Saturday, February 02, 2008

Trading Emissions: Full Global Potential by Simon Linnett

Simon Linnett's plan, written for the Social Market Foundation, for a global response to the threat of anthropogenic global warming (PDF) is entirely misconceived. At each stage it chooses the worst possible path forward from its analysis of the threat, to the manner of the response, to the scale at which it is organised.

Framing the problem in terms of changes we 'must' make

Lurking in the background in this study, and in many other doubtful contributions to environmental policy thinking, is Sir Nicholas Stern's study on climate change. This was the study that most successfully pushed the idea that climate change is not just one more challenge that threatens to impose particular costs on the world economy and humanity at large but instead a likely catastrophe warranting a messianic response.

The TaxPayers' Alliance study The Case Against Further Green Taxes (PDF, Box 1.3) summarised how his analysis has not stood up to scrutiny well at all. Stern's study took no account of the possibility of adaptation, chose an unrealistically low discount rate and cherry-picked the most pessimistic predictions of future conditions. This left him proposing that we take dramatic policy steps in order to make an uncertain contribution to conditions not ten or a hundred years from now but in the distant future - more than half the harms described in the report are expected to occur after 2800. As I set out some months ago, when looking so far beyond the horizon it is absolutely important not to assume that technologies and societies are fixed, as Stern does, and discount harms for an inventive society's ability to adapt to them.

At no point does Linnett even consider the case that the earlier approach to climate change economics might be correct. He clearly has decided that the time for such debate is past and prefers to move onto the loftier task of proposing theoretical trasnational institutions. Unfortunately, not considering the more established literature in climate change economics leaves him with an absolutist view of the kind of measures that are needed which leaves little room for the balancing of costs and benefits that should inform a sensible response to any external threat.

'Cap and trade'

Cap and trade can sound, at first, like a very sensible, market-based solution. This is how Linnett describes it. After all, it implies "trading" and creates a market. Unfortunately, that picture is very misleading.

Emissions trading schemes have had a very poor record so far. Again, a more detailed summary of the case against them is contained in the TaxPayers' Alliance The Case Against Further Green Taxes report (chapter six). The European Union Emissions Trading Scheme has been a complete farce so far with oil and electricity generation companies making a profit and NHS hospitals facing big bills. Negotiations towards the establishment of Phase II suggest that little improvement can be expected any time soon. Cap and trade schemes in America have had little more success with erratic prices, thanks to the political nature of the market, making business planning impossible and killing the incentive to invest.

Cap and trade does not involve the private sector more than a carbon tax. The key difference between the two is that with a carbon tax the Government sets a price for carbon dioxide emissions and then the market is free to use or not use as much carbon as is economical, where the benefits outweigh the costs of increased climate change. This means that an incentive to greater efficiency is created but the market is also involved in deciding the level of carbon emissions at which the social cost is balanced against the benefits. By contrast, with cap and trade the absolute amount of permissible carbon emissions is set by Government, which needs to reach some political understanding of the costs of carbon emissions cuts - and sometimes also to allocate emissions permits between different providers - and the market is only involved to try and seek an efficient means of cutting emissions. Cap and trade is not the market solution.

Failing to stare the costs of cutting emissions in the face

This entire scheme is predicated on Government capping emissions and then the market miraculously making the actual cuts. It takes no account of the cost of emissions cuts for two reasons discussed already: First, Stern's hyperbolic account of the costs of climate change is designed to forestall a meaningful balancing of costs and benefits - and Linnett's study is predicated on Stern's analysis. Secondly, cap and trade - as a mechanism - takes no account of the cost of cutting carbon emissions as it is centred around absolute limits to emissions. The cost of meeting those limits is a problem left to industry.

This is another fatal flaw in Linnett's report. Any meaningful plan for a global reduction in emissions has to deal with the central problem that to do so with today's technology would be incredibly expensive. He argues, at one point, that to join this scheme would be in China and India's interests as the scheme would aim to base emissions allocations on population and that would give them a valuable resource - emissions permits - to trade. This just can't be reconciled with the kinds of brutal arithmetic that combining a growing world economy with big cuts in emissions implies:

"Even if you were to miraculously cut developed world emissions to zero, complete de-carbonisation, the developing countries would still need to cut their emissions by 9.5 gigatones, 46 per cent. Growth in poor countries will mean that the rich world just can't do all the work in cutting emissions. If your cut in developed world emissions is more realistic, two-thirds for example, then the developed countries would need to make a 74 per cent cut."

This brutal arithmetic, and the clear implication that developed country cuts won't be enough, is the result of developing world growth that swamps any change in developed world emissions.

The cuts mentioned would all need to be on top of the continued improvements in energy efficiency that we should expect regardless of climate change policy as companies seek to avoid expensive fuel bills. Unless we can find some new and miraculous source of energy efficiency those cuts in emissions will require commensurate cuts in national incomes. Massive sacrifices of economic growth and living standards. All this and more was set out in a presentation by the White House Council on Environmental Quality and illustrates just how challenging it will be to cut carbon emissions on the scale thought necessary by those proposing deep emissions cuts.

Linnett found space in his report to discuss where his proposed World Environment Agency's offices should be, London apparently, but doesn't even mention these massive, intractable challenges that any such institution would face. The scale of the cuts needed to meet the targets thrown around in so cavalier a fashion illustrate why countries will have every incentive to interfere, seek advantage and screw with a World Environment Agency. This brings us on to the final, critical flaw in Linnett's plan.


This organisation removes yet another element of policy from the sovereignty of national parliaments. Linnett does little to address the problems such a move creates. The lack of accountability that plagues all existing supranational institutions, particularly the EU and the UN; the extremely watered down nature of any democratic involvement; the establishment of government by an international, bureaucratic aristocracy. This institution would be Tranzi central.

Beyond that, by creating a single organisation with so much power and little accountability you create a superb target for interest group capture. Whether led astray by intense lobbying, nations threatening to leave or actual corruption a World Environment Agency's power is unlikely to be used in an enlightened matter, even if it is set up with the most benign of intentions. The stakes would be too high for powerful interests not to get involved and try to sway decisions.


Linnett's analysis and proposal both have severe problems. The best policy response to climate change remains the following three-pronged strategy, set out in more detail here:

1) Technology - cutting emissions to the level Al Gore, Zac Goldsmith or even Chris Huhne would like isn't impossible. It just requires a miracle. Fortunately science has a history of providing what, to previous generations, would have seemed miracles. There are economical steps we can take that don't screw over our economy and might make such a miracle, or just an incremental technology that reduces our emissions a bit, more likely.

Prizes for technological discovery, an alternative to patents that was very successful in encouraging important developments during the Industrial Revolution, were proposed by Jim Manzi in a recent National Review article and might offer a good way of encouraging green technologies.

2) Adaptation - we can make sure our flood defences are in order, our crops will respond well to the new seasons and take other steps to prepare for the challenges of a warmer world. We can help poor countries do the same. This needn't be particularly expensive and we should avoid doing too much while we don't know precisely what we'll be adapting to but adaptation is clearly a central response to climate change under any sensible programme.

3) Resilience - Manzi put it well: "Wealth and technology are raw materials for options". The most important thing to do in order to be able to withstand an ecological crisis is make sure you're rich to start off with. Rich countries are so much better able to withstand the harms of global warming. If we screw up our economy in a vain attempt to avert climate change future generations will not thanks us.

1 comment:

pommygranate said...


John Humphreys of the Aus Libertarian Soc has written a pretty extensive paper on the merits of a carbon tax over 'cap and trade'. given how much work you and th TPA are putting in to this, you might want to take a look.