May 29, 2007
Practical steps to climate control
by Lawrence Summers If global warming is the ultimate inconvenient truth, the most important inconvenient truth about global warming policy, argued in last month’s column, is what happens in the developing world. These countries will deliver three-quarters of the increase in global greenhouse gas emissions over the next generation, on current forecasts. Beyond the developing world’s preponderant impact on emissions, there is the additional reality that because so much of economic activity is mobile, policies that restrict emissions in some places but not everywhere may just relocate emissions not reduce them. Developing countries recognise that today’s greenhouse gas problem was made mostly by industrial countries, that their own energy usage per capita represents about 20 per cent of the corresponding industrial country usage and that their citizens have pressing material needs. They are also keenly aware of the uncertainty surrounding projections of economic growth, patterns of production and future energy technologies. It is easy to sympathise with their extreme reluctance to commit to levels of emissions decades from now that are lower than what industrial countries are emitting today. For these and other reasons, I argued last time that the Kyoto approach to climate change – through the setting of targets – could prove to be like the League of Nations approach to preserving peace: idealistic and visionary yet impractical, ultimately ineffective and perhaps even counterproductive because of the valuable political capital it consumes. I hope I am wrong but I fear that commitments to vast reductions in emissions decades hence are no more real than commitments to end aggressions or war. What then should be done either instead of or as a complement to the Kyoto approach? The place to start is with the recognition that it is much easier for governments to make and keep commitments to policies they can control than to outcomes they cannot assure. Whatever targets are negotiated or set, emphasis should also be placed on concrete measures that will have meaningful impact. First, the US must engage in an energy efficiency programme that takes effect without delay and has meaningful bite. As long as developing countries can point to the US as a free rider there will not be serious dialogue about what they are willing to do. I prefer carbon and/or gasoline tax measures to permit systems or heavy regulatory approaches because the latter are more likely to be economically inefficient and to be regressive. The key point is that after Kyoto, where there was US vision in setting goals but no on-the-ground action, there must be real policy commitments. Second, the major industrial countries should commit to a very large increase in funding for research in technologies that offer the prospect of reducing the concentration of greenhouse gases, such as renewable energy, carbon sequestration and energy efficient engines. They should also learn a lesson from the pharmaceutical experience and commit to making intellectual property relating to clean energy available to developing countries on preferential terms. It may be that ambitious emissions- reduction targets can be achieved with existing technology, yet new technologies could help. Third, the World Bank, and probably the regional development banks, should be reconstituted by their shareholders as “Banks for Development and the Global Environment” and take on as a major mission the provision of subsidised capital for projects that have environmental benefits that go beyond national borders. There is much that can be done to encourage energy efficiency in almost every sector within developing countries, yet national governments have inadequate incentives to take account of global impacts. Moreover, the institutions need a new role with respect to countries other than the poorest ones at a time when the leading developing countries are actually exporting rather than importing capital. Fourth, a goal should be set of eliminating by 2025 the more than $200bn the world spends each year on energy subsidies, and enforced through strategies such as those used for inappropriate subsidies in trade. This is a clear case where environmental and economic imperatives coincide and it is one where external political commitment is likely to be desirable in many countries, just as in the trade area. This will require considerable work on the definition of and measurement of total energy subsidies. Such work will lay a foundation for the more ambitious efforts that may be needed in harmonising world energy prices above market levels in the future. There is a final critical process element in the policy response. Given that viable solutions depend on significant changes in developing country policies and that these countries are unlikely to make them unless they see their own interests as at stake, it is essential that they be full participants in setting the global direction. They are surely likely to do more if they can help shape policy than if it is simply the Group of Seven leading industrialised nations seeking to bring them along. Is all of this a sufficiently ambitious agenda? Perhaps not; and perhaps political efforts to generate commitments to ambitious if remote targets can be worthwhile as powerful forces for change, as with human rights in eastern Europe. But they must be married to more immediate if less dramatic steps that have real and practical effect. The writer is Charles W. Eliot university professor at Harvard
Robert Wade: I agree with Larry that much of the discussion of climate change in the North misleads by focussing on hard emission cuts as the main route to climate mitigation/adaption; that Kyoto can be a recipe for inaction on the ground; and that the world needs much more action by way of applying existing energy efficient technologies and innovating new ones, especially in developing countries.
