Getting warmer. A special report on climate change and carbon economy
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Transcript of Getting warmer. A special report on climate change and carbon economy
Getting warmerA special report on climate change and the carbon economyDecember 5th 2009
Carboncov.indd 1 24/11/09 14:39:58
The Economist December 5th 2009 A special report on the carbon economy 1
So far the e�ort to tackle global warming has achieved little.Copenhagen o�ers the chance to do better, says Emma Duncan
gerous anthropogenic interference withthe climate system�. The Kyoto protocol,which set about realising those aims, wassigned in 1997 and came into force in 2005.Its �rst commitment period runs out in2012, and implementing a new one is expected to take at least three years, which iswhy the 15th conference of the parties tothe UNFCCC that starts in Copenhagen onDecember 7th is such a big deal. Without anew global agreement, there is not muchchance of averting serious climate change.
Since the UNFCCC was signed, muchhas changed, though more in the biosphere than the human sphere. Accordingto the Intergovernmental Panel on ClimateChange (IPCC), the body set up to establisha scienti�c consensus on what is happening, heat waves, droughts, �oods and serious hurricanes have increased in frequency over the past few decades; it reckonsthose trends are all likely or very likely tohave been caused by human activity andwill probably continue. Temperatures bythe end of the century might be up by anything from 1.1°C to 6.4°C.
In most of the world the climatechanges to date are barely perceptible orhard to pin on warming. In British Columbia and farther north the e�ects of climatechange are clearer. Air temperatures in theArctic are rising about twice as fast as in therest of the world. The summer sea ice isthinning and shrinking. The past threeyears have seen the biggest losses sinceproper recordkeeping started in 1979. Ten
Getting warmer
THE mountain bark beetle is a familiarpest in the forests of British Columbia.
Its population rises and falls unpredictably, destroying clumps of pinewood as itpeaks which then regenerate as the bug recedes. But Scott Green, who studies forestecology at the University of Northern British Columbia, says the current outbreak is�unprecedented in recorded history: a natural backgroundnoise disturbance has become a major outbreak. We’re looking atthe loss of 80% of our forest cover.� Otherparts of North America have also been affected, but the damage in British Columbiais particularly severe, and particularlytroubling in a province whose economy isdominated by timber.
Three main explanations for this disastrous outbreak suggest themselves. It couldbe chance. Populations do �uctuate dramatically and unexpectedly. It could be theresult of management practices. British Columbia’s woodland is less varied than itused to be, which helps a beetle that prefers pine. Or it could be caused by the higher temperatures that now prevail in northern areas, allowing beetles to breed moreoften in summer and survive in greaternumbers through the winter.
The Framework Convention on Climate Change (UNFCCC), which the United Nations adopted at the Earth Summitin Rio de Janeiro, is now 17 years old. Its aimwas �to achieve stabilisation of greenhousegas concentrations in the atmosphere at a level that would prevent dan
An audio interview with the author is at
Economist.com/audiovideo
A list of sources is at
Economist.com/specialreports
Is it worth it?What economists have to say about mitigating climate change. Page 3
The green slumpWhy investors have been deserting cleanenergy. Page 4
Good policy, and badSome mitigation policies are e�ective, someare e�cient, and some are neither. Page 5
Vampires on a dietHow a boring gadget saved $2 billionworthof electricity. Page 6
Cap and tiradeAmerica struggles with climatechangelegislation. Page 8
Who cares?Don’t count on public opinion to supportmitigation. Page 9
A long gameChina sees opportunities as well as dangersin climate change Page 10
Closing the gapsHow the world divides on a global deal.Page 11
What needs to changeThe prospects are gloomy, but they can bemade brighter. Page 13
Unpacking the problemThe attractions of a piecemeal approach toglobal warming. Page 13
Also in the section
AcknowledgmentsMany people who have not been quoted helped in the research for this special report. Thanks are due to all ofthem, but especially to Ulrika Barklund Larsson, ambassador at the Swedish permanent representation to the EU,who worked on this issue until three weeks before herdeath from cancer at the age of 45.
1
2 A special report on the carbon economy The Economist December 5th 2009
2 years ago scientists reckoned that summerseaice would be gone by the end of thiscentury. Now they expect it to disappearwithin a decade or so.
Since seaice is already in the water, itsmelting has little e�ect on sea levels. Thoseare determined by temperature (warmerwater takes up more room) and the size ofthe Greenland and Antarctic ice caps. Theglaciers in southeastern Greenland havepicked up speed. Jakobshavn Isbrae, thelargest of them, which drains 6% of Greenland’s ice, is now moving at 12km a year�twice as fast as it was when the UNFCCC
was signed�and its �calving front�, whereit breaks down into icebergs, has retreatedby 20km in six years. That is part of the reason why the sea level is now rising at 33.5mm a year, twice the average annualrate in the 20th century.
As with the mountain bark beetle, it isnot entirely clear why this is happening.The glaciers could be retreating because ofone of the countless natural oscillations inthe climate that scientists do not properlyunderstand. If so, the glacial retreat couldwell stop, as it did in the middle of the 20thcentury after a 100year retreat. But theusual causes of natural variability do notseem to explain the current trend, so scientists incline to the view that it is manmade. It is therefore likely to persist unlessmankind starts to behave di�erently�andthere is not much sign of that happening.
Carbondioxide emissions are now30% higher than they were when theUNFCCC was signed 17 years ago. Atmospheric concentrations of CO2 equivalent(carbon dioxide and other greenhouse gases) reached 430 parts per million last year,compared with 280ppm before the industrial revolution. At the current rate of increase they could more than treble by theend of the century, which would mean a50% risk of a global temperature increaseof 5°C. To put that in context, the currentaverage global temperature is only 5°Cwarmer than the last ice age. Such a risewould probably lead to fastmelting icesheets, rising sea levels, drought, diseaseand collapsing agriculture in poor countries, and mass migration. But nobody really knows, and nobody wants to know.
Some scientists think that the planet isalready on an irreversible journey to dangerous warming. A few climatechangesceptics think the problem will right itself.Either may be correct. Predictions about amechanism as complex as the climate cannot be made with any certainty. But thebroad scienti�c consensus is that seriousclimate change is a danger, and this news
paper believes that, as an insurance policyagainst a catastrophe that may never happen, the world needs to adjust its behaviour to try to avert that threat.
The problem is not a technological one.The human race has almost all the tools itneeds to continue leading much the sort oflife it has been enjoying without causing anet increase in greenhousegas concentrations in the atmosphere. Industrial and agricultural processes can be changed. Electricity can be produced by wind, sunlight,biomass or nuclear reactors, and cars canbe powered by biofuels and electricity. Biofuel engines for aircraft still need somework before they are suitable for longhaul�ights, but should be available soon.
Nor is it a question of economics. Economists argue over the sums (see the nextarticle), but broadly agree that greenhousegas emissions can be curbed without �attening the world economy.
A hard sellIt is all about politics. Climate change is thehardest political problem the world hasever had to deal with. It is a prisoner’s dilemma, a freerider problem and the tragedy of the commons all rolled into one. Atissue is the di�culty of allocating the costof collective action and trusting other parties to bear their share of the burden. At acity, state and national level, institutionsthat can resolve such problems have beenbuilt up over the centuries. But climatechange has been a worldwide worry foronly a couple of decades. Mankind has noframework for it. The UN is a useful talkingshop, but it does not get much done.
The closest parallel is the world tradingsystem. This has many achievements to itsname, but it is not an encouraging model.Not only is the latest round of negotiationsmired in di�culty, but the World Trade Organisation’s task is child’s play comparedwith climate change. The bene�ts of con
cluding trade deals are certain and accruein the short term. The bene�ts of mitigating climate change are uncertain, since scientists are unsure of the scale and consequences of global warming, and willmostly accrue many years hence. The needfor action, by contrast, is urgent.
The problem will be solved only if theworld economy moves from carbonintensive to lowcarbon�and, in the long term,to zerocarbon�products and processes.That requires businesses to change their investment patterns. And they will do soonly if governments give them clear, consistent signals. This special report will argue that so far this has not happened. Thepolicies adopted to avoid dangerous climate change have been partly misconceived and largely inadequate. They havesent too many wrong signals and notenough of the right ones.
That is partly because of the way theKyoto protocol was designed. By trying toinclude all the greenhouse gases in a singleagreement, it has been less successful thanthe less ambitious Montreal protocol,which cut ozonedepleting gases fast andcheaply. By including too many countriesin detailed negotiations, it has reduced thechances of agreement. And by dividing theworld into developed and developingcountries, it has deepened a rift that isproving hard to close. Ultimately, though,the international agreement has fallen victim to domestic politics. Voters do notwant to bear the cost of their elected leaders’ aspirations, and those leaders have notbeen brave enough to push them.
