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Climate change and the crisis

October 16th, 2008

As I’ve mentioned before, the drama of the financial crisis has tended to distract attention from the bigger long-term problem of climate change. But is there more than that? How will the crisis affect the economics of a response to climate change? I’ve been asked by GetUp to do a guest post on this.

Most obviously, given the likelihood of a global recession, there will be a modest slowdown in economic growth which will have an impact on emissions of carbon dioxide (other greenhouse gases like methane won’t be much affected). But this effect is too small to count as even modest consolation. As a first approximation, a general decline in economic output will have a proportional effect on emissions. That is, a severe recession, with a 5 per cent reduction in global output, would reduce emissions by around 5 per cent. In fact, the impact is likely to be smaller, because the supply of oil in particular is now constrained by declining reserves. An economic slowdown will reduce the price of oil but won’t do much to change consumption.

Comparing this marginal impact to the size of the reductions that we need (at least 30 per cent over the next decade relative to business as usual), it is obvious that the way to get there is not to reduce total output and income but to shift to a less emissions-intensive pattern of economic activity. As a string of economic studies have shown, we could reduce emissions greatly (60-90 per cent by 2050) at a cost of reducing total consumption by a few per cent. Unsurprisingly, as with most claims about spin-off effects, the way to reduce CO2 emissions is not to reduce economic activity or to target any other indirectly related variable. The best way to reduce CO2 emissions is with policies designed for that purpose.

The big question is whether, in the light of the financial crisis, we need to reconsider policies designed to stabilise climate, such as emissions trading schemes, carbon taxes and direct interventions to promote energy efficiency and renewable energy. In general, the answer is “No�. Most of these policies are either neutral or stimulatory in their impact on economic activity. In the case of emissions trading, for example, all existing proposals call for revenue to be returned either to households or to affected industries. So, there should be little net effect on aggregate demand.

Policies encouraging investment in more sustainable infrastructure will be more desirable in a situation where private investment in general is likely to be depressed for some time. The Rudd government has already announced that its infrastructure program will be brought forward, and that is obviously sensible.

The main implication of the crisis is that more attention needs to be paid to the employment effects of policy changes. While these will be positive on balance, since renewable energy tends to be more labour-intensive than fossil fuel industries, and energy efficiency and offset programs more labour-intensive again, the need for adjustment assistance for those who lose out (workers in coal-fired power stations and communities based on those industries) will be greater than before. This should include not only cash payments but support for the development of new sources of employment.

Finally, as regards the politics, the short-run effect has undoubtedly been a shift of public attention away from the environment. But many of the long-term effects of the crisis will be favorable for the environment. These include the collapse of ideological objections to government intervention (ludicrous now that the Masters of the Universe are begging for partial nationalisation), and a rejection of the culture of excessive and ostentatious consumption that has characterized the boom. More conservative virtues of thrift and caution are likely to come to the fore, and these are virtues exemplified more by the conservation movement (which derives its name from the same source) than by those commonly described as political ‘conservatives’.

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  1. Hermit
    October 18th, 2008 at 07:18 | #1

    It seems that despite plenty of advance notice the Feds could lose their nerve on the ETS. I think Garnaut’s idea of a fixed carbon price for the first two years is astute. However to make the ETS more politically palatable I suggest the lag between revenue and refunds should be turned into a lead. If say 400 Mt @ $20/t = $8 bn revenue is initially funded from the main budget it could be repaid later. Thus if the Feds hold their nerve and commence the ETS on 1/7/10 they should already be putting in solar water heaters and creating green jobs on a large scale. Hit the ground running. Do it downturn or not to steer the economy in a new direction.

  2. Damocles
    October 18th, 2008 at 08:26 | #2

    Terje – yes let’s drastically reduce the progressive elements of the tax system while whacking on a massive regressive tax on consumption.

    While we’re at let’s introduce a $10,000 poll tax.

  3. BilB
    October 18th, 2008 at 09:01 | #3

    Damocles,

    For you guys who believe in this flat tax, user pays for everything approach there is the wonderful possibility of pooling your resources globally, buying an island somewhere, creating your own nation and proving that these theories really work in practice with real people. The experiment would be watched with great interest.

