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The Wall Street Journal: Cap and Blockade

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STATE OF THE UNION 
By JULIAN MORRIS
August 13, 2007

Last Thursday, Lithuania’s government said it will sue the European Commission for cutting its greenhouse-gas allocation, the seventh EU member state to take legal action over this issue. The conflict highlights the absurdity of the growth-retarding Kyoto Protocol and similar “cap and trade” schemes, which would be enormously expensive and relatively ineffective at addressing climate change.
 
Under the Kyoto Protocol, the 27 EU nations must collectively cut greenhouse gas emissions 8% below 1990 levels by 2012. When the protocol was signed in 1997, the European Union had only 15 member states, each of which accepted a specific commitment to reduce emissions. Since then, however, only two of the original EU countries have lived up to their pledge: the U.K., which switched from coal to gas-fired power stations (though the high price of gas has led to a substantial switchback in recent years), and Sweden, which is increasingly postindustrial.

Lithuania, Latvia, Estonia, Poland, Hungary, Slovakia and the Czech Republic — the seven countries that are challenging the EU’s allocation decisions — accepted partial responsibility for the EU’s Kyoto commitment when they joined the EU. Their emissions fell substantially in the early 1990s following the collapse of communism, as they replaced an aging power infrastructure and closed down inefficient industries. They therefore had reason to believe that Kyoto might be actually a good business opportunity, allowing them to sell surplus emission permits to other EU countries.

But rapid economic growth in these former communist countries also fueled their greenhouse gas emissions — though they are still well below their 1990 levels. When the Commission cut their emission allocations far below the levels those governments had originally expected, it meant fewer permits for the new member countries to sell. This, in turn, is set to drive up the price of each permit, making everyone else in the EU pay more for their emissions.

It will not be worth the pain. Even if the Kyoto Protocol were fully implemented — not just by the EU, but by all of the more than 160 signatories — and its restrictions kept in place until 2100, its effect on the climate would barely be discernible. It would merely delay the projected warming by less than a decade over the course of the next century. Meanwhile, the economic cost has been estimated at between 0.1% and 3% of gross world product. Even at the lower end, that is an enormous price to pay for essentially no benefit.

Given these undisputed facts, you may be wondering what is driving the global push for cap and trade. The answer is that the scheme has been gamed by various vested interests. Several big companies, including Shell, BP and Exxon, were granted more permits than they required and were able to sell them to companies with lower allocations who thought they needed more. Meanwhile, other companies, such as Climate Change Capital, have made money by buying up emission permits in China cheaply and selling them in Europe.

In May 2006, it became apparent that the EU allocated more permits than were required during the first period of trading, which started in 2005 and runs through the end of this year, and the price of such permits collapsed. The same vested interests who initially made money from carbon trading worried that the same would happen in the 2008-2012 period and so lobbied the EU and member state governments very hard to issue fewer permits for that period.

A more cost-efficient and effective alternative to stem global warming would be to invest in new technologies that could cut greenhouse gas emissions in the future. One way to incentivize such investments is to impose a small but rising tax on carbon. Environmental economist Ross McKitrick has suggested a carbon tax that would be tied to the mean temperature of the tropical troposphere (a region of the atmosphere that is believed to be particularly susceptible to greenhouse gas-induced warming). If the temperature rises, the tax should rise; if it falls the tax should fall. This is an intuitively appealing idea, since a higher tax would probably spur more rapid developments of low-carbon technologies, countering further carbon-related increases in temperature.

Such a tax would also, among other things, motivate private-sector investments in climate forecasting, since companies would want to know what the tax level was likely to be in coming years. This would introduce long-needed competition and progress in a field currently dominated by government funding.

In the short term, though, the main response to climate change must be adaptation. That is because most of the problems associated with climate change are extensions of problems that we already face today — from malaria and water-borne diseases to flooding and crop failure. If we could tackle those problems now, reducing their severity, incidence and consequences, then they would be also less of a problem in the future, with or without climate change.

By adaptation, economists generally do not mean government mega-projects, such as dams and the like. Rather, they mean enabling people more effectively to address the problems they face. This is especially so for the poor, who suffer the most from the vagaries of the weather — they are least adapted to the current climate.

For the poor, the best adaptation strategy is to become wealthier and to diversify away from subsistence agriculture. Then they would be able to afford to pump and purify water — avoiding the water-borne diseases that today kill around two million children. They’d be able to afford clean energy (even if it is produced in coal-fired power stations), thereby avoiding the noxious fumes that result from burning wood, dung and paraffin in poorly ventilated fires, which currently leads to over a million deaths a year from respiratory infections. And they’d be able to afford sturdier houses with better drainage and air conditioning, keeping them away from animals and stagnant water, and keeping out mosquitoes and malaria — which currently kills around two million a year. But none of this will come about without a great deal of economic growth, which is unlikely to take place if Kyoto-style policies are implemented.

So what about the global cap-and-trade scheme? Most likely India, China and other large growing economies won’t sign up to such irrational restrictions after 2012 and we will all be saved the economic damage that would otherwise result. In the absence of future binding restrictions, it makes even less sense for the EU to constrain emissions between now and 2012. So let’s hope that the East Europeans win their cases and the cap-and-trade system collapses once and for all.

Mr. Morris, an environmental economist, is visiting professor at the University of Buckingham and executive director of International Policy Network.

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