Copenhagen represents a secondchance to make a di�erence. The aspirations are high, but so are the hurdles. Thegap between the parties on the two crucialquestions�emissions levels and money�remains large. America’s failure so far topass climatechange legislation means thata legally binding agreement will not bereached at the conference. The talk is ofone in Bonn, in six months’ time, or inMexico City in a year.
To suggest that much has gone wrong isnot to denigrate the e�orts of the manypeople who have dedicated two decadesto this problem. For mankind to get even tothe threshold of a global agreement is amarvel. But any global climate deal willwork only if the domestic policies throughwhich it is implemented are both e�cientand e�ective. If they are ine�ective, nothing will change. If they are ine�cient, theywill waste money. And if taxpayers decidethat green policies are packed with pork,they will turn against them. 7
1It’s a wicked world
Source: WRI *2005
Greenhouse-gas emissions per person, 2007Tonnes of CO2 equivalent
0 5 10 15 20 25 30
Australia
United States
Japan
EU-27*
China*
Brazil*
India*
Total, tonnes bn
0.54
7.1
1.4
5.0
7.2
1.0
1.9
The Economist December 5th 2009 A special report on the carbon economy 3
1
EVER since climate change became a subject for public discourse, economists
have been making life di�cult for environmentalists. Their problem is that mitigating climate change will require sizeable investments. When making investments,governments and companies normallylook at rates of return. If an investmentlooks likely to deliver a decent return, it isworth making. If it doesn’t, it isn’t.
The trouble with mitigating climatechange is that the bene�ts are uncertainand distant. Compared with investmentsthat deliver clear bene�ts in the near future�such as education in developingcountries, for instance, which commonlyproduces returns of around 10% a year�they do not look worthwhile. Conventional analysis would therefore suggestthat those who want to make the planet abetter place should invest in schools in Malawi rather than in clean energy.
Lord Stern, asked by Tony Blair, thenBritain’s prime minister, to look into theeconomics of climate change, devoted hisreport published in 2006 to the question ofwhether mitigation was worthwhile (or,according to some critics, to justifying a political decision that had already beenmade). He came out in favour.
The Stern review has since been used asan intellectual prop by greenish politicianseverywhere. Economists have been morecritical, on two grounds. The �rst concernsthe discount rate�the annual rate at whichfuture costs and bene�ts are discounted.Lord Stern uses a rate close to zero. A higherrate, often the cost of borrowing money, ismore common. The higher the rate, thelower the value of future bene�ts or costs;and vice versa. Lord Stern agrees withFrank Ramsey, an economist who wrote 80years ago that discounting �later enjoyments in comparison with earlier onesðisethically indefensible and arises merelyfrom the weakness of the imagination�.
Other economists feel there is nothingwrong with their imaginations but plentywrong with Lord Stern’s nearzero rate.They think he should have used what William Nordhaus, an economics professor atYale University, calls �assumptions that areconsistent with today’s marketplace realinterest rates and savings rates�. In a world
of limited resources, they point out, it is notobvious that spending them on future generations rather than on the current one ismorally right. After all, since future generations will probably be much richer thanwe are, it makes no more sense for us tosacri�ce our wellbeing for them than itwould to expect 18thcentury peasants togo without gruel so we can buy more computers. Mr Nordhaus argues for a 3% discount rate, which implies that bene�ts accrued in 25 years’ time are worth abouthalf their current value. He would prefer tospend less money now, and live with morewarming, than Lord Stern would.
But others argue against using shortterm rates in the long term. Paul Klemperer,an economics professor at Oxford University, points out that very longterm securities carry very low interest rates. When theBritish government recently issued 40year indexlinked bonds, for instance, itdid so at a 0.5% real rate. And over the verylong term standard discount rates lead tostrange conclusions. At a modest 2% rate,for instance, a single cent rendered untoCaesar in Jesus’s time is the equivalent ofabout $1.5 quadrillion (or 30 times the value of the entire world economy) today.
Martin Weitzman, an economics professor at Harvard University, is less criticalof Lord Stern than Mr Nordhaus is: hethinks the review is �right for the wrongreasons�. Its Leitmotiv, he maintains, is �theimmorality of relegating future generations to live under the shadow� of seriousclimate change �when for a mere annuitycost of a per cent or two (or at most three)of GDP each year we might have purchased an insurance policy on their behalf�. But, he says, such guilt feelings arelikely to lead to the choice of a discountrate that is hard to justify intellectually. �Ithink that rather than trying to go throughthe back door with [an] unreasonably low[discount rate]ðit is much better to go directly through the front door with the legitimate concern that there is a chance,whose subjective probability is small butdi�use, that global warming may eventually cause disastrous temperatures and environmental catastrophes.�
A premium to buy peace of mindMost economic analyses of climate changeconcentrate on the likeliest outcome�thehighest point in the probability curve.That, on the basis of the IPCC’s data,would be 2.8°C over the next 100 years. MrWeitzman reckons they should look instead at events that are less likely to materialise but cannot be ruled out (the righthand tail of the curve), such as a massivetemperature increase within a century.�Societies and ecosystems whose averagetemperature has changed in the course of acentury by more than 6°C are located inthe terra incognita of what any honest economic modeller would have to admit is aplanet Earth recon�gured as science �ction, since such high temperatures havenot existed for some tens of millions ofyears.� It is worth buying insurance againstsuch an eventuality, he says. Mr Weitzman,thus, succeeds where many others havefailed: he manages to reconcile economicswith normal human instincts.
Ken Caldeira, an atmospheric scientistat the Carnegie Institution, puts the samepoint a di�erent way. �If we already hadenergy and transportation systems thatmet our needs without using the atmosphere as a waste dump for our carbon
Is it worth it?
What economists have to say about mitigating climate change
4 A special report on the carbon economy The Economist December 5th 2009
2
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dioxide pollution, and I told you that youcould be 2% richer, but all you had to dowas acidify the oceans and risk killing o�coral reefs and other marine ecosystems,risk melting the ice caps with rapid sealevel rise, shifting weather patterns so thatfoodgrowing regions might not be able toproduce adequate amounts of food, andso on, would you take all of that environmental risk, just to be 2% richer?� He has,he says, often asked audiences this question; nobody has ever answered �yes�.
The second point on which economiststake issue with Lord Stern is his estimate ofthe cost of mitigating climate change. Thereview reckons that it would take somewhere between 2% and 5% of gdp peryear to limit them to 500550ppm. At thebottom end of the range, in other words,shifting to clean energy would increaseeconomic growth, whereas at the top it
would shrink it. The review plumps for anaverage cost of around 1% of GDP per year.
The IPCC, the International EnergyAgency and McKinsey, a consultancy, tendto agree with Lord Stern. And a piece of recent research, which shows that the cost ofcutting pollution often turns out to be lessthan forecast, supports a modest estimate.Resources For the Future, an Americanthinktank, looked at regulations on thingssuch as asbestos, powerstation emissionsand CFCs (refrigerant gases) and foundthat 12 of the 25 sets of rules it looked atwere less expensive to implement than expected and only six were dearer.
But some economists think Lord Stern’scost estimates are too low. Dieter Helm,professor of energy policy at Oxford University, says the underlying assumptionsabout the costs of various technologies arelikely to prove overoptimistic because they
are produced by people who have an interest in exaggerating their viability.
Whether or not Lord Stern has won theargument economically, he has certainlywon it politically, for his 1% of GDP �gurefor the cost of mitigating climate change isnow widely used. But a large caveatshould accompany any use of that �gure,because it assumes that the policies employed for mitigation will be both e�cientand e�ective�and so far that has not beentrue. As Mr Helm points out, �there is a voluminous literature of government failure,regulatory capture and the impact of rentseeking behaviour within the policy process. Climatechange policy is likely to beone of the largest sources of economicrents from policy interventions. There is alarge and growing climatechange ‘porkbarrel’.� The larger the barrel, the higherthe costs of mitigation will be. 7
THE slogan that BP adopted in 2000,�Beyond Petroleum�, was brilliantly
unforgettable. It linked the company’sname with the bright, clean future which,the �ower/sun logo implied, was to befound on the far side of fossil fuels. Butthat, as it turned out, was unfortunate, forthe company is no longer hurrying towards those fresh green pastures.
