Climate Change Series Five economists with disparate views discuss the threat of climate change, how government and business should respond and the relative merits of various strategies
PARTICIPANTS
TERRY BARKER is director of the Cambridge Centre for Climate Change Mitigation Research at the University of Cambridge, and a co-ordinating lead author for the Intergovernmental Panel on Climate Change’s Fourth Assessment Report.
MICHAEL GRUBB is chief economist of the Carbon Trust, senior research associate at the faculty of economics at the University of Cambridge and visiting professor at Imperial College.
DAVID HENDERSON is visiting professor at Westminster Business School at the University of Westminster, and a former chief economist of the OECD.
JEFFREY SACHS is director of the Earth Institute, Quetelet Professor of Sustainable Development and professor of health policy and management at Columbia University.
MARTIN WOLF is associate editor and chief economics commentator of the Financial Times.
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Martin Wolf: Let’s start by looking at how big the threat of climate change is and how well agreed it is that there is a threat. Terry, could you give us your perspective?
Terry Barker: It is a huge topic. Climate scientists are more and more certain that if the world’s temperature were to rise by, say, 6°C above pre-industrial levels, the potential impacts are frightening.
MW: Michael, would you agree with this assessment?
Michael Grubb: There is no doubt that the vast majority of scientists are deeply concerned and would probably subscribe to calling it a “big threat”.
What complicates things from an economic and policy standpoint is the trade-off against other costs and questions of how soon it will all happen. We do not know how big a threat it will be over the next decade or several decades, but there are a lot of economic and other arguments to suggest that that very fact is what makes it a big threat – that the economics of risk are different if you have many different planets with which to experiment; but we don’t.
MW: David, how far would you go along with this sort of assessment? How far does your reading of the evidence and of the opinions of scientists go against this apparent consensus?
David Henderson: As I see it, there are two threats. First, that climate change would be highly damaging or catastrophic unless strong and urgent action is taken to curb carbon emissions. But that risk has an opposite risk which is less stressed: that governments will embark on an ambitious and costly worldwide exercise in social engineering – which is what is involved if this is taken seriously – on the basis of ideas and presumptions that, in time, will prove not to be well founded. Part of the uncertainty is the possibility that they will prove to be ill-founded and I do not think that there is a solid scientific consensus.
MW: That brings us to our second point of discussion: what should be done and how urgently? There are a number of distinguished economists who would argue that while the science is established, given the uncertainties about the imminence of the threat; the fact that future generations will be richer, we hope, than we are; and the potential costs of immediate action, the right thing to do is to wait and delay most of the major action. Terry, how would you assess the arguments for and against early strong action or waiting?
TB: I have come to the conclusion that we need to act more urgently than many of the existing reports, such as the Stern Review, have advocated. I have created a long-term model to study how to decarbonise the world economy by 2020 via an investment programme that would cost trillions of dollars. That is how urgent I consider the problem to be.
The reason for the urgency is to do with the risks of dangerous climate change or what I call “wild weather”. Wild weather, combined with a rise in sea levels, could destroy our cities. We are sitting, for example, at the FT’s offices next to the River Thames. If it were to rise by seven metres, it would overcome our flood defences. If there were a strong sea surge and it actually rose by more than that, we would be lost.
MW: Just to be clear about the figures, if you look at the Stern Review, his estimate of the cost is quite low. Recently, he has been talking about an annual cost of about 2 per cent, of a world economy worth $60,000bn – or $1,200bn. That seems a pretty modest investment project. But you would be prepared to go well beyond that. Is there a limit to how much you would advocate spending?
TB: From doing what I call a multicriterion analysis, which takes into account the risk, I see great macroeconomic benefits from this programme of investment. My estimate is a macroeconomic benefit of 1-3 per cent of gross domestic product, which rises astonishingly when you go to more stringent targets. And the reason it rises is to do with the non-linearity of the system and the economies of scale.
MG: The core of your question, Martin, is about the urgency of significant action to limit emissions. There has been a big debate around this which depends partly on how you value future generations and the ethics thereof, and I think Lord Stern made a persuasive case for looking at this from a public policy standpoint and very low discount rates. And that, particularly combined with risk assessments, does make a powerful case about the seriousness.
