Tackling climate change 
A bargain
May 4th 2007
From Economist.com 
About 0.1% of world GDP would do it

AFP
THE Intergovernmental Panel on Climate Change (IPCC), set up under the  
auspices of the United Nations to establish a consensus on global warming and  what 
to do about it, has now completed its fourth assessment report. The first  
two parts, published earlier this year, about the science and the impacts of  
climate change, were designed to spread gloom. Change was happening, they said;  
it was mankind’s fault; and it was going to be damaging. The third part,  
released on Friday May 4th in Bangkok, is about mitigating climate change, and  
is designed to spread hope. Just as mankind caused the problem, it says, so  
mankind can stop it—and at a reasonable cost. 
In some areas of economic activity, emissions could be cut with no cost to  
consumers or taxpayers. The heating and lighting systems of many buildings, for 
 instance, are startlingly inefficient. Improving this would cut both 
emissions  and bills. Economists are troubled by this, for it implies that people and 
 businesses are not maximising their economic self-interest; yet the low 
take-up  of energy-efficient lightbulbs suggests this is indeed the case. 
Governments are  therefore beginning to tighten regulations on the energy efficiency 
of  buildings, and to talk about, for instance, banning incandescent 
lightbulbs. The  IPCC reckons that such measures could cut 30% of projected emissions 
from this  sector at no extra cost. 
 


Transport is trickier, because car ownership is rocketing and the demand for  
fuel is fairly inelastic. If people want to drive they are going to drive,  
unless governments jack up petrol prices to levels that are politically  
unacceptable. So for emissions to fall in the transport sector, new  technologies, 
such as more efficient biofuels or electric cars, are needed.  Given a big R&D 
effort in this sector, there is a good chance that those  will be forthcoming. 
Similarly, in power generation, there is scope for cutting emissions. The  
cost of renewable energy, such as wind and solar, has been falling. Nuclear  
generating technology has improved. Carbon capture and storage, which involves  
taking the carbon dioxide (or C02) out of power station flue gases and 
injecting  it back into the earth, is also a possibility, though that technology is at 
an  early stage. 
Technological solutions to climate change, then, are available. But most of  
those on offer in the power and transport sectors cost more than fossil-fuel  
generated energy. Fortunately, economics comes to the rescue. Burning fossil  
fuels imposes a cost to society that is not reflected in their price. 
Economics  says that it should be; and if it were, the price of using fossil fuels 
would  rise in relation to the price of using renewable energy.  
Unfortunately, the social cost of carbon is hard to calculate. Plenty of  
economists have tried, with unconvincing results. It requires estimating the  
impact of climate change on economic growth, which involves too many unknowns.  
So the IPCC report starts from the other end. Rather than trying to work out 
the  social cost of carbon, and letting it feed through to reduce greenhouse-gas 
 concentrations in the atmosphere, it starts from a manageable greenhouse-gas 
 concentration and works backwards to a carbon price. Conveniently, it says 
the  “social cost of carbon is at least comparable to, and possibly higher than 
 carbon prices for even the most stringent scenarios assessed by the IPCC”. 
And what is the right price? The report says that to stabilise greenhouse-gas 
 concentrations at 550 parts per million (a level most scientists think 
safeish)  would require a price of $20-50 per tonne of carbon by 2020-30. That is 
along  the lines of the carbon price established the European Emissions-Trading 
Scheme,  which varied between $6 and $40 in 2005-06. It has not bankrupted 
the European  economy so far. The IPCC’s economic models reckon, on average, 
that if the world  adopted such a price the global economy would be 1.3% smaller 
than it otherwise  would have been by 2050; or, put another way, global 
economic growth would be  0.1% a year lower than it otherwise would have been. 
The world would barely notice such figures; so one might think that climate  
change can be easily sorted. The problem, of course, is that the numbers work  
only if they are applied globally. If a few countries—even a few big  
countries—adopt a carbon price, it will make little difference. All the world’s  big 
emitters need to do it. Which brings the world straight back to the problem  
that sank Kyoto. No country alone can make a difference, and it is in every  
country’s interest to ensure that everybody else bears the burden. As the IPCC  
report convincingly argues, the technology and the economics of this problem 
are  easily soluble. It is the politics that is so  difficult.



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