Tag: COP26

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Good COP and bad COP: reflections on the Glasgow climate change conference


The Climate Change Pact agreed by leaders at the end of COP26 in Glasgow went further than many pessimists had forecast, but not far enough to meet the goal of keeping global warming to 1.5°C above pre-industrial levels. The Pact states that:

limiting global warming to 1.5°C requires rapid, deep and sustained reductions in global greenhouse gas emissions, including reducing global carbon dioxide emissions by 45 per cent by 2030 relative to the 2010 level and to net zero around mid-century, as well as deep reductions in other greenhouse gases.

So how far would the commitments made in Glasgow restrict global warming and what actions need to be put in place to meet these commitments?

Short-term commitments and long-term goals

According to Climate Action Tracker, the short-term commitments to action that countries set out would cause global warming of 2.4°C by the end of the century, the effects of which would be calamitous in terms of rising sea levels and extreme weather.

However, long-term commitments to goals, as opposed to specific actions, if turned into specific actions to meet the goals would restrict warming to around 1.8°C by the end of the century. These long-term goals include reaching net zero emissions by certain dates. For the majority of the 136 countries agreeing to reach net zero, the date they set was 2050, but for some developing countries, it was later. China, Brazil, Indonesia, Russia, Nigeria, Sri Lanka and Saudi Arabia, for example, set a date of 2060 and India of 2070. Some countries set an earlier target and others, such as Benin, Bhutan, Cambodia, Guyana, Liberia and Madagascar, claimed they had already reached zero net emissions.

Despite these target dates, Climate Action Tracker argues that only 6 per cent of countries pledging net zero have robust policies in place to meet the targets. The problem is that actions are required by firms and individuals. They must cut their direct emissions and reduce the consumption of products whose production involved emissions.

Governments can incentivise individuals and firms through emissions and product taxes, through carbon pricing, through cap-and-trade schemes, through subsidies on green investment, production and consumption, through legal limits on emissions, through trying to change behaviour by education campaigns, and so on. In each case, the extent to which individuals and firms will respond is hard to predict. People may want to reduce global warming and yet be reluctant to change their own behaviour, seeing themselves as too insignificant to make any difference and blaming big business, governments or rich individuals. It is important, therefore, for governments to get incentive mechanisms right to achieve the stated targets.

Let us turn to some specific targets specified in the Climate Change Pact.

Phasing out fossil fuel subsidies

Paragraph 20 of the Climate Change Pact

Calls upon Parties to accelerate … efforts towards the … phase-out of inefficient fossil fuel subsidies, while providing targeted support to the poorest and most vulnerable in line with national circumstances and recognizing the need for support towards a just transition.

Production subsidies include tax breaks or direct payments that reduce the cost of producing coal, oil or gas. Consumption subsidies cut fuel prices for the end user, such as by fixing the price at the petrol pump below the market rate. They are often justified as a way of making energy cheaper for poorer people. In fact, they provide a bigger benefit to wealthier people, who are larger users of energy. A more efficient way of helping the poor would be through benefits or general tax relief. Removing consumption subsidies in 32 countries alone would, according to International Institute for Sustainable Development, cut greenhouse gas emission by an average of 6 per cent by 2025.

The chart shows the 15 countries providing the largest amount of support to fossil fuel industries in 2020 (in 2021 prices). The bars are in billions of dollars and the percentage of GDP is also given for each country. Subsidies include both production and consumption subsidies. (Click here for a PowerPoint of the chart.) In addition to the direct subsidies shown in the chart, there are the indirect costs of subsidies, including pollution, environmental destruction and the impact on the climate. According to the IMF, these amounted to $5.4 trillion in 2020.

But getting countries to agree on a path to cutting subsidies, when conditions vary enormously from one country to another, proved very difficult.

The first draft of the conference agreement called for countries to ‘to accelerate the phasing-out of coal and subsidies for fossil fuels’. But, after objections from major coal producing countries, such as China, India and Australia, this was weakened to calling on countries to accelerate the shift to clean energy systems ‘by scaling up the deployment of clean power generation and energy efficiency measures, including accelerating efforts towards the phasedown of unabated coal power and phase-out of inefficient fossil fuel subsidies’. (‘Unabated’ coal power refers to power generation with no carbon capture.) Changing ‘phasing-out’ to ‘the phasedown’ caused consternation among many delegates who saw this as a substantial weakening of the drive to end the use of coal.