I want to elaborate on his third step, about the World Bank as a hub for climate change initiatives-backed-by-finance: “The World Bank, and probably the regional development banks, should be reconstituted by their share-holders as ‘Banks for Development and the Global Environment’ and take on as a major mission the provision of subsidised capital for projects that have environmental benefits that go beyond national borders… Moreover, the institutions need a new role with respect to countries other than the poorest ones at a time when the leading developing countries are actually exporting rather than importing capital”. I draw on my testimony to Congress on 22 May 07 about the future of the World Bank. (The House Committee on Financial Services, chaired by Barney Frank, the first oversight as distinct from legislative hearings about the Bank and Fund for more than 10 years, testimony available shortly at www.lse.ac.uk/collections/DESTIN/whosWho/Wader.htm).
The Bank’s big advantage – compared to the other competitors in the development business (consulting firms, new aid-giving countries like China, foundations like Gates, and the regional development banks ) - comes from its almost unique global reach combined with its inter-state governance and guarantees. In view of the loss of its traditional comparative advantage (due to the rise of competitors) it should reposition itself to take a much stronger role in international environment issues than hitherto, and above all in climate change. I consider (and I presume Larry agrees) that climate change is the biggest problem facing the world, bigger even than HIV/AIDs and nuclear proliferation. It affects us all, but it most affects poor countries of the tropics. Unless climate change solutions are applied in developing countries, the biggest problem facing humanity will not be solved.
The necessary ingredients are in place for a Big Push: (a) the science (eg IPCC reports), (b) the economics (eg Stern Report), and (c) public awareness of the imperative to act now to make the world safer from climate change and its consequences (including distress migration on a mass scale, and civil and inter-state wars). For the Bank – and the new Bank president – the sharp question is: what should be the Bank’s role in helping to decouple economic growth from carbon emissions?
The organization has a lot of experience of translating economic policies into investment plans and investment plans into investments on the ground. It should use this experience to take the general conclusions in reports like the IPCC and Stern and spell out what these general conclusions mean for specific countries, like China, Russia, Brazil, Bangladesh; and then help these governments work out country programmes focused on decoupling their economic growth from their emissions.
To do this the Bank needs to develop new financing instruments. For example, a carbon fund – or, since the fund should not be tied only to carbon, a “climate-stabilizing” fund. Such a fund would enable a developing country government – eg China – to borrow from the Bank for, say, a power station and choose a state-of-the-art minimum carbon emission technology even though it is more costly than a standard technology, with the fund rather than the government bearing the incremental cost.
Such a fund could be used to accelerate the uptake of climate friendly investments in the power sector; in transportation (eg railways in Africa); in forestry and land use practices ; and in still other sectors.
How could such a fund be capitalized? Some of the finance should come from World Bank reserves. The reserves are currently around $36 bn., while the Bank needs only around $25 bn. in reserves to maintain its all-important AAA credit rating. Some of the difference between $25 bn. and $36 bn. should be diverted to the climate-stabilizing fund. The fund would also receive grants from OECD governments and private foundations.
The fund would not depend only on altruism. Contributors would get carbon credits in return. And the fund would open new markets for private firms in environmental technologies (carbon capture technologies, for example, and wind and wave power). So business would have a distinct interest in the fund too. (For a discussion of some of the complexities behind these apparently simple ideas see the paper by colleague Timothy Forsyth, “Flexible mechanisms of climate technology transfer”, J. Environment & Development, 8, 3, 1999, 238-57.)
The Bank should also do more by way of piloting schemes for later scaling up by governments and the private sector. It has already played a catalytic role of this kind in the case of carbon trading. It spent $15o million on a pilot carbon trading scheme, which went on to become a $30 bn. market.
One especially important direction of experimentation is carbon trading in the sectors of forestation and land use. 20-30 per cent of carbon emissions come from land use practices and deforestation. Yet these sources have been quite neglected in mitigation schemes; less than 1% of carbon trading relates to these sectors. The Bank is well positioned to initiate new schemes for expanding this kind of carbon trading.
A large part of the answer why the Bank has not pushed much harder into international environmental issues – one of its big comparative advantages – is that the Bush administration has not wanted it to. With a new president taking over and the Bush administration coming to an end, horizons open.
Posted by: Robert Wade | May 30th, 2007 at 7:28 pm | Report this commentJagdish Bhagwati: The Summers contributions to climate change policy are brilliant, as always. I might however add a few important points which he should consider.
