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”:(http://www.number-10.gov.uk/output/Page7881.asp, 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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