Stern Words on Climate Change

I was disappointed by this op ed from fellow second generation Dunera Boy Sir Nicholas Stern.

As we know, Sir Nicholas threw the switch to Vaudeville in his report on the economics of climate change. I don’t have too much problem with that given the seriousness of the issue and the genuine value of highlighting the economic costs of not meeting the challenge.

What does upset me deeply however is Stern’s falling for the ‘poor developing countries’ line.

Here’s his three principles of climate change action.

  • Effectiveness: the scale must be commensurate with the challenge which means setting a stability target (or its equivalent in terms of an emissions reduction path) that can keep the risks at acceptable levels.
  • Efficiency: we must keep down the costs of emissions reduction, using prices or taxes wherever possible.
  • Equity: the problem is deeply inequitable with the rich countries having caused the bulk of current stocks of greenhouse gases and the poor countries being hit earliest and hardest which means that the rich countries must take the lead.

I like the first two principles. The first is risk based which is how we should see the problem. Efficiency may not always require prices or taxes, but it’s a good starting assumption – and a good reason why quite a few climate change policies – particularly the more popular ones like ‘renewables targets’ may be dodgy.

Now lets have a look at equity. Firstly I think readers of this blog will know that I’m not down on helping out the poor. If I were running the place, after I’d secured economic order – without which everyone gets poor – I can’t think of a higher, more worthy priority than assisting the poor (providing one is actually doing that rather than throwing money down the drain in poorly designed and unaccountable aid projects).

Now it’s true that rich countries caused the bulk of the current stock of anthropogenic atmospheric carbon. But for a good deal of that time they didn’t know that they were doing anything wrong. At least to that extent it’s irrelevant. By contrast the poor world picks up technologies into which the developed countries have poured trillions of hard earned dollars to bring to the state they’re in. There’s a rich transfer going on backward and forward between developed and developing countries.

I’m not sure what follows from some finding of what’s ‘fair’ (I’ll discuss Sir N’s conclusions shortly), so I don’t know why we spend time on it, but I can’t for the life of me work out what’s fair and what’s not in the relationship between developed and developing countries. It’s certainly unfair that my standard of living is far higher than a king’s standard of living in the eighteenth century, while billions people live on a dollar or two per day. But I’m not doing anything about it. (Well I am, but what I’m doing is an embarrassment compared with the magnitude of the ‘unfairness’). I doubt Sir N is doing anything very different.

But the real disappointment sets in when we hear from Sir N that this unfairness leads to the conclusion that “the rich countries must take the lead.” I don’t think I’ve ever used the expression ‘latte left’ on this blog before, but I’m afraid this is latte leftism of the most pernicious kind. Indeed, since its earliest days economics has grown from a critique of this kind of sloppy thinking – or what David Henderson calls ‘do it yourself economics’.

Here we are with China and India using all the technology the rich countries pioneered at bargain basement prices (much of it for free) to turn themselves into rich countries at a speed that has never been done before. So much so that China will, in not too many years be the biggest emitter on earth. And yet we’re saying that they should not be one of the leaders of action on climate change. Well if they’re not, I’m not sure what the point of it is.

One thing about fairness is that one does get pretty strong pushback when people see things being done that are costly to them and which don’t make any sense on their merits. People in the West will not be too pleased when they see aluminium smelters upping stumps to set up in poor countries with the transfer actually increasing emissions. In case you’re wondering, I support the Kyoto Protocol as a first step – but if the developing countries are not included pretty soon, I won’t be interested. That’s where our diplomatic effort should go. So important is the issue it dwarfs all others on climate change. Yet George W Bush (God help us) seems to be the only one left saying this. All the rest are prepared to sit around forever while the developing world plays silly buggers.

Change of scene: There’s a savage drought and water is scarce. What water restrictions have you ever encountered that exempt the poor? It makes no sense at all! As I got taught at the breakfast table there are two problems going on here. One is that people are poor. The other is that water is scarce – we need a solution for each, and a solution for dealing with the drought won’t work if it exempts the poor. And it probably won’t work too well if they get more lenient treatment. Of course putting up the price of water might generate specific hardships for poor people which one might want to take into account in the way you design the response to the drought, but you wouldn’t run round saying that ‘the rich should take the lead’ meaning that policies for dealing with the water scarcity should be focused mainly on rich people. And it’s quite possible that a really efficient policy for dealing with the drought could (for instance by raising the price of water) generate lots of tax revenue that can be used to actually address people’s poverty, rather than keep them poor but let them waste as much water as they like.

