Cost & Benefit Analysis of The United States’ Withdrawal from The Paris Agreement

– Carolina Arlota

What are the benefits and costs associated with the United States withdrawing from the Paris Agreement on climate change? This note approaches this question focusing on the advantages and disadvantages for the United States while considering its global impact and the moral dimensions involved. This work is unique, because it considers this United States’ controversial decision from this law and economics perspective. This note also advances our understanding about membership in the Paris Accord, as it compares the United States’ withdrawal with the engagement of India.

Scientific consensus relates climate change to global warming, which has among its human-induced causes the accumulation of greenhouse gases (GHG) in the atmosphere. The United Nations Framework Convention on Climate Change (UNFCCC), an international agreement signed at the Rio Earth Summit 92 and which entered into force in 1994, aimed at the stabilization of greenhouse gas emissions. In 2015, the Twenty First Conference of Parties of the United Nations Framework Convention on Climate Change enacted the Paris Agreement. This Accord aims at containing the rising of the global average temperature to well below 2C above pre-industrial levels, while advancing efforts to cap the temperature increase to 1.5 C above pre-industrial levels. The United States has been actively involved in the negotiation and approval of the Paris Agreement, with former President Obama calling it a tribute to American leadership.

In June 2017, President Trump announced that the United States would be “getting out” of the Paris Climate Accord. Former President Obama wasted no time, and fiercely defended the Agreement. The United States’ withdrawal, which will only be effective in 2020, has been a contentious topic even before its official announcement by President Trump, due to the goals of the Paris Agreement, namely, to reduce greenhouse gases in the atmosphere. Despite the general scientific consensus referred above, some U.S. politicians remain skeptical about the existence of global warming itself. Notwithstanding this skepticism, CEOs of major U.S. companies and members of both political parties have criticized the withdrawal. European leaders strongly condemned President Trumps’ decision.

Adding to the controversy is the nature of climate change itself as a collective problem. This is the case, because the benefits of carbon abatement cannot be restricted to those who contributed to it; nor will climate change affect only those who contribute to create it. Following this line of reasoning, the involved parties have incentives to free ride. Climate change governance, thus, is notoriously difficult. The challenges are exacerbated because of the division of powers in the international system, with top-down bargaining not being a realistic course of action. In addition, cognitive uncertainty about the feasibility of achieving policy outcomes, such as lowering carbon emissions, at acceptable costs contribute to increase difficulty when bargaining. 

In light of the above, this note contends that the United States’ withdrawal from the Paris Accord is not aligned with cost-benefit analysis grounded on the normative use of economics. Hence, this note builds on the notion of cost-benefit analysis being used to improve the environment, while also considering wealth maximization. In this vein, the normative utility of cost-benefit analysis is present, by clarifying governments’ choices, making those more transparent as it aims to isolate government’s decisions from interest-group politics. 

Focusing on assessing the benefits and costs of the policy choice of withdrawing, this research clarifies how President’s Trump choice abruptly departs from the previous administration with regard to reasoned regulatory action. It also illustrates how the withdrawal is unlikely to produce winners in the medium and long runs. U.S. enterprises, consumers and citizens, generally, will have to coop with a polluted environment by coal industries longer than needed, and without getting benefits for themselves. This note briefly contrasts the United States position with the paradigmatic Indian case, as India pledged to significantly reduce its emissions in accordance with the targets of its 2016 ratification of the Paris Accord. The comparison is meaningful, because India is the fourth country in absolute number of emissions, with the United States being the second. 

This note is organized as follows: Part I examines a few considerations on why the United States’ withdrawal is not maximizing the overall well being of its population, focusing on the cost considerations associated with it. Part II contends that moral considerations should be also factor in this analysis. It also addresses two specific climate change principles which are based on moral concepts: the precautionary principle, and intra-and-inter-generational equity. This note concludes that the United States’ withdrawal of the Paris Accord is costly on traditional considerations and when moral considerations are factored in. It also contrasts the United States example with India, a country which moved from reluctant signatory to active member of the Accord.

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