Daily Archives: January 25, 2013

As the new year begins, it may seem hard not to be pessimistic about the global battle to manage the huge risks of climate change, a defining challenge of this century.

The most recent UN climate change summit in Doha made only modest progress. In addition to confirming a second commitment phase of the Kyoto protocol, now based mostly on action by the EU only, it set work programmes ahead of the 2015 summit at which a global deal will be attempted for a post-2020 framework with a unified legal structure.

Doha made crystal clear that the pace of international action is not consistent with the scale and urgency of the challenge the world faces. Evidence mounts that our planet is heating up, and prospects of us preventing dangerous climate change, which all countries have agreed should be avoided by limiting warming to no more than 2C, seem to be receding by the day. Indeed, current projections may imply possible warming of 4C or more to temperatures that probably have not been seen on Earth for tens of millions of years, with consequences that could be catastrophic.

Given this backdrop, it is not hard to see why there is so much pessimism. However, far from this being the hopeless situation some assert, we believe that we may be reaching a point when the tide could decisively turn.

Why the reason for retaining optimism amid so much apparent gloom? If one takes a step back and examines what is happening at national and provincial levels, a wholly different picture is emerging.

In contrast to the pace of international negotiations, domestic laws to address climate change are being passed at an increasing rate. In the past year alone, as described in a new report published on January 14 by Globe International and the Grantham Research Institute, 32 of 33 surveyed countries have introduced or are progressing significant climate or related legislation and regulation.

This is nothing less than a “game-changing” development, taking place across all major continents. Cumulatively, it represents a crucial and vastly under-appreciated change.

For example, China passed its first sub-national legislation last year in order to control greenhouse gases in Shenzhen and is developing a national climate change law. Moreover, Mexico passed a ground-breaking General Law on Climate Change, legislating for a quantified emissions reduction target of 30 per cent below “business as usual” by 2020.

Meanwhile, South Korea passed legislation to begin a nationwide emissions trading scheme by 2015; Bangladesh passed the Sustainable and Renewable Energy Development Authority Act; and Kenya approved its climate change national action plan and its parliament is debating the climate change authority bill. Other important advances have been made by Ethiopia and South Africa and embodied in their medium-term planning frameworks.

One key finding of the report is that developing countries, which will provide the motor of global economic growth in coming decades, are leading this drive. Many, including China, are concluding it is in their national interest to reduce greenhouse gas emissions by embracing low-carbon growth and development, and to better prepare for the impact of climate change.

They see that expanding domestic sources of renewable energy not only reduces emissions but also increases energy security by reducing reliance on imported fossil fuels. Reducing energy demand through greater efficiency reduces costs and increases competitiveness. Improving resilience to the impacts of climate change also makes sound economic sense.

Many governments and companies have recognised that a green race has started, and they are determined to compete. They also recognise that, over time, those that produce in “dirty” ways will be increasingly likely to face “border adjustment mechanisms” which take account of the subsidy associated with their taking advantage of any unpriced pollution.

While progress has generally been slower among the richer nations, some are showing leadership, such as the UK through its 2008 Climate Change Act. In the US, existing environmental regulations are being used to tackle climate change, and states are moving more quickly, such as California, where trading started this month in its new carbon market.

It follows, therefore, that advancing domestic legislation on climate change, and experiencing the co-benefits of reducing emissions, is a crucial building block to help create the political conditions to enable a comprehensive, global climate agreement to be reached. Domestic laws give clear signals about direction of policy, increasing confidence and reducing uncertainty, particularly for the private sector which can drive low-carbon economic growth.

With negotiations on a post-2020 global deal scheduled to conclude in 2015, it is very unlikely that an agreement, with the necessary ambition, will be reached unless more of these domestic frameworks are in place in key countries. Sound domestic actions enhance the prospects of international action, and better international prospects enhance domestic actions.

The clear implication is that more emphasis should be placed on bilateral and regional activities to encourage the advance of domestic legislation between now and 2015. That means greater engagement, primarily, between legislators and parliaments, a constituency that has long received too little attention within the environment and sustainable development agenda.

Taken overall, despite the recent slow pace of the international response to climate change, we are therefore encouraged by the domestic action being taken, particularly by developing countries. To be sure, this is just a beginning and much remains to be done. But there are grounds for real optimism if momentum for action to tackle climate change at the national level continues to build ahead of a strong international agreement in 2015.