If we try to work out how Sir N interprets his principle that the rich should take the lead, it looks like he’s suggesting that we try to ‘engage’ them in a kind of ‘no regrets’ trading regime, in which they can trade if it looks advantageous to them, but at the same time they don’t feel the heat of strong binding commitments to face the true environmental cost of their emissions. He says this. The Clean Development Mechanism is one such system in which developed countries can qualify to increase their own emissions caps by funding abatement in developed countries. Thus the system can’t impose any harm on developing countries – it can only underwrite beneficial, carbon abating investment. But any system like this is inevitably incredibly cumbersome and will become more so over time. Of course it’s even more cumbersome than it needs to be now. Sir N reckons we can improve it, but his description doesn’t sound too promising.

[T]here should be a major reform of the Clean Development Mechanism, a Kyoto mechanism that allows developing countries to sell emission reductions, but does not penalise them for emissions themselves (a ‘one-sided’ trade mechanism). This is much too cumbersome for the scale required and omits key technologies. In the next stage, its successor should be based on sector and technological benchmarks against which reductions can be measured.

So the new mechanism would be a baseline and credit system. But they’re incredibly messy. If China puts in a gas fired plant, what’s the baseline? If the alternative was coal, the plant generates emission credits that can be sold back to rich (strictly carbon constrained) countries. If the alternative was nuclear or renewables, it will be a net emitter. Even working this out doesn’t answer the question of whether this plant should qualify for credits. What if the gas fired plant is being installed to generate electricity to smelt aluminium which was otherwise going to be made in Norway at lower emissions because of the partial use of hydro power? Baseline and credit systems are very imperfect and become more so, and more complex and arbitrary and so ‘unfair’ over time – just like a command economy does. It works OK for a while and then gets worse and worse.

Then Sir N says that this of his souped up Clean Development Mechanism.

In this way, it can move to ‘wholesale’ and build confidence in a flow of private sector finance to developing countries to help build low-carbon economies that can grow strongly. Demonstrating the viability of these flows is crucial to any acceptance, eventually, of overall targets by developing countries.

So while Sir N’s name is synonymous with the message that we’ve gotta act seriously and act fast, he wants to wait around to demonstrate how well these new (‘no regrets’?) highly administered trading schemes are compatible with strong low carbon growth before the developing countries get to take on serious binding commitments.

How long will that be? Another couple of decades? If so, I wonder why we’re bothering. We may as well just get out the sunnies and sun-screen, mix up a pina colada and try to enjoy the ride.

It’s all so irrational. And focused on the costs – in the very best pre-Ricardian tradition of do-it-yourself economics. Of course requiring the developed countries to get real about carbon abatement can impose costs on them. But that’s a very partial way of looking at the problem – like imagining that the jobs we lose from free trade are the dominant concern when we (generally) gain more than we lose.

Putting emissions in developing countries on a ‘level playing field’ with developed countries is so important to the efficiency of the global abatement effort (and ultimately to public perceptions of its fairness) that in my judgement the alternatives are not worth considering. And from its efficiency dividend we should be able to compensate the developing countries so that they’re in at least as good an economic position as they would have been by continuing their current spoiling role.

If that sounds pie in the sky to you, I have a specific model in mind. Not only would it be a massive bonanza for developing countries, but it is the only solution that really is fair. As we iterate and re-iterate the process of negotiating commitments at the successor agreements to Kyoto the negotiation of targets is going to become progressively more contentious. Why did Australia get a target of +108% when almost all other countries accepted a cut? We argued that our target should be more lenient because of the carbon intensity of our economy – which is mainly an argument for the opposite – since it this offered plenty of opportunities for abatement. The short answer is that we got the deal we got because we made bastards of ourselves. We were relatively more intransigent. The lesson for other countries at the next negotiations is clear.

