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| Putting a Price on Carbon: The Key to Securing Global Stability |
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By Larry Elliott Tuesday 31 October 2006 New technologies and removal of barriers to change seen as key factors. The Stern review makes it clear that there is more to reducing the risks from global warming than making consumers pay more for long-haul flights or the use of gas-guzzling cars: "Three elements of policy for mitigation are essential: a carbon price, technology policy and the removal of barriers to international change. Leaving out any one of these elements will significantly increase the costs of action." Sir Nicholas's starting point is that the world needs to put a price on carbon. Economic theory says prices are set by the forces of demand and supply, but the report says global warming represents the failure of the market on a colossal scale. The reason is that the price of a cheap flight to eastern Europe or of a bunch of hothouse flowers flown in from east Africa does not include the cost to the environment. By international agreement, airline fuel is exempt from tax. "Greenhouse gases are, in economic terms, an externality," the report says. "Those who produce greenhouse gas emissions are bringing about climate change, thereby imposing costs on the world and on future generations, but they do not face the full consequences of their actions themselves." As the first leg of his strategy, Sir Nicholas says there needs to be an appropriate price for carbon. This could be achieved by raising taxes, by tougher regulation or by carbon-trading - a mechanism whereby companies or countries would pay for the right to pollute. Once people were faced with the full social cost of their actions, they would switch from high-carbon goods and services and invest in low-carbon alternatives. The prime minister said yesterday that he was keen to see expansion of the EU's emission trading scheme. Under this, each country is granted a quota for greenhouse gases from sectors such as energy generation, metal production, cement, bricks, and pulp and paper. The UK believes that under a global carbon-trading scheme rich countries would have to buy up a share of the pollution permits granted to poor countries and that this would help developing nations invest in low-carbon energy sources. Mr Blair said yesterday that aviation had to be brought to the heart of a beefed-up EU scheme when the current agreement runs out in 2012. According to the Stern review: "The level of the carbon price faced by aviation should reflect the full contribution of emissions from aviation to climate change. The impact of aviation is two to four times higher than the impact of the CO2 emissions alone. This should be taken into account, either through the design of a tax or trading scheme, through both in tandem, or by using additional complementary measures". Sir Nicholas said the second ingredient necessary to tackle climate change was a range of policies to support the development of low-carbon and high-efficiency technologies. Gordon Brown, the chancellor, said the government was already expanding its efforts in this sector, and would strive to ensure that the UK was "at the cutting edge of discovery and development of environmental innovation". Britain's environment sector had increased in size from £16bn in 2001 to £25bn in 2004, with the numbers employed rising from 170,000 to 400,000. The Stern review noted that low-carbon technologies were "currently more expensive than the fossil-fuel alternatives", but that as the green sector grew larger the cost would fall. Carbon pricing, it stressed, was important to ensure there was an incentive to invest in new technologies, but companies faced with the risk of making big new investments had to have the assurance that there would be no backsliding in the future. "Public spending on research, development and demonstration has fallen significantly in the last two decades and is now low relative to other industries," the review said. "There are likely to be high returns to a doubling of investments in this area to around $20bn (£10.5bn) per annum globally, to support the development of a diverse portfolio of technologies." With an urgent need to find alternatives to coal and oil as sources of electricity generation, Sir Nicholas said there was a need to help greener energy sources establish a foothold in the market. The scale of incentives worldwide needed to increase by "two to five times, from the current level of around $34bn per annum". Finally, Sir Nicholas said there was a need to remove the barriers that prevented people from changing their behaviour. Even where measures to reduce emissions were cost effective, there were often obstacles - such as a lack of information, transaction costs, or simple inertia - that prevented change. "Regulatory measures can play a powerful role in cutting through these complexities and providing clarity and certainty. Minimum standards for building and appliances have proved a cost-effective way to improve performance, where price signals alone may be too muted to have a significant impact." Sir Nicholas stressed that it would take time - several decades - for the three-pronged mitigation strategy to work and that until then countries had to adapt policies as best they could. "Some aspects of adaptation, such as major infrastructure decisions, will require greater foresight and planning," says the review. As global temperatures rose, the report added, the cost of adaptation would rise sharply. "The additional costs of making new infrastructure and buildings resilient to climate change in OECD countries [the 30 rich nations in the Organisation for Economic Cooperation and Development] could be $15-$150bn each year". That would represent up to 0.5% of GDP. Sir Nicholas concluded that the need for action was urgent. "Demand for energy and transportation is growing rapidly in many countries, and many developed countries are also due to renew a significant proportion of capital stock. The investments made in the next 10-20 years could lock in very high emissions for the next half-century, or present an opportunity to move the world on to a more sustainable path." 10 Things You Can Do How to reduce your carbon footprint - as recommended by environment groups and government advice centres:
(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. h o t g l o b e has no affiliation whatsoever with the originator of this article nor is h o t g l o b e endorsed or sponsored by the originator.) |
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