Global Development: Views from the Center

Along the same lines of this post - the long view on the carbon market- the World Bank and the IFC are currently running an online dialogue on the future of the carbon market, looking at the role of the public and private sectors. One of the issues raised there is whether the rising interest expressed by investors in clean technologies is a sign of the new times to come.
http://psdblog.worldbank.org/psdblog/2006/05/whats_the_futur.html

Imagine the worldwide pie of rights to emit. Imagine that those rights are allocated on a per capita basis. Wow! Imagine the transfers from rich to poor countries. Ok: Be realistic and imagine that rights are allocated by GDP at 50% weight and population at 50% weight.

Could David please guesstimate the resulting implied transfers from rich to poor countries in the first year of such a trading system?

The alternative point of view on carbon trading is found in this link, including articles from Foreign Affairs (May/June 2006), Issues in Science and Technology and Environmental Forum that argue that trading isn't likely to work in major parts of the world, and explains why: www.weathervane.rff.org/solutions_and_actions/International/What_to_Do_About_Climate_Change.cfm

I'd like to strongly suggest the need for a Plan B, offsets and trading where there is assurance that genuine reliable reductions result and approaches elsewhere that are suitable under the particular circumstances.

Interesting question, Nancy, and not straightforward to answer, as it has to do with what economists would call the elasticity of demand for greenhouse gas emissions. In plain words: If you restrict the number of permits in the trading system, then developing countries will probably have fewer to sell to richer ones--but on the other hand the price will be higher, so would their total sales revenue go up or down?

So some very rough numbers. Current global carbon emissions are 7 billion tons/year. If permits for 6 billion tons/year were issued based 50/50 on population and GDP and this resulted in a market price of $100/ton, AND if non-industrial countries sold enough permits so that industrial and "non-industrial" countries ended up with the same emissions per unit GDP, then they would start with 39% of the pie and sell 18 of those percentage points, to settle at 21%. 18% of 6 billion tons @ $100/ton is about $100 billion/year, a chunk more than current aid levels. Note that by "industrial countries," I mean countries listed in Annex I of the Framework Convention on Climate Change, which includes former Eastern bloc nations but not China.

I read Ruth Greenspan Bell's article in Foreign Affairs. It is thoughtful and I disagree with few of its details.

I did come away a bit confused about the overall conclusion. Toward the beginning it casts doubt on emissions trading in general: "The first is to revise the assumptions behind currently proposed fixes, namely emissions-trading regimes, which by themselves actually do too little to cap pollution." But most of the criticisms appear to apply to a hypothetical *global* trading system, in particular the monitoring and enforcement challenges in poorer nations. I share this skepticism; it has never been very clear to me how a global trading system would work.

But I also see the problems with a global system and monitoring and enforcement in poorer countries as somewhat secondary. I think the only realistic long-term allocation of a limited carbon pie among the expected 8 billion people on this planet will be on a roughly per capita basis. Can you imagine Chinese accepting fewer emissions rights each than Americans, or vice versa? Add to that the need to reduce total global emissions substantially if we are to slow global warming, and you end up with 80-95% reductions for today's richest countries.

There is no way a rich country can sidestep that by buying permits from India and Russia. There wouldn't be enough permits to buy. In almost all countries, then, controlling carbon is essentially a domestic problem. So let there be domestic carbon trading systems (including the EU system). Perhaps treaties could faciliate coordination on prices or quantities, and facilitate some international transfers in the spirit of Kyoto.

Moreover, for carbon emissions control, enforcement is relatively easy. This is because fossil fuels enter and exit the economy at a handful of easily monitored points--ports, minemouths, wells--and because there is a fairly simple relationship between how much fuel is burned and how much carbon is emitted, so you basically just have to weigh the stuff. (There are variations by type of coal or oil, but this can be handled fairly well.) Even in developing countries monitoring would be easy to administer *relative* to other environmental policies, for the same reason that poor governments depend most heavily for revenue on duties collected at customs. I wouldn't want to minimize the monitoring and enforcement challenge in developing countries in absolute terms. But in general, the more a country emits, the richer it is, and the more it can handle the administration--whether the U.S. today or China in 2030.

I just don't see how we can work our way out of this problem without a strong price signal that will percolate throughout industrial economies, rewarding efficiency, conservation, fuel-switching, and innovation. That does not mean that we should *only* use market mechanisms. They can go hand-in-hand with many other approaches. Bell seems to agree, which is another reason I am confused by her calling hers an alternative point of view: "Focusing on capping emissions requires steadiness of purpose, imperviousness to the siren song of short-term interests, and the willingness to commit significant resources. But it is a realistic and effective strategy for fighting a problem that reaches deep into every economy. Harnessing the magic of the market and enlisting technology may become significant tools in combating climate change, but they will not work on their own."

I think David Roodman and I are not in much disagreement, but there are a few more points I want to make. First, is the essential role of the US. Nothing real can happen until the United States makes a firm, solid commitment and makes the necessary adjustments.

Second, if you look at the current “plan” on the world’s table, it doesn’t consist of much more than Kyoto, and Kyoto is essentially a vast global emissions trading and/or offsets program of one form or another. The point I make in the FA article, but in more detail in the other two, is that the assumption currently in play is that greenhouse gas emissions can be controlled by instituting an incentive system based on emissions trading, and that the system will create incentives that will drive technology forward everywhere. Despite Gregg Easterbrook’s declaration in yesterday’s NYTimes (which actually proves my earlier point) that “a system of tradable greenhouse permits, similar to those for acid rain, would create a profit incentive. Engineers and entrepreneurs would turn to the problem. Someone might even invent something cheap that would spread to the poorer countries, preventing reductions here from being swamped elsewhere. Unlikely? Right now reformulated gasoline and the low-cost catalytic converter, invented here to contain smog, are becoming common in developing nations,” this doesn’t seem very realistic, for the reasons I set out in greater detail in Issues in Science and Technology and Environmental Forum. Visually, I see the roadrunner, running straight off the cliff and going a few feet because he realizes he is standing on thin air; we (the world collectively) are in basically the same position for climate with this fantasy that putting the “right” incentives in place is going to solve the problem. Environmental regulation has never actually worked that way. In fact, controlling these emissions is, plain and simple, a regulatory challenge; it requires the same skills, monitoring, compliance, enforcement and sustained attention. And this is where the countries with the fastest growing have no experience and a huge learning curve ahead.

David Roodman raises legitimate questions about allocation systems, etc. I don’t see those solved very quickly and the clock is ticking. My own recommendation would be to step away, for the time being, from these extended debates about allocations and to start thinking about building the necessary institutional skills and political will place by place. Or at least to have both going on at the same time. Whatever turns out to be the ultimate goal of China, for example, it is clear from current behavior that they don’t have institutions to support the efforts they must make. But there could also be benefits domestically to their populations if they were to do a better job of controlling their staggering levels of pollution, and if they did so, the same activities would have global benefits as well.

Finally, I am not sure I agree that monitoring is so easy. One example: it isn’t always just enough to know the fuel and make the calculation because it’s important to know the quality of the fuel. Poor quality coal, for example, is officially often banned many places, but it is used anyway in huge quantities. China routinely officially shuts down mines for reasons of the quality of their coal and for occupational safety reasons, and guess what? The mines are up and running again in virtually no time. Reality (and local corruption) upsets what are represented as routine calculations.