Introduction

The global financial crisis, a deepening global recession, and continued turmoil in credit markets drive home the importance of developing a global climate architecture that can withstand major economic disruptions. A well-designed global climate regime and the attendant domestic policies in participating countries need to be resilient to large and unexpected changes in economic growth, technology, energy prices, demographic trends, and other factors that drive costs of abatement and emissions. Ideally, the climate regime would not exacerbate macroeconomic shocks, and would possibly buffer them instead, while withstanding defaults by individual members. Because climate policy must endure indefinitely in order to stabilize atmospheric concentrations of greenhouse gases (GHGs), all sorts of shocks will occur at some stage in the policy's existence. Anticipating such shocks may mean rejecting policies that might reduce emissions reliably in stable economic conditions but would be vulnerable to collapse—with consequent deterioration in environmental outcomes—in volatile conditions.

Macroeconomic volatility is the practical manifestation of an issue that has received considerable attention in the theoretical literature on the design of environmental policies: uncertainty about the costs and benefits of reducing emissions. In particular, macroeconomic shocks can cause the cost of regulation to be much higher or lower than anticipated. Unexpectedly stringent and costly regulations may become political lightning rods. Recent world events, for example, highlight the fact that economic surprises can subject governments to enormous pressures to relax or repeal taxes or other policies perceived to impede economic growth.

Introduction

Fewer barriers to international transactions and rapidly spreading information technology lie at the root of the accelerating integration of markets worldwide. Although not a new phenomenon, ‘globalisation’ has become a popular term since the 1990s to describe the increasingly integrated and interdependent world economy, which has led to higher trade, production and services outsourcing, as well as the migration of highly skilled professionals (Hummels, 2007). As these developments have unfolded, economic integration at a regional level has also strengthened, as a result of tighter institutional arrangements as well as substantial pressure from market forces.

Every single country in the world is now a member of regional trade agreements and at least one regional bloc. More than one-third of world trade takes place within such arrangements. All regional agreements have the objective of reducing barriers to trade between member countries and therefore, implicitly, of discriminating against trade with non-member countries. At their simplest level, RTAs aim at reducing or removing altogether tariffs on trade flows between member countries, with some also eliminating non-tariff barriers and liberalising investment flows. At their deepest level, RTAs have the objective of achieving economic union, implying the creation of common institutions (Schiff and Winters, 2003).

Globalisation has implied a sharp abatement of barriers to economic exchanges between countries. In the immediate aftermath of World War II the process mainly involved advanced economies, but more recently it has increasingly included less advanced and transition economies, which by now are substantially integrated into the world economy. Global integration has also been accompanied by a sharp increase in regional trade agreements (RTAs), which constitute a logical means by which neighbouring countries may take up the challenges and opportunities implied by globalisation. The European Union is a prime example of regionalism. Today there exist more than 300 regional trade arrangements in the world, including free trade agreements (FTAs), customs unions and common markets. But how are globalisation and regionalism interconnected? Do they tend to complement each other as part of the same phenomenon or is there a tension between them? And, if the complementarity prevails, how do globalisation and regionalism affect the international transmission of shocks at a time of major structural changes? The main objective of this book is to address these issues, both theoretically and empirically.

Chapter 1 (International linkages in the context of global and regional integration, by Stephane Dees, Filippo di Mauro and Warwick J. McKibbin) gives an overview of our understanding of globalisation and regionalism and creates a unified and coherent overall perspective in which to situate all the various aspects covered by the different chapters.

The first step toward meaningful progress on climate change is to be realistic about institutions – both about how existing institutions, such as national governments, can be brought to bear on the problem, and also about the prospects for creating powerful new international institutions. It is, in essence, a decision about whether it is more productive to bring existing tools, however imperfect, to bear on the problem or to design new and better tools at the international level. The latter course has attractions, but the risk is that the design process may go on indefinitely – with greenhouse gas emissions rising unchecked – without producing a viable new institution. Such has been the case over the last decade as attention has focused on designing the Kyoto Protocol, an elaborate new international institution without any real precedent that may do nothing to slow emissions.

In this chapter we argue that a better alternative would be to tackle climate change with simpler policies that can be carried out by national governments immediately. As David Victor noted in chapter 4, that process is happening by default already. We discuss key characteristics needed in an effective approach to climate change and argue that prospects for creating a powerful international institution to control greenhouse gas emissions are dim at best. We then outline one policy, an internationally coordinated system of national policies based on a hybrid tradable permit mechanism, that can be implemented with minimal development of new international institutions.

INTRODUCTION

Indonesia faces a number of important challenges both in the short run and in the longer run. The world economy is currently growing robustly but a number of uncertainties cloud the economic outlook. A strong global economy is being challenged by higher oil prices. The emergence of significant trade imbalances between East Asia and the United States will undoubtedly put pressure on economic and political relations between the major regions of global growth. At the same time as the global economy is providing short-term economic stimulus to Indonesia, there are a number of serious environmental problems that Indonesia needs to face. Key among these are depletion of natural resources, particularly the degradation of forests, and rising greenhouse gas emissions. Global policies to reduce greenhouse gas emissions will directly affect Indonesia, a major fossil fuel producer.

This chapter gives an overview of the current state of the global economy, with a focus on the three most important risks currently facing world growth: the impact of rising oil prices on the global economy, the resolution of trans-Pacific trade imbalances and, related to this, surprisingly low long-term real interest rates throughout the world. The chapter then focuses on two sets of longer-term issues currently facing Indonesia. The first concerns rising energy use, rising greenhouse emissions and the implications for Indonesia of serious global climate change policy. The second concerns the serious depletion of natural resources, particularly forests. I also suggest how we can deal with these two longer-term issues within a single framework that focuses on creating property rights and clear incentives to manage forests and greenhouse gas emissions.