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Are Our Strategies to Combat Climate Change Fundamentally Mistaken?

1/7/2013 by tday

 

In the 20 years since world leaders set a CO2 baseline for climate negotiations in Rio de Janiero, carbon (CO2) emissions into the atmosphere have accelerated, from 2 ppm annually to 3 ppm as a result of an unprecedented economic expansion in China and other developing countries that has been largely fueled by coal.  Absent some change, limiting atmospheric carbon to 400-450 ppm, the concentration roughly associated with a 2°C rise in global temperature will be infeasible and the result could be catastrophic.

 In The Carbon Crunch: How We're Getting Climate Change Wrong and How to Fix It (Yale 2012), Dieter Helm, a distinguished energy economist, takes the threat of catastrophic climate change seriously, but also recognizes how confusion about science and computer modeling has resulted in mistaken public expectations of predictive certainty, as well as growing doubts. Like others, Helm argues that climate change policy must be informed by ethical considerations. Helm maintains, however, that those considerations must be grounded in resource allocation, demand and supply, and must be mediated through actual rather than ideal behavior.

The heart of the climate change problem, Helm contends, is “economic illiteracy,” failure to consider incentives realistically. Kyoto, Helm observes, is very well modeled by the “Prisoners’ Dilemma” model in game theory: while both parties in the game, prisoners being interviewed separately, would be better off by not cooperating, each individually has an incentive to get a better result by agreeing to cooperate and then pursuing self-interest.  The best outcome for both prisoners would be to cooperate, but cooperation requires trust which is the dilemma.

As in the Prisoners’ Dilemma, getting agreement in Kyoto has been thwarted by countries’ self-interests and incentives to “free ride” on commitments made by others. One crucial difference, Helm observes, is that the climate negotiation incentives are even more challenging because the damage is in the future and is inflicted on future generations. Because of these dynamics, climate change is “not an obvious candidate for a globally binding agreement.” Confronting climate change risk requires a different approach, one that realistically allocates responsibility for continuing emissions of carbon into the atmosphere.

 It is also necessary not to confound short-term measures and long-term goals. The mainstream doubts about the costs and efficacy of existing wind, solar, nuclear, and biofuels technologies as means to mitigate climate change are valid and should not be confused with skepticism about the human role in climate change. Existing wind, solar and biofuels technologies cannot meet energy demand because the land and water resources any deployment in scale would require are simply not available on the planet. While those technologies will evolve with further development, the technologies in their current state of development are not a solution.  Similarly, improved energy efficiency may have the perverse, but economically predictable effect of increasing consumption.

 The reductions in carbon emissions experienced in the developed world are most significantly attributable to its deindustrialization, to the shift of polluting industries to China, India and other countries in the developing world, rather than to deployments of solar and wind energy or increased energy efficiency. If carbon consumption per capita is measured, consumption of products with embedded carbon has actually increased in the developed world. Further, with economic development and continuing population increases in the rest of the world, global demand for energy will rise in the rest of the world as well.

 Resolving the issues posed by global economic development involves rights and entitlements as well as causality. As a matter of entitlement, the new, marginal emissions of carbon into the atmosphere are the emissions that can be affected by policy. Helm maintains that these marginal emissions, their causes, and who is responsible should be the focus.

 Kyoto, Helm maintains, got this wrong. While its focus on emissions sources, power stations, transport systems, and factories might seem intuitively good, the Kyoto approach fails to direct attention to those ultimately consuming the products. “If carbon emissions embedded in goods and services are priced (regardless of where they are produced), then those who are responsible for consuming more carbon will pay more. … Carbon pricing therefore affects both the demand for carbon embedded in goods and services and the relative economic attractiveness of different ways of generating the energy used in producing them.”

 Pricing carbon and imposing the cost on consumers is best achieved, Helm maintains, through a tax on carbon consumption, rather than through the cap and trade strategy currently getting more attention. In a market with perfect information, imposition of a tax and the currently favored cap and trade strategy for reducing carbon emissions would be equivalent. Information, however, is not perfect.

In addition, carbon emissions are not inherently toxic, a circumstance that would justify a strict permitting system. Within limits, how much carbon is emitted over the short term is less important than not exceeding critical global warming thresholds decades from now. The problem of climate change must be managed over decades with effective alternative energy technologies developing over a longer terms as well.

Emissions caps, in contrast, would be administered through pollution permits issued to existing polluters that could then be traded or offset.  The permitting scheme would need to be adjusted every few years with corresponding opportunities for industry lobbying and accompanying uncertainty, both disincentives to longer term investments in R&D.  By contrast, a tax on carbon could be set for a longer term, would not require periodic issuance of permits, could reflect global carbon emissions concerns, and could be applied by a country equally to goods produced within and outside national borders -- with reciprocal tax credits available for imports of goods from countries that also impose a carbon consumption tax.

An additional factor favoring a carbon tax, Helm maintains, is the recent discovery of large reserves of natural gas which represent a viable alternative to coal. An intermediate-term shift from coal and oil to natural gas would in itself result in a reduction of carbon emissions, something that renewables have not achieved to date. Natural gas reserves, as currently estimated, are sufficient to meet energy demand during the term over which alternatives could develop with stable market incentives for investments in R&D.

Helm is not a radical libertarian. While he believes that market forces are the best means for addressing the uncertainties in setting climate change policy, he also sees a role for site-specific regulation of natural gas extraction. As with other mining activities, how natural gas is extracted must be regulated to control methane emissions, to protect groundwater, and to protect against other environmental harms.

At a time when climate change has stirred public doubts and apprehensions about costs, Helm has written a morally significant book. A contention that climate change policy must ultimately be grounded in ethics, in ethics of stewardship and fairness is common enough. What makes Helm’s book morally significant is that he analyzes these moral arguments carefully and argues for an assignment of responsibility grounded in economic facts, by focusing not simply on who caused emissions in the past, but also on who is causing emissions now. 

As Helm observes, we can do something only about new atmospheric emissions of carbon. In demonstrating how an ethical resolution of the challenge of climate change can be grounded in human nature and prevailing circumstances, Helm identifies effective means to reduce emissions that do not depend on international agreement which has proven so elusive. 

In building his case for a tax on carbon consumption, Helm points a way between the horns of the Kyoto dilemma. If taken seriously by policy makers, Helm’s analysis can change the international dialogue and can within nations shift focus toward effective means for reducing global carbon emissions that are within their control and consistent with international norms.

 

For additional discussion, see the following article by Dieter Helm on carbon consumption tax mechanics:
Forget the Kyoto Accord and Tax Carbon Consumption: Yale Environment 360

 

Comments:

by Tal on 2/22/2013 at 10:30:29 AM
A further exploration of the challenge in imposing an equitable carbon tax on imports and exports from developed countries may be found here. The authors argue that imposing a tax on the total embedded carbon content of a product exported from a developing country would be inequitable and would harm trade. http://www.economist.com/news/finance-and-economics/21572180-can-trade-restrictions-be-justified-environmental-grounds-air-trade?frsc=dg%7Ca


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