As this process goes on, there is one model that will come to dominate the mind – the only logical equitable ‘equilibrium’ I can think of. Countries should have an entitlement to emit in proportion to their population. And guess what that means? A massive source of revenue for the developing world paid by the developed countries. Can it happen soon? No – we’re too greedy (and we can also justify that greed to the extent that we might be able to argue that many countries couldn’t absorb this transfer in a way that advantages their population – because of bad governance or that if they can, there needs to be a period of adjustment to absorb such transfers).

But if it can’t happen gradually – over the kinds of periods that Sir N is talking about reducing carbon emissions by 50% – then I don’t think there’s any chance for serious global climate change action.

And we could lead the process of getting to this place. The current government is committed to reducing emissions by 60% by 2050. I have my doubts as to how it will be delivered, but since we’re committed to it, lets just go into the next negotiation and say that, in return for the major developing countries signing on to serious undertakings to match domestically the domestic emissions pricing of developed countries, we’ll donate any entitlement we have that exceeds an entitlement based on equal per capita emission entitlements, to the developing countries.

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Patrick
Patrick
14 years ago

As we pretend not to know, Sir Nicholas threw the switch to Vaudeville in his report on the economics of climate change.

Not sure why you thought the switch was ever going to be flicked back. See, eg: Al Gore.

We may as well just get out the sunnies and sun-screen, mix up a pina coladadry plymouth martini and try to enjoy the ride.

Good idea.

the only logical equitable equilibrium I can think of. Countries should have an entitlement to emit in proportion to their population.

Putting aside the fact that I don’t think we need any such thing, I would agree. But I think we should probably avoid targets except as broad goals (which, to give credit where its due, is all anyone actually seems to treat the Kyoto targets as being). I think, and you may agree, that we should aim to move a part of the tax burden from incomes to carbon. It might turn out that we really can’t reduce carbon consumption that much at any reasonable price – and so we won’t, but pretty soon we will be able to afford those once-unreasonable prices. Or it may turn out much easier than expected once we start and the putative targets might be simply eclipsed. Either way, we should get a solution that better fits the real world than any arbitrary target.

Joshua Gans
Joshua Gans(@joshua-gans)
14 years ago

You won’t find anyone defending arbitrary targets, Patrick. And having a tax instead of a cap-and-trade scheme doesn’t avoid the problem of how much carbon we want to release into the atmosphere. Start taking it seriously.

Peter Gallagher
14 years ago

Hi Nick,

I don’t like Stern’s advice any more than you do but for different reasons.

I think Patrick is right to worry that the targets we get from negotiation are ineffective and arbitrary (or worse). We’ve plenty of evidence from domestic and international regimes of this.

I think that James is wrong to imply that deprecating target-bound agreements is ‘not serious’. There are other, probably more successful — and almost certainly shorter — routes to multilateral agreement on the atmospheric commons than the negotiation of targets. In fact, the report of the (former) PM’s Taskforce earlier this year sort of identified part of the alternative solution (overlapping regional agreements).

I agree with your criticism of the Stern line on ‘equity’. I don’t like it, but I suspect that most jurists would say that differential treatment of emerging economies on the grounds of lesser ‘responsibility’ is now pretty much settled law (as much as international law is ever settled).

Best

Peter

Jc
Jc
14 years ago

Very Good post Nic.

There is no constituency in India for the government to sign a binding agreement on emissions. The government, any government there would be thrown out office. As you correctly allude to China’s intransigence on its currency is a good pointer on what it thinks about emissions cap. Zippo. Chinas attitude about its currency is that you dont have to buy their products if you dont want them and the currency is their own business. Their thinking about emissions would be not much different.

The best alternative as I see it is if we go the carbon tax routes world wide with full income tax mitigation.

I would think both China and India could be persuaded to go that way, as the penalty is minimal.

johng
johng
14 years ago

The per capita emissions of most developing countries are so low, that we must recognise we have to allow them to increase their per capita emissions so they can develop. The trick is to have a Kyoto 2 which reduces the rate at which these per capita emissions go up. But it has to be a two track agreement with obligations of those countries above our world per capita emissions target being different to those countries with per capita emissions below our target. There are lots of ways of doing this, but any regime that recognises the differences between the below world average and above world average countries will have the above world average countries doing most of the heavy lifting. And if you choose to add in equity consderations then the above world average countries will be doing an even greater proportion of the work.

derrida derider
derrida derider
14 years ago

The risks of massive damage to everyone – rich and poor – are so great that we should adopt a “whatever it takes” approach to address the problem. So in this case I’m not fussed about equity for its own sake, though perceptions of equity will matter if that’s the only way we can get action taken.

