This progress will not happen at COP summits, but in institutions such as the OECD and through the provisions of bilateral and multilateral investment agreements.

A good place to start a serious climate push is with taxation. Researchers have estimated that between $7 trillion and $32 trillion in corporate assets are held in offshore accounts where they are subject to little or no tax. The EU Tax Observatory, a research institute, found that more than one-third of corporations’ multinational profits, amounting to $1 trillion in 2022, are offshored to avoid taxes. Offshoring helps expand the wealth—and therefore the influence—of large, established fossil asset owners. And it creates huge losses for governments, especially for developing countries; many businesses generate profits in developing countries through data collection, advertising, and other purely digital activities but book those profits in other jurisdictions. Repatriating these revenues can provide governments with funds for the green energy transition and for climate adaptation—funds that developing countries clearly need.

The most notable progress on curtailing tax avoidance is happening through the OECD, which in 2021 created “model rules” to address offshoring by applying a 15 percent minimum corporate tax. To date, nearly 140 countries have agreed to the minimum tax rate and 65 have introduced or passed domestic laws to enforce it. Signatories that have not yet created legislation to implement the agreement must now do so, and all should track the effects of these new rules to find and close any remaining gaps. Civil society groups should also continue to advocate for expanding taxation through measures such as the “Zucman tax” in France (named after the economist who proposed it, Gabriel Zucman), which failed to pass a parliamentary vote but would have assessed a two percent tax on assets over 100 million euros.

Taxation may seem far removed from climate policy, but unlike carbon pricing or offsets, it gets at the root of the climate problem: money. Extreme wealth is correlated to huge emissions. A recent Oxfam report found that the richest 0.1 percent of the world’s population produced more carbon pollution in a day than the poorest 50 percent emit all year. Making sure that fossil asset owners pay their fair share of taxes chips away at their overwhelming political advantage.

Another step toward decarbonization is to curtail investment protections for fossil asset owners. Since 1980, countries have signed more than 2,600 bilateral and multilateral investment treaties that protect investors from national expropriation, trade discrimination, and undue regulatory burdens. Alleged violations of these treaties are arbitrated through the Investor State Dispute Settlement system (ISDS), which has turned out to be a boon for fossil asset owners. Since 2013, roughly 20 percent of ISDS cases are initiated by fossil fuel companies. The companies have won roughly 40 percent of the time with an average award of $600 million. Eight of the 11 largest ISDS awards—all over $1 billion—have gone to fossil fuel companies.

Not only do ISDS protections prop up the profitability of fossil assets, but the payouts are so burdensome that they have even discouraged some governments from enacting climate policies in the first place, for fear of losing arbitration cases. In New Zealand, for instance, the government banned new offshore oil exploration in 2018 but chose not to apply the ban to existing concessions for fear of litigation. Without ISDS provisions, governments would not have to worry about potentially incurring huge financial burdens if they make decisions that could threaten the interests of fossil fuel investors.

One fix for this problem would be for countries to withdraw from the International Center for Settlement of Investment Disputes, the division of the World Bank that serves as one venue for ISDS arbitration. Bolivia, Honduras, and Venezuela have already done so, citing concerns about preserving sovereignty. Or countries could simply exclude ISDS provisions from present or future investment treaties, as Canada, Mexico, and the United States did in their 2020 trade agreement. An even more limited but still potentially effective option would be to exclude the fossil fuel industry from arbitration protections. India, for example, has rewritten the rules of its model investment agreement, which serves as a template for bilateral deals, to allow for exemptions related to human, animal, and plant life or health.

Reforming investment protections or excluding them from investment agreements altogether is a more expansive way to think about climate policy. When governments no longer have to pay large sums to fossil asset owners that win arbitration cases, those sums can be freed up for green investments, a form of climate finance. Even if the funds are used for less climate-friendly purposes, they would not go straight into the coffers of large fossil fuel companies.

 

Time’s Up

Defenders of the COP process often argue that, despite its flaws, it is the only game in town. It isn’t. It’s time to stop throwing political will and resources at policies that don’t work and start channeling international momentum on climate policy into pursuing the structural economic change that is necessary to decarbonize. This means narrowing the role of the UNFCCC. Its usefulness as a host of carbon offset markets is limited, and governments should have no illusions that their annual check-in under the Paris agreement will enforce real accountability, much less create incentives for more ambitious national pledges.

The Paris agreement can remain a secondary source of funding for mitigation and adaptation efforts. It is not equipped to do more. The UNFCCC currently has six financial mechanisms, the largest of which, the Green Climate Fund, has disbursed approximately $6 billion in funds since its creation in 2010. Any amount of aid is welcome, but this kind of sum can only make a dent in the more than $1 trillion annually that developing countries say they will need.

The UNFCCC should also remain a platform for data collection and information and technology sharing. The convention requires countries to report their emissions regularly (although frequency depends on level of development), which is critical for evaluating progress toward climate goals. Its various committees also help countries with the nuts and bolts of climate policy by providing a forum to plan mitigation and adaptation measures, facilitate access to new technologies, and share information on financial, technological, and capacity-building needs.

Moving the core of decarbonization efforts away from the UNFCCC, however, may worry developing countries. The UNFCCC works by consensus, leveling the playing field for less powerful countries. But the current approach to climate policy simply isn’t built for success—and maintaining the status quo amid an intensifying climate crisis will be especially harmful for the developing countries that suffer most from its effects. With countries struggling to meet even their most basic obligations under the Paris agreement, the treaty is at risk of becoming a dead letter. Sticking with a process that has not yielded results will only cause more damage and death.

 

 

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