Another problem is in defining ‘inefficient’ subsidies. Countries are likely to define them in a way that suits them.

The key question was the extent to which countries would actually adopt such measures and what the details would be. Would they be strong enough? This remained to be seen.

As an article in the journal, Nature, points out:

There are three main barriers to removing production subsidies … First, fossil-fuel companies are powerful political groups. Second, there are legitimate concerns about job losses in communities that have few alternative employment options. And third, people often worry that rising energy prices might depress economic growth or trigger inflation.

The other question with the phasing out of subsidies is how and how much would there be ‘targeted support to the poorest and most vulnerable in line with national circumstances’.

Financial support for developing countries

Transitioning to a low-carbon economy and investing in measures to protect people from rising sea levels, floods, droughts, fires, etc. costs money. With many developing countries facing serious financial problems, especially in the light of measures to support their economies and healthcare systems to mitigate the effects of COVID-19, support is needed from the developed world.

In the COP21 Paris Agreement in 2015, developed countries pledged $100 billion by 2020 to support mitigation of and adaptation to the effects of climate change by developing countries. But the target was not reached. The COP26 Pact urged ‘developed country Parties to fully deliver on the $100 billion goal urgently and through to 2025’. It also emphasised the importance of transparency in the implementation of their pledges. The proposal was also discussed to set up a trillion dollar per year fund from 2025, but no agreement was reached.

It remains to be seen just how much support will be given.

Then there was the question of compensating developing countries for the loss and damage which has already resulted from climate change. Large historical polluters, such as the USA, the UK and various EU countries, were unwilling to agree to a compensation mechanism, fearing that any recognition of culpability could make them open to lawsuits and demands for financial compensation.

Other decisions

  • More than 100 countries at the meeting agreed to cut global methane emissions by at least 30 per cent from 2020 levels by 2030. Methane is a more powerful but shorter-living greenhouse gas than carbon. It is responsible for about a third of all human-generated global warming. China, India and Russia, however, did not sign up.
  • Again, more than 100 countries agreed to stop deforestation by 2030. These countries include Indonesia and Brazil, which has been heavily criticised for allowing large parts of the Amazon rainforest to be cleared for farming, such that the Amazon region in recent years has been a net emitter of carbon from the felling and burning of trees. The pledge has been met with considerable cynicism, however, as it unclear how it will be policed. Much of the deforestation around the world is already illegal but goes ahead anyway.
  • A mechanism for trading carbon credits was agreed. This allows countries which plant forests or build wind farms to earn credits. However, it may simply provide a mechanism for rich countries and businesses to keep emitting as usual by buying credits.
  • Forty-five countries pledged to invest in green agricultural practices to make farming more sustainable.
  • Twenty-two countries signed a declaration to create zero-emission maritime shipping routes.
  • The USA and China signed a joint declaration promising to boost co-operation over the next decade on various climate actions, including reducing methane emissions, tackling deforestation and regulating decarbonisation.

Blah, blah, blah or real action?

Many of the decisions merely represent targets. What is essential is for countries clearly to spell out the mechanisms they will use for achieving them. So far there is too little detail. It was agreed, therefore, to reconvene in a year’s time at COP27 in Egypt. Countries will be expected to spell out in detail what actions they are taking to meet their emissions targets and other targets such as ending deforestation and reducing coal-fired generation.

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Questions

  1. What were the main achievements of COP26?
  2. What were the main failings of COP26?
  3. How can people be incentivised to reduce their direct and indirect greenhouse gas emissions?
  4. How is game theory relevant to understanding the difficulties in achieving global net zero emissions?
  5. Should developing countries be required to give up coal power?
  6. If the world is to achieve net zero greenhouse gas emissions, should all countries achieve net zero or should some countries achieve net negative emissions to allow others to continue with net positive emissions (albeit at a lower level)?
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Code Red for humanity

The UN’s Intergovernmental Panel on Climate Change (IPCC) has just published the first part of its latest seven-yearly Assessment Report (AR6) on global warming and its consequences (see video summary). The report was prepared by 234 scientists from 66 countries and endorsed by 195 governments. Its forecasts are stark. World temperatures, already 1.1C above pre-industrial levels, will continue to rise. This will bring further rises in sea levels and more extreme weather conditions with more droughts, floods, wildfires, hurricanes and glacial melting.

