Climate change and economic ‘rationalism’

It means only pro­por­tion­al­i­ty; weigh­ing costs against ben­e­fits and seek­ing pos­i­tive returns, for pub­lic and pri­vate invest­ment of resources includ­ing those held in col­lec­tive own­er­ship. Some of the hard­est conun­drums of pub­lic pol­i­cy call for a ratio­nal approach to man­ag­ing large-scale, long-term, risks in the face of pub­lic reac­tion that is more like pan­ic. For exam­ple, the search for a pre­cau­tion­ary but pro­por­tion­ate approach­es to man­ag­ing the risk posed by green­house gas emis­sions or by the spread of ani­mal and plant dis­eases by trade across nation­al bor­ders. Politi­cians can eas­i­ly be spooked by pub­lic dread of these risks into endors­ing poli­cies that fail deliv­er net ben­e­fits. They deserve more help from opin­ion lead­ers who see them­selves as advo­cates for ratio­nal pub­lic pol­i­cy choices

A month or so back I con­tributed an Op-ed piece to the Finan­cial Review news­pa­per on the eco­nom­ic incen­tives behind the pro­tec­tion­ist demand for quar­an­tine pro­tec­tion in Aus­tralia and the need for a cost-ben­e­fit approach to future pol­i­cy. I’ll have more to add on that top­ic in the next few days.

I’ve con­tributed a piece to the Finan­cial Review—due for pub­li­ca­tion tomorrow—that calls for a ‘cost-ben­e­fit’ approach from the Asia Pacif­ic Part­ner­ship on Clean Devel­op­ment and Cli­mate. In Novem­ber, this year, in Ade­laide in South Aus­tralia, the six Part­ners (Aus­tralia, Chi­na, India, Japan, Korea and the USA) will attempt to turn the rel­a­tive­ly sen­si­ble G‑8 Cli­mate Change state­ment into some sort of action pro­gram. This is where I think they should start:

    It’s time to ask the eco­nom­ic ques­tion about cli­mate change: how much con­trol does the world real­ly need? Aus­tralian indus­try has a unique oppor­tu­ni­ty lat­er this year to help the gov­ern­ment come up with an answer.

    It’s tak­en more than a decade for the G‑8 gov­ern­ments to agree that green­house gas emis­sion con­trols could have an impact on warm­ing. But their July (Gle­nea­gles) state­ment on cli­mate change bit­ter­ly dis­ap­point­ed the evan­ge­lists for urgent action. It failed to reflect their sense of anx­i­ety, endors­ing only inno­va­tion, pol­i­cy change and pub­lic aware­ness cam­paigns to ensure that future ener­gy investments—more than $20 tril­lion over the next 25 years—do not increase emis­sions at an unac­cept­able rate [“Genea­gles Cli­mate Change State­ment”:(, paras 5 & 6]. 

    The focus now shifts to Ade­laide, in Novem­ber, when the Asia

    Pacif­ic Part­ner­ship for Clean Devel­op­ment and Cli­mate, com­pris­ing the world’s biggest car­bon-ener­gy extrac­tors and con­sumers wil attempt to devel­op a more detailed pro­gram for inter­gov­ern­men­tal action on cli­mate change. Aus­tralia, as host, has a good oppor­tu­ni­ty to shape ideas for the next steps. 

    But the gov­ern­ment has giv­en us no clues about what it has in mind except to say that the Part­ner­ship won’t replace Kyoto. This is noth­ing more than a con­ces­sion to the pol­i­tics of cli­mate change. It side-steps the seri­ous prac­ti­cal prob­lems fac­ing the Pro­to­col, which is already due for renewal. 

