November 7, 2006
Curbs on emissions will take a change of political climate
What is the chance of effective action to curb climate change? “Not much” is the answer. This is not because the costs of action would be prohibitive, at least according to the report on climate change by Sir Nicholas Stern published last week.* It is because the obstacles to achieving the necessary global co-operation are so steep. Sceptics worry that costly action is likely. But believers in climate change have far better reason to be worried.
The report produced by Sir Nicholas last week called for efforts to stabilise greenhouse gas concentrations at between 450 and 550 parts per million by 2050. By then, global emissions would have to be at least 25 per cent below current levels, even though the world economy may be between three and four times bigger.
Yet, according to the report, stabilising concentrations at 550ppm might cost only about 1 per cent of gross domestic product, with a range between minus 1 per cent (a benefit) and plus 3.5 per cent (a cost). Thus, the report says comfortingly, we can tackle climate change at minimal cost to living standards. So why, given the growing consensus on the threat, is it so hard to forestall it? It is because this is an extraordinarily difficult challenge for humans to deal with.
The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free - click ‘Comments’ below.
Jeffrey Frankel: As Martin Wolf observes, there will be no substantial curbing of the emissions of greenhouse gases (GHG) without an increase in the price that consumers have to pay for fossil fuels – and that producers can earn for technological innovation to conserves on them. We can debate which method of raising fossil fuel prices – taxes or tradable permits — is the more difficult politically. But, however npopular, it will be necessary one way or another.
What might create sufficient political support – in the United States, in particular - for deliberate government action to raise prices on fossil fuels, or at least to prevent them from falling in the future? It used to be said that tangible climate effects, such as a few hot summers, might do the trick politically, even if it is not possible scientifically to establish a causal connection between GHG concentrations and near-term climate events. I think last year’s hurricane disasters in New Orleans disproved that “hope”: a search for articles mentioning both “oil” and “Katrina” would turn up far more articles bemoaning the negative effect of the hurricane on oil production and refining on the Gulf Coast than articles bemoaning the effect of oil on hurricane frequency. Nor would a change in the political fortunes of the two political parties in the United States, which appears to have begun this week, do the trick in itself. Democratic Senators voted were as much a part of the 95-0 vote against Kyoto in 1996 as Republicans.
But it is not impossible that one day soon the political tide on energy taxes could turn. People say that Americans would never support a substantial gas tax. But the day after September 11, 2001, they would have, if we had had intelligent national leadership to propose it and to package the environmental benefits together with national security benefits (and others as well: reducing traffic congestion and accidents, reducing the trade deficit, and generating revenue for other purposes, including either tax cuts, deficit reduction, or spending related to the environment and security). If, God forbid, there should in the future be a new high-casualty terrorist attack, this time perhaps with nuclear or radiological weapons, the political support for reducing dependence on mid-eastern oil would materialize. The American public has now noticed that the White House’s policy responses - invading Iraq, cutting taxes on the rich, and giving benefits to oil and gas companies - did not turn out to have been helpful. Next time they will be ready for a more rational approach.
Posted by: FT Forums | November 8th, 2006 at 3:01 pm | Report this commentMonty Graham: Martin Wolf’s, and Willem Buiter’s, logic as to why action on global warming might not be forthcoming is daunting and difficult to rebut. However, there nonetheless is hope. Society has, after all, been able to take action in the recent past with respect to other major collective action problems.
What comes to mind, first and foremost, is the danger to the upper atmosphere ozone layer posed by chlorofluorocarbons (CFCs). This ozone absorbs (and re-emits, but at a harmless lower frequency) high frequency ultraviolet radiation that, if it reached the earth’s surface, could cause a much higher incidence of melanoma (deadly skin cancer), eye disease leading to blindness, and other problems to health. In this case, in spite of a collective action problem not unlike that posed by Martin and Willem and a rather high economic cost of action, the world did act effectively, by banning the production, sale, and international trade of CFCs. This action stemmed from widespread public realization that a serious problem indeed did exist, and understanding among governments that only collective action to eliminate CFCs would solve the problem. Today, as a result, the ozone layer seems on the way to repairing itself from the damage done by CFCs.
Other positive examples can be cited, e.g., the once-serious problem of acid rain has been ameliorated, albeit not completely eliminated, because effective “cap and trade” programs to limit sulfur dioxide emissions have been implemented. Again, a collective action problem had to be overcome in order for these programs to come into existence. But society again proved to be up to the task of doing so.
Global warming, alas, is different from the CFCs or acid rain problems; relative to these earlier environmental issues, global warming creates the potential for a much bigger and more pervasive problem, which to solve will require more extensive and expensive countermeasures to be taken. But, also, the costs of inaction lie further in the future than was the case for CFCs or acid rain. These differences exacerbate the collective action problem and indeed reduce the likelihood that effective action will be taken against global warming, or at least so any time soon.
Can we then do anything to make the case for action more compelling? We can do so indeed. We can, above all else, work to convince the public that the scientific basis for global warming is not untested theory, as so many of the public seem to believe, aided and abetted doubtlessly by those who are in denial over this problem or who have an interest in blocking any effective action. The public must be convinced rather that this basis is very solid. (I hope that my earlier comments indeed might help, even if just a little, to make this case.) There indeed are uncertainties over exactly how much mean annual surface temperatures will rise and what will be the full consequence of this rise. The public must be made to understand that such uncertainties do not imply that there is uncertainty over whether increased concentrations of greenhouse gas will create a “greenhouse effect”. The greenhouse effect is not uncertain; what is uncertain is whether, and to what extent, there will be concurrent effects, ones that can either mitigate or exacerbate the greenhouse effect.