BP insists that the role of renewable energy in its strategy has not changed, but admits that investment in it will fall from $1.4billion in 2008 to between $500m and $1billion this year. The company is sellingsome of its renewableenergy assets, including three wind farms in India, and hascut its solarcell manufacturing capacity inSpain and America. The one renewableenergy source it still seems to be seriousabout is biofuels.
Shell, which also took a sizeable punton renewable energy, admits that its strategy has changed. Earlier this year its thenchief executive, Jeroen van der Veer, said ofwind, solar and hydrogen, �I don’t expectthem to grow much at Shell from here.�Further investments in renewable energy,he said, would focus on biofuels. LindaCook, who resigned in May as head ofShell’s gas and power business, said thatwind and solar �struggle to compete withthe other investment opportunities we
have in our portfolio�. Whereas policymakers have been scur
rying from conference to conference tourge the world on towards a green future,investors have been walking away from it.For one businessman the attendance at theWorld Business Summit on ClimateChange in Copenhagen in May said it all.�There was the usual raft of bigwigs on thepanel, but the audience was just hangerson�journalists, PR people and so forth.There were no serious delegates there.�
The cleanenergy business has had ahard year. Investment in the sector tankedin late 2008, as did share prices (see chart
2). Private equity and venture capital heldup a little better, but not much. The beginning of 2009 was �scary�, according to Michael Liebreich, chief executive of New Energy Finance, a consultancy.
The industry su�ered particularly badly in the credit crunch. Almost by de�nition, renewable energy sources have lowrunning costs but high upfront costs. Andbecause they are regulated assets withlongterm prede�ned revenue streams,they are particularly suited to debt �nance,and therefore tend to have high debttoequity ratios (typically 8020). �When theproject �nance disappears, you’ve got aproblem,� says Robert Clover, director ofalternativeenergy equity research atHSBC. He points out that some of thebanks that su�ered worst during the crisis�RBS, Lehman Brothers, WashingtonMutual and Fortis�were also among thebiggest in cleanenergy �nance.
As the �ow of �nance to electricity generators dried up, so did the orders to equipment manufacturers. Mr Clover reckonsthat windturbine manufacturers’ orderbooks so far this year are down by 5560%on the same period in 2008.
But the problem was not just the shortage and cost of capital. The credit crisis alsorevealed a basic problem with the cleanenergy business. Fossil fuels are, in terms
The green slump
Why investors have been deserting clean energy
2Recession-hit
Source: Thomson Reuters
Share prices, November 1st 2007=100
2007 08 0920
40
60
80
100
S&P 500
Wilderhill NewEnergy Global
Innovation index
The Economist December 5th 2009 A special report on the carbon economy 5
2
1
of the energy they store, remarkably inexpensive to get out of the ground and sell.That makes dirty industrial processes irresistibly cheap�so long as they are not required to cover the costs of the pollutionthey cause. Companies cannot be expected to abandon them unless they get a clearsignal from consumers or governmentsthat it is in their �nancial interest to do so.And they are not getting such a signal.
Public awareness of global warmingpicked up signi�cantly about three yearsago. Now most consumers claim to be concerned about it, and public concern is onereason why companies have been branding themselves green. Energy companiesboasted of their diversi�cation out of fossilfuels. Businesses with small carbon footprints, such as banks and retailers, promised to go carbonneutral.
But consumers’ commitment to greenery is rather doubtful. There is a big marketfor organic products (though it has gotsmaller since the recession), but shoppersare more concerned about their families’health than about the planet, and few areprepared to pay premium prices for greenproducts. BA, for instance, has been o�ering carbon o�sets with its �ights for thepast four years, but �nds that only around3% of customers buy them.
In the absence of pressure from consumers, governments need to give businesses a shove. That was the idea behindthe Kyoto protocol, which aims to cutgreenhousegas emissions by getting countries to accept binding targets with timetables attached. It divided the world into developed countries, which are required tocut their emissions, and developing countries, which are not. When rich countries
ratify the protocol, they have to committhemselves to reducing their emissions bya certain percentage below a date of theirchoosing (mostly 1990)�Britain by 12.5%,Japan and Canada by 6%, and so on. Theidea is that in order to meet these targetsgovernments should introduce policiesthat send price signals to businesses toshift investment away from dirty productsand processes to cleaner ones.
Global carbondioxide emissions haverisen by 20% since the protocol was signedin 1997, so the plan has evidently notworked all that well. There are three mainreasons for that. First, rich countries haveexported some of their dirty industry tothe developing world. Steel, cement, cars,fridges, computers, toasters, kettles and allthe paraphernalia of modern life the production of which used to cause pollutionin developed countries are now made inChina and other developing countrieswhere emissions are not capped�andhave risen partly as a result of that shift.
Second, the world’s biggest emitterwhen Kyoto was signed, America, has notrati�ed the protocol, and the biggest polluter per person among countries with significant emissions, Australia, did so only twoyears ago. It might reasonably be arguedthat the blame should fall on those countries’ governments, rather than on thetreaty itself; but a treaty in which the mostimportant parties play no part cannot besaid to be a success.
Third, some countries have failed to cuttheir emissions as promised. In 2007 Canada’s emissions were 29% above their 1990level and Spain’s 57%. But there is no needfor them to miss their targets, thanks to thecountries of the former Soviet Union.Their dirty industries collapsed during the1990s, so they are awash with carbon credits that can be bought for a small consideration. Countries in danger of failing tomeet their Kyoto targets can simply buywhat is known in the industry as �Russianhot air�. As the 2012 deadline for meetingKyoto targets approaches, there is a growing appetite for those meaningless credits.
Even in countries that have cut theiremissions substantially, business is not always getting the right signals. Britain’s apparently creditable performance, for instance, is less the result of a welldesignedpolicy than the �dash for gas� in the 1980s,spurred by the hostility to the coal industryof its then prime minister, MargaretThatcher. Attempts to get a renewableenergy industry going have �opped.
Britain is not alone in �nding it hard towork out how to send business the rightsignals. Policies that are e�ective, e�cientand politically palatable have proved elusive everywhere. 7
3Short by a mile
Source: NewEnergy Finance
*To limit temperature increase to2°C above pre-industrial levels
Clean-energy capital investment, $bn
R E Q U I R E D*
0
100
200
300
400
500
600
2005 09080706 10 15 20 25 30
GREENHOUSEGAS emissions targetscan be implemented through three
sorts of policy instruments�regulation,carbonpricing and subsidies. Governments generally like regulation (because itappears to be costfree), economists likecarbon prices (because they are e�cient)and businesses like subsidies (becausethey get the handouts).
Regulation can be useful where themarket is not working well. Buildings arerarely designed to save energy, because
those who put them up do not usually paythe bills and those who occupy themchoose them for their views or their looks,not their energye�ciency. The same goesfor appliances, most of which do not useenough energy to a�ect consumers’choices. Small regulatory changes (seebox, next page) can cut energy consumption without distorting the market much.According to McKinsey, around onethirdof the required greenhousegas reductionswill actually save money.
Twothirds, however, will not. They canbe achieved only if companies invest inmore expensive, cleaner technology. Thatwill happen only if governments requirethem to do so, or tax dirty products andprocesses (through a carbon price), or subsidise clean ones.
Carbon pricing keeps government outof management decisions and allowsmanagers to choose between di�erentways of cutting carbon. According to a paper by Carolyn Fischer, of Resources for
Good policy, and bad
Some mitigation policies are e�ective, some are e�cient, and some are neither
6 A special report on the carbon economy The Economist December 5th 2009
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1
the Future, and Richard Newell, head ofAmerica’s Energy Information Administration, a carbon price is around twice ase�cient as a renewable portfolio standard(which requires power companies to generate a certain proportion of the powerthey sell from renewable sources) andabout twoandahalf times as e�cient asa renewableenergy subsidy.
A carbon price can be set either by a taxor through a capandtrade system. Europealready has such a system and America,Australia and Japan are trying to set oneup. Norway and Sweden have carbon taxes and France soon will (though none ofthem covers much of those countries’economies). The European Commission isalso now looking at a tax. Both methodshave advantages and drawbacks, but taxwins out for simplicity and stability.
More important than the way the priceis set, though, is its level. It needs to be highenough to send an unmistakable signal tobusiness. According to Dimitri Zenghelis,one of the authors of the Stern Review anda senior adviser to Cisco and the Grantham Research Institute, a $40 carbon pricenow, doubling by 2050, and combinedwith nonprice policies such as appliancestandards and R&D support, is needed tohit the 450ppm target.