    First, the Pro­to­col fails to con­trol emis­sions in Chi­na or India— two mem­bers of the Part­ner­ship whose share of world growth makes it essen­tial they under­write any future glob­al emis­sions con­trols. Sec­ond, Kyoto emmis­sion quo­tas (‘targets’)are expen­sive to imple­ment but make scarce­ly any dif­fer­ence to green­house gas lev­els even by 2100; esti­mates based on assum­ing US com­pli­ance and (implau­si­ble) zero glob­al emis­sion growth beyond this decade show Kyoto shav­ing ‘base­line’ green­house gas con­cen­tra­tions by less than 10%.  Third, the quo­tas are unen­force­able any­way. The penal­ty for exceed­ing the lim­its of a Kyoto emis­sions tar­get is that, the next time around, per­mit­ted emis­sions are cut by 130% of the excess. Non-com­pli­ant gov­ern­ments would sim­ply walk away from such a penal­ty, so not even well-dis­posed states have much faith in the targets.

    In com­ing up with a new non-Kyoto approach, the Asia Pacif­ic Part­ner­ship must fos­ter a debate on how much cli­mate con­trol the world wants. Eco­nom­ic assess­ments sup­port­ing a cost-ben­e­fit approach to cli­mate change sug­gest the glob­al ben­e­fits of achiev­ing even high­ly ambi­tious Kyoto-like cuts to emis­sions are supris­ing­ly modest.

    Accord­ing to the UK House of Lords Eco­nom­ic Committee’s thor­ough review [Report of the UK House of Lords Select Com­mit­tee on Eco­nom­ic Affairs Report The Eco­nom­ics of Cli­mate Change, July 2005], the eco­nom­ic impact of a large tem­per­a­ture rise of 2.5% by the end of this cen­tu­ry is a rea­son to be ‘con­cerned but not alarmed’: it might cut 2% from glob­al out­put. The cost of achiev­ing dras­tic cuts to green­house gas con­cen­tra­tions, how­ev­er, to about 550 ppm—not guar­an­teed by cur­rent sci­ence to halt tem­per­a­ture rises—is estim­tat­ed to be at least 1.3% of world income flows and pos­si­bly 2.5% if the pro­gram is ‘front end loaded’ over the next 20 years. Net ben­e­fit: between 0.7% and a pos­si­ble ‑0.5% of glob­al income flows. 

    These num­bers jus­ti­fy the lack of edge in the G‑8 state­ment. They sug­gest that the Asia Pacif­ic part­ners should imple­ment new emis­sion con­trol pro­grams, but not at any cost; only if it can be done with­out putting more than a small dent, if any, in eco­nom­ic growth. It also jus­ti­fies calls for the accel­er­a­tion of tech­nol­o­gy to adapt economies to high­er glob­al tem­per­a­tures; a fate we can­not avoid even if we stopped adding to atmos­pher­ic green­house lev­els tomorrow.

    The pro­gram must be inter­gov­ern­men­tal, like Kyoto, and should not sim­ply walk away from the achieve­ments of the Pro­to­col. But it must aban­don the flawed emis­sion quo­tas. Glob­al­ly-aligned nation­al car­bon tax­es are a more mar­ket-friend­ly mech­a­nism to ‘inter­nal­ize’ the small net costs of emis­sions in ener­gy con­sump­tion deci­sions. Their adop­tion could be backed by ‘peer’ pres­sure to emu­late lead­er­ship from the giant economies of the Part­ner­ship and even by trade ben­e­fits offered to coop­er­a­tors. Tax sub­si­dies to tech­nol­gy devel­op­ment and ‘clean devel­op­ment’ projects could be part of the deal to con­vince Kyoto’s non-quo­ta coun­tries to accept obligations.

    The Aus­tralian gov­ern­ment as host should rec­og­nize, too, that the Part­ner­ship must have mech­a­nisms for coop­er­a­tion between gov­ern­ments and indus­try on the def­i­n­i­tion and imple­men­ta­tion of goals for emis­sion reduc­tions and the devel­op­ment and com­mer­cial­iza­tion of new tech­nolo­gies. A lot has changed in the glob­al econ­o­my since cli­mate change became a con­cern in the ear­ly 1990s; effec­tive glob­al mea­sures need the mar­ket knowl­edge and coop­er­a­tion of stake­hold­ers and investors as well as con­sumers and civ­il soci­ety.

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