First, while he underlines the need for India and China also to come on board - an omission that even Clinton and Gore could not overcome when faced with the result that the Senate was opposed to the Kyoto Protocol by a staggering 99 to 1 majority, he does not seem to offer a meaningful resolution to that problem.
Last summer, I did address that question frontally in the Financial Times, with a hugely favourable response. I said that the Kyoto protocol was deeply flawed because it was letting off Indian and China from the current flow obligations for net CO2 discharges on the stock ground that the rich countries had done a lot of damage in the past.
Conceptually, and hence politically, it made more sense to separate out the stock and flow aspects of what needed to be done. Following the superfund approach, developed and adopted in the US, the rich countries ought to set aside, through political bargaining, a
substantial sum like $50bn annually for 25 years, a superfund for the past damage inflicted on the environment through CO2 emissions.
At the same time, for the flow damage currently being imposed, every country must pay: this would mean something like a uniform carbon tax. The superfund proceeds, as also the carbon tax proceeds, could be used for a variety of purposes, many environmental, among
them the development of alternative fuels, recovery of carbon technologies, domestic environmental programs (such as clean-up costs on polluted lakes and rivers), and even on added developmental aid to countries that are both damaged by Global warming and simultaneously have strong resource constraints (typically those in Africa today).
The idea of making everyone pay, as against having arbitrary, politically determined caps for different countries, implies that the carbon tax would be a neat market solution.
The combination of the superfund approach (which is already being used within the US) and of the carbon tax (which is a fully market-based approach that the US should ideally endorse), should make it hard for the US to deny a revised Kyoto Protocol that reflects the political and economic principles that it preaches and practices. (I might also draw Professor Summers’ attention to the fact that such a two-pronged solution would also rule out his worry that firms will go off to invest in India and China because they are exempted as in the current Kyoto treaty. No, they would also be getting taxed for their current CO2 emissions, and at the same rate.)
If all we have again is arbitrarily defined caps for different countries and a potpourri of proposals without a conceptual rationale, both replacing the existing, flawed Kyoto Protocol, we cannot expect a sensible resolution of the problems that Kyoto has run into. Economists such as Summers should unite behind my proposal which has found many sympathetic responses among influential commentators (e.g. Cass Sunnstein) and even the IPCC chief at a Helsinki Conference.
Second, we probably should not altogether dismiss, despite the idea of a uniform carbon tax, the occasional regulatory ideas. Emission caps have been accepted for cars; we no longer say: let people drive CO2- emitting cars if they are willing to pay for it. I suspect however that we ought to minimise such regulations, as long as we have a carbon tax. But if we do accept such regulations, we might even ask: if cars produce more CO2 the faster they are driven, then why not simply prohibit cars from being made which allow cars to be driven in excess of 85 miles per hour?
Also, why not declare that SUVs are Socially Undesirable Vehicles and prohibit their sale?
Third, one needs to remind the environmentalists that intellectual sophistication and thoughtfulness are necessary before putting ideas into the public domain. The singer Sheryl Crow recently proposed that we use only one piece of toilet paper rather than two, to economise on paper! I am surprised that she uses only two currently. Using one would surely make her a risk to her friends, as much as eating garlic would, so that she probably has to use perfume to make her company acceptable: and that, in turn, would create environmental damage via the production of perfumes! But she also would surely have to wash her soiled panties more often, resulting probably in more use of detergents and setting up costs elsewhere in the economic system! There was also a story recently about how the fuel-efficient minicars were now being bought in the US. But they are not replacing SUVs; they are simply being added as a third or fourth car in the family! So, there we go again: you are saving on petrol consumption and hence on CO2 emissions when you use the little car instead of your SUV; but you are adding to the emissions associated with car production in turn. In short, the zeal of the instant environmentalists in terms of both exhortation and regulations needs to be welcomed but subjected to serious examination. In any case, it cannot be a substitute for policies like the carbon tax.
Finally, read what I and Petros Mavroidis have written on the legal and political aspects of the French proposal to tax US exports because the US has not signed on to the Kyoto treaty. It is on Mavroidis’s and my website . It is also due to appear in the World Trade Law. With Mr Sarkozy now keen to “engage” the US on global warming, it is necessary to get this absolutely right; the endorsement of people like my colleague Joe Stiglitz is unfortunately based on erroneous argumentation.
Posted by: Jagdish Bhagwati | June 5th, 2007 at 1:26 pm | Report this comment