Carbon markets are not the answer

Published in the Liberal Democrat Autumn 2007 Federal Conference Agenda and Directory, 15th- 20th September 2007.

We face a shared dilemma. All of us need to secure reliable access to energy for our economies to grow. Without that growth we cannot maintain social cohesion and political stability.

For China, India and the United States, as well as Europe, that means using more fossil fuels, especially coal. If we do so with present technologies then it is certain the climate will change, threatening the very social cohesion and political stability we are burning the fossil fuels to maintain.

The point of a dilemma is that neither of the choices is attractive. We do not want to give up either the use of fossil fuels or a stable climate. The problem with a dilemma is that you will be gored by both of its horns if you take too long to decide what to do.

Conventional economic thinking says: get the price of carbon right, internalize the externality, and all will be well. Technology will be deployed, behaviour will be changed, emissions will be reduced, even eliminated, and this discomfiting dilemma will disappear in a puff of rhetorical smoke and oratorical mirrors.

Climate change is a problem like no other humanity has ever faced. A stable climate is not simply another good thing to have if we can get it. Without it we cannot have any of the other good things we need or desire. Keeping the climate stable is an imperative, not an option.

Climate change is different in other ways. It will adversely affect the security and prosperity of literally every single person on the planet. More importantly, climate change has a ticking clock – the two parts per million increase in the amount of carbon dioxide in the atmosphere each year. And that clock is ticking faster.

There is no rewind button on the climate. We cannot go back and correct mistakes. Once the extra carbon is in the atmosphere we must live, or die, with whatever climate it produces. This means we cannot afford policy failure. Securing a stable climate means making the global energy system carbon neutral by the middle of the century. The earth’s natural buffers absorb some of our carbon emissions. But that buffering capacity is all taken up by agriculture, deforestation and land-use changes.

That is why stabilising carbon concentrations, and thus temperatures, means all our electricity generation and transport must be emission-free in just over forty years. We can do this by improving energy efficiency, using zero carbon coal, wind and solar and other renewables for electricity and hybrids and eventually hydrogen for transport. Getting there from here means making very rapid step changes in technology. At best, a carbon price will make a difference at the margins. Price signals are helpful if you are making incremental decisions. However, incremental decisions will not stabilize the climate in the time available.

Economic models are useful tools to help you think about the world. They are very dangerous alternatives to doing that thinking. Markets work much better in economic models than they do in the real world. In the models, investors behave as you assume they will. In the real world, they are much more inventive. Generally, they try hard to find new ways to carry on doing exactly what they were doing before.

Nothing illustrates the incoherence in market-distorted thinking about climate change better than the deep contradiction in this government’s policy.

Such is its belief in the power of markets that in the same Energy White Paper we are told that we must liberalise energy markets as quickly as possible to drive energy prices down for competitiveness reasons, and that we must drive the price of carbon up aggressively for climate reasons.

Nowhere are we told how the left hand pushing energy prices down at the same time as the right hand is pushing them up leads you to anywhere other than the land of the deeply confused.

The widely held belief that building carbon markets is the best policy for tackling climate change is the triumph – and tragedy – of theory. Of course they have a role to play but it is currently much smaller than is believed and much too small to solve the problem.

In practice, three other policy tools are much more important and reliable. The first is to set the right technical standards to drive the technology deployments we need. The European Union has already shown the way by beginning the legislative process to require all fossil-fuelled electricity generation to be carbon-neutral by 2020.

The second is to structure the regulation of energy markets so as to allow utilities to pass through the additional capital costs of making the low-carbon transition to the whole of the rate base. This would spread the costs so thinly as to make them much more bearable than the oil price rise we have absorbed with little difficulty.

The third is to spend public money on buying the public good of a stable climate by paying to accelerate the rate at which low-carbon technologies are deployed, thus driving down their costs more rapidly than markets alone could ever accomplish.

About tomburke

Tom Burke is the Chairman of E3G, Third Generation Environmentalism, and an Environmental Policy Adviser (part time) to Rio Tinto plc. He is a Visiting Professor at both Imperial and University Colleges, London. He is a member of the External Review Committee of Shell and the Sustainable Sourcing Advisory Board of Unilever and a Trustee of the Black-E Community Arts Project, Liverpool.
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