The European Union’s EmissionsTrading Scheme, which started up in 2005, isthe only largescale attempt so far to set acarbon price. Under the ETS, EU countriesget national allocations which they thenparcel out to over 11,500 factories in �vedirty industries. Companies can buy andsell allocations amongst themselves, andcan also buy �certi�ed emission reductions� from developing countries to meettheir caps through Kyoto’s �clean development mechanism�.
Europe’s �agshipThe ETS makes up the vast bulk of the global carbon market, which will be wortharound $122 billion this year. It is the principal way of �nancing the shift from high tolowcarbon power and industrial processes in the developing world. A wind farm inIndia; a methanecapture scheme for pigfarms in Brazil; a forestry project in Indonesia; equipment to capture industrial gasesin China�the ETS can �nance them all.
Although it is still young, the ETS hashad some impact on emissions. Accordingto a 2008 study at the Massachusetts Institute of Technology, in its �rst three years itprobably reduced them by 120m300mtonnes, or 25% a year, below what theywould otherwise have been.
Power companies and manufacturersfactor a carbon price into their investmentdecisions these days. At ¤15 ($22) a tonnethe price is high enough to induce powercompanies to switch some generationfrom coal to gas at the margin, but not highenough to encourage much innovation.
Blame politics. The price is determinedby the cap, which is set by the EuropeanCommission in consultation with member states. Initially, member states overestimated their emissions in order to get lots ofpermits, so the carbon price was lowerthan the commission had expected. For thesecond phase of allocations, from 2008,member states fought vigorously to getmore permits than their neighbours. Somesued the commission and, in September2009, won. The price dipped again.
Thanks to a combination of recessionand lack of political will, most estimates ofthe future level of Europe’s carbon pricehave been revised sharply downwardsthis year. And if America gets a carbonprice, it is unlikely to be high enough tomake much di�erence. According to America’s Environmental Protection Agency, thelegislation Congress is now consideringwould set it at $12 a tonne in 2012, rising to$20 in 2020. That, by itself, is unlikely to encourage much new investment, so if Amer
THE dullest bits of the many electronicdevices people plug into mains sockets
in their houses and o�ces are the poweradaptors. These are boxes that sit betweenthe plug and the device, or are sometimesintegrated with the plug. Their job is toconvert highvoltage alternating currentfrom the mains into lowvoltage directcurrent for mobile phones, laptops, iPodsand other electronic gadgets. About 5 billion such devices are in use worldwide.
Until recently the conversion wasmade using copper wire. Typically, halfthe power they drew from the wall, andsometimes as much as 80%, would be lostin conversion. As a result, electricity billsand carbon emissions were both higherthan necessary.
Making the conversion with integratedcircuits is much more e�cient, with as little as 20% of the power being lost. The
technology for this has been available formany years and costs only around 30%more than the copperwire method, butthe market gave manufacturers little incentive to switch. Power adaptors arecheap, usually costing $2 or less. Appliancemakers tend to buy them from companies in Taiwan or China. Contracts arewon and lost on a fraction of a cent perunit. And since consumers do not thinkabout power consumption when choosing a phone or laptop, manufacturerstended to stick with copper wire.
Seven years ago the Natural ResourcesDefence Council and Ecos Consulting, anenergy consultancy, got manufacturers,power utilities and the state and federalgovernments together to talk about shifting to integrated circuits. It took two yearsto get regulations in place in America.Once adopted in the world’s biggest mar
ket, integratedcircuit adaptors spreadswiftly everywhere, because manufacturers cannot a�ord to make things that cannot be sold in America.
For consumers the switch has meantlower power bills and smaller, lighterpower adaptors. For the world as a wholeit has meant a drop in global power consumption worth around $2 billion a year�saving 13m tonnes of CO2 annually worldwide, the equivalent of closing downeight coal�red power stations.
There are plenty more such savingsavailable, says Chris Calwell of Ecos Consulting. The biggest potential is in largescreen televisions, cable and satellite settop boxes and battery chargers. Millionsof devices�known to energye�ciencyexperts as �vampires��continue to suckin electricity even when the device thatsits in them is fully charged.
How a boring gadget saved $2 billionworth of electricity Vampires on a diet
The Economist December 5th 2009 A special report on the carbon economy 7
2 ica is to make a dent in its emissions, it willhave to rely mostly on subsidies.
There is an argument for some of those.Basic R&D in new energy technologies�incarbon capture and storage, for instance,which would allow the continued use ofcoal to generate electricity�is too risky formost companies to undertake on theirown, and o�ers enough social bene�ts todeserve government support. But the subsidies now on o�er go far beyond that.
Governments are spending heavily onencouraging the switch to lowcarbontechnologies, especially wind and solarpower. �These policies are not particularlye�cient, but they have been quite e�ective,� says Guy Turner, director of carbonmarkets at New Energy Finance. Some 50%of new power capacity added in the EU in200006 was renewable energy, comparedwith 29% in 19902000.
This sort of energy is expensive. Thebest indication of that is the carbon pricethat would be required to make investment in renewables worthwhile withoutsubsidy. According to New Energy Finance,onshore wind energy needs a carbon priceof $38, o�shore of $136 and solar cells of$196. Europe’s target for generating 20% ofits energy from renewable sources therefore looks pricey. According to RichardGreen, director of the Institute for EnergyResearch and Policy at Birmingham University, the implied marginal cost of carbon would be ¤129 a tonne�which suggests that allocating such large resources torenewableenergy subsidies is, as MrGreen says, �seriously suboptimal�.
The worst example of a wasteful subsidy is America’s support programme forhomegrown corn ethanol, which is coupled with tari�s on cheaper sugarcaneethanol from Brazil. The programme hasraised global food prices (and thus increased malnutrition among the world’spoorest); lined the pockets of America’sfarmers; given policies to cut carbon a badname; and cut little, if any, carbon.
Solar �areEurope has yet to devise a policy quite sodisastrous, but Spain’s solar subsidycomes a close second. Its feedin tari� forsolar energy, established in 2007, o�eredgenerators 44 euro cents per kilowatthour.Coal�red power costs around 4 cents perkwh to generate. The tari� was supposedto be for smallscale projects, of 100kw orless; but generators found that they couldget it for larger ones if they installed banksof 100kw modules next to each other.
The resulting boom bene�ted manufac
turers not just in Spain but also in Germany and China, the biggest producers ofsolar cells. Last year Spain accounted for40% of world demand. The governmenthad planned for 400MW of solar capacityto be built by 2010. In the event, 3GW wasbuilt. Panicking about the commitments itwas building up, the government announced that rates would drop to 32 centson September 29th 2008. �There were allsorts of abuses,� says Jenny Chase, solaranalyst at New Energy Finance. �If youconnected a single module to the grid before September 29th, your whole projectgot �nanced. So modules were changinghands for vast sums of money.� After thedeadline the market collapsed.
The Spanish crash hit siliconwafer producers, the manufacturers of equipmentfor solarcell producers and the makers ofcells across the world. Prices across the industry crashed by 3040%, and solar companies’ share prices fell by 5075% in 2008,though they have picked up a bit this year.Some 20,000 jobs have been lost in the solar industry in Spain over the past year,and plenty more elsewhere.
Europe’s energy subsidies, unlikeAmerica’s, do not include nuclear, largelybecause of German opposition (whichmay change, following Angela Merkel’s recent election victory). Nuclear power ismore expensive than coal and gas, butprobably cheaper than most renewables�though nobody is sure, since political opposition has ensured that few plants havebeen built in the West in recent years. Nuclear power does, however, have the virtueof scale. For renewables a gigawatt of power is a massive amount; for nuclear powerit is the basic unit.
Thanks to stimulus money to combatthe recession, subsidies are now �oodinginto the renewableenergy business faster
than ever before. Governments across theworld have trumpeted their stimulus packages as a way of saving the world economyand the planet at the same time. Greenstimulus money globally adds up toaround $163 billion, according to New Energy Finance, of which more than $100 billion is being spent in America and China.The biggest chunk, around a quarter, is going on improving energy e�ciency. Griddevelopment is next, with a �fth.
The green stimulus money has beenslow in coming. In America it started to�ow in the second half of this year, just asthe economy began to recover. Some of ithas been used to extend the tax credits forwind and solar energy and to convertsome of the taxcredit schemes into grants.As a result, wind developers in Americanow get a cheque for 30% of the cost of theproject once they connect to the grid. Thatscheme runs out at the end of next year.
Mr Clover is concerned about the likelye�ect. �We’re expecting a stampede in2010. The danger is that you just bring forward demand. That’s been a key feature ofthe US market. We’ve already seen severalsubsidy cycles�very high installations followed by complete cessations of activity.All anybody wants is longterm regulatorystability.� He hopes that will come with theimposition of a federal renewable portfolio standard on generators, which wouldrequire them to sell a certain proportion ofrenewable electricity as part of the mix.