The IPCC looked at a number of scenarios with different levels of greenhouse gas emissions. Even in the most optimistic scenarios, where significant steps are taken to cut emissions, global warming is set to reach 1.5C by 2040. If few or no cuts are made, global warming is predicted to reach 4.4C by 2080, the effects of which would be catastrophic.

The articles below go into considerable detail on the different scenarios and their consequences. Here we focus on the economic causes of the crisis and the policies that need to be pursued.

Global success in reducing emissions, although partly dependent on technological developments and their impact on costs, will depend largely on the will of individuals, firms and governments to take action. These actions will be influenced by incentives, economic, social and political.

Economic causes of the climate emergency

The allocation of resources across the world is through a mixture of the market and government intervention, with the mix varying from country to country. But both market and government allocation suffer from a failure to meet social and environmental objectives – and such objectives change over time with the preferences of citizens and with the development of scientific knowledge.

The market fails to achieve a socially efficient use of the environment because large parts of the environment are a common resource (such as the air and the oceans), because production or consumption often generates environmental externalities, because of ignorance of the environmental effects of our actions, and because of a lack of concern for future generations.

Governments fail because of the dominance of short-term objectives, such as winning the next election or appeasing a population which itself has short-term objectives related to the volume of current consumption. Governments are often reluctant to ask people to make sacrifices today for the future – a future when there will be a different government. What is more, government action on the environment which involves sacrifices from their own population, often primarily benefit people in other countries and/or future generations. This makes it harder for governments to get popular backing for such policies.

Economic systems are sub-optimal when there are perverse incentives, such as advertising persuading people to consume more despite its effects on the environment, or subsidies for industries producing negative environmental externalities. But if people can see the effects of global warming affecting their lives today, though fires, floods, droughts, hurricanes, rising sea levels, etc., they are more likely to be willing to take action today or for their governments to do so, even if it involves various sacrifices. Scientists, teachers, journalists and politicians can help to drive changes in public opinion through education and appealing to people’s concern for others and for future generations, including their own descendants.

Policy implications of the IPCC report

At the COP26 meeting in Glasgow in November, countries will gather to make commitments to tackle climate change. The IPCC report is clear: although we are on course for a 1.5C rise in global temperatures by 2040, it is not too late to take action to prevent rises going much higher: to avoid the attendant damage to the planet and changes to weather systems, and the accompanying costs to lives and livelihoods. Carbon neutrality must be reached as soon as possible and this requires strong action now. It is not enough for government to set dates for achieving carbon neutrality, they must adopt policies that immediately begin reducing emissions.

The articles look at various policies that governments can adopt. They also look at actions that can be taken by people and businesses, actions that can be stimulated by government incentives and by social pressures. Examples include:

  • A rapid phasing out of fossil fuel power stations. This may require legislation and/or the use of taxes on fossil fuel generation and subsidies for green energy.
  • A rapid move to green transport, with investment in charging infrastructure for electric cars, subsidies for electric cars, a ban on new petrol and diesel vehicles in the near future, investment in hydrogen fuel cell technology for lorries and hydrogen production and infrastructure, cycle lanes and various incentives to cycle.
  • A rapid shift away from gas for cooking and heating homes and workplaces and a move to ground source heating, solar panels and efficient electric heating combined with battery storage using electricity during the night. These again may require a mix of investment, legislation, taxes and subsidies.
  • Improvements in energy efficiency, with better insulation of homes and workplaces.
  • Education, public information and discussion in the media and with friends on ways in which people can reduce their carbon emissions. Things we can do include walking and cycling more, getting an electric car and reducing flying, eating less meat and dairy, reducing food waste, stopping using peat as compost, reducing heating in the home and putting on more clothes, installing better insulation and draught proofing, buying more second-hand products, repairing products where possible rather than replacing them, and so on.
  • Governments requiring businesses to conduct and publish green audits and providing a range of incentives and regulations for businesses to reduce carbon emissions.

It is easy for governments to produce plans and to make long-term commitments that will fall on future governments to deliver. What is important is that radical measures are taken now. The problem is that governments are likely to face resistance from their supporters and from members of the public and various business who resist facing higher costs now. It is thus important that the pressures on governments to make radical and speedy reductions in emissions are greater than the pressures to do little or nothing and that governments are held to account for their actions and that their actions match their rhetoric.

