Sunday, October 08, 2006
We'll go green: just give us the incentive
Posted by David Smith at 11:00 AM
Category: David Smith's other articles


This is climate change month, and not just because of the October storms. The Tory conference in Bournemouth had a green tinge. Before the end of the month the government will publish an important review, led by Sir Nick Stern, on the economics of climate change.

It is important, not just because it will inform UK government policy on the issue but also because it is keenly awaited internationally. Stern himself spoke at last week’s ‘dialogue’ meeting in Monterrey, Mexico, attended by the world’s leading energy-consuming countries, rich and poor.

The top five energy consumers are, by the way, America, China, Russia, Japan and India, which account for more than half of global energy use. America uses 22% of the world total.

Before I come on to what Stern might say, readers may recall I have expressed scepticism about climate change alarmism, and about the fact that there is a good deal of uncertainty about what is often presented as a scientific consensus. Some newspapers find a new way of trying to scare their readers about global warming most days, to the point where it loses any impact.

But things have moved on. Governments and firms are gearing up for action. The scientific debate is not over but is looking a bit passé, and I would not want to be accused of that.

This isn’t like the Y2K bug scare of 2000, which was immediately shown to have been overstated. If, in 50 years time, it turns out that current warnings about climate change were overstated, I won’t be around to crow about it. If the warnings are justified, however, as Stern argued last week, the economic costs could be enormous, let alone the effect on people’s lives. And, because action now on climate change almost certainly means preserving finite oil, gas and coal reserves for longer, it makes sense.

Stern will argue that the costs of meaningful action to reduce carbon emissions are manageable, it action is taken early. A useful report from Price Waterhouse Coopers, ‘The World in 2050: implications of global growth for carbon emissions and climate change policy’, gives some pointers.

It suggests that putting the world onto a path of green growth would mean a level of global gross domestic product in 2050 2% to 3% below its baseline projection. That sounds significant but, as PWC’s John Hawksworth points out, it is only equivalent to a year’s economic growth. If Stern is right and the long-run economic consequences of climate change will be enormous, the baseline itself may not be achievable, let alone PWC’s “scorched Earth” scenario in which nobody bothers about energy efficiency or switching away from fossil fuels.

How do you achieve green growth? Claude Mandil, executive director of the International Energy Agency, also spoke at the Monterrey conference. Energy-efficiency measures can go a long way. Lighting accounts for 19% of worldwide electricity demand and on present policies CO2 emissions related to lighting will rise 80% by 2030.

State-of-the-art energy-efficient lighting systems, if adopted, could cut those 2030 emissions below present levels, and that does not take account of technological improvements in the pipeline. Other-energy saving initiatives include limiting standby power use on set-top boxes and other electrical equipment and reducing the rolling resistance of tyres. We waste energy in a way future generations will regard as primitive.

As Mandil pointed out, energy efficiency does not mean “hairshirt” limits on growth. Neither does the use of technology to limit CO2 emissions for power plants - one of the big problem areas. Carbon capture and storage (CCS) - taking CO2 from power plants and storing in in depleted oil and gas fields, deep underground in rock formations or in the oceans and cutting emissions by up to 90%. CCS, assuming its widespread use is technically feasible, will play a key role in reducing emissions. Nuclear power and renewable will play a role.

The big question that comes up in this area is, to paraphrase The Sound of Music, what do you do about a problem like China and India? As these countries grow, and per capita car ownership and energy use rises, surely any efforts we make will be a drop in the ocean.

The key idea here is convergence. India may be the world’s fifth largest energy consumer but per capita energy use for its 1.1 billion people is only a twentieth of America’s. Thus India’s per capita consumption has to rise and America’s has to fall. That is understood in California, but not yet in Washington.

PWC’s projections assume convergence will happen. Thus, on its “green growth plus carbon capture” scenario, global CO2 emissions in 2050 are 17% lower than now, despite the fact that emissions from the E7 (E stands for emerging) - China, India, Russia, Brazil, Mexico, Indonesia and Turkey - are 30% higher. The reduction is achieved by a halving of emissions among the G7 countries. Even then, while China will be the biggest producer of greenhouse gases, America will be in second place.