Globally, New Energy Finance reckonsthat only $24 billion of greenstimulusmoney will be disbursed this year, withanother $58 billion to follow in 2010 and afurther $56 billion in 2011. So it looks asthough the money will come too late totemper the recession of 200809, and mayinstead fuel another in�ationary boom ina couple of years’ time. 7
8 A special report on the carbon economy The Economist December 5th 2009
�WHAT that means in code�, SenatorBob Corker, a conservative Repub
lican from Tennessee, told the audience ata hearing of the Senate Committee on Energy and Natural Resources about America’s proposed climatechange legislation,�is we’re transferring wealth from ourcompanies and our citizensðto raise carbon prices and send money abroad.�
Senator Maria Cantwell, a leftwingDemocrat from Washington, does not normally agree with Mr Corker, but her line ofreasoning was similar. In costing the bill,she said, the Environmental ProtectionAgency had estimated that $1.4 trillion dollars a year would go abroad to cover thegenerous provision for o�sets in the bill.�What can we buy abroad for that? Can’twe spend this money on developing technology at home?� Senator Corker was fairly sure that the foreigners would �ndthings to sell America. �When $1 trillioncomes around there are hucksters all overthe world who will do business with you.�
After eight years of resistance from theBush administration, America may beabout to get mandatory federal greenhousegas emissions controls. The Houseof Representatives has passed the American Clean Energy and Security Act, otherwise known as the WaxmanMarkey bill. Itis sponsored by two powerful Democrats,Henry Waxman, chairman of the HouseCommittee on Energy and Commerce, andEdward Markey, chairman of the Subcommittee on Energy and Environment.
The bill steers a di�cult course between the demands of environmentalistsand those of business. In attempting tobring emissions down by 17% below 2005by 2020, or 4% below 1990 levels, it aimslow by the standards of other rich countries, but is under attack in America on theground that it will hurt the economy. In acapandtrade system designed purely fore�ciency all permits would be auctioned,which is what Mr Obama wanted. But as aresult of concessions made in committee,by the time it was passed, 85% were to begiven away initially (though some of thevalue of the giveaways will be returned topower consumers as rebates).
Even so, the bill is struggling. It gotthrough the House by a mere seven votes
and has got stuck in the Senate. The KerryBoxer bill (the Senate version of WaxmanMarkey) has fallen victim to many factors.One is health care, which has used up a lotof political time and energy and generatedmuch ill will between the parties. Republican former supporters of capandtrade�such as John McCain, Richard Lugar andLisa Murkowski�have become unwillingto do the president any favours. Another ispublic attitudes (see box, next page).
The distribution of Senate seats doesnot help. Americans on the coasts are morewilling than those in the hinterland to mitigate climate change, partly because theyare more liberal, partly because they areless reliant on coal and partly because theyare more worried by hurricanes and risingsea levels; yet coastal Americans are vastlyunderrepresented because their states aremore heavily populated than those inlandand every state gets two Senate seats. Andsince a bill needs 60 votes out of 100 topass through the Senate, senators representing a mere 11% of the population canblock that passage. The biggest problem forthe bill, however, is that much of businesshas weighed in against it.
Business, ironically, was largely responsible for WaxmanMarkey’s inception. In2007 a group called USCAP, made up ofenvironmental organisations and companies that wanted legislation, proposed acapandtrade bill, and WaxmanMarkeylooks a lot like their proposal. Some ofthose companies (such as Exelon and
PG&E) were power utilities with little or nocoal�red generation; some (such as GE
and Alstom) were equipment companiesthat would bene�t from regulations requiring their customers to buy new kit.
Waking a sleeping bearBut oil companies and energyintensivemanufacturers tend to fear carbon caps,and once the bill started trundling throughCongress those companies were stirredinto action. �It was like poking a sleepingbear,� says Elizabeth Moler at Exelon, thelargest nuclearpower generator in America. Powerful trade associations such as theNational Association of Manufacturers,the American Petroleum Institute and theUS Chamber of Commerce started to lobby heavily against it.
The energy companies’ voices tend tobe heard loud and clear in Washington,DC. According to the Centre for ResponsivePolitics, the energy industry has been thefourthbiggest spender this year out of 13sectors. In the �rst ten months of this yearit lavished $300m on 2,225 lobbyists inWashington, DC. It handed twice as muchin campaign contributions to the bill’s opponents in Congress than to its supporters.
These days it is considered bad form tosay that the planet can go boil itself, so rather than denying that the globe is warming,corporate critics of the bill tend to arguethat capandtrade is the wrong remedy.Some, such as ExxonMobil, actually advocate a tax (which is unlikely to materialise).
The move to give away, rather than auction, permits has been much criticised. Butperhaps the most contentious aspect of thebill is its generous provision for the use ofo�sets�the matter which exercised Senators Corker and Cantwell. O�sets are popular among developing countries becausethey provide an income, and among businesses in rich countries because they keepdown the cost of compliance. The Environmental Protection Agency says that without the contribution from o�sets, the carbon price under the capandtrade systemwould be twice as high as it is now.
Yet there are worries about the authenticity of o�sets. That is partly because theyare vulnerable to fraud, but mainly fordeeper and more philosophical reasons.
Cap and tirade
America struggles with climatechange legislation
1
The Economist December 5th 2009 A special report on the carbon economy 9
2 O�sets are based on the idea of �additionality��that the credit is being issued for acut in emissions which would not otherwise have taken place. Within the CleanDevelopment Mechanism (CDM) of theKyoto protocol, which creates most international o�sets, projects have to be certi�ed as producing �additional� cuts by theCDM’s executive board.
But Michael Wara, an expert on environmental law at Stanford University, argues that it is in practice impossible for theboard to know that the projects they approve would not have happened otherwise, and indeed some of the projects thathave been �nanced look as though theymight have. He cites some 20 gas�redpower stations in China that were partly �nanced by the CDM (and thus, indirectly,by European consumers). Given that China long ago announced its intention to diversify out of coal for reasons unconnectedwith climate change, he reckons that thosepower stations would have been built anyway, so the emissions cuts they led to werenot additional. Senator Corker shares hisscepticism about o�sets. �That’s not a market,� says the senator. �That’s Alice in Wonderland makebelieve.�
The WaxmanMarkey bill covers moreof the American economy than the ETS
does of Europe’s, and takes a far more generous approach to o�sets. As a result, theAmerican o�set market would be 2050times larger than the existing CDM market,says Mr Wara. This could pose problems.The CDM board’s approval rate has declined lately because it is determined notto issue dodgy credits. With a market aslarge as America promises to create, thereis a risk that there will not be enough o�sets available, or that they will be suspect.Senator John Barrasso, a Republican fromWyoming who sits on the energy committee, predicts that it will be �rife with greencollar crime�.
MarketphobiaArguments about o�sets and volatilityhave raged since capandtrade was invented. But this year its supporters face anew problem: a postcreditcrunch hostility to markets in general. For Jason Grumet,who as executive director of America’s National Commission on Energy Policy hasbeen pushing capandtrade legislation foryears, �mistrust of the market is as big achallenge to getting the legislation throughas concerns about costs.� In the House itled to emendations of the bill to restricttrading in carbon derivatives�and thusboth the scope for banks to make money
and the usefulness of the market. Senator Murkowski, a Republican from
Alaska, cosponsored a previous bill tocurb emissions because she was worriedabout the e�ect of climate change on thecoastline. But a bill like WaxmanMarkeymay not get her support. �There’s a concern that we’re creating a new $1 trillionmarket that will be susceptible to beingmanipulated by Wall Street in the sameway as mortgagebacked securities were.�
This newfound scepticism about market mechanisms leaves supporters of carbon curbs in some despair. �There’s noquestion that a tax would be much easierto implement,� Mr Grumet told the Senate’s energy committee. �If there were a serious bipartisan e�ort to garner support forsuch a measure it would gather a head ofsteam.� But so far there isn’t.
Harry Reid, the Senate majority leader,
has said there will be a vote on an economywide bill next spring. But given theopposition to such a system, other outcomes are possible. One is regulation. TheEPA is required by a Supreme Court decision to regulate greenhousegases as pollutants under the Clean Air Act�a prospectso alarming to business that it increasesthe chances of legislation. There is also talkof a more limited capandtrade system,covering the power utilities, which are reconciled to the idea, but excluding the oil industry, which is still �ercely resisting it.