If that means, for example, that we have to do (literally) dirty deals to preserve a rich little country’s coal interests, or bribe some very unlovely third world regimes, then I say do it – unfair as it may be.

Mark Heydon
Mark Heydon
14 years ago

Interesting discussion.
Per capita emission entitlements sounds like the only fair solution to me.
However, one question which nags me is how to fairly (there’s that word again) attribute emissions. For example, if Australia digs up coal, burns it to make electricity and uses the electricity to smelt aluminium which is 100% exported to China, I presume Australia owns the emissions. If instead the same coal and alumina is exported to China, I presume China owns the emissions.
I can’t help feeling that there should be some sharing of emissions in circumstances like this.

Peter Gallagher
14 years ago

Nick,

I completely agree with your argument. Id like to post it up on Troppo – with your permission.

You’re welcome to do so.

Peter

Ken Parish
Admin
Ken Parish(@ken-parish)
14 years ago

If, as seems likely, the US ends up next year with a Democrat President who takes global warming rather more seriously than Bush does, there might well be some possibility of a developed world consensus to compel third world participation should that become necessary. In effect, that’s how GATT and then WTO came about. Europe and the US used a range of trade barriers (tariffs, subsidies etc) to achieve eventual agreement on free trade in manufactured goods, notwithstanding that it differentially benefits the first world (by excluding primary produce) and is to that extent “unfair”. I’m not as pessimistic as Nicholas seems to be about the prospects of achieving a workable and enforceable international carbon emissions reduction regime (whether based on a tax or cap and trade permits) because of the WTO experience. We WILL be willing to strongarm reluctant starters as the evidence becomes more and more undeniable that the alternatives to strongarm tactics are immeasurably worse.

Patrick
Patrick
14 years ago

Although what seems likely is the Clinton administration, who in their previous incarnation never suggested that Kyoto might be ratified.

Not that I held that against them.

Tom N.
Tom N.
14 years ago

POPULATE AND FRY

Nice post as usual Nick. Re: you view that “countries should have an entitlement to emit in proportion to their population.”, I tend to agree, but just to complicate matters I also think that its important to get the (dis)incentives to increase population over time correct too. This means that entitlements would need to be tied to some base year population, rather than varying over time to reflect differences in population growth.

Tom

Andrew Bray
Andrew Bray
14 years ago

Nick,

I’m interested to see your arguments develop in post 9. A question… is it a global carbon trading market that will allow

Similar marginal cost of carbon abatement in all countries’?

To address a couple of your other points:

I reckon there’s too much concern about dirty industries shifting to countries with looser regimes. Regardless of the Bali wash-up, you’d think developing countries will only be able to hold out for so long. Pulling up stumps on an aluminium smelter doesn’t happen overnight and nor does it happen unless there are 3 or 4 decades of favourable sovereign treatment locked in in the new destination. I don’t know there’d be too many Alcoa execs with the stomach for a decision to move to a China or India given the current fluidity.

The question of rich countries leading the way really comes down to how best to shift poorer countries into accepting big binding targets – which, I agree, has to be the endgame. For instance, should Bush’s successor continue his position and sit on the sidelines waiting for China to budge before they do, how is that a defensible, or in Stern’s lingo, an ‘effective’ position? It’s just been given the hiding it deserved here with Howard’s demise.

Sure, Australia and other developed countries can insist on the developing countries submitting to binding targets but unless we’re prepared to make the first move I don’t see how it will happen. It has to be perceived to be fair from the other side too….

Peter Wood
Peter Wood
14 years ago

Apart from the ethical and welfare considerations, there is another reason why equity is important. A framework for reducing greenhouse gas emissions needs to have integrity. If there is not integrity then there will not be a perception that it will continue, which would jeopardise investment decisions in climate change mitigation. For there to be integrity there needs to be a perception of fairness.

Furthermore, people and countries who are more well off have a greater capacity to absorb any costs of mitigation. If a disproportionate amount of these costs were bared by those less well off there will be less capacity to make big emission reductions.