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Questions

  1. Summarise the effects of different levels of global warming as predicted by the IPCC report.
  2. To what extent is global warming an example of the ‘tragedy of the commons’?
  3. How could prices be affected by government policy so as to provide an incentive to reduce carbon emissions?
  4. What incentives could be put in place to encourage people to cut their own individual carbon footprint?
  5. To what extent is game theory relevant to understanding the difficulties of achieving international action on reducing carbon emissions?
  6. Identify four different measures that a government could adopt to reduce carbon emissions and assess the likely effectiveness of these measures.
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Is capitalism changing?

The coronavirus pandemic and the climate emergency have highlighted the weaknesses of free-market capitalism.

Governments around the world have intervened massively to provide economic support to people and businesses affected by the pandemic through grants and furlough schemes. They have also stressed the importance of collective responsibility in abiding by lockdowns, social distancing and receiving vaccinations.

The pandemic has also highlighted the huge inequalities around the world. The rich countries have been able to offer much more support to their people than poor countries and they have had much greater access to vaccines. Inequality has also been growing within many countries as rich people have gained from rising asset prices, while many people find themselves stuck in low-paid jobs, suffering from poor educational opportunities and low economic and social mobility.

The increased use of working from home and online shopping has accelerated the rise of big tech companies, such as Amazon and Google. Their command of the market makes it difficult for small companies to compete – and competition is vital if capitalism is to benefit societies. There have been growing calls for increased regulation of powerful companies and measures to stimulate competition. The problem has been recognised by governments, central banks and international agencies, such as the IMF and the OECD.

At the same time as the world has been grappling with the pandemic, global warming has contributed to extreme heat and wildfires in various parts of the world, such as western North America, the eastern Mediterranean and Siberia, and major flooding in areas such as western Europe and China. Governments again have intervened by providing support to people whose property and livelihoods have been affected. Also there is a growing urgency to tackle global warming, with some movement, albeit often limited, in implementing policies to achieve net zero carbon emissions by some specified point in the future. Expectations are rising for concerted action to be agreed at the international COP26 climate meeting in Glasgow in November this year.

An evolving capitalism

So are we seeing a new variant of capitalism, with a greater recognition of social responsibility and greater government intervention?

Western governments seem more committed to spending on socially desirable projects, such as transport, communications and green energy infrastructure, education, science and health. They are beginning to pursue more active industrial and regional policies. They are also taking measures to tax multinationals (see the blog The G7 agrees on measures to stop corporate tax avoidance). Many governments are publicly recognising the need to tackle inequality and to ‘level up’ society. Active fiscal policy, a central plank of Keynesian economics, has now come back into fashion, with a greater willingness to fund expenditure by borrowing and, over the longer term, to use higher taxes to fund increased government expenditure.

But there is also a growing movement among capitalists themselves to move away from profits being their sole objective. A more inclusive ‘stakeholder capitalism’ is being advocated by many companies, where they take into account the interests of a range of stakeholders, from customers, to workers, to local communities, to society in general and to the environment. For example, the Council for Inclusive Capitalism, which is a joint initiative of the Vatican and several world business and public-sector leaders, seeks to make ‘the world fairer, more inclusive, and sustainable’.

If there is to be a true transformation of capitalism from the low-tax free-market capitalism of neoclassical economists and libertarian policymakers to a more interventionist mixed market capitalism, where capitalists pursue a broader set of objectives, then words have to be matched by action. Talk is easy; long-term plans are easy; taking action now is what matters.

Articles and videos

Questions

  1. How similar is the economic response of Western governments to the pandemic to their response to the financial crisis of 2007–8?
  2. What do you understand by ‘inclusive capitalism’? How can stakeholders hold companies to account?
  3. What indicators are there of market power? Why have these been on the rise?
  4. How can entrepreneurs contribute to ‘closing the inequality gap for a more sustainable and inclusive form of society’?
  5. What can be done to hold governments to account for meeting various social and environmental objectives? How successful is this likely to be?
  6. Can inequality be tackled without redistributing income and wealth from the rich to the poor?
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The environment: a missing market in plain sight

We rely on the natural environment as a source of food and raw materials, for recreation and health and as a dump for waste. Yet, too often, little or no monetary value is placed on the environment. GDP, the standard measure of economic success, is based on market values; and the market undervalues the environment. The prices of the goods we buy bear little relationship with the environmental costs of their production. And yet we all bear the costs (some more than others) as the planet warms, as rain forests are cut down, as seas become polluted and as biodiversity is destroyed.