With midterm elections next autumn,a bill on such a sensitive issue will need topass before summer. Much depends on thepresident. If he puts his back behind WaxmanMarkey, America may get a weakened version of a secondbest policy. If hedoesn’t, America may get somethingworse�or nothing at all. 7
AMERICANS support the idea of controlling emissions. In a poll published
in October by the Pew Research Centre,50% of those who had an opinion supported limits, compared with 39% against.Other polls have shown higher levels ofsupport. But that apparent enthusiasm isquali�ed by a number of factors.
The �rst is price sensitivity. In a poll inAugust, 58% said they would support acapandtrade system that increasedmonthly electricity bills by $10, but for anincrease of $25 the �gure dropped to 39%.
Second, ignorance and indi�erenceare rife. Whereas half of the respondentsto the Pew poll who knew about capandtrade supported the idea, 55% had neverheard of it. In a Gallup poll in September,1% cited the environment as America’smost important problem, 26% health careand 29% the economy.
Third, scepticism seems to be on therise. The Pew poll showed a fall in the proportion of Americans who thought therewas solid evidence of rising global temperatures, from 71% in April 2008 to 57% inOctober 2009. The proportion blamingrising temperatures on human activityalso fell over the period, from 47% to 36%.
It is hard to see how scienti�c developments could be responsible for this shift.It seems more likely to be the result of economics. When people are poorer theymay be less willing to support policiesthat will cost them money, but feel uncomfortable about jeopardising the planet’s future to fatten their bank balance.Scepticism absolves them of sel�shness.
Figures from other countries supportthe idea that attitudes have changed during�and possibly as a result of�the recession. A poll published by the EuropeanCommission showed a fall in the numberof EU citizens who saw climate change asthe world’s gravest problem from 62% inspring 2008 to 50% in July 2009. Over thesame period the proportion citing globalrecession as their main concern rose from24% to 52%.
In Australia, meanwhile, where KevinRudd’s support for mitigation helped himwin the 2007 election�probably the �rstelection anywhere in which climatechange played a serious part�a poll published in July by the Lowy Instituteshowed that the proportion of voterswho were prepared to shoulder �signi�cant costs� to tackle global warming hadfallen to 48% from 68% in 2006.
Don’t count on public opinion to support mitigation
Who cares?
4A change of mind
Source: Gallup
With which statement do you most agree:“Protection of the environment should be givenpriority even at the risk of curbing economicgrowth”, or “economic growth has priority evenif the environment suffers to some extent”?
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10 A special report on the carbon economy The Economist December 5th 2009
1
UNLIKE America’s leaders, China’sbosses are not much troubled by recal
citrant legislatures. The government hastherefore had no di�culty in executing asmart volte face on climate change.Around three years ago its �erce resistanceto the notion of any limit on its greenhousegas emissions started to soften. Itnow seems to be making serious e�orts tocontrol them.
One reason for this change is the country’s growing awareness of its vulnerability to a warming world. The monsoonseems to be weakening, travelling less farinland and dumping its rainfall on thecoasts. As a result China is seeing �oods inthe southeast and droughts in the northwest. At the same time the country’s leaders are deeply concerned about the melting of the glaciers on the Tibetan plateau,which feed not just the Ganges, the Indus,the Brahmaputra and the Mekong but alsothe Yangzi and Yellow rivers (see map).
A second reason is China’s growingsense of global responsibility. The countryis not only the world’s largest emitter ofgreenhouse gases; it now regards itself, andis regarded, as one of the world’s leadingpowers, and therefore expects to workwith the other big powers to tackle globalproblems such as the economic crisis, nuclear proliferation and climate change.
A third reason is energy security. Although China has large coal reserves, it isalso a big importer. Concerns about excessive dependence on foreign fossil fuelssharpened when China’s oil imports rocketed and, in 2005, the attempt by CNOOC,China’s largest o�shore oil and gas company, to buy America’s Unocal was rebu�ed. China’s push into nuclear and renewable energy has been driven by itsneed to diversify its energy sources.
The fourth reason is economic. TheKyoto protocol has given China an incentive to clean up its act. China has received$2 billion through the CDM for cleaning upits industrial processes and building cleanenergy capacity�half the money that has�owed through the CDM. That is expectedto rise to $8 billion by 2012.
But a longerterm economic motivesprings from a shift in the way Chinathinks about growth. In the past, its allout
drive for growth has led it to rebu� pressure to cut emissions. Attempts to controlpollution foundered on the performanceassessment system for o�cials at all levelsof government, which prioritises growth.But that has been adjusted to encourageenergy e�ciency, and at the same time theleadership has started to argue that growthand greenery are compatible.
Since Wen Jiabao took over as primeminister, the leadership has tried to de�neeconomic growth as something broaderand longerterm than GDP �gures imply:the emphasis has been on a �harmonioussociety� and �scienti�c development�. Nobody was sure what the latter meant, butMr Wen has recently been talking about amore �resourcee�cient environmentallyfriendly society� and Hu Jintao, the president, has referred several times to a �lowcarbon economy� and a �green economy�.
Local pollution may help to explain theshift. Residents are infuriated by �lthy airand water that kills people and damagesunborn children. Policies to cut carbondioxide emissions�through reducing the energy used to produce goods�can helpclean up China’s cities at the same time.
More interesting is the idea that cleanenergy might be a source of growth ratherthan a constraint on it. China, so the argument goes, missed out on the computerrevolution. It makes hardware, but American �rms own most of the valuable stu��the intellectual property for the software.�You can’t get rich making socks and toys,�explains Lin Jiang, director of the China
Sustainable Energy Programme at the Energy Foundation in San Francisco. �They’relooking for the next growth industry. Cleanenergy clearly has huge potential. And nocountry dominates the industry yet. It’s awideopen �eld.� Hu Angang, an economist at Tsinghua University, calls this �ahuge opportunity for China. The countrywill become the largest renewableenergymarket, bioenergy market, cleancoal market, nuclearpower market, carbonexchange market, environmentaltechnology market, lowcarbon economy,exporter of lowcarbon products and lowcarbontechnology innovator.�
The government is giving the economya shove in that direction. In 2006 the �veyear plan set a target for a 20% cut in the energy intensity of GDP by the end of 2010.The start was slow, but by the end of lastyear it had managed 10% and it now lookson track for its target. According to Mr Lin,that would mean a reduction in carbonemissions of 1.5 billion tonnes per year by2010, more than the WaxmanMarkeybill’s caps for domestic industry wouldtake out of America’s economy by 2020.China has relatively tight vehicle fuele�ciency standards (see chart 5). Electric vehicles are being generously subsidised($8,800 for a car and $73,500 for a bus) andthe government plans to build the capacityto produce half a million a year by 2012.
The most visible changes have come inrenewable energy. In 2005 the NationalPeople’s Congress passed legislation to offer subsidies for renewable energy�
A long game
China sees opportunities as well as dangers in climate change
5Abating thirst
Source: Lin Jiang,The Energy Foundation
*Dashed lines: proposed or contestedSolid lines: enacted
Fuel standards for new passenger vehicles, mpg
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California United StatesAustralia
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The Economist December 5th 2009 A special report on the carbon economy 11
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1
around twice the amount for coal. Forwind energy, the target was set at 20GW ofcapacity by 2020. The subsidy generatedso much building that China now expectsto hit that target by the end of this year andis aiming for 150GW by 2020. �It’s like agold rush right now,� says Mr Lin. The target for solar energy, similarly, has beenraised from 1.8GW to 20GW by 2020.
To put this in context, wind currently
generates only 0.4% of Chinese electricity.Coal generates 80%. And, although China’s government does not have to jumpthe legislative hurdles faced by America’spresident, it sometimes struggles to getpolicy implemented on the ground. Yet ifChina’s many layers of government can bepersuaded that green means growth, theywill cleave to this policy; and the leadership seems keen to make that happen.
China, thus, is after the same �greenjobs� that Americans have been promisedas part of their road to economic recovery.America has huge advantages in terms oftechnology and capital, but China has acouple of things going for it too: cheaper labour and a leadership unconstrained bythe need to get reelected every four years.China can play a long game, which helpswhen dealing with climate change. 7
BEYOND the planetsaving rhetoric, theargument at Copenhagen and beyond
will be about emissions levels and money.On both, large gaps need to be closed for adeal to be reached. The main gap on emissions levels is between America and therest of the world. The main gap on moneyis between the developed and the developing world.