Lord Stern of Brentford is chair of the Grantham Research Institute on Climate Change and the Environment and I.G. Patel Professor of Economics and Government at London School of Economics and Political Science, and was formerly chief economist at the World Bank. This article was co-written with Lord Deben (John Gummer), who is president of the Global Legislators’ Organisation (Globe International), a former UK secretary of state for the environment and chairman of the UK’s statutory committee on climate change.

David Cameron made a well-received intervention here in Davos on his priorities for the Group of Eight, which he chairs this year, but inevitably the focus of attention has been the speech he made about Europe, before leaving London.

He was wise to lay his egg at home, as it would have been in the lead balloon category here. Davos Man, and his fur-clad trophy wife, are europhiles, almost to a fault. The eurosceptic tendency is very thin on the ice. You might think that there would be a natural constituency in the alpine confederation, but the Swiss who show up in Davos are typically those who bemoan their lack of influence in the councils of Europe and wish their compatriots weren’t, well, so damned Swiss about it all.

Even the London mayor Boris Johnson, a ubiquitous presence this year, was on his best behaviour, supporting the British prime minister’s careful line, emphasising the positive side, and also referring from time to time to his impeccably eurocratic father. The Duke of York, who genially hosted the British bash, might have his own private views on the European Commission’s working time directive, but they were undisclosed, and it would be inappropriate to speculate on them in a family newspaper.

With these isolated exceptions the spectrum of views here on the prospect of a British referendum on EU membership ran across the range from iffy to bonkers. Those at the iffy end emphasised the time it would take, thought it might be possible to negotiate a face-saving list of concessions, and if all else failed took refuge in the Micawber doctrine, that “something might turn up” to stave off the worst. The “bonkers” crowd took the view that no good could possibly come of it, that the UK would be crazy even to think of leaving the EU, and no foreign company would ever again invest a penny anywhere from Land’s End to John O’Groats.

At a dinner of what we like to call opinion-formers on Thursday night, the attendees were asked for their views on how likely it is that the UK will leave. The host was a hedge fund, so we were asked to price a derivative which would pay out $100 if the UK leaves the EU within five years, and $0 if it did not. The guests included a former US Treasury secretary and a former Bundesbank president, so not all of them had political acumen. The answer was that the average bid price was $40.

This struck me as on the high side, and I immediately enquired about the opportunity to take a short position against the room, but the hedgies did not seem comfortable with their price formation methodology and declined to trade. At my end of the table we concluded that there is about a 66 per cent chance that a referendum will take place (the Tories may lose the election, which lowers the probability, but Labour may also be forced into a referendum commitment, which raises it). If a referendum is held there is, we thought, a 33 per cent chance of a No (the Tories may recommend Yes if they achieve a renegotiation; Labour may recommend Yes, anyway). So the correct price on this assessment is $22 (a third of two-thirds).

The more important conclusion was that it will be Germany’s Angela Merkel who decides the outcome. The referendum is most likely to happen if Mr Cameron achieves a majority after the next general election. He will then seek a new deal with his partners. Will they be prepared to grant him enough leeway to say he has negotiated a new settlement which he can recommend to the nation, as was done with Harold Wilson in 1975? (No one, incidentally, can recall anything of what Wilson is supposed to have secured then, so the detail hardly matters.) Or will he be told that it is the menu touristique or nothing, and that Europe à la carte is not on offer.

For what it is worth, our largely German table took the latter view. They are sick and tired of us Brits. If we want to sling our collective hook, that is fine by them.

I wonder whether that will be their considered view, even if it is the way they now feel. They should certainly not offer concessions now, pour encourager les autres. But the calculation may be different if the choice is between supporting a prime minister who wants a deal he can recommend and UK withdrawal, with all its awkward consequences for the oft-proclaimed inevitability of the European project. That prime minister will, however, need an absolute majority to reach a favourable negotiating position.

In the meantime, $22 is your answer to any question on this vexed topic. Buy below, and sell above. The Treasury is always looking for clever ways of funding the deficit by appealing to diverse investor preferences. I know a hedge fund who can construct them an instrument that will tap the surplus funds of Davos Man. It would save the lives of many small furry creatures too.

The writer is a former chairman of the Financial Services Authority, former deputy governor of the Bank of England and former director of London School of Economics. He is now a professor of practice at Sciences Po in Paris

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