Saturday 7 December 2019

Brendan Keenan: Everything has a price - so we must put a cost on carbon cut

Emissions: Wasted decade means the challenge of addressing climate change is greater than many realise
Emissions: Wasted decade means the challenge of addressing climate change is greater than many realise
Brendan Keenan

Brendan Keenan

Who now remembers the Stern Review? Hardly anyone it seems, which is surprising given that climate change is out front and centre stage.

It was the report commissioned by Tony Blair and/or Gordon Brown - they never could agree about anything - on the costs of global warming and of measures to combat it. The emphasis was on costs. Nicholas Stern was not a climate scientist, but a former chief economist of the World Bank.

The result was an impressive report. Yet not only has it slipped into relative obscurity, so too has the idea of measuring the cost of serious attempts to halt the growth in greenhouse gas emissions against the cost of doing little or nothing.

The Stern report appeared in 2006. Many economists have done much work on the subject since but the debate has become rhetorical, even biblical, rather than quantitative. For some in the green lobby, even to raise the question of cost versus benefit is akin to querying the aerodynamics of an angel.

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This is a pity. We are not dealing with a philosophical question, but with a practical one of utmost seriousness. The big difference from 13 years ago is the widespread acceptance that the cost of doing nothing will indeed be very large.

The whole idea of measuring benefits against the cost of bringing them about is somewhat out of fashion at the moment. It is an inexact science and has suffered from being much abused by governments everywhere.

But it is a common language which transcends politics. It is also the case that, when benefits could be very large - in this case perhaps as large as keeping the planet inhabitable - it can make sense to incur large costs now, even if they turn out not to have been needed.

Paradoxically, the Stern report suffered because its estimate of remedial costs seemed too optimistic. It reckoned the costs of climate change at between 5pc and 20pc of global output. Fair enough, that top figure could be regarded only as gargantuan. But it argued the situation could be stabilised through reduced emissions with the loss of just 1pc of output.

It is a troubling thought that, if this was even half right, how much extra loss will have arisen from 13 years of no progress. Perhaps it took the lowest plausible figure in the hope of stirring governments into action. If so it failed.

There was much argument about the "discount rate", which hardly anyone understood, and interest faded away. Since then, economists have looked for more comprehensible numbers. One is to estimate the social cost of emitting a ton of carbon dioxide or its greenhouse equivalent.

That way, it is at least possible to see if the cost of eliminating a tonne is greater or less than the ultimate cost of not doing so. The Obama administration did its bit, coming up with a figure of $50 for the cost of the damage done by emitting a ton of greenhouse gas. Any reduction strategy which cost less than that is clearly worth applying, and we may not be better off, overall, by paying more.

It is not a popular way of looking at things. A common attitude is that any cost is worth paying to curb climate change, but that may not be the case. It is true that all such estimates are highly uncertain, but the real point is that, to have any chance of being adopted, unpopular, disruptive proposals must come with some evidence they have a basis in reality and the chance of success.

This week, the IMF's 'Finance & Development' magazine tried to pull these issues together to identify a plausible global strategy. The wasted decade means the challenge is greater than even many green activists realise, because time is so short.

Time may be more of a constraint than money. The IMF's own calculations show that a global tax of $75 per ton of carbon would bring about enough change to meet the target of holding global warming to 2˚C over pre-industrial levels. Sounds feasible, although government anguish over whether to have a €5 or €10 carbon tax in the Budget bodes ill.

Outgoing Bank of England governor Mark Carney finds another way to convey the urgency. Taking the Intergovernmental Panel on Climate Change view that there are only 12 years left to stop runaway warming, he points out this is just 48 more meetings of the Bank's financial policy committee.

The goal of eliminating net greenhouse emissions by 2050, which many countries, including Ireland, have adopted, "will require a vast transformation of the energy sources used to power the global economy," writes Kenneth Gillingham, associate professor of environmental and energy economics at Yale University.

Despite those ambitious targets, current trends will not lead to such a transformation. Estimates are that fossil fuels could still be generating 57pc of electricity in 2050. It needs to be to only 5pc.

The key message is that, while the changes to individual behaviour which dominate the airwaves and blogosphere are important, of themselves they cannot possibly achieve these kinds of results.

At what might be called the other end of the behaviour scale, Mr Carney writes about the potential role of financial markets, including banks, in moving to a low-carbon world. The BoE's latest survey found that almost three-quarters of UK banks are starting to treat the risks from climate change like other financial risks.

They include exposure of mortgage books (ie house prices) to flood dangers, the impact of extreme weather events on government finances, their own lending to carbon-intensive sectors and even consumer loans for diesel vehicles.

Speaking in Dublin last week, Green Party leader Eamon Ryan surprised some by welcoming the contribution markets might make to de-carbonisation. He also noted that many large firms are beginning to shift their business models in that direction. Capitalism and climate may not be the sworn enemies of popular lore.

The capitalists may be ahead of the game. Portfolios biased towards companies with high environmental, social and governance (ESG) ratings have outperformed global stock indices for close to a decade.

Mr Carney calls for agreed ways to measure ESG, to help financial markets identify where to invest in environmental performance. At present, measures such as that used by the EU rate only the very good and the very bad. A financial market which could reveal likely future costs for business is on the way, he says, along with complete carbon pricing, but, as always, things will have to move faster.

Such markets would be useful in facilitating the growth of different technologies as their startup costs decline. There is a wide, and sometimes surprising, disparity, with basic figures showing that solar heat costs $130 per ton of carbon emissions saved as compared with burning coal, offshore wind requires $100 per ton but the most modern natural gas plants are roughly the same as onshore wind, at €25 per ton more expensive than coal.

The future path of technology is unknown, so we can only speculate about the ultimate cost of reaching net zero emissions, says Prof Gillingham. The best thing is to plan for the future by providing subsidies for the inexpensive emission reductions, investing in new technologies and creating new structures such as economy-wide carbon pricing.

Higher costs will come down as more investment goes into these areas, but that takes time. Another constraint is that, although time is dangerously short, trying to do too much too quickly could prove cripplingly expensive, as well as politically impossible.

Much store is being set on the fact new wealth and employment will be created by these investments and changes in consumption. Some look to booming wartime economies as an example of what might be achieved - in a much better cause.

Unfortunately, the 19th century looks a better fit than the 20th. This is a case not just of massive spending but massive disruption as old technologies are replaced by new ones. In the industrial revolution, everyone was enormously better off when it was all over, but individually all too many were ruined.

It sounds a pretty good description, however alarming, of what needs to happen - but with the important addition that saving the world from the horrors of substantial climate change will be even more beneficial than was taking parts of it out of 18th century poverty.

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