But let me focus on specific reasons why this is urgent. First, there is a lot that can be done fairly cheaply and I cannot find logic in saying, “Let’s not do much at all because some of the things we could do could be really expensive.”
Second, we all know that innovation is important and leaving everything to centralised government research and development programmes is not a good way of doing innovation. In the real world, action will itself help to provoke better, cheaper ways of doing things. So there is a knock-on benefit from the right kind of investment.
Third, we are at a time of major opportunity costs. Failing to act is equivalent to some least-cost choice, it takes us down a particular investment path that we know to be dangerous. The world needs to invest trillions of dollars in some kind of energy supply. The question is whether that goes into high carbon systems or low carbon systems.
Fourth, we are dealing with systems that have a huge amount of inertia. Taking the wrong steps now will last for decades in terms of sunk capital in high carbon technology.
Fifth, you have to weigh the kinds of risk. David correctly spelt out that there are risks on both sides but they are totally different. On the one hand are those that are basically knowable and manageable – you can observe the costs you are imposing and pull back, refocus or redesign policies. On the other hand are the risks to the climate system, which are cumulative and long term. So you cannot discover exactly what you have committed yourself to until decades later, by which time it is far too late to do very much.
MW: David, what is wrong with this sort of argument? We are quickly approaching, we are told, various limits which are dangerous. It is going to be more costly to deal with this later on than now.
Why do you not accept this sort of argument for the sort of massive project that Terry was talking about?
DH: First, Terry’s trillions underline my point that the risks are not only on one side. Second, both Terry and Michael are overstating the extent of what can be said with confidence about the risks.
Mike Hulme, a British climate scientist, recently made two interesting statements on his blog. One, he drew a contrast between what he called “climate scientists” and “catastrophists”. Two, he referred to the limits and fragility of scientific knowledge. I would stress that very strongly. We are dealing here with a climate system that is extraordinarily complex, about which not a great deal is known. It is not just a matter of uncertainty, but of actual lack of knowledge. It is dubious to take those expressions of opinion as being close to authoritative.
I disagree with an assumption of the Stern Review which took the science as given. Its starting point should have been that governments have decided that action is needed, there is a serious problem and we start from that as the basis and look at the consequences through economics.
MW: Whether or not they were wise to start with the science, it is history, in a sense, because that is how they started. We could also say it is what governments decided.
But can you clarify the intellectual basis of what you are saying? Clearly, knowledge is uncertain, but the uncertainty, rather clearly, is both ways: we cannot be absolutely sure these things will happen, but we certainly cannot be sure that they will not happen. The problem with the position you have just advanced is the thing we cannot rule out, namely that these developments are, if they happen, very, very scary. And if what you call the catastrophists are right, by the time we do know, it will be too late.
In that case, is it not rational to invest in a set of policies that would substantially reduce the likelihood of something we don’t know will happen, but if it did happen, could be extraordinarily costly?
DH: Yes, if you are thinking in terms of paying what may be a modest insurance premium against a low unknown probability with potentially disastrous consequences.
MW: It might be a very high probability. We do not know. It might be 100 per cent for all I know.
DH: I think that is a perfectly reasonable argument, and perhaps I should clarify that I am not in favour of inaction. Lord Stern and his colleagues wrote an indignant response to a critique that I and some colleagues published in which, of my account, the term “inaction” appeared 14 times. That was not our position.
Nor am I, to quote a phrase that is often used illegitimately, “denying the science”. I agree that there is a prevailing scientific opinion but what I do not accept is that it is accurately represented by what Mr Hulme called the catastrophists.
MW: Michael, how much do you think this might actually cost, and what might its principal elements be if we were to take early action?
MG: One of the things that makes this problem complex from a policy standpoint is that it covers so many different aspects of our economy. It is hard to summarise with one instrument.
However, if I were to do my best and use carbon price as a rough indicator, we should aim for a cost of less than €100 a tonne.
MW: What might that mean in terms of the increase in the cost of energy for users? What are we talking about as a rough proportional increase in electricity prices or fuel prices?
MG: The impact on electricity price would depend on how much coal there was in the grid, but you are talking about a 20 per cent-ish increase in electricity prices. The impact on the fuel prices at the pump, frankly, would be a lot less, certainly in Europe, where the current price already equates to €300 or €400 a tonne of CO2 in many jurisdictions.