To establish the size of the emissionscuts needed, you have to start with whereyou want to end up and work backwards.The G8 group of nations agreed in Italy earlier this year that the increase in globaltemperatures should be no more than 2°Cabove preindustrial levels. To achievethat, according to the models on which theIPCC bases its calculations, global emissions will have to be cut to half their 1990levels by 2050. For rich countries thatmeans an 80% cut in their emissions bythat date, a reduction to two tonnes of CO2
equivalent per head per year. At present,emissions in America are around 24tonnes per head; in Europe they are ten.
Forty years is a long time. Governmentscan agree to meet distant targets in thecomfortable knowledge that they will notbe held responsible for failing to do so.Shorterterm targets are therefore more important. The IPCC’s �gures suggest the developed world should aim to cut by 2540%below 1990 levels by 2020. That will be astretch, since the targets that developedcountries have put on the table so far addup to around 15% below 1990 (see chart 6).
The European Union is committed to a20% cut, rising to 30% if the rest of theworld promises signi�cant cuts. It has a detailed plan for getting there, including lower country caps in its EmissionsTradingScheme and regulations on car emissions.Japan’s new government has promised a
reduction of 25% on 1990, but has revealedlittle about how it might manage that. Australia’s government struggled trying to getits legislation through parliament. Canada’s emissions continue to grow.
The two most important participantsare America and China. They are not onlythe biggest emitters but also the countrieswhose fallingout sank Kyoto. And neitherhas revealed what it is bringing to the table.
The target in the Senate’s KerryBoxerbill, its version of WaxmanMarkey, wouldcommit America to a 20% reduction below2005 levels by 2020, which works outaround 4% below 1990 levels. But developed countries are expected to o�er morelike 2540% by 2020. What are America’snegotiators to do?
Stretch the dates, probably, and imply atrajectory with smaller cuts earlier on andbigger cuts later. On that basis, America’snegotiators reckon that the bill could produce cuts of approximately 17% over 1990by 2025, or 30% savings over 1990 by 2030.
Those numbers are not o�cial, but America’s negotiating partners have a prettygood idea of what it is going to put on thetable. Todd Stern, America’s special envoyon climate change, reckons that they maybe acceptable. �Several di�erent countrieshave come up to me and said, ‘You’ve got apath that’s pretty good even if we don’t likeyour 2020 number’.�
America’s negotiators have to treadvery carefully because of the precariousposition of the legislation. The Senate reacts badly to a sense that America is beingpushed around by foreigners. It voted 950to reject the Kyoto deal that the Clinton administration had negotiated. If it thinksthat the Obama administration is caving into international pressure it might reject notjust the treaty but also the legislation.
The administration’s chances of gettingthe legislation through will be much higher if China makes a similarly signi�cant offer. Developing countries are still not expected to commit themselves to particulartargets, but nor will they get o� scotfree, asthey did under Kyoto. According to the�road map� drawn up two years ago at theUNFCCC conference in Bali, they are required to propose �nationally appropriatemitigation and adaptation actions�.
Hu Jintao promised on his visit to NewYork in September that China would comeup with a �notable� �gure for reducing thecarbon intensity of its economy. America’snegotiators reckon that needs to be a reduction of around 30% in carbon intensityin the next �veyear plan, or 50% over three�veyear plans.
Assuming that both groups of countries can produce satisfactory plans thatthe other signs o� on, there will then becarrots and sticks to hold them to theirpromises. In theory Kyoto is a legally bind
Closing the gaps
How the world divides on a global deal
Promises, promises
Source: NewEnergy Finance
*Will go to 30% if othercountries make big cuts
†If Congress passes legislation
Pledged emission-reduction targets% decrease on 1990 levels by 2020
6
0 10 20 30 40
IPCC
EU-27*
Japan
Australia
Developed-country average
United States†
Canada Range
12 A special report on the carbon economy The Economist December 5th 2009
2 ing agreement with a compliance mechanism. In practice it is toothless, partly because of the availability of �hot air� fromthe countries of the former Soviet Unionfor rich countries to buy to meet their targets. But even without the hot air, there isno e�ective way of holding noncomplying countries to account, for the compliance mechanism merely imposes punitively large cuts in the next period oncountries failing to meet their targets in thisone. That is not going to happen.
France would like something muchtoothier: trade sanctions, more politelyknown as �bordertax adjustments�.These, in the view of some, would serveboth to keep countries to the commitments they had made, and to prevent factories moving from rich countries to poorones. The threat of tari�s has got some momentum in America too, and the WaxmanMarkey bill includes a provision for bordertax adjustments.
Moneyshaped carrotsTo most developing countries this is poison. China’s ministry of commerce saidthe measure �will not help any country’sendeavours during the climatechange negotiations, and China is strongly opposedto it�. Mr Obama is with the Chinese. �At atime when the economy worldwide is stilldeep in recession and we’ve seen a significant drop in global trade,� he said after theHouse of Representatives passed the WaxmanMarkey bill, �I think we have to bevery careful about sending any protectionist signals out there.�
The carrot to get developing countriesto honour their commitments is money.There are two reasons for rich countries tocough up as part of a Copenhagen deal.The �rst is a moral one. It is widely accepted that since the developed world is responsible for pumping 200 yearsworth ofcarbon dioxide into the atmosphere, itshould help the developing world adapt toclimate change. The second is a pragmaticone. China aside, many developing countries lack the capital to invest in cleaningup their economies, so if they cannot getaccess to richworld capital, the investment will not happen.
China says that the developed worldshould hand over 1% of its GDP, or about$400 billion a year. The African Unionwants $67 billion a year for Africa alone.Britain’s prime minister, Gordon Brown,has suggested that the developed worldshould pay $100 billion a year in total. TheEuropean Commission is proposing ¤100billion a year in 2020. The gap between the
numbers proposed is even larger thanthose �gures suggest, because the Chineseand the Africans seem to be talking aboutgovernmenttogovernment transfers only,whereas Mr Brown and the EuropeanCommission are talking about a combination of those and private capital.
There is no objective way of establishing how much guilt money the rich worldshould come up with. The amount of investment needed to clean up the worldeconomy is somewhat easier to determine. According to the International Energy Agency, the 2°C target will requirearound $1 trillion a year in investment. TheWorld Bank says around $475 billion ofthat total will need to be spent in developing countries.
Various countries have made constructive suggestions about how to rustle upcash. Mexico wants a $10 billion GreenFund to which countries would contributeon the basis of both their emissions andtheir GDP; Norway is suggesting an auction of 2% of carbonmarket emissions allowances which could raise $1525 billion;the poorest countries have proposed a taxon air travel which could raise $825 billion; the World Bank has a $5 billion targetfor its climate investment funds. Altogether those might raise $60 billion, which stillleaves a big hole.
How could it be �lled? �By private capital,� says Cameron Hepburn of OxfordUniversity’s Smith School of Enterpriseand the Environment. �Rich governmentshave serious pressures on their �nances.But they can maximise the bang for theirbuck by mobilising their vast capital markets.� And privatesector investment islikely to be more e�ciently used than governmenttogovernment transfers.
At present there is not much sign ofprivate capital investing in developingworld cleanenergy infrastructure. But it isnot a mad idea. Energy infrastructure is alongterm investment. That should suitpension and sovereignwealth funds. Withassets of $12 trillion and $3.75 trillion respectively, they should be able to raisesome of the necessary funds.
But �rst developing countries need toput in place those �nationally appropriatemitigation actions�. In a tiny way that isstarting in China, where APG, a Dutch pension fund with a portfolio of $200 billion,has put together an energye�ciency fundbecause the incentives the Chinese government has put in place make it worthwhile. �It washes its face �nancially,� saysRob Lake, head of sustainability at APG.
But China is not short of capital. Theproblem is elsewhere in the developingworld, where economic, political and currency risks scare o� foreign investors. So alot of thinking is going on about how tomitigate those risks. The United NationsEnvironment Programme, in collaborationwith the P8, a group of big pension funds,and other institutional investors, has produced a report on how to use publicsectormoney to leverage much larger amounts ofprivatesector �nance into clean investment in developing countries; the WorldEconomic Forum has produced another;Lord Stern a third.
The general idea is that the most e�cient use for the publicsector funds whichrich countries are going to transfer to poorones would be to insure private moneyagainst the risks posed by volatile currencies, unreliable governments and the riskthat cleaninvestment policies will not survive political change. Using public moneyto leverage private money to build infrastructure and transform economies is not anew idea, says Dominic Waughray of theWorld Economic Forum: it is the model theMarshall Fund used to rebuild Europe afterthe second world war. But it is still a contentious one. Some developingcountrygovernments suspect this is a ruse by richcountries to shirk their responsibilitieswhile making money out of the poor. Theytend to prefer the idea of the cash goingstraight into their co�ers.