How do you force people - entire countries - to make meaningful cuts in CO2 emissions? Incentives are everything in economics. Energy-saving lightbulbs costing £5, compared with 25p for a standard bulb, do not offer much of an incentive.

More broadly, this is an area for using market-based incentives. The McKibbin-Wilcoxen blueprint, put together some years ago by economists Warwick McKibbin and Peter Wilcoxen, is one ingenious approach. It sees markets in carbon permits developing in a similar way to the money markets.

Governments would issue long-term permits, analagous to government bonds, and short-term permits, for the current year, analagous to Bank Rate. The number of permits each government could issue would be decided by international agreement and permits would be sold at the same internationally-agreed price in all countries. Getting agreement could be the scheme’s Achilles’ heel.

Assuming that can be overcome, firms would require permits, short or long-term, equivalent to the emissions they intend to produce. Any long-term permits used this year could not be carried over, providing an incentive to greater energy efficiency. Any permits not needed could be sold on. Getting a global scheme like this up and running would not be easy - the European scheme has had its share of problems. But it looks like a way forward. The best way to make people conserve energy is to demonstrate they can make money out of doing so.

PS The Bank of England’s monetary policy committee (MPC) chose to hold its fire on rates last week, which was my preferred outcome. As things stand, however, the stay of execution looks only temporary. Barring unforeseen developments, the MPC is on course for a hike to 5% next month.

An interesting situation is developing, on two fronts. Evidence of the weakness of the American economy is coming in by the day. So is the weakness of energy prices. People who thought oil and gas prices could only go up, including some of our finest minds in the hedge-fund industry, have been left with burnt fingers.

The easing of global energy prices, with oil dropping below $58 a barrel last week, presents an interesting test. My argument has been that the rise in Britain’s inflation rate has been very much an energy story. The striking thing about inflation was not how high it rose but how low it stayed after a sharp rise in oil prices.

The majority view on the MPC has been that it is more broadly based. The Bank’s regional agents have detected that firms are finding it easier to pass on higher costs to customers. Maybe, but when pay increases are contained and oil is lower than a year ago, the pressure to raise prices is reduced. We’ll soon see who’s right.

From The Sunday Times, October 8 2006


global warming commentary is humbug.please see the house of lords report.their conclusion was there is nothing to be done. the messianic commentary(not my phrase)is vastly over-stated. .definitely a case of lie back and enjoy it.the bbc and the liberal media are having a whale of a time scaring the whole world.i am happy to read that you are a bring a smile to my face.

Posted by: richard at October 8, 2006 03:31 PM

Rather than requiring proof that it is our energy use causing global warming how about we proove that it isnt? Until we have how can we gamble with our decendents lives? Surely the whole point of life is to ensure the survival of the species? Growth? What excactly are we growing? Whats the aim? Where does it stop? Because growth will stop at some point. Why not now? The earth has taken 4 billion years to develop to this point and we just come along and suck the life out of it in a few hundred. Its easy to see how some beleive that the human race is destined to destroy itself. Whether it be through climate change or war things will come to a head. Its a shame that our children will have to reap what we have sewn. I just hope that nature finds a way to survive our greed and ignorance.

Posted by: Jim at October 8, 2006 05:41 PM

Actually there is an enormous degree of consensus among independent scientists that global warming is fact. If you want to read the research funded by Exxon and Philip Morris by all means do and you'll find counter arguments - but let's stop this charade - Global Warming is not being seriously questioned by serious scientists. W are going through the fastest period of warming in 75 million years and if you think that the fact that it coincides with the industrial and post industrial revolution, an exoplosion in human population and rapidly rising CO2 emissions is just a coincidence, fine! But for heavens sake it's like learning to look both ways when you cross the road. You can cross blindfold in the belief that a truck won't hit you if you want. Me, I prefer to take precautions. And - bottom line - there are billions upon billions of dollars to be made from addressing this problem.

Posted by: jonathan at October 9, 2006 03:16 AM

No, that's what the green lobby would argue - that nobody, and certainly no scientist, can disagree with them unless they're in the pay of big oil, or for some other underhand reason. It isn't true. And don't forget that the green lobby's record of telling the truth is a very poor one. But, as I was trying to argue, that is water under the bridge, almost no longer worth debating. If enough people are convinced by the dangers of global warming - which they are - then action will be taken. The question then is what that action should be taken which (a) works (b) does least damage.