MW: We are now joined via videoconference by Jeffrey Sachs from New York. Jeffrey, would you address why you think it is extremely important to act now on climate change and the sorts of costs that might be incurred?
JS: We need decisive action, but it doesn’t mean huge steps at the beginning, it means a clear plan at the beginning and a roadmap of what we are going to do. The reason we need to act now is that this is going to take decades to bring to fruition. We do not even have many of the key technologies in place that we are going to need to get this problem under control. So the urgency is to get started in a clear, decisive way but that will start in many cases with research and development on renewable energy sources, on carbon capture and sequestration (CCS), on the long-lasting batteries that we will need for electric or plug-in hybrid vehicles, and so on.
The mistake is to think that we can do this with existing technologies. There are certain things that can be done, and those should be done now, but the vast change is going to come through new kinds of energy systems, new kinds of automobiles, new buildings. And all of that development is going to happen over the course of decades, not over the course of years. So we need to get started now, precisely because of how long it is going to take.
TB: I disagree with a lot of what Jeffrey just said. For example, the point about CCS. There is a German power station which, although it is not up to scale, has proved the technology and is working.
JS: Do not make a phoney argument that does not exist.
TB: That is not a phoney argument, that is a current technology.
JS: No, what I am saying is something completely different, so do not misunderstand me. I have been campaigning for quick action just as much as anyone. What I am saying is that you cannot claim that these things are proven and to scale right now, and what I am saying is that we have to get them scaled up, demonstrated and put into place.
TB: I would say it is proven. Chinese factories produce electric cars for children at a massive scale. Why can’t they produce electric cars for adults?
JS: Because people care about how far they go, the performance, the duration, the safety.
TB: Maybe we should think about whether we really need to travel more than 150km by car.
MG: If Jeffrey is saying that driving everything through a carbon price is not the only thing that needs to be done or the most efficient solution, then I totally agree.
Where, however, we can narrow the difference between Jeffrey and Terry is by acknowledging the major blocks of the energy system itself that need addressing, in each of which there are dozens of different technologies, each of which is at different stages of development.
We need the right mix of economic incentives to quickly put in place the things that we know how to do that are either already at scale or are trying to make their way into these markets.
MW: That allows me to move on to what the policy steps are in practice. David, where would you start?
DH: Number one, given the situation that we are in now, and given what is prevailing scientific opinion, there is a good case for a carbon tax. It should be as general as possible, transparent and revenue neutral. If it can be made to work on that basis, I am in favour of it but I would not like to specify or even guess the level.
And, most important of all, if you had an effective and sufficiently widespread carbon tax, then it ought to be possible to get rid of all sorts of costly expedients that governments have already introduced, a whole range of subsidies and targets and regulations. The thought that it becomes inevitable that no one in the world should be allowed to choose their own light bulbs is really rather daunting.
Part two of my policy proposal is that, given that there are large uncertainties and the stakes are high, it is very important to ensure a thorough and balanced review and inquiry process – something which we do not have now.
MW: Jeffrey, it looks increasingly like a cap-and-trade system is more likely to be introduced than a carbon tax. What is your view on where we should be going in terms of policy? And in which direction do you think the US might go, since we have a new administration with a very different orientation on climate change from its predecessor?
JS: Again, I would emphasise the need for large-scale technology transformation: different kinds of power plants, a different kind of electricity grid, a different kind of automobile, and so on. Crucially, changing these systems involves both public and private goods. Our grid in the US and in most countries, for example, is largely a public good. Public land management is vital. Regulation is vital. A network for plug-in vehicles is a major infrastructure change.
Given that, a carbon tax is useful for both the long-term incentives and for picking off some of the low-cost changes that can be made right now. Instead of cap and trade, which I find a silly, cumbersome system, we should have an upstream, simple, direct tax that is easy to collect and that would not require the monitoring of thousands of enterprises.
Beyond that, if we are going to make the right decisions on major issues such as improving grids and nuclear power, it is not going to be on the basis of a carbon tax but a public policy decision. This would have to include carbon pricing, technology development, large-scale public financing of R&D – and that includes a system of technology transfer that is melded with the international patent system.
