Tuesday, December 15, 2009

Krugman vs Lomborg

"We have a reasonable probability of catastrophe"


HT: Krugman

"The economics are very simple. It's an externality, stupid so price it."


THE Copenhagen summit is missing a crucial element. How should we design a long-term agreement to reduce global emissions of greenhouse gases?

Negotiators focus on the medium term. How much should each country do to cut emissions or restrain their growth by 2020? Under what rules? What should rich countries do to help poor countries rein in emissions growth?

There's logic there. No political leader will be in power long enough to deliver on a target for 2050. The 2020 deadline means it's up to them to deliver the action that meets their pledges.

And at this distance, the signs seem encouraging. All the key players have put pledges on the table, some better than others. The fact that 110 leaders are coming to Copenhagen to negotiate in person suggests they mean business.

True, pledges can be broken: we saw that with the Kyoto commitments, especially from Japan and Canada. But it is positive when China commits to cut its emissions per dollar of GDP by 40 to 45 per cent, President Obama pledges a 17 per cent cut in total US emissions, Congress party chief Sonia Gandhi overrules India's obdurate negotiators to pledge a cut of 20 to 25 per cent from business-as-usual levels, and even Russia's President Medvedev doubles its promised cut.

Yet there are worrying signs. The developed countries' pledges collectively fall well short of the 25 to 40 per cent cut from 1990 levels that, realistically or not, was widely expected. And some developing countries still seem to see this as a problem for the rich world to solve, not one that requires all to take verifiable action.

The head of the International Energy Agency, Nobuo Tanaka, puts it bluntly: on current policies, he says, 97 per cent of all growth in emissions to 2030 would come in developing countries.

Even if the rich countries were to reduce their emissions to zero, global temperatures would still rise by more than 2 degrees.

China understands that. But while it is taking wide-ranging action to slow emissions growth, its own hang-ups prevent it playing the leadership role the summit needs. Its refusal to agree to international verification of its emissions is like its perverse policy of maintaining a hugely undervalued currency. Both are unnecessary, and both seriously harm the prospects of other countries.

But Copenhagen might not see the gaps close. One reason why is that we are debating medium-term targets without having agreed on a long-term goal.

Yes, there is broad agreement that we need to reduce global emissions in 2050 to half their 2000 levels. But how will we distribute those emission rights? And by what road will we get there?

Ask these questions, and one reality leaps out at you. The only fair basis for determining long-term emission rights is population. At Copenhagen, they are negotiating on total emissions or emissions growth. Yet inescapably, the currency we will end up dealing with is emissions per head.

Ross Garnaut saw this clearly, and made it the central feature of his report's design for a global agreement. He proposed that the world adopt a goal of convergence to equal per capita emissions by 2050. With a 50 per cent cut in global emissions, that implies cutting emissions to about 2.5 tonnes per head.

That implies Australia and the US would have to cut emissions per head by 90 per cent over the next 40 years, and China by 45 per cent. But a poor country like India would be able to expand emissions by 90 per cent. And countries could trade emission rights to meet the target.

That goal would be tough, but fair but they're not talking about it in Copenhagen because it's too hard. The US and Australia don't want it, because they have the largest per capita emissions of the big players, so they would have to make the largest cuts. The shriller advocates for developing countries don't support it, because it allows Western countries another 40 years to lower their emissions to sustainable levels.

But realistically, it's at the outer edges of what Western democracy American democracy, in particular can promise. It implies massive technological leaps to achieve affordable low-emission technologies. It then implies a rapid roll-out of them all around the world. That would be hard.

Can it be done without putting a price on carbon, as Tony Abbott and others argue? Former climate change sceptic Bjorn Lomborg, who now accepts the need for action, argues that instead of emissions trading or a carbon tax, the world should spend $US100 billion ($A109 billion) a

year on research and development to discover affordable renewable energy technologies then roll them out.

But to get there would be impossible without a price on carbon.

Dirty coal is cheap and plentiful partly because when you burn it, you pay nothing for dumping your hot air in the atmosphere. If that distortion (what economists call an externality) is not corrected, new technologies whether renewable, nuclear, or clean coal will never be cheaper than dirty coal.

