Enviornment - Climate Change

Rarely has a report with so many charts and equations in it caused such a stir. Sir Nicholas Stern's review of the economics of climate change, published on October 30th, was all over the local media and much of the foreign press too. But the figures splattered over the report's 600 pages were something of a red herring, for the report was more about politics than about economics—specifically, the politics of getting America involved in the global effort to mitigate climate change.

One reason for that was America's reluctance. It was a moving force in the effort to curb greenhouse-gas emissions in the 1990s, when the Kyoto protocol was being negotiated, but in 2001 the Bush administration refused to ratify Kyoto and has since shown no interest in the matter. Europe, Japan, and a very half-hearted Canada are doing their bit; but American involvement is generally reckoned to be crucial, not just because it is the world's largest emitter of greenhouse gases (see chart) but also because unless America tries to curb its emissions, developing countries won't either. And American intransigence has been particularly irritating to Tony Blair, because climate change is one of the areas where the British prime minister might have got some reward for his support over Iraq.

Sir Nicholas, who says he had no views on climate change before taking the job, has come up with a report that looks perfectly designed to push America's buttons. Most previous assessments of the cost of climate change to the world economy are relatively modest—in the order of 0-3% of global output. Since the costs of stabilising carbon dioxide concentrations by switching to alternative fuels are, most economists reckon, around 1% of global output by 2050, it might be worth doing something about climate change even on the basis of those figures.

But rich countries tend to do relatively well from those forecasts. Some—especially those in northern Europe—actually benefit from a bit of warming. The brunt of the costs falls on poor countries, because they are hotter and relatively dependent on agriculture. Rich countries just about manage to put up with the sufferings of poor countries now. A bit more is unlikely to move them to curb their emissions.

Sir Nicholas, however, comes up with quite different figures. By feeding into his model both some recent science on the increased risks of dramatic climate change, and the possibility of such catastrophes as a rise in sea level big enough to flood London and New York, he calculates that the range of possible outcomes lies somewhere between 5% and 20% of global output over the next century or two. At those sorts of levels of overall economic damage, the impact on the rich world as well as the poor world is huge.

Sir Nicholas's policy prescriptions, as well as his analysis, seem designed to draw America in. Although most economists argue that a carbon tax would be the most efficient solution, Sir Nicholas is neutral between a carbon tax and the other ways of raising the cost of emitting carbon—by regulation or a cap-and-trade system. Those are the methods America has tended to use to control pollution. Vehicle emissions, for instance, are controlled by regulation in America, whereas they are mostly discouraged by fuel taxes in Europe. Sulphur dioxide pollution in America has been cut by a successful cap-and-trade system. Europe adopted a cap-and-trade system to cut its emissions under Kyoto only because America was plugging the idea before it pulled out. America's aversion to taxes means that a carbon tax is not regarded as a serious option.

While resisting pressure to curb carbon emissions, the Bush administration has enthusiastically subsidised alternative energy technologies such as biofuels and nuclear. Many economists doubt the value of picking winners in this way. But Sir Nicholas supports the idea of technology subsidies as a vital part of the policy mix. Even if governments manage to put a global price on carbon, he says, the private sector will not necessarily trust them to maintain it, so may need extra incentives to invest.

It may be a good time to give climate change an extra push in America. A campaign by Al Gore, a former vice-president, has given the issue momentum, as has California's adoption of Kyoto-style targets. California is now talking about setting up a European-style emissions-trading scheme with north-eastern states.

A lot of businesses, convinced that the federal government will somehow raise the price of using fossil fuels, are investing in developing green technologies because they believe that the market for them is bound to grow. The more the private sector invests in greenery, the less resistance there is to legislation.

The Bush administration is sticking to its position that investing in new technologies, not controlling emissions, is the way to go. But there are a number of bills hanging around Congress, at various stages of maturity, to control greenhouse-gas emissions. One of them is backed by John McCain, the Republican front-runner for the White House in 2008. If he, or Hillary Clinton, the Democratic front-runner, get the job, America may well once more take a lead in the global effort to mitigate climate change. Which is what Sir Nicholas's report is all about.

Source: Economist