A major study commissioned by the UK government has just been published. The Economics of Biodiversity: The Dasgupta Review looks at how we need to rethink the value we attach to nature and embed that within economic decisions. As the Review begins by saying, ‘We are part of Nature, not separate from it’. Nature is an asset on which we all depend and yet is is hugely undervalued. The Amazon rainforest is seen by developers as valuable only for clearance for cattle, soy or mining. In these terms, Amazon the company, valued at over US$1 trillion, is worth more than the Amazon rainforest. As page 2 of the Headline Messages states:

Nature’s worth to society – the true value of the various goods and services it provides – is not reflected in market prices because much of it is open to all at no monetary charge. These pricing distortions have led us to invest relatively more in other assets, such as produced capital, and underinvest in our natural assets.
 
Moreover, aspects of Nature are mobile; some are invisible, such as in the soils; and many are silent. These features mean that the effects of many of our actions on ourselves and others – including our descendants – are hard to trace and go unaccounted for, giving rise to widespread ‘externalities’ and making it hard for markets to function well.
 
But this is not simply a market failure: it is a broader institutional failure too. Many of our institutions have proved unfit to manage the externalities. Governments almost everywhere exacerbate the problem by paying people more to exploit Nature than to protect it, and to prioritise unsustainable economic activities. A conservative estimate of the total cost globally of subsidies that damage Nature is around US$4 to 6 trillion per year. And we lack the institutional arrangements needed to protect global public goods, such as the ocean or the world’s rainforests.

The Review urges a complete rethinking of environmental value. We need to recognise that we are embedded in Nature and that biodiversity has intrinsic worth – perhaps even moral worth. Only this way can correct economic decisions be made.

To detach Nature from economic reasoning is to imply that we consider ourselves to be external to Nature. The fault is not in economics; it lies in the way we have chosen to practise it.

Policy recommendations

The Review highlights some specific policies that can be adopted to attach value to the environment. It makes three major recommendations.

  • Ensure that our demands on Nature do not exceed its supply, and that we increase Nature’s supply relative to its current level. This involves countries and their citizens accepting that they are stewards of the land, seas and atmosphere. This means making conservation central to decision making in areas such a food production, raw material extraction, energy generation and recycling. A range of policy instruments can be used, including taxes and subsidies, laws and regulations, public investment and provision of services.
     
  • Change our measures of economic success to guide us on a more sustainable path. This would involve amending measures, such as GDP, to include environmental degradation (-ve) and improvement (+ve) and national wealth to include all natural assets, such as biodiversity and land, air, sea and water quality. This would involve ‘natural capital accounting’. This, in turn, would be helped by global standardised presentation of data and modelling approaches, and the provision of data on the environment by statistical agencies.
     
  • Transform our institutions and systems – in particular our finance and education systems – to enable these changes and sustain them for future generations. Institutional arrangements should be put into place that allow the pooling of environmental information at local, national and global levels. Then there will need to be international subsidies to countries with environments that should be protected for the global good (e.g. rainforests) and international charges for the use of global common resources, such as oceans and the atmosphere. ‘What is ultimately required is a set of global standards underpinned by credible, decision-grade data, which businesses and financial institutions can use to fully integrate Nature-related considerations into their decision-making, and assess and disclose their use of, and impact on, Nature.’ But this must also be backed up by education so as to encourage people to be more conservationist in their behaviour and attitudes.

It is hoped that the Review will be a major focus of two upcoming United Nations conferences: on Biological Diversity (COP15) in Kunming, China in May 2021 and on Climate Change (COP26) in Glasgow in November 2021. The authors of the Review hope that these conferences will set new environmental commitments and establish the necessary institutional arrangements to ensure such commitments are met. This will involve changing the approach to economic decision making at all levels in society.

As Sir David Attenborough states in his foreword to the Review,

Economics is a discipline that shapes decisions of the utmost consequence, and so matters to us all. The Dasgupta Review at last puts biodiversity at its core and provides the compass that we urgently need. In doing so, it shows us how, by bringing economics and ecology together, we can help save the natural world at what may be the last minute – and in doing so, save ourselves.

