Climate policy architecture for the Cancun paradigm shift: building on the lessons from history

The economics of climate policy after Rio led to a climate centric paradigm which departs from the original UNFCCC’s cooperative framework for designing climate policies from the perspective of sustainable development. This resulted in a cap-and-trade approach which aims to mitigate the adverse effects on development through appropriate transfers to achieve fair burden sharing. However, the continuation of this paradigm cannot untie the development-climate Gordian knot. (The Gordian Knot refers to a seemingly intractable problem. According to a Greek legend, Gordios arrived in Phrygia in an ox cart, was made King and dedicated his cart to Zeus, tying it up with an intricate knot. The person who would untie the knot would rule Asia. Alexander the Great found a solution by cutting it with his sword. Hourcade et al. (The design of climate policy. MIT Press, Cambridge, p 408, 2008) explain that, after Rio Earth Summit (1992), the climate negotiations remained disengaged from the debates on development pathways, thus tying up a new Gordian knot of misunderstandings.) Instead one loses sight of the benefits of cooperation in a global agreement to abate GHGs emissions. The challenge is now to align the development and climate objectives taking into consideration the changing context since the 1990s which includes a re-equilibrium of the world economic balance and the adverse context created by the 2008 financial crisis. This paper proposes that carbon finance should be considered as part of a general reform of the financial system. The adoption of a carbon value as a notional price could trigger a wave of low-carbon investments in the world thereby redirecting some global savings towards low-carbon investments, thus providing a lever for equitable access to development.