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Climate Pragmatism or Climate Illusion?

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With the Republican Party and a good many Democrats currently opposed to sanctioning any meaningful reduction in greenhouse gas emissions, United States climate policy, at least at federal level, appears stagnant at the moment.

So it is perhaps welcome that a new pamphlet called 'Climate Pragmatism: Innovation, Resilience and No Regrets' seeks bipartisan progress on measures to tackle climate change. The authors of the pamphlet propose a new approach by the United States which they claim values "pluralism over universalism, flexibility over rigidity, and practical results over utopian ideals".

Unfortunately, while their advice on some aspects of climate policy does make good sense, and its upbeat, 'can do' tone is very refreshing, its overall analysis is fundamentally flawed.

The paper advocates increasing expenditure on energy technology innovation and on resilience to extreme weather events, in line with sensible policy-making. But like its earlier sister publications, the Hartwell Paper and Post-Partisan Power, it ducks the major challenge of how to stop the rise in atmospheric concentrations of greenhouse gases.
'Climate Pragmatism' fails on two major points. First, it surrenders the most powerful and market-friendly weapon available to policy-makers by calling for the introduction of a "small carbon charge" in order to fund greater research and development on alternative energy sources, but only at a level low enough not to significantly impact fossil fuel prices.

The aim, say the authors, should be to decarbonise the energy system by making alternatives to fossil fuels cheaper, rather than making the use of oil, coal and gas more expensive. While this may seem laudable, increasing investment in alternative energy on its own does not adequately address the fundamental problems that are holding back progress at the moment, and the authors overlook the importance of markets in driving or halting climate change.

As the Stern Review pointed out nearly five years ago, climate change is the result of a number of market failures, the largest of which arises from the fact that the prices of products and services involving emissions of greenhouse gases do not reflect the true costs of the damage caused through impacts on the climate. In essence, there is a subsidy for emitters of carbon dioxide and other greenhouse gases because the polluted, rather than the polluter, picks up the tab.

All serious economic analyses of how to tackle climate change identify the need to correct this market failure through a carbon price, which can be implemented, for instance, through cap and trade schemes or carbon taxes. The primary purpose of the carbon price is to remove the subsidy for greenhouse gas pollution, creating a disincentive against emissions, so that 'dirty' fuels, such as oil, coal and gas, compete on a more level playing field with 'cleaner' energy sources, such as wind and solar power. Removing the subsidy for 'dirty' fuels also increases the rewards from improvements in energy efficiency.

The introduction of a carbon price does not in principle mean that any revenues raised have to be used in any particular way, as long as they are not used to remove the disincentive to emit carbon dioxide. Indeed, it is possible for the revenues to be fiscally neutral by being used to reduce other taxes. However, it is clear that environmental economic instruments can both improve pollution control and raise revenue, as has long been acknowledged by the Congressional Budget Office, among others.

A carbon price that effectively and efficiently controls greenhouse gas pollution would take into account both the potential costs that need to be avoided from climate change and the costs of reducing emissions. It would provide a pervasive incentive to adopt low-carbon technologies (in the home as well as in industry), pursue innovation, and improve energy efficiency, while avoiding pork-barrel politics and arbitrary discrimination between businesses. A carbon price can be usefully supplemented by improvements in innovation policies, but it needs to be at the core of action on climate change, as this paper by Carolyn Fischer and Richard Newell points out.

Setting the right level for such a price is not easy, but economic models that give some guidance abound - and the pricing system can be adjusted as more is learnt about the technological options, the operation of carbon markets, and the magnitude and timing of the likely future impacts of climate change.

Yet the authors of 'Climate Pragmatism' ignore the role of a carbon price in creating market incentives to control emissions and limit the rise in atmospheric concentrations of carbon dioxide. Instead they seek only the revenue from a charge that will be hardly noticed by businesses and households, and hope that investing it in developing alternative sources of energy will lead to decarbonisation and therefore eventually limit atmospheric concentrations of greenhouse gases to an unspecified 'safe' level. It offers no guarantee that the research effort will be great enough to rise to the innovation challenge, nor that the emissions reductions will be big enough and soon enough.

This exposes the other major failing of 'Climate Pragmatism' - it avoids any discussion of what level of climate impacts, and therefore of greenhouse gas concentrations, should be avoided, and so provides no sense of how much mitigation effort is required. But by implication, a small carbon charge that creates little or no disincentive against emissions will result in rising concentrations of greenhouse gases, probably to much more than double pre-industrial levels by the end of the century, and significant risks of severe economic and societal impacts due to potential global warming of 4°C or more.

In fact, all countries that have signed the United Nations Framework Convention on Climate Change agreed last December in Cancún, Mexico, that a warming of more than 2°C should be avoided if possible. But that goal will only be realised if the actions of every country collectively add up to sufficient reductions in global annual emissions - current commitments and plans do not. While one can argue about the challenges of reaching agreement about ambitious national emissions targets, there is no way of circumventing the brutal reality that each country's emissions contribute to the atmospheric concentration of greenhouse gases.

As the authors of the paper point out, it is proving difficult to reach an international agreement about the division of mitigation effort among countries, even though 42 developed countries and 48 developing countries have now made commitments and plans to bring down their annual emissions by 2020.

Yet the authors of 'Climate Pragmatism' suggest giving up on what they call "unenforceable emissions targets and timetables". However, they offer a false choice between agreeing national targets and delivering national emission reductions, failing to recognise that the two complement and reinforce each other, and that neither is sufficient on its own.

It would be wonderful if 'Climate Pragmatism' did offer a new and easier way for the United States to show international leadership on climate change. But all it has really attempted to do is to create the illusion that climate change risks could be effectively managed without tackling the massive market failure caused by the subsidy for greenhouse gas pollution from fossil fuels.

Bob Ward and Alex Bowen are policy and communications director and principal research fellow at the Grantham Research Institute on Climate Change and the Environment at London School of Economics and Political Science.