The International Monetary Fund's director of fiscal affairs, Carlo Cottarelli, puts it bluntly on an IMF blog: "The science of the issue can get pretty incomprehensible pretty quickly. And the politics are clearly very ugly. Let's not forget, however, that much of the economics is very simple. It's an externality, stupid so price it.

"The basic principle remains: polluters should pay." If they don't, the future will.

Related Posts

. An animated journey through climate change

. On CRPS D-Day

. Betraying the planet - Krugman


Anonymous said...

Krugman is correct when he says that money spent on dealing with climate change would not be diverted into other types of aid. This is one of the classic red herrings thrown up by a well orchestrated FUD campaign.

Adam S said...

Much of what Colebatch is saying makes intuitive sense. A couple of things though:

1, Surely total emissions is more important to address than per capita? He says: "Yet inescapably, the currency we will end up dealing with is emissions per head.". OK, but what I don't quite get is how he or Garnaut arrive at that conclusion. Can someone explain this to me?

2, If we in Australia are to achieve a 90% reduction in our carbon emissions, what is the economically viable game plan for this? At current technology levels, this would be a staggeringly expensive undertaking, as well as substantially damaging our export economy. Is there any good economic modelling of how we would achieve this?

My expectation is that technology will get better as time moves on and we could get to the target gradually. So maybe Lomborg is right, spending on the energy technology is the correct path. I am fairly aware of his opinions on the matter and would probably combine his approach with a carbon tax. That to me would do a better job of sending the appropriate price signals to consumers and energy producers. An ETS just sounds like a derivatives scheme all over again.

Anonymous said...

Ultimately if the science proves correct then a per capita rate is the only fair way to divide up emissions across the globe. Although it would also seem fair to reward countries that maintain a stable population.

As far as cutting emissions by 90% this seems impossible with current technology and current lifestyles. Both will of course change over time with or without any action on climate change. We are living in an age of celebratory resource pilfering and energy wastage which is not sustainable into the future. Even a few economists will quietly conceed the world is a finite place, although they still haven't figured out how to fit this into theory.

An ETS should, if it was designed well, have the advantage of spreading the incentives to cut emissions more broadly. It is a testament to how few people believe in markets these days that this idea is being derided. Long live the counter counter revolution.

Anonymous said...


Adam S said...

Anon2, I am a pro-market guy, but I'm not doctrinaire about it or take the efficiency of markets as an article of religious faith. There are times when a tax is simpler to and create greater certainty for everyone. There is an old adage about "taxing the things you wish to discourage", which is probably appropriate in this case. Furthermore, a lot of the ETS designs I have seen (including our own) seem to do little to actually attack the problem, while giving away tons of money and credits to the very people who supposedly contribute to it most. If we want to use an ETS and/or carbon market, then we are going to have to do a lot better than that which we have currently.

Energy efficiency and new technology would appear to be sound strategies, but they will take time. We've really only been debating this issue for a relatively short period and it takes time for manufacturing techniques, energy generation technologies and social changes to evolve.

Anonymous said...

Adam S.

We can agree on one thing - the Australian ETS offers too much compensation (I'm hardly an expert on ETS's I'll admit).

I'm not a doctrinaire pro market person either, but I more or less believe in the power of markets to efficiently allocate resources. I also believe in intelligent market regulation.

I'm a little bit annoyed with the big project/big research investment strategy because I believe this would probably only work in a climate of extraordinary urgency (e.g. WWII). Maybe we should be tackling climate change like that but we are not there yet. In the present climate it looks to easily captured by vested interests and pork barrelling.

I can see a large scope for small solutions to energy efficiency as well as large scale projects. Maybe a tax would drive this quicker? I would be interested to know why the GST couldn't be converted into a quasi carbon tax. Activities that are low carbon should be cheaper, not just things that are high carbon being more expensive.

Maybe both a carbon tax and an ETS along with large scale investment driven by government all have a role to play in finding the quickest and cheapest path to carbon reduction.

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