Articles

The Dasgupta Review

Questions

  1. To what extent is the Dasgupta Review an updated version of the Stern Review of 2006?
  2. Draw a diagram to illustrate how the existence of negative externalities will lead to production levels above the social optimum.
  3. To what extent is Nature a public good?
  4. What is meant by the ‘tragedy of the commons’? How is it relevant to the exploitation of Nature?
  5. How could market incentives be changed by governments so as to halt the loss of biodiversity?
  6. Following an international agreement to protect the natural environment, what sanctions could be imposed on countries or companies which violate the agreement? How effective would they be?
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Biden’s green agenda

Back in November, when Joe Biden had just been elected, we considered some of his proposed policies to tackle climate change (see A new era for climate change policy?). On 20th January, the day of his inauguration, he signed 17 executive orders overturning a range of policies of the Trump presidency. Further executive orders followed. Some of these related directly to climate change.

The first was to cancel the Keystone XL oil pipeline project. If it had gone ahead, it would have transported 830 000 barrels of oil per day from the Alberta tar sands in Canada to refineries on the Gulf Coast of Texas. It would have involved building a new pipeline from Alberta to Nebraska, where it would have linked to an existing pipeline to Texas. Extracting oil from tar sands is a particularly dirty process, involves cutting down large areas of forest (a carbon sink) and total emissions are around 20% greater per barrel than from conventional crude.

The pipeline would have cut across First Nations land and any spills would have been highly toxic to the local environment. In terms of profitability, returns on tar sands oil extraction and transportation are very low. This is likely to remain the case as oil prices are likely to remain low, with greater global energy efficiency and the switch to renewables.

Critics of Biden’s decision argue that the pipeline project would have created some 5000 to 6000 temporary jobs in the USA during the two-year construction phase. Also they claim that it would have contributed to greater energy security for the USA.

The second executive order was to rejoin the Paris Climate Agreement, a process that will take 30 days. Rejoining will involve commitments to cut greenhouse gas emissions and the adoption of various measures to bring this about. During the election campaign, Biden pledged to achieve economy-wide net-zero emissions no later than 2050. As we saw in the previous blog, under Biden the USA will play a leading role in the November 2021 UN COP26 climate change conference in Glasgow.

At present, the Paris agreement is for countries to aim to reach a peak of greenhouse gas emissions as soon as possible to achieve a climate neutral world by mid-century. Many countries have have made commitments about when they aim to achieve carbon neutrality, although concrete action is much more limited. It is hoped that the COP26 conference will lead to stronger commitments and actions and that the USA under Biden will play a leading part in driving this forward.

In addition, to cancelling the Keystone XL pipeline and rejoining the Paris Agreement, the executive orders reversed more than 100 other decisions with negative environmental effects taken by the Trump administration – many overturning environmental measures introduced by previous administrations, especially the Obama administration.

These orders included reversing the easing of vehicle emissions standards; stopping reductions in the area of two major national monuments (parks) in Utah; enforcing a temporary moratorium on oil and natural gas leases in Alaska’s Arctic National Wildlife Refuge; and re-establishing a working group on the social costs of greenhouse gasses.

Then there will be new measures, such as adopting strict fuel economy standards and investment in clean public transport. But it remains to be seen how far and fast the Biden administration can move to green the US economy. With the desire for bipartisanship and seeking an end to the divisive policies of Trump, there may be limits to what the new President can achieve in terms of new legislation, especially with a Senate divided 50:50 and only the casting vote of the chair (Kamala Harris as Vice-President) being in Democrat hands.

The articles below consider the various green policies and how likely they are to succeed in their objectives.

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Questions

  1. Find out what other environmental policies are being pursued by President Biden and assess their likely effectiveness in achieving their environmental objectives.
  2. Would policies to reduce carbon emissions necessarily be desirable? How would you assess their desirability?
  3. When is it best to use the ‘precautionary principle’ when devising environmental policies?
  4. To what extent is game theory relevant in understanding the difficulties and opportunities of developing internationally agreed policies on carbon reduction?
  5. If the objective is to tackle global warming, is it better to seek international agreement on limiting the extent of global warming or international agreement on carbon reduction? Explain.