Posted by: David Smith at October 9, 2006 08:53 AM

Dear David -Global Warming et al

I read your column regularly and am pleased you have brought a rational and cautious mind to this area . In last Sundays article you moved on from your April 30th position .

I was however surpised you didn't mention among recent events Al Gore's An Inconvenient Truth. Have you seen it ? Almost mandatory and if true which I beleive, most salutary. Pity he didn't spend more time on solutions - maybe that is for the sequel

For me it was as close to a damoscene moment I would hope to get to and I am now totally convineced and the only issue is what how, when etc and how much

Most of the what and how exist or at at an advanced stage of deveolpment . It is the when and the who which is the most important part of the process of change

The who will need more incentives in order to implement the what etc to accelerate the when.

I would like to suggest that next time you write about this there is more emphasis on who should be taking action and how they should be encouraged- a more micro approach. Individuals ,at home, travelling , shopping etc organisations firms ,schools government department /agencies etc

You might say that this is not for the business secion but you do write inthe main part of the paper and an economists take onthe who and the when might give a different angke and move more people forwardand also as one of your respondents commented will get more people taking advantage of this great opportinity to make some money!

New build situations are reletively easy ,retrofit is more difficult but is the greater challenge

In this context I am involved with a leading rainwater harvesting and recycling company and if you or anyone would like to know more please contact me

Posted by: Stephen Hyde at October 12, 2006 08:24 AM

I have seen Al Gore present his An Inconvenient Truth in person, and it is indeed a tour de force. I did have some problems with it, in the sense that he cut a few corners. One example: He quotes NOAA data quite extensively on hurricane activity - Katrina being a defining 'global warming' event for many Americans. But the NOAA said in its report on the 2005 hurricane season that there was no evidence global warming had played any role. This hurricane season, you'll note, has been remarkably quiet so far.

Just to be clear. I still have doubts - but things have moved on - there is a critical mass of belief in global warming so the debate is now about the right kind of policies to pursue.

Posted by: David Smith at October 12, 2006 09:59 AM

Dear David

This is not for posting .
Until last night I had not realised that my note had got through-pity about the spelling not able to spell check on your site
Thank you for putting up and your comments
While I agree with some and policy will help it is as I said about actions that inviduals/organisations will take etc so rather than wait for policy which is like Godot .We alL need to get on with what we can do and influence todaye.g I have just joined the Board of a major housing assocaition and my thems will be ecofrindly building and fuel poverty
In Nottigham I am pushing hard for earlier adoption for Merton Planning rules and getting somewhere and have now got a commitment from the politicain in charge of schools that all schools built from now on will have a full eco spec etc

We are making changes at home

On the policy front the Companies Bill which was going through Parliament yesterday and is very close to legisaltion will totoally change the regulatory framework for all companies in the Uk on environmental reporting and more importantly accelaerate action

I dont know whether you have come across I think you will find of interest as they are very involved in the City with fund mamagers etc determing carbon profiles etc of companies and funds etc .Incidentally founded by a group of economists and likley to go to AIM early next year. If you go to their site and click 'Tools for Companies' you will see Guide to the Companies Bill which clearly sets out the upcoming postionand developments

As and when passed could trigger a story?

Incidentally I was in Homebase buying lightbulbs yesterday and own brand ecofriendy were £3.99 each!!

Enough from me

Best Regards Stephen

Posted by: stephen hyde at October 20, 2006 07:42 AM

Dear everyone,
I am extremely happy in seeing a degree of rationalism here, as I find it one of the most precious attributes to mankind, on the contrary to political or other kinds of bias.
Yet must one not be biased in this very case, towards the maintaining our all-precious ecosystem functioning correctly? in the end, it is what keeps us alive and healthy, and undeniably we are ruining it. chemical contamination, waste and carbon emissions are undeniably major risk hazards and are piling up on our planet, beginning to loom on us. This is why in this single matter I will support extremists that will defend it, even at the cost of sacrificing rationalism for once.

Posted by: Edoardo at October 21, 2006 01:16 PM
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