How do we get this going? First, the fulcrum is the European Union, the US and China. The latter two countries represent about 45 per cent of the total world’s carbon emissions and they have not really been at the table so far. So, I hope that President Obama, on his first day of office, sends an envoy to Beijing and says, “Let’s get started seriously on a mutual commitment on this.”
Second, there needs to be a large-scale demonstration of CCS. We need to get some demonstration plants up and running in the US and in China – at a cost of perhaps $1bn each – to prove that this can be done properly. That would represent a fundamental commitment to a technology driver.
As an example of the type of project I am talking about, in the US we may not have much of an auto industry within the next few months unless we decide on a bail-out. I favour a bail-out precisely because I would like GM to produce an electric vehicle by the year 2010. But really making that a practical base vehicle for the US is going to require a huge amount of public investment in R&D and basic infrastructure, together with regulations on the kinds of cars that Americans can drive. To make this happen would require a quasi-public takeover of the auto industry because if we don’t, it is going to go bankrupt before we even get there.
MW: Michael, would you go along with the way Jeffrey has set out the policy challenge?
MG: With one major exception. I disagree on the issue of a carbon tax versus a cap-and-trade system. I look at this from the standpoint of both economics and political economy, and I do not think cap and trade is the wrong turning.
The feature of the tax is that you are trying to do two totally different things with one instrument: set a carbon price and extract a vast amount of money from industry and transfer it to government. Anyone who looks at that from a political economy standpoint would recognise that you are not going to end up with a pure price instrument at the right level if you are mixing it up with a massive transfer of resources from very powerful and influential entities to governments.
The empirical evidence clear. Twenty years ago, for example, the four Scandinavian countries all said they believed in the carbon tax. Today, they all have instruments that they call carbon taxes, that are at different levels, with different exemptions and exceptions, that have all been moulded to accommodate the domestic political realities. Even in a relatively homogenous region, it was difficult to establish a standard carbon tax. So, the idea that you can compare cap and trade against some sort of nirvana where the EU, the US and the rest of the world would all adopt a perfect carbon tax does not, frankly, pass the laugh test.
On technology, there is one other issue that we need to pin down. We are saying the world is going to have to be seriously carbon constrained. The puzzle is: why is the private sector spending so little on low carbon innovation? You talk about CCS. Any engineering company which is first to the post with CCS should expect to win hundreds of billions of dollars – if not trillions, when you look at the scale of application – in profits. Why is that not happening? One reason is that the business community remains unconvinced that governments have the guts to regulate carbon seriously and drive down the caps that would drive up prices to a level that they think would generate the adequate returns for taking those risks.
MW: Let me just be clear what you are really saying. You cannot get industry on board without giving them what economists would call the quota rent, or at least some part of it. And this is not about extracting money from industry, it is really about extracting money from consumers, and the question is whether the money extracted from consumers goes to government or to industry.
Under a cap-and-trade system, the money basically is transferred from consumers to industry and under a tax it goes to government. It is much easier to bribe business with money than it is to impose a tax on them.
MG: I would say that any major fiscal transfer is not going to be delivered overnight by any real political system. You need to have a strategy that gets you there, and, frankly, not many people believed what economists said would happen – that the costs would get passed through from industry to consumers. Once it had been demonstrated that at least the power sector did pass most of those costs through, it became much easier to impose an auction-oriented system, which is more efficient.
MW: Terry, you have been champing at the bit to disagree.
TB: I agree with Jeffrey’s general position but I disagree with some of the details and his approaches. For example, I agree that we need many options. But I disagree with his framing of the debate. I will start with the framing of costs. You are talking about costs but I would describe the same costs in terms of investments. Investments are pursued because they will be of long-term benefit.
Then there is the question of the carbon price. What should it be? Where should it come from? As this is a global issue, we need a global carbon price signal, like the social cost of carbon, which would tell us what the carbon price ought to be. We can work that out on the basis of modelling. Governments can agree that. And then it can be a guarantee for the investment plans, so that businesses that want to get on investing can do so with confidence.
MW: If one wants a price, that would seem strongly to suggest that a tax is going to work better than cap and trade, at least on the evidence that we have seen in the European system, where the prices that are set are extremely variable.
