Tuesday, 22 December 2009

How to solve climate change

By Chan Akya


"Why should I do anything for posterity? What has posterity ever done for me?"
- Groucho Marx
I am neither surprised nor happy about the failure of the Copenhagen summit on climate change. The mutual finger-pointing that has been unleashed, particularly between the United States and European Union on the one end and China, India and other developing countries on the other, is merely a result of human beings acting to their narrow self (national) interests rather than those of humanity in general.

Groucho Marx captured the sentiment many decades ago, as my opening quote shows; mankind is all about living for the now, damn the consequences.

I blame the following factors for the failure of Copenhagen:
1. A poor negotiating framework where unimportant countries such as Venezuela effectively got to block the efforts of bigger carbon emitters to make good.
2. An extraordinary focus on national carbon emission targets, as against a focus on reducing per capita emissions globally.
3. Asymmetry between rich countries that are producing most of the world's carbon emissions but are in demographic decline against poor countries that produce the least carbon emissions but are in demographic ascent.
4. Unsavory discussions, particularly from the Europeans, on who would foot the bill for reducing the effects of climate change.

As a late convert to the science of global warming, or more accurately climate change - and no, it wasn't Al Gore's movie (An Inconvenient Truth) that did the trick - perhaps I am among the last people who should actually write anything on this subject. Then again, it is our world after all, so here goes. In December 2007, I wrote an article titled How central banks could save the world for Asia Times Online. This article dealt with the failed economic logic behind the movement to save the world from itself. Here is a part of the article that should ring with readers, especially seeing as it is over two years old now:
... Going back to the current account deficit though, it represents the "dream" target of any Green. In actual carbon terms, the import of Asian products, for example, represents the carbon emissions of Asian countries as well as those of the global shipping industry. All told, various publications cite different figures but it would not be hazardous to assign some 30% of global emissions to the US current account deficit.

This is what the Greens miss completely - they count the emissions of China and India in the same league of the US and Europe, and that is wrong because a substantial portion of Asian emissions goes to the manufacture of goods consumed in the US.

In turn, what gets consumed in the US is also financed by Asia because Americans stopped saving from the time [president Jimmy] Carter stepped down. This is the billions of dollars in Asian central banks devoted to the purchase of US treasury bonds, as well as various "highly rated" securities. I have written often enough about how much money will be lost in Asia because of these bonds, and there is no need to repeat my arguments here.

To a large extent, the twin forces of a disingenuous Fed (euphemism for outright liars) and harmony-seeking Asian central banks (euphemism for dumb no-gooders who wouldn't get a job flipping burgers if their uncles hadn't made them the governors of the PBOC or BoJ or whatever) allow this circle of deficit-financed consumption to persist.

At the moment, with the US consumers' loans looking very risky indeed - this week for example reports showed sharply increased delinquency rates on auto loans in addition to the continued defaults on housing loans - Asian bankers are panicking about what to do with the billions of US securities on their books.

They have urged the US Fed to become more aggressive on interest rate cuts, to help the US economy recover, in effect helping to perpetuate the cycle of global warming described above. In the face of rampant inflation, it makes sense for the US Fed to hike rates now and engineer a hard landing for the US economy. A few million Americans will be thrown out of work, but so what - they weren't necessarily working on anything except selling each other inflated housing anyway.

A hard landing for the US economy will help cut global carbon emissions, by a factor of over 10%, so why not engineer it? This will also force Asian central banks to abandon their US dollar pegs (which is the main reason their incompetence can never be seen by the public) and actually try to manage inflation and growth in their own countries.

With a bulk of the world's manufacturing now in Asia, a shift in consumption to the region would not be a bad thing, and anyway overall shipping emissions will decline because goods will be consumed closer to the point of manufacture.
Moving forward from here requires every level of Group of 20 (G-20) government to buy into the following guiding principles:
1. It isn't the total emissions of any country that matter but rather the per capita figure: a human life in Cambodia is no less valuable than one in Germany.
2. Per capita emissions should be adjusted for trade, ie add emissions from imports and reduce those from exports.
3. The cure of carbon capture (specifically CO2 capture) is more effective than any preventive steps that can be taken from here on.
4. Developed countries should bear most of the cost.

A huge swathe of carbon emissions today are tied to the category of wasteful consumption: from plastic packaging to paper towels, items of daily use for the middle classes of Europe and the United States represent the most substantial burden on the rest of humanity. On the other end of the spectrum, the basic quality of life in much of Asia including China and India, as well as most of Africa, remains fairly challenging. Asian cities have improved dramatically, particularly in China, for the past two decades, but the countryside remains a place for making further improvements to the human condition. Thus, Asia and Africa have very little room to reduce aggregate emissions.

An alternate approach
After reading my previous article in its entirety as well as a follow up article, my suggestion would be for the following framework to be adopted by G-20 immediately:

Firstly, all central banks will push interest rates up to a level of 5% real - that is, the difference between nominal interest rates and inflation in those countries will be at least 5%

Secondly, the global average per capita CO2 emission will be targeted for reduction - the laws of statistics are that the best way to achieve this would be to cut the emissions of those producing significantly above this average, that is, the United States and Europe and certain countries in the Middle East such as Qatar (the world's highest per capita emitter).

Thirdly, negative economic goods will see their prices shoot up dramatically, for example fuel costs will have to be increased in order to push people towards alternate sources of energy.

Fourthly, only countries that sign up to these rules would be eligible for free trade; punitive duties will be imposed on trade with any country that doesn't sign up.

Lastly, all global summits including those of the United Nations, G-20 and climate meetings will be held in hot, under-developed countries such as in sub-Saharan Africa rather than in comfortable and cozy tourist spots.

Look at the benefits:

By raising interest rates to a comfortable real level, all manners of wasteful consumption will be immediately curtailed. The notion of buying a "McMansion", thereby requiring imports of Canadian timber, Brazilian hardwood, Chinese appliances et al will have to be economically sustainable; that isn't necessarily comfortable in a 5% real interest rate environment.

Targeting a reduction in global per capita emissions means that an economic contraction will have to take place in G-20; otherwise rich countries will have to invest substantially in carbon capture to meet their obligations. Either way, the planet wins.

Tripling the price of oil at the pump and gas for heating would be a good start for the United States. In Europe, with its substantial duties and taxes, a doubling would suffice. This move would push Americans and Europeans to invest in more sustainable energy sources including nuclear, solar and wind.

As I wrote at the beginning of this article, the Copenhagen summit failed because there was no penalty for not agreeing to a deal. Instead, countries adopting these principles could effectively erect trade barriers against any holdouts. By increasing the cost of saying "no", the chances of a "yes" are increased dramatically. Simple game theory, really.

My last point isn't meant as a throwaway. I have a deeply held suspicion that people in rich countries who start waving their hands and pointing fingers at these climate-change pulpits have no real understanding of the real economic issues confronting the developing world. If you were to stick French President Nicholas Sarkozy in the middle of a Tanzanian drought-hit flatland, his propensity to talk up the need for rich countries to "share" with poor countries would, I suspect, actually reverse from his current position.

Plus it would be good fun to watch all these idiot politicians actually sweat towards a deal, for a change.

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