  4. Joseph Clark
    October 18th, 2008 at 09:23 | #4

    damocles,
    seasteading.org

  5. Joseph Clark
    October 18th, 2008 at 09:24 | #5

    sorry, that was for BilB.

  6. Michael of Summer Hill
    October 18th, 2008 at 10:39 | #6

    John, my guess is that the world will take advantage of the current state of play and clean up their act and go green for the renewable energy market is begging to be exploited.

  7. Donald Oats
    October 18th, 2008 at 15:05 | #7

    I sure hope an ETS or Carbon Tax is in play before the next election. Otherwise it is too easy for the next government to ignore any commitment to take action. For example, the Kyoto ratification back in the 90′s was ignored by the (Liberal) government for 10 years.

    Something else that I think is missing from the picture is a big block of cash for consumer-level CO2e reduction. For that matter, blocks of cash for local townships to take action on renewable energy. While $1Bill AUD went to coal-related technologies, only one tenth of that went to all other renewable energy technologies. We aren’t going to have true reductions in CO2 outputs unless we have a critical mass of installed alternative energy stations at the local township level, and consumer-level. Efficiency and production improvements will most likely come rapidly once an installed base of users of alternative energy stations (and other products) exists. Big improvements certainly won’t come without it.

    How about it Rudd? Don’t razor gang the current alternative energy funding; increase it to that of coal instead.

  8. observa
    October 19th, 2008 at 21:40 | #8

    JamesH says-
    “The problem with a carbon tax is that it doesn’t create an upper limit of carbon emissions…”
    and raises the Nick Xenophon line.
    That’s why I raised the notion of a theoretical maxima to either form of carbon tax regime, because tax it will be whether levied communally(Govt) or privately by those lucky enough to be given them gratis or allowed to bid for them early on with limited knowledge. On the last point I note that agriculture and transport are to be given a holiday, as are some ‘essential’ import/export competing sectors. Now ETS fans have to face an ugly truth here because if they choose to control quantity, they must leave price to the market.(the converse of central bankers controlling the price of money and leaving quantity to float we should all note here) Immediately we can see the peril in doing that as there is no theoretical upper bound to that private price, so much so that Govt may be forced to back off those targets. They may only realise their mistake (really ours) once the taxing power has been ceded to selected interests. (think MDB water rights and private bank money creation here)

    ETS fans have to be aware of a price maxima here and who will be awarded the right to charge it ie. progressively commandeer it. For mine, they are privatising blue sky taxing powers with their radically reducing, quantitative emissions permits, at the expense of ‘our’ communal ones.

  9. observa
    October 19th, 2008 at 22:34 | #9

    I guess all I’d say to ETS fans is be wary of those taxi licences where cabbies and rides are free to trade late Saturday night, with no buses in sight.

    Universal price is like atmospheric pressure on a balloon, whereas quantity controls are akin to crudely squeezing the balloon-
    http://www.forbes.com/business/energy/2008/10/13/carbon-kyoto-europe-biz-energy-cx_wp_1013kyoto.html
    They have a nasty habit of simply bulging out elsewhere

  10. Damocles
    October 19th, 2008 at 23:48 | #10

    BilB & Joseph Clark – was my sarcasm too subtle (hard to believe) or am I missing something?

  11. BilB
    October 20th, 2008 at 09:37 | #11

    Damocles, sarcasm is hard to spot when communing with the Friedman/neoliberal/religeous right set, because the whole damn philosophy is so extreme.

  12. observa
    October 20th, 2008 at 14:05 | #12

    Actually the Forbes article link should be specifically to ‘Cooking the carbon books’ item that leads off with-

    ‘Los Angeles has either the second-smallest or second-largest carbon footprint in the United States. Which is it? Depends how you ask.

    In the past six months, the Brookings Institute, a Washington D.C.-based policy organization, and a team of NASA researchers have respectively ranked Los Angeles as the nation’s second-smallest and second-largest carbon footprint. And, like it or not, they were both right–at least according to their own carbon calculations.’

  13. John Mashey
  14. October 27th, 2008 at 14:40 | #14

    If the enivronment is the issue then I think Paul Keating said it best “This is the recession we had to have”

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