Opinion: A bet on climate

Green finance special section

AS THE POLICY debate over climate change unfolds, the Big Bet gets lost in the rhetoric. Congress and the American people are being asked to place a bet on how sensitive the Earth’s climate is to changes in carbon dioxide in the atmosphere. A wager on the low end could trigger the catastrophic events we all dread. The alternative, a policy that acknowledges how high and likely the risk really is, leads to the best possible future.

Policy experts seeking solutions to the threat of climate change are generally united on science but divided on policy. Some favour a carbon tax to drive changes in business practices and energy use; others favour a cap-and-trade system that puts a firm limit on CO₂ emissions and harnesses market forces to drive change.

What they have in common is the data. According to projections by the Intergovernmental Panel on Climate Change, a doubling of atmospheric CO₂ concentration would raise temperature by 3°C from pre-industrial times. With continued dependence on fossil fuels we are comfortably on track to exceed this doubling. And 3° is not in the middle of their likely range of 2°C to 4.5°C. That is because the odds are not even: higher temperatures are more likely than lower ones. These stacked odds derive from feedback loops in the climate: more ocean ice melts, the open water absorbs more heat from the sun, and melting accelerates; melting permafrost releases methane (a far more potent greenhouse gas than CO₂) and in turn creates more melting permafrost.

Carbon taxes and safety valves: rolling the dice

Carbon tax advocates claim that simply setting a price for CO₂ will make it uneconomic to emit so much. This reasoning is similar to smoking abatement policy: more tax on tobacco should mean less smoking. Since Congress is not inclined to pass a new tax, a new twist on this approach is a cap-and trade-system with a safety valve – meaning a price at which the cap is broken and emissions are simply taxed. The current legislative proposal with a safety valve feature (Bingaman-Specter) starts with a $12 per ton price of CO₂, well below half the trading price for allowances in Europe for 2008 through 2012 under the Kyoto Protocol.

Safety valves and carbon taxes say to innovators: invent low-CO₂ technology if you can operate within the government price limit. Similarly, they say to emitters: if you don’t want to risk using new technologies then just buy allowances from the government until you are sure. Either way the result is the same: less technology and more emissions.

These advocates also believe something very different about the odds outlined by the IPCC. They believe that since both costs and benefits are uncertain, it’s better to take the risk on climate than the risk on the economy. Their policy is to limit the resources devoted to mitigating the risk and hope the climate is less sensitive to CO₂ than we thought.

Advocates of a hard cap on CO₂ and a robust emissions trading system – such as the major corporations in the US Climate Action Partnership – believe that betting the planet on a tax-guessing game is simply too risky. Instead, they realize that mandatory emission reductions of 1.5% to 2% a year over 40 years brings the 60% to 80% reduction needed to stabilize temperature somewhere near a 2°C rise. They also see this timeframe as gradual enough for private enterprise to develop efficient low-carbon technologies that deliver a huge competitive advantage if they are invented here. In short, cap-and-trade advocates would rather bet on innovation than bet the planet.

Cap-and-trade advocates also know that beating the odds means getting developing countries to join in emissions reductions. Creating a robust emissions trading market in the US and linking it with Europe’s trading system would create the strength in numbers needed to get caps from the developing world. As some have suggested, this might eventually require importers from countries without a cap  to purchase allowances for the emissions-content of their goods.

The truth about cost containment

With a carbon tax or safety valve, advocates claim we can contain the cost of climate policy. True. But there is no free lunch. These methods of cost containment are synonymous with technology containment. And high-quality jobs containment.

A CO₂ market can manage costs efficiently if it has three key design attributes: breadth, flexibility, and continuity. Breadth means an economy-wide programme, including verifiable offsets, and one eventually linked to other trading systems globally. Flexibility is about letting emitters bank and borrow allowances to manage their own opportunities to abate emissions cheaply. Continuity means small annual reductions over a long period of time, like 2% per year over 40 years. The bottom line is this: incentivizing the cheapest reductions as soon as possible is the best way to contain costs and get technology.

Many in the fossil fuel business wouldn’t mind a carbon tax that limits the price increase of their product and inhibits competing technologies from coming into the marketplace too quickly. Yet the auto industry, through years of resisting higher fuel economy, certainly hasn’t benefited from such short-term thinking. It is hard to create technology winners if our policy precludes losers.

Climate is a manageable risk if we act now. We can’t afford to start with what we can afford. Harnessing market forces for innovation will create technology options, and a more stable climate, for future generations.