Copenhagen and a Cornucopia of Conundrums

I was over at Zero Carbon earlier and happened to mention the Man in the Wardrobe fallacy. It is one of several problems that arise when you try to put a price on carbon. The purpose of this post is to identify and distinguish 4 of these policy-killers: the Dutch Disease (formerly known as the Curse of Oil); the problem of Displacement; Jevon’s Paradox or the Rebound Effect and the Man in the Wardrobe fallacy, first proposed by myself one evening this summer at CB1 cafe, Mill Road, Cambridge.

Today’s FT suggests that the EU is indeed very keen on the idea of the “developed” countries giving $100bn/year to the so-called “developing” countries in return it seems for some kind of ineffectual agreement to reduce emissions. As I’ve mentioned already, Lord Stern is a keen proponent of such bribery.

Clearly the dozy delegates are unclear about the subtle difference between “cash” and “capital”. Turning the former into the latter is a process fraught with difficulties. The problem is that injecting cash into an economy for something other than a sustainable industry creates the first of our problems: what I learn today in the FT is termed the Dutch Disease. The main symptom is an overvalued currency – normally as a result of revenues from resource exports – choking off the development of productive, value-add industries. The syndrome is quite common, apparently, with a recent outbreak in the UAE and a programme of antibiotics instituted just this morning in Brazil. I say antibiotics rather than a vaccine, because the disease is expected to develop resistance.

The EU’s annual $100bn largesse (more than $100 p.a. each from every man, woman, pensioner or not and child in the developed world) may well slow the rise in carbon emissions from some of the world’s poorest economies, not by nudging them onto a low-carbon growth path, but by simply undermining their economies. (I assume the money is destined for the poorest countries, but who knows? Maybe the EU intends to send some to countries such as China which as I’ve been discussing lately already has too much foreign currency).

I’d feel differently, of course, if I felt the $100bn was going to help develop sustainable industries e.g. in ecosystem services. The FT provides a quote I can only describe as “interesting”:

“Yvo de Boer, the UN’s top climate change official… encouraged rich countries to do more. ‘This has nothing to do with signing blank cheques. It’s about building trust and showing that you are serious [about climate change].’ “

Building trust, eh? Wouldn’t building livelihoods be more appropriate?

So much for Copenhagen. What of other options?

Well, let’s suppose we don’t achieve a water-tight global agreement to restrict carbon emissions. Unthinkable, I know, but just bear with me for a minute. All that will happen is that carbon-intensive activities will relocate to countries where controls are lax – Displacement. Oil tankers will be diverted mid-ocean and some multi-1000km gas pipeline projects brought to fruition whilst others are canned.

In a slightly different context I note that the UN now accepts that biofuel production leads to land use changes (and therefore carbon emissions) elsewhere by displacement of other land use activities.

OK, let’s now imagine that we somehow succeed in raising the price of carbon by creating an effective emissions trading scheme with a ceiling on the carbon price or even imposing a tax on carbon emissions. Will this succeed in reducing emissions, compared to not having the emissions trading scheme or tax?

I’m afraid to say I’m not so sure. The problem is that increasing the price of carbon (or fossil fuel) without effectively capping the supply (the crucial point) will simply favour activities that use carbon to create a lot of value over those that use it to create less. Because these efficient activities (e.g. cars with smaller engines) are such good value, their use will increase. And the increase could even lead over time to an increase in overall carbon emissions. We’ll use fossil-fuel more efficiently, but, by the Rebound Effect could end up using more overall.

Furthermore, if we create more efficient internal combustion engine cars, say by mandating them, as is the usually preferred policy option, because taxes are unpopular, the hurdle before electric cars become a superior value proposition becomes even greater! Efficiency improvements can become an own goal.

Now, the Rebound Effect is subtly different from the Man in the Wardrobe fallacy. Let’s imagine the UK decides unilaterally to impose a swingeing tax on carbon. Such a tax would be purely internal to the UK economy, like the old Beano joke of the removal man helping his mates by climbing into the wardrobe and carrying the clothes. Such a tax would in itself make no difference at all to the UK’s ability to afford to import fossil fuels.

The Man in the Wardrobe fallacy could manifest itself in two main ways:
– the tax would reduce consumption by heavy carbon users e.g. owners of big-engined cars, and levy high taxes on such people. But below average carbon users would be better off. They could afford to drive more. This case could – I’m tempted to say “would” – lead to increased fossil-fuel consumption. How? The UK economy as a whole would become more efficient – we’d be able to produce a unit of exports for less per unit of imports, and exports would increase or the £ rise against other currencies – and we’d be able to import more fossil-fuel.
– the UK might consume less fossil-fuel as a result of the tax. This would leave us with some spare dosh. We could import something else instead, I don’t know, fine Australian wine, say. But the production (and transport) of that wine will have involved various forms of fossil-fuel emissions – potentially even more than the fossil-fuel we would otherwise have imported. Or, to look at the problem another way, the foreign currency we provide to the Aussie wine-grower may simply be spent on fossil-fuel imports to Australia.

Problems, problems. What a tangled web we weave, when first we start trying to manipulate the market! And I haven’t even mentioned remuneration accommodation (I just coined that term) whereby salaries and (bonuses etc) adjust over time as prices rise. For example, a punitive tax on flying would lead over time, to a realignment of enough people’s wages with the cost of flying, so that people could once again afford to consume all the flights the available resources are capable of providing.

I’m going to move to a conclusion, and it’s this: no amount of demand-side financial jiggery-pokery will succeed in keeping fossil-fuels in the ground. The only viable policy options to reduce carbon emissions are those which involve a global reduction in carbon supply. Prices will just have to do whatever they’ve gotta do in response. Let the horse lead the cart.

PS It gets worse. This just popped up on the “wire” (Yahoo! Finance). I quote:

“Britain’s Chancellor Alistair Darling delayed his flight to try and salvage a compromise agreement, which would have seen the nine rebel countries accept commission figures that would commit the EU to some 100 billion euros each year from 2012 to help meet developing world needs.”

That’s not $100bn p.a. for the entire “developed” world, that’s euros from Europeans. That’s around 300 euros each! Have you all gone nuts? Isn’t the electorate going to ask some pretty searching questions about what it’s going to get for its money?

Look, Brown, Darling, you’re not going to save the world in 50 days. I doubt you’re even going to save your own careers. Take a step back. Relax. Breathe.

PPS I’ve just checked the “wire” again and AP reports some more realistic figures:

“Poland, Romania and Hungary led a group of eastern European countries opposing a burden-sharing plan intended to come up with at least euro15 billion a year in new aid to help the world’s poorest countries cope with climate change.

The European Parliament’s environment committee urged EU nations to offer at least euro30 billion ($45 billion), double the euro15 billion Barroso proposed last month.”

I can’t keep up with all this superhero action! Still, 30 billion euros is around 75 each.