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A Global Environment Organization: The Fourth Bretton Woods Pillar?

Dan Esty

This year's 50th anniversary celebration for the Bretton Woods Institutions has created a chance to reflect on the existing international order and a window of opportunity to move our international management system forward. In reflecting on the past 50 years, there certainly are criticisms that can be levelled at all three of the Bretton Woods Institutions; but one has to admit that the international system has done a lot better after World War II than after World War I. Now, the challenge is to look forward over the next 50 years and to determine the structure of the international system that is needed to manage future global issues.

One of the major challenges that separates the next 50 years from the last 50 is a recognition of the world's ecological interdependence as well as the growing economic interdependence of nations. Economic interdependence has been around for some time. Indeed, it was the response to the recognition of economic interdependence that led to the creation of the Bretton Woods Institutions in the wake of World War II. In fact, it was the crisis brought about by the Great Depression and then the War that allowed the leaders of the world at that time to acknowledge this interdependence and to respond to it with an international institutional structure to manage that interdependence.

Today, a similar challenge exists in the environmental realm. But there is no analogous crisis of sufficient proportions to create the political will to address the challenge. Nevertheless, environmental interdependence must be worked into the G7 agenda for Halifax. True leaders must have vision; they must be able to see the difficult issues of tomorrow and work to address them before crisis hits.

Ecological interdependence necessitates an improved institutional structure for managing environmental problems on an international scale. There are three main reason for this.

First, we now recognize the existence of global environmental issues. Fifty years ago, there was no appreciation of the interconnectedness of countries in an environmental or ecological sense. Today it is clear that there is a great potential for pollution spillovers (or what economists call "externalities") to cause market failure. Thus, ecological interdependence is economic interdependence for all countries. Failure to attend to the ecological links has potentially serious implications for trade and other economic relationships.

Specifically, there is a danger of "freeriding." Some countries or industries recognize that they can send pollution up a smokestack or out an effluent pipeline and not bear the costs of cleaning up these emissions because someone downwind or downstream will have to deal with the problem. But there exists real danger in allowing every party, every corporation, or every country to pursue its own narrow selfinterest without taking these spillover costs into account. In a system where this is permitted, the result will be spillovers that are not attended to, not regulated, and which impede the ability of the global market to deliver optimal results.

There is a long history in economics of developing responses to these market failures. In fact, it is a history that is hundreds of years old. The basic thinking is this: where the problem is limited to a small number of people, one can negotiate a solution. And it does not really matter who is assigned the initial property rights, either the polluter or the victim. If the numbers are small, it is still possible to negotiate to optimal resource use.

However, where "transaction costs" are high (that is, where the ability to respond to the problem is made more costly because the numbers are large), an optimal solution is not likely to be achieved through negotiation, and some kind of regulatory structure is required to avoid market failures and inefficient outcomes. For most global environmental problems, where a large number of actors are involved, the best response is, following economic theory, some form of overarching regulatory structure.

Another fundamental lesson from economics is that the best way to regulate spillover problems is to set out structures commensurate with the scale of the environmental harm. Where the problem is local, a local response is appropriate. Where the problem is provincial, a provincial response is appropriate. Where the problem is national, a national response is needed. When it is international, one needs to have an international structure. Most developed countries have created effective local and national regulatory systems ¾ what is lacking is an international system.

There are two other reasons to consider some form of a Global Environment Organization (GEO) beyond the need to provide an international regulatory structure. Specifically, one could envision a GEO that has a somewhat softer character and a somewhat more muted initial mandate. For example, providing an intersection point for countries thinking about "common problems" ¾ that is, problems that all countries or many countries face. There is a great deal to be gained by sharing information about how to respond to common problems, getting data and the best science to understand them, providing the best risk analysis to figure out what the impacts are on public health or ecological resources, developing a common understanding of possible policy responses, and comparing notes on what works and what does not work. This kind of organization already exists. Indeed, the Organization for Economic Cooperation and Development (OECD) provides an excellent model for intergovernmental cooperation of this sort. There is an enormous benefit to having representatives of the 25 different countries come together, share information, talk through problems, and take home the best thinking about how to respond to the issues that they all face.

There is a third set of issues that also argues for some international coordination and perhaps some kind of GEO. This set derives from the link between economic policy and environmental policy ¾ competitiveness. In an interdependent economic structure, a global marketplace, how countries handle their local environmental problems takes on an international dimension. Companies are always asking the question: "Are environmental regulations making me bear costs that my competitors abroad do not have to bear?" That concern is politically very vibrant, even if economists have been hardpressed to identify it as empirically significant. Even more important is the impact of fears of competitive disadvantage on environmental policy debates. In the North American Free Trade Agreement (NAFTA) debate, for example, Ross Perot made a big splash with his arguments about the giant sucking sound of jobs flowing south and fanned the fear that US companies would be disadvantaged competing against Mexican companies that might face lower environmental standards or less stringent enforcement.

These competitiveness fears are also illustrated by the collapse of several recent efforts to advance creative and more optimal environmental policies. This "political drag" was clear in the European Union's ability, or lack thereof, to put an energy tax in place. It is also apparent in the United States on the same issue, where the Clinton Administration's Btu tax collapsed in the face of competitiveness concerns.

