Bill Totten's Weblog

Friday, February 22, 2008

Path of least resistance

The government's fallacious use of carbon pricing means that it can disguise its aviation expansion plans as alleviating climate change

by Paul Ekins

The Guardian (February 13 2008)

Probably the most important recommendation of the recent Stern review of the economics of climate change was that carbon must be priced if societies want to get climate change under control. But the key follow-up question is: what price to use?

My policy recommendation to governments has always been that the price should be high enough, when allied to other appropriate policies, to drive the behavioural change in consumption and stimulate the development and deployment of low-carbon technologies that are sufficient to prevent climate change getting really out of hand.

Russian roulette

That is widely interpreted as requiring the global average temperature rise to be limited to two degrees Celsius, which in turn requires the atmospheric concentration of greenhouse gases such as carbon dioxide to stabilise in the range 450-550 parts per million. It is now 436 ppm - up from about 280 ppm in pre-industrial times - and is rising at about 2.5 ppm a year. Keeping it below 550 ppm will require global emissions to stabilise in the next ten years and then to reduce, with countries such as the UK cutting their emissions by sixty bo eighty per cent by 2050. Even that is playing Russian roulette with humanity's future. We really ought to go aggressively for 450 ppm, which would require global emissions to start falling almost immediately.

We do not know how high the carbon price would need to be to achieve 450-550 ppm (or a sixty to eighty per cent reduction for the UK), except that it is much higher than at present. A prudent and responsible government would therefore put an indefinite escalating carbon tax on top of all existing energy taxes in order to get serious with the imperative of decarbonising the economy, and would simply rule out any large-scale increase in carbon-intensive infrastructure that will make emissions harder to reduce in future.

Unfortunately, the Department for Environment, Food and Rural Affairs (Defra) has decided to take an approach based on applying a "shadow price of carbon" (SPC), which, if the calculations for the consultation paper for the expansion of Heathrow airport - a carbon-intensive development if ever there was one - are anything to go by, will have exactly the opposite effect.

The SPC is based on estimates of the damage that climate change - and, therefore, the carbon emissions that cause it - will do. The scientific uncertainties around climate change mean that one recent scientific study estimated that the SPC could lie anywhere between GBP 1 and GBP 1,000 per tonne of carbon emitted today, but that even this was not a maximum (because of the possibility of absolutely catastrophic effects) and there was no way of arriving at a "best estimate".

I have concluded that a number with these characteristics is of little policy usefulness, but Defra and Treasury economists continue the heroic task of trying to fix on a single number. Their decision on this issue makes an enormous difference to the amount of carbon dioxide the UK will emit in the future.

On current trends of global carbon emissions, atmospheric concentrations will reach 700 ppm or more. The Stern review estimated that, at this level, the SPC is around $85 (GBP 44) per tonne of carbon dioxide, or $312 per tonne of carbon. However, if the world were to stabilise atmospheric concentrations at 550 ppm, climate change damage, and therefore the SPC, would be much less. Stern estimates this at $30 per tonne of carbon dioxide, or $110 per tonne of carbon - lower by almost a factor of three. This $110 to $312 per tonne of carbon effectively defines the range of SPCs that policy makers can use.

In the consultation paper on the proposed addition of a third runway to Heathrow, the government uses the lower SPC, on the grounds that it is committed to a 550 ppm stabilisation concentration and is legislating in the climate change bill for the UK to achieve carbon reduction targets that are appropriate to achieve this objective. In the economically most favourable option considered, the annual benefits of Heathrow expansion are calculated as GBP 18.9 billion, while the costs are GBP 13.1 billion - a net benefit of GBP 5.8 billion. The costs include GBP 5 billion for climate change damages, using the low value of SPC identified above. Heathrow expansion, and the huge rise in carbon emissions it will bring about (180 million tonnes of carbon dioxide from 2020 to 2080), is thereby judged to be economically beneficial and, no doubt, will be pushed through.

But it is a simple calculation to show that use of an SPC of $238 per tonne of carbon or more would have turned the economic benefit of Heathrow expansion into an economic cost. This $238 is still well below Stern's estimate of the cost of the emissions trajectory the world is currently on, and even further below the levels of catastrophic damage from climate change that many scientists believe is distinctly possible.

The extraordinary thing about the use of the SPC to which the government now seems to be committed is that the assumption, against all the evidence, that the world - and the UK - is on a low emissions trajectory that will limit climate change damage both justifies and promotes high-carbon developments that will ensure that this trajectory will not be achieved.

Impossible beliefs

This is "Alice in Wonderland" economics. One can just imagine the White Queen, who taught herself to believe six impossible things before breakfast, saying: "We are on a low-carbon emissions trajectory because I say we are, and that means I can emit as much carbon as I like!"

This is a "cake having and eating" strategy if ever there was one, intended to permit the government both to claim to be committed to climate change mitigation and to have all the aviation expansion it wants. When future generations, struggling with the multiple ills that climate change will bring about, look back on this sort of policy sophistry, they will realise just how comprehensively, and knowingly, this generation has sold them down the river.

Paul Ekins, past head of the environment group at the Policy Studies Institute, is professor of energy and environment policy at King's College London.

Bill Totten


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