THIS is climate-change month, and not just because of the October storms. The Tory conference in Bournemouth had a green tinge. Before the end of the month the government will publish an important review, led by Sir Nick Stern, on the economics of climate change.
It is important, not just because it will inform British government policy on the matter but also because it is keenly awaited internationally. Stern spoke at last week’s “dialogue” meeting in Mexico, attended by the world’s leading energy-consuming countries, rich and poor.
The top five energy consumers are, by the way, America, China, Russia, Japan and India, which account for more than half of global energy use. America uses 22% of the world total.
Readers may recall I have expressed scepticism about climate-change alarmism, and about the fact that there is uncertainty amid what is often presented as a scientific consensus.
But things have moved on. Governments and firms are gearing up for action. The scientific debate is not over but is looking a bit passé, which I don’t want to be.
This isn’t like the Y2K bug scare of 2000, which was immediately shown to have been overstated. If the warnings are justified, as Stern will argue, the economic costs could be enormous, let alone the effect on people’s lives. And, because action now on climate change almost certainly means preserving finite oil, gas and coal reserves for longer, it makes sense.
Stern will claim that the costs of meaningful action to reduce carbon emissions are manageable if action is taken early. A report from Price Waterhouse Coopers, “The World in 2050: implications of global growth for carbon emissions and climate change policy”, gives some pointers.
It suggests that putting the world on a path of green growth would mean global GDP in 2050 2% to 3% below its baseline projection. That sounds significant but, as PWC’s John Hawksworth points out, it is equivalent to only a year’s economic growth. If Stern is right and the consequences of climate change are enormous, baseline growth may not be achievable, let alone PWC’s “scorched Earth” scenario in which nobody bothers about energy efficiency.
How do you achieve green growth? Claude Mandil, executive director of the International Energy Agency, also spoke at the Mexico conference. Energy-efficiency measures can go a long way. Lighting accounts for 19% of worldwide electricity demand, and on present policies carbon-dioxide emissions related to lighting will rise 80% by 2030.
State-of-the-art energy-efficient lighting systems, if adopted, could cut those 2030 emissions below present levels, and that does not take account of technological improvements in the pipeline. Other energy-saving initiatives include limiting standby power use on television sets and other electrical equipment and reducing the rolling resistance of tyres. We waste energy in a way future generations will regard as primitive.
As Mandil pointed out, energy efficiency does not mean “hairshirt” limits on growth and nor does the use of technology to limit carbon-dioxide emissions from power stations — one of the big problem areas. Carbon capture and storage (CCS) — taking carbon-dioxide from power plants and storing it in depleted oil and gas fields, deep underground in rock formations or in the oceans — could reduce emissions by up to 90%, assuming its use is feasible. Nuclear power and renewable energy will also play a role.
The big question that comes up in this area is, to paraphrase The Sound of Music, what do you do about a problem like China and India? As these countries grow, and car ownership and energy use rise, surely any efforts we make will be a drop in the ocean.
The key is convergence. India may be the world’s fifth-largest energy consumer, but per-capita energy use for its 1.1 billion people is only a twentieth of America’s. India’s per-capita consumption has to rise and America’s has to fall. This is understood in California, but not yet in Washington.
PWC’s projections assume convergence will happen. Thus, on its “green growth plus carbon capture” scenario, global carbon- dioxide emissions in 2050 are 17% lower than now, despite the fact that emissions from the E7 — (E stands for emerging) China, India, Russia, Brazil, Mexico, Indonesia and Turkey — are 30% higher. The reduction is achieved by a halving of emissions from the G7 countries. Even then, while China will be the biggest producer of greenhouse gases, America will be in second place.
How do you force people — entire countries — to make meaningful cuts in carbon-dioxide emissions? Incentives are every- thing in economics. Energy-saving lightbulbs costing £5, compared with 25p for a standard bulb, do not offer much of an incentive.
This is an area for market-based incentives. The McKibbin-Wilcoxen blueprint, put together some years ago by economists Warwick McKibbin and Peter Wilcoxen, is one ingenious approach. It sees markets in carbon permits developing in a similar way to the money markets.
Governments would issue long-term permits, analagous to government bonds, and short-term permits, for the current year, analagous to Bank rate. The permits each government could issue would be decided by international agreement and permits sold at the same price in all countries. Getting agreement, however, could be the scheme’s Achilles’ heel.
Assuming this can be overcome, firms would require permits for the emissions they intend to produce. Any long-term permits used this year could not be carried over, providing an incentive for greater energy efficiency. Any permits not needed could be sold on. Getting a global scheme like this up and running would not be easy. But it looks like a way forward. The best way to make people conserve energy is to show they can make money out of doing so.
PS: The Bank of England’s monetary policy committee (MPC) chose to hold its fire on rates last week, which was my preferred outcome. The stay of execution looks only temporary, with the MPC on course for a rise to 5% next month.
But an interesting situation is developing, on two fronts. Evidence of the weakness of the American economy is coming in by the day. And energy prices are falling back.
The easing of global energy prices, with oil dropping below $58 a barrel last week, is an interesting test. My argument has been that the rise in Britain’s inflation rate has been very much an energy story. The striking thing about inflation was not how high it rose but how low it stayed.
The majority MPC view is that inflation is more broadly based. The Bank’s regional agents say firms are finding it easier to pass on higher costs. Maybe, but when pay rises are contained and oil prices lower, the pressure to raise prices is reduced. We will soon see who’s right.