So there is a real need for cooperation and coordination to ensure that these environmentcompetitiveness issues do not overwhelm economic interdependence and countries' ability to push toward freer trade. Because the real fear here is not only that environmental policy will be negatively affected by competitiveness, but also that there will be a counterattack or backlash against free trade as an avenue for sustainable development.

But we have seen this issue before in the trade realm. The major powers recognized the "beggarthyneighbour" policies of the 1920s and '30s that led to the Great Depression as the result of successive rounds of retaliatory tariff increases. That beggarthyneighbour risk forced countries to surrender some of their traditional national sovereignty in order to work together in a cooperative international structure, the GATT. The same risk is at play in the environmental realm with a "litterthyneighbour" problem. And there is the same need to have some recognition of interdependence and subsequent surrender of sovereignty to an overarching system that allows all parties to prosper.

One can respond quite properly by saying, "well, we can agree with all of these diagnoses of the problem and not agree with the proposed solution." However, there are a number of alternatives to setting up a Global Environment Organization.

The first alternative is to do nothing and let the problem lie. That appears to be what is indeed

happening. And this is all right as long as the environmental spillovers and the costs they impose are not great. But there is increasing recognition that the costs are significant. In China, for example, there are enormous spillovers from its development path, particularly spillovers from its energy policy, which is heavily dependent on coal. Initial analysis suggests that Japan and Korea are bearing hundreds of millions of dollars of pollution burden from China's coalburning emissions. And if one puts even a small price on CO2 emissions, the world is threatened with billions of dollars of additional spillovers due to China's rapidly expanding economic activities. It is important to point out that these spillovers from China are of special note only because of the phenomenal Chinese growth. Countries all over the world are bearing spillovers from each other as well. So the suggestion that pollution spillovers are too small a problem to worry about is inaccurate ¾ and increasingly problematic. Thus, even if "do nothing" seemed like the best policy in the past, prospectively "benign neglect" of international environmental problems is clearly inappropriate.

A second response might be ad hoc international environmental agreements. Where a problem is identified, a convention, then a protocol, and then a structure are put together. This pattern seems to have worked, for example, in the case of the Montreal Protocol. Maybe it is working in the case of biodiversity and maybe it is working in climate change. Probably not. These treaties seem to be doing very little. Moreover, enormous opportunities are being lost to address these issues in ways that recognize their interconnectedness. For example, the loss of forest cover is an issue for biodiversity and also for climate change. Managing CFCs is an issue for ozone depletion and for climate change. There are considerable synergies to be obtained by addressing these problems as linked.

An ad hoc approach also creates a system that results in what some have called "treaty congestion." This issue will become more prevalent in the environmental realm where there are now more than 900 different bilateral and multilateral environmental agreements in place. When the same sort of web of overlapping, and often conflicting, treaties began to be recognized in the intellectual property area, there was an effort to unite that system into a World Intellectual Property Organization. This structure is now in place and has the unfortunate acronym of WIPO. At any rate, the need to unify a disconnected series of international environmental agreements that is becoming increasingly complex and potentially inefficient and ineffective makes the ad hoc response to environmental problems less than sufficient.

The third possible alternative might be to fix the existing structures in institutions such as the United Nations Environment Programme (UNEP) or the United Nations Commission for Sustainable Development (CSD). These institutions are, however, beyond repair. The CSD, in particular, has an almost impossible mandate of trying to follow up on Agenda 21 with little political backing and very little budget. UNEP has the additional handicap of having to try and run the world from Nairobi. Although it is politically incorrect to say, trying to do that is very difficult both because of the lack of infrastructure and, more importantly, because of the difficulty of attracting and retaining firstrate people to spend their careers and lives in Nairobi. The contrast with the OECD, which can get good people to go to Paris, or the GATT and the World Trade Organization, which can get good people to go to Geneva, is stark. It is time for international environmental management to stop being held hostage to a political gesture to the developing world. That gesture is important, but there must be other ways to respond. The international management of environmental problems is too important to be sacrificed.

Finally, the question must be asked: Doesn't the prospect of a GEO run hard in the face of prevailing wisdom that says, first of all, "international organizations are something we do not like;" secondly, "we do not want to give them money;" and thirdly, "the system is so confused, why add to it?" The answer has to be "Yes, there are problems. But when there are problems, one should not stick with the status quo." If there are problems, why not address them and take on the challenge of undoing existing systems, abolishing organizations that are not fulfilling their needs, refining those that are performing, and compressing and consolidating these into a new and better functioning structure? Isn't it right to clean house and consolidate the existing international environmental institutions with new, streamlined, efficient lean operations that can respond to today's problems?

Clearly there are enormous complexities and difficulties, but looking with the kind of vision that includes a 50year time horizon it becomes clear that these problems are not going away. And the institutional response and how one manages that is quite critical.

Finally, there is another political dimension that deserves quick consideration. To address these issues of interdependence requires an acceptance of something that, at least in the United States, there is currently no acceptance of: that national sovereignty, as the constitutional underpinning of international relations, does not work any longer. Although we have accepted national sovereignty as the absolute starting point since the Peace of Westphalia in 1648, that concept is no longer appropriate in managing present and future global interdependence. We can no longer afford to ignore or reject our ecological interdependence. We must acknowledge this new model of the world and work together toward a more sustainable future for all countries.

Dan Esty is a professor of environmental law and policy at the Yale School Forestry, a professor of environmental studies at the Yale Law School and Director of the Yale Center for Environmental Law.

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