Sins of Emission
By Dieter Helm
13 March 2008
The Wall Street Journal Europe
(Copyright (c) 2008, Dow Jones & Company, Inc.)
EU leaders will gather today and tomorrow in Brussels to sign off on the European Commission's proposals to cut carbon emissions by 20% by 2020 -- with the added bait of a 30% reduction if the U.S. and other countries make meaningful commitments. For the U.S., it appears that the question is no longer about whether it will adopt targets, but rather about how and what.
To some this all looks like good progress. Yet it is based upon the very shaky arithmetic of the Kyoto Protocol and its legacy. The Kyoto framework looks at the emissions that countries produce within their borders, and this is seductively flattering. Both the U.S. and Europe have seen their CO2 output growth slowing even as economic growth has marched on. It might appear that economic growth and emissions have been decoupled.
The 2006 Stern report seemed to confirm this rosy scenario, suggesting that additional emissions cuts could be achieved at the comparatively trivial cost of around 1% of gross domestic product.
But this is just smoke and mirrors. The projected growth of global emissions clearly tracks the growth of energy demand. The world's CO2 output is likely to increase by some 50% by 2030, paralleling the growth of energy demand and economic growth. There is no global decoupling.
But, say the U.S. and the Europeans, this is because of China and India and their failure to match our emissions reductions. The U.S. in particular insists that any post-Kyoto agreement must, at a minimum, involve emissions caps on China as well. And in one sense the Americans are right: There will be no solution to global warming if China builds 1,000 new coal power stations in the next couple of decades.
This is, however, only half right. The critical question is: Who "owns" the emissions? China is an energy-intensive, export-oriented country. It makes many of the highly polluting industrial products which used to be made in the U.S. and Europe. We exported our smoke-stack industries to developing countries like China and import their products.
If this carbon outsourcing is factored back in, the U.K.'s impressive emissions cuts over the past two decades don't look so impressive anymore. Rather than falling by over 15% since 1990, they actually rose by around 19%. And even this is flattering, since the U.K. closed most of its coal industry in the 1990s for reasons unrelated to climate change. No doubt, recalculating the figures for other European countries and the U.S. would reveal a similar pattern.
After all, the U.S. and the EU together account for nearly half of world GDP. And it is consumption, not production, that matters. This means that if global warming is to be limited, the U.S. and Europe will have to take much more drastic action to reduce those emissions embedded in their own consumption. Their appropriate emissions-reduction targets will have to be based on the consumption of goods that cause those emissions in the first place.
This not only means that the true scale of required emissions reductions in the Western world will be much higher but that the impact on economic growth and living standards there will also be more severe than so far believed.
Politicians like to cite the 1% of GDP quoted in the Stern report, as this sounds like a manageable figure. But they delude themselves and the voters by not looking at the small print. The report says it would cost 1% of GDP only if there is an optimal use of new technology. The report also assumes that there will be no policy costs, meaning the implementation of new technology will effectively be cost-free.
A moment's reflection tells us otherwise. There is no evidence that policy designed to reduce emissions is going to be optimal or efficient. In the U.K., for example, official figures indicate renewables have turned out to be staggeringly expensive. Some wind-generated energy, for example, has cost between GBP 280 and GBP 510 per ton of carbon abated. This compares with the GBP 10- GBP 20 per ton price of carbon on the European emissions trading market.
But even these astonishing costs pale into insignificance against biofuels. The inefficient and costly production of ethanol in the U.S., which may not even be carbon-neutral, is perhaps only topped by such examples as Indonesia, where virgin rainforest is being cut down to grow palm oil. There is no reason at all to believe that these enormous policy costs are about to be rectified. On the contrary: The recent EU commitments to biofuels and renewables are very likely to compound the damage.
The U.S. and Europe refuse to acknowledge that halting the relentless rise in the concentrations of greenhouse gases in the atmosphere will take a significant slice out of economic growth. It will probably mean living standards will have to be cut if our consumption is going to be environmentally sustainable. We are simply living beyond our -- and the planet's -- means.
This is not a welcome message for politicians to give to their voters. But it happens to be what is required to tackle this global crisis. Not since the late 1930s, in the run-up to World War II, has such a massive restructuring of major economies been required. Nobody told the British or American people then that the challenge of creating a wartime economy was going to be cheap. They should stop pretending that the enormous challenge of decarbonizing the major economies can be done on the cheap, either.
Mr. Helm is a professor of energy policy at Oxford.