Public understanding that a problem exists and why it exists will not, to be sure, by itself solve the problem. But, in the absence of such understanding, no solution is likely to be forthcoming. Thus, the priority for the moment is to foster this understanding and, to this end, I take off my hat to Martin Wolf.
Posted by: FT Forums | November 8th, 2006 at 5:14 pm | Report this commentMartin Wolf: Jeff and Monty have both added something important to our discussions.
Jeff argues that now that the American people have noticed their leadership is, at the very least, grossly incompetent (my own view being that its embrace of the politics of fear and force makes it far more dangerous than that), they may also begin to appreciate the virtues of higher taxes on energy, as a way to lower their dependence on Middle East oil. I hope he is right, for several reasons. But, as I noted in the column, the two goals of energy security and dealing with greenhouse gases only coincide to a certain extent.
The US could decide to rely more heavily on coal, for example, which would be good for energy security and dreadful for climate change. Lowering demand for oil, other things being equal, would reduce its price and so lead to greater energy intensity across the world. So the US also needs to accept the case for dealing directly with climate change. That seems a long way away. So far as effective action is concerned (rather than rhetoric about it) Europe isn’t that much closer. True, the energy intensity of the US economy is significantly higher than Europe’s, but the latter’s is still too high.
In an earlier draft of the piece, I referred to CFCs, as Monty does. (I had to remove the discussion for lack of space.) It is quite an encouraging precedent, as he notes. But there are important differences, too: the danger was universally agreed; there existed an alternative technology that did not cost too much more; and the time horizon for dealing with the problem was at least relatively short. But what that example shows is that such problems can be dealt with, though not that this one will be.
My personal view is that nothing useful will happen without committed US leadership and agreement by China and India that this is a problem that concerns them seriously. But even this would be a necessary rather than a sufficient condition for action.
As Monty also mentions, there is much denial around. I intend to discuss some of these arguments next week.
Posted by: FT Forum - Martin Wolf | November 8th, 2006 at 10:50 pm | Report this commentRichard Cooper: In his second column on the important issue of what to do about climate change, Martin Wolf points out that efficient reduction of carbon emissions requires the same marginal cost in all activities. He goes on to observe: “it is hard to agree common taxes across the world. For that reason emissions trading…will also be part of the picture.” The first part of this statement is surely correct. The second part, however, is a non sequiter. While it is hard to agree on common carbon taxes across the world, it will in my judgment be impossible to agree on a common (efficient) trading system across the world. This is so for three different but inter-related reasons.
First, a global allocation of emissions rights will have to occur. This is likely to prove impossible for a global total of rights that actually reduces emissions, because of sharp philosophical differences between rich and poor countries on the principles on which such rights should be allocated.
Second, for a trading system to function well, each nation’s rights will have to be further allocated to firms and other major emitters within each country. If the emissions rights have significant value, as they must if they are to encourage a reduction in emissions, each national allocation process will provide the occasion for high corruption in many (most?) countries. Do we want environmental protection to become a handmaiden for all-but-universal corruption?
Third, assuming the emission rights were allocated and a trading system established, trade in emission rights would result in large transfers of funds among countries — how large and in what direction depending on the total level and initial allocation of emission rights. If we have learned anything after half a century of foreign aid, it is that unconditional transfers of funds are unlikely to be socially beneficial. Is it possible to imagine that the US Senate would knowingly ratify an agreement whose consequence would be, in effect, to tax the average American family and transfer the funds, unconditionally, to firms in Russia, or China, or Iran, or North Korea? No Senator could defend his vote for such an agreement.
Thus, while agreeing on carbon taxes across the world will surely be hard, agreeing on a system of tradable emission rights across the world will be impossible. We should go for the merely difficult.
Posted by: FT Forums | November 10th, 2006 at 9:57 am | Report this commentMartin Wolf: Basically, I agree with Dick Cooper on this. In a previous column (”Taxation can give the earth a chance”, July 18 2006), I said just that.
So are there any arguments for emissions trading? I think there are a few.
First, it may be the only way, in practice, to deal with civil aviation and marine transport. An international regime that allocated or, better still, sold emission rights to these businesses may be the only way forward.
Second, emissions trading, based on the grandfathering of existing emissions, may also be the only way to get affected companies, particularly the large emitters, to support limits on emissions. I know this is distasteful. But the politics may require such bribery.
Third, some countries (the US, for example) are allergic to the notion of taxes. So tradeable permits may be the only route forward.
Fourth, some allocation of permits across countries may be the only way to get developing countries committed to limits on carbon emissions.
So, reluctantly, I have come round to the idea of a hybrid system. But I do also agree with Dick that large transfers of resources across frontiers are not going to happen, whether we like it or not, which is why most emissions trading will be within countries or systems of countries, such as the European Union. That is why we may not end up with a single price of carbon emitted.
Ultimately, this discussion underlines the big point that agreeing on an effective global system will be incredibly hard.
Posted by: FT Forum - Martin Wolf | November 10th, 2006 at 1:47 pm | Report this comment