JS: All of the arguments point in favour of tax. Michael’s political economy argument is valid, but it can be handled by tax. First, taxes are easier to administer. Second, a tax is comprehensive. It covers the auto sector, the consumer sector, things that are not covered now under cap and trade. Third, instead of a spot price, you get a multi-year commitment on tax. Fourth, Michael is right on the politics, but you can – and I gulp as I say this – you can have tax credits on initial levels of energy use, and you can place deductions in grandfathering clauses just like you do with the permits.
MG: I do not see this huge difference in transaction costs because for a tax system you have to measure the emissions that you are trying to tax just as rigorously as you have to in a trading system. The transaction costs of the trading scheme in the big facilities to which it is applied in Europe are trivial compared with the economic benefits of having a single carbon price across Europe, which would be impossible under a tax system. Of course, in other sectors, such as transport, a tax may well make a lot more sense, and in Europe, we will probably have those two co-existing.
MW: Where do we go globally? What sort of process is needed to bring the relevant producers of the world into an effective system, particularly given that there are these huge equity questions? Jeffrey, you started to touch on this with the US-China question but you did not really address what this might mean in terms of system limits, constraints.
JS: My first step would be save the US auto industry with a vision of it becoming an electric or plug-in hybrid industry.
Beyond that, we need to create a system based on national targets. Most important, China must make binding commitments, both for the sanity of this process and for the politics in the US. Those two countries need to get together and agree that they are both going to do things. Europe already is clearly way ahead in this regard. If we can get the three parties agreed, we are going to make a big advance. Now, these commitments should build in explicitly convergent rates of economic growth. Of course, we hope to get back to economic growth, but we have to presume that we build in a scenario where China is going to be growing rapidly and using a lot more energy.
We need to move on a technology-based scenario. China cannot now agree to an aggressive reduction of emissions from coal, for example, until CCS is up and running, or alternatives are developed that are achievable at a reasonable cost and proved. So, in a practical sense, we make national commitments that are based on best available technologies. I would define that as available technologies in which the avoidance of emissions is at a number like $50 per tonne or less, so it is a price-based notion of what best available technology means.
We have to move along a process that has both public goods and private goods elements.
TB: I agree with a lot of what of what Jeffrey said. I would vary it by saying that there are more like 20 parties than the three key blocks he identified. I think his $50 per tonne should be more like $100 per tonne of CO2 equivalent in the year 2000 prices by 2020. He mentioned technology, but I think it is far more important to look at energy efficiency and carbon saving on the demand side. That would represent about three times the carbon saving on the supply side.
On the supply side, I would come to CCS last. CCS is one of the most expensive technological options, and going down that route is probably a waste of money.
MG: We need a structure based on national targets and we need to erode the distinction between industrialised and developing countries progressively over time.. Part of the reason is because, even at present, China emits maybe one-third of the levels of the US per capita, India less than one-fifth and sub-Saharan Africa well under one-tenth. Those are three different blocks with a huge population in each, and they need to be treated differently. One of the keys may be that if one looks at China and, to an important degree, India, what we are really dealing with is a major developed industrial sector embedded within a developing country context.
A credible political deal, if there is one – it is not easy to be optimistic – may have to play along the grain of that distinction in terms of engaging industrial sectors, where I maintain the view that cap and trade combined with some crediting system, like the clean development mechanism, is probably key. But there are many other parts of the global problem that cannot sensibly be touched without looking at more direct international finance and other sorts of collaboration and co-operation.
What makes me most pessimistic is that I am not sure there is the willingness to even acknowledge that this will require some fairly substantial levels of resource transfer.
We need to craft the public-private partnership solution internationally but I do not think we have the ideas to deliver that at the moment.
MW: I am going to give you the last word, David.
DH: My last word is related to a conviction of mine. You all seem to take it as given that the climate system can be reliably tuned and guided by controlling man-made emissions. We do not actually know much about the system or about what will happen, and I am worried that in this situation, governments everywhere have put their trust in the expert official advisory process as a whole, and the IPCC in particular.
Where so much remains uncertain, unsettled and unknown, policies should be evolutionary and less presumptive than they are now and should be guided by a process of inquiry and review which is more objective, more thorough and more professional.
MW: I will not dare to sum this up, particularly since people disagree so violently. At the very least, this has been an interesting discussion of some of the key issues. Thank you, all of you.