The gaps that remain between rich andpoor countries on these issues are huge. Itis clear that some will remain after Copenhagen. That does not mean the world isgiving up on a deal. It means that there willbe a lot of work to do next year. That workwill be easier if the world goes about it in adi�erent way. 7
The Economist December 5th 2009 A special report on the carbon economy 13
1
THOSE who have had the misfortune tobe closely involved in climatechange
negotiations are not short of ideas on howthe process might be made more productive. One improvement would be to stoptrying to deal with so many gases at once(see box). Another would be to stop tryingto deal with so many countries.
With 192 participants, the annualUNFCCC conferences are too big to doanything very useful. But most greenhousegas emissions are produced by the17 countries that meet in the Major Economies Forum, a group put together byGeorge Bush in what was widely regarded
as an attempt to sabotage the UNFCCC.The MEF has, ironically, turned out to be agood forum for tackling di�cult questions.The UNFCCC should therefore stick to bigstatements of principle and leave the details to the MEF or other small groups.
The negotiations also divide the worldinto two halves. The idea of �common butdi�erentiated responsibilities� on whichthe UNFCCC is based�that everybody is init together but some countries are more responsible than others�is reasonable. Butthe way it is being applied means that thedeveloped (�Annex 1�) countries bear allthe burden of mitigation whereas develop
ing (�nonAnnex 1�) countries bene�t fromthe CDM and are not required to limit theiremissions at all.
This binary division has fostered an usandthem attitude that gets in the way ofagreement and forces together countriesthat have little in common. The worldeconomy has changed a lot in 17 years. Forexample, Mexico and South Korea are nonAnnex 1countries, but also members of theOECD, the club of rich countries. The nonAnnex 1 countries now have widely di�ering concerns. China wants money for cutting industrial emissions. Africa wantsgenerous provisions for forestry. Brazil has
What needs to change
The prospects are gloomy, but they can be made brighter
ONLY half of manmade global warming comes from CO2. The rest comes
from a variety of sources, includinghydro�uorocarbons (HFCs), black carbon(soot), methane and nitrogen compounds.Packing them all up together gives theKyoto protocol an elegant frameworkwhich in theory should solve the problemwith a single set of numbers�the nationalcaps that are designed to cut the wholerange of greenhouse gases.
Critics point out that the Kyoto protocol has achieved a great deal less than theMontreal protocol, which was designed toprevent the use of ozonedepleting CFCs.Montreal, implemented in 1987, was originally expected to cut half of its gases in 12years. In the event it got rid of all of themin ten years. It has had a huge globalwarming sidebene�t. CFCs are greenhouse, as well as ozonedepleting, gases.According to a study in 2007, the Montrealprotocol prevented the emission of 189 billion tonnes of CO2 equivalent. Kyoto hasabated around 10 billion tonnes.
Montreal worked better than Kyotolargely because the problem was a manageable size and the gases similar in nature and origin. Some people therefore ar
gue that the greenhousegas problemshould be unpacked and dealt with underdi�erent agreements.
Methane and nitrous oxides producedby agriculture account for about 10% ofmanmade warming. Most of that comesfrom the guts of cattle and sheep. Thatcould be cut through breeding programmes and less gassy diets.
Black carbon is a particular problem inthe Arctic and the Himalayan glaciers; itmelts snow and ice and thus increases thetendency to absorb heat from the sun. It
contributes somewhere between aneighth and a quarter of global warming.Unlike CO2, which stays in the atmosphere for centuries, it disappears withinweeks. Cutting emissions would therefore make an instant di�erence.
Black carbon is produced by diesel engines and primitive stoves burning woodand cow dung. Mechanisms appropriatefor dealing with largescale emissionsfrom power plants and factories will havelittle impact on peasants’ cooking techniques. Providing villagers with cheap,cleaner stoves would be more e�ective.
HFCs�industrial gases with 1,440times the globalwarming potential ofcarbon dioxide�are another candidate.Like CFCs, they are produced by a smallish number of industrial processes, andcutting emissions of them is cheap andeasy. America, Mexico, Canada and abunch of other countries have indicatedthat they support the idea of dealing withHFCs under the Montreal protocol.
Those in favour of a more holistic approach argue that disaggregating greenhouse gases could undermine the e�ort tosolve the problem as a whole. But better toget some signi�cant cuts made than none.
The attractions of a piecemealapproach to global warmingUnpacking the problem
7Kyoto’s mouse
Source: D. Zaelke, IGSD 2009
Greenhouse-gas reductions, gigatonnes of CO2
equivalent, 100-year global-warming potential
0 50 100 150 200 250Montreal protocolphase-out of ozone-depleting substances1990-2010
Kyoto protocol2008-12
Estimated potentialHFC mitigation2012-50
Range
14 A special report on the carbon economy The Economist December 5th 2009
2
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hydro power and biofuels, so it wants a regime that favours those. South Africa’seconomy is based on coal, so it wants investment in carbon capture and storage.
Most developing countries cling to thisdivision because they have done well outof it, but some middleincome countriesare trying to get rid of it. �Mexico’s maingoal�, says Mario Molina, a Nobel prizewinning chemist and a key �gure in thesuccessful campaign to cut ozonedepleting gases, �is to make a di�erence in the impasse between developed and developingcountries.� Mexico has made a commitment along developedcountry lines tohalve emissions by 2050, and proposesthat prosperous heavyemitting developing countries�including Mexico�be netcontributors to its �Green Fund�. Chinadislikes the idea, but it is gaining traction.
A further problem with the frameworkcreated at Kyoto is that it ignored some crucial sources of emissions�chief amongthem deforestation, the source of around12% of manmade greenhousegas emissions, more than the EU contributes in total. Dealing with it is also one of the cheapest ways of cutting emissions. But workingout how to do that is di�cult, which is whydeforestation got left out of Kyoto.
Cutting emissions from factoriesmeans paying people to do things di�erently. Stopping deforestation, by contrast,means paying people for not doing something they might otherwise have done.This is tricky. Should people be paid foreach year in which they have refrainedfrom cutting down trees? If so, how much?And who, exactly, should be paid? Theowners or occupants of forests that are being cut down? Or the owners or occupantsof all the forests in the world? That wouldeither be prohibitively expensive, sinceforests cover 30% of the Earth’s landmass,or the payments would not be highenough to protect the most endangered areas of forest.
The UN programme for Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (REDD),the main model under discussion at Co
penhagen, favours the more limited approach. But that, its opponents argue,would create a perverse incentive. AsBharrat Jagdeo, Guyana’s president, says,�You can’t have a sustainable strategy thatfocuses only on those places that have highrates of deforestation, otherwise you’ll getleakage. The logging companies will havean incentive to move to countries that haveconserved their forests,� as Guyana has.Creating a sensible mechanism to dealwith deforestation is going to require different levels of payment�higher ones forareas vulnerable to being cut down forfarming and lower ones for the rest.
Despite the di�culties, avoiding deforestation is regarded as a crucial tool for cutting emissions. Indonesia, for instance, hassaid that with REDD in place, it could cut itsemissions in two decades by 40% from2005 levels. A deal on deforestation therefore looks likely�if not at Copenhagen,then in the near future.
Hold the champagneThat the world is gathering in Copenhagennext week to try to decarbonise the globaleconomy is a good thing in itself, and aconsequence of other reasons for optimism. It is now widely accepted that avert
ing serious climate change is technicallyfeasible and economically a�ordable.Everybody has a good idea of what isneeded, in terms of money and emissionscuts, to get a deal. Most big emitters have either started on, or promised, serious reduction programmes, and all of those countries’ leaders have invested a lot of politicalcapital in being seen to make a success ofaverting serious climate change.
Copenhagen will not produce a detailed, comprehensive, legally bindingagreement. But with good luck and goodwill, something positive may come out ofit: a political agreement, which would beturned into a legally binding agreementwhen the fate of America’s climatechangelegislation has been decided, and a deal onsome speci�cs, such as forestry.
But even if Copenhagen’s participantsend up toasting their e�orts over the headof the little mermaid, what really matters ishow any international agreement is implemented at a national level. And there, although progress has been made, somethings are also going awry. Too little e�ortis going into carbon pricing and too muchmoney into subsidies. The system is getting fat with pork; and the more pork thereis, the smaller the chance that the worldcan cut its emissions without causing serious damage to its economy.
And yet it can be done. Most of the necessary technologies are available. The economics can be made to work. Everythingdepends, in the end, on the voters andtheir political leaders. Willing voters andbraver politicians will mean better policies. And better policies will enable mankind to make a big di�erence to the planet’sfuture at a surprisingly small cost. 7