Author: Jose A. Tapia
Posted on: Brooklynrail | 13th of December 2017
In the first part of this essay (Field Notes, November 2017), I argued that in the United States changes in greenhouse emissions, particularly of CO2, have been strongly linked to changes in the economy. When the US economy was booming, state and national CO2 emissions increased; when the economy stagnated or contracted in a recession, emissions stagnated or dropped. This is not surprising, as emissions are produced by agricultural, industrial, and transportation activities that expand at a faster rate when the economy grows faster and stagnate or contract during economic downturns. It is the same at the global level, as the world total of CO2 emissions is strongly correlated with the conditions of the global economy. Figure 1 on this page reveals that link, showing the volume of CO2 emissions and the global economy in the period 1968-2016, both as annual rates of growth. Note how the only periods in which global CO2 emissions dropped were the five times when the world economy was significantly depressed. Thus emissions dropped (i.e., they had a negative rate of growth) for the first time in the mid-1970s, second during the early 1980s, third during the early 1990s, fourth during the late 1990s, and fifth in 2009. These five periods correspond to years of low or negative growth of the global economy, shown in the figure by rates of growth of world GDP that are either close to zero or negative.
Now, as Figure 1 shows, since 2010, when emissions grew five percent, they have been growing at slower rates; indeed, in 2015, according to preliminary data, they basically grew by zero percent. A number of authors in the climate-change community have pointed to this zero growth of emissions as a hopeful sign that the climate-change problem is on the way to solution. There are, however, two major objections to that view. First, to prevent catastrophic climate change, CO2 emissions must have continuous negative growth, not zero growth, for quite a number of years, until they get close to zero and atmospheric CO2 stabilizes and then drops to much lower concentrations than present ones, for instance around 350 ppm (parts per million). That is far from what has been going on in recent years, during which atmospheric CO2 concentrations, which just passed 400 ppm, have been growing between 1 and 1.5 ppm per year, with greater growth when the world economy expanded faster. Second, everything suggests that the decline of the rate of growth of emissions since 2010 is not a consequence of policies or technological developments, but rather an effect of the semi-stagnant condition of the global economy, which had only a partial recovery from the Great Recession and has basically muddled along since 2009. Considering what we know about the world economy and the chemical processes that produce CO2, it seems obvious that a global economic recovery like the one politicians, businessmen, and economists are hoping for—which would see the world economy growing at rates of, say, four or five annually, as in the early years of the century—would raise the rate of growth of emissions again to positive territory.
Given such a close connection between the economy and the volume of emissions, can the economy grow without emissions growing? Or, to put it in a different way, is it possible to reduce emissions without reducing economic activity? It seems to me there is quite strong evidence that the answer is no to both questions, but others proposing specific policies to cut emissions seem convinced that the answer is yes. For instance, in his last days in office President Obama published a paper stating that “mounting economic and scientific evidