THE financial crisis has given many Australians reason to question the merits and timing of launching an emissions trading scheme to control carbon emissions. The debate is healthy, and hopefully will lead to a broader discussion about smarter ways to respond to this threat.
The Australian Government is to be commended for recognising the threat of climate change. Natural science has undeniably shown us that global warming is man-made and real. But just as undeniable is the economic science, which makes
it clear that a narrow focus on reducing carbon emissions could leave future generations lumbered with major costs, without major cuts in temperatures.
At first glance, an ETS seems like a neat market solution to global warming. In fact, it is worse than a straightforward carbon tax, where the costs are obvious.
With an ETS, the costs – to jobs, household consumption and economic growth – are hidden, and easily lead to lobbying, special favours and heavy rent-seeking.
But there is a bigger problem with both a carbon tax and a cap-and-trade system: they are ineffective, expensive ways to cut temperatures.
Countries that ratified the Kyoto Protocol – including, of course belatedly, Australia – promised to make significant reductions to their carbon emissions. A lot of nations are struggling to absorb the hit to economic growth that carbon cuts require, so many of these promises will not be fulfilled.
But even if every country lived up to its Kyoto agreement vows for every year until 2099 – costing the world $250 billion in lost growth every year – temperature rises would only be cut by a tiny 0.2 degrees Celsius.
It seems logical to think, then, that countries such as Australia should advocate even bigger carbon cuts. But this means even more financial pain, without an equivalent increase in benefits. Even if the European Union were successful in its radical plan to slash emissions by 20 per cent below 1990 levels within 12 years, global temperatures would only be one-sixtieth of one degree Celsius lower by 2100, at a cost of $10 trillion.
When we calculate the environmental and human benefits from this minuscule reduction in temperature rises, we discover that all of Europe’s efforts would only achieve four cents worth of benefits for every dollar spent.
The goal of carbon emission mitigation is to make burning carbon so expensive that everyone switches to green energy sources. But this will not happen any time soon.
Low-carbon energy sources such as wind and solar power remain extremely expensive and uncompetitive. To produce the same amount of electricity, solar panels are four times more expensive than building a natural gas plant, and three times more expensive than a nuclear plant. Wind power is more than 50 per cent more expensive than electricity generated by coal.
Rather than attempting the politically impossible by making fossil fuels so expensive that nobody will use them, we should try to make green energy so cheap everyone will use it.
The typical cost of cutting a ton of CO2 is now about $29, but the damage that a ton of carbon causes in the atmosphere is about $10. Spending $29 to achieve $10 worth of “good’ makes no sense.
It is clear that we need to reduce by roughly tenfold the cost of cutting emissions. That will not be achieved on the world’s present path: spending on research and development of alternative energy sources has declined since the Kyoto Protocol was signed.
Instead of continuing with the politically challenging, financially expensive and economically flawed approach of an ETS, Australia should focus on boosting investment into research and development of green energy.
Economists who have calculated the long-term benefits for humans and the planet from reducing global warming – such as fewer heat deaths and less flooding – show that every dollar invested in making low-carbon energy cheaper will do $16 worth of “good”. Spending a dollar to do $16 worth of good makes a lot of sense.
The Australian Government plans to participate in discussions in Copenhagen this December to replace the Kyoto Protocol. Those discussions will be complicated and charged, with developing nations such as China and India – who were not responsible for the emissions that will hurt the planet – seeking to be paid off in return for the major blow to development that carbon cuts would necessitate.
This could so easily be avoided and a more effective response to climate change embraced.
Instead of promising even bigger carbon cuts than Kyoto, leaders could instead call for every country to spend 0.05 per cent of its gross domestic product on low-carbon energy research and development.
That would increase the amount of such spending tenfold, yet the total cost would be only one-tenth of the cost of Kyoto.
For Australia, it would mean an annual outlay of $540 million a year, considerably cheaper than many estimates of the industry damage that the ETS would cause.
Kyoto-style emissions cuts can only ever be an expensive distraction from the real business of weaning ourselves off fossil fuels. Until green energy sources become genuinely competitive, carbon will continue its stranglehold on every economy on Earth.
Carbon cuts have become the only answer to global warming that is discussed. There has been a convergence of interests between businesses that stand to make a fortune from an ETS and some environmental campaigners who see carbon cuts as virtuous, while both neglect the commonsense contribution from the field of economic science.
Fears about climate change are understandable. But fear alone is a poor basis upon which to build sound decisions.
We should take lessons from both natural science and economic science, and ensure that we choose the most effective and realistic response to this global threat.
Bjorn Lomborg is the director of the Denmark-based think tank the Copenhagen Consensus Centre, author of The Skeptical Environmentalist and Cool It: The Skeptical Environmentalist’s Guide to Global Warming, and an adjunct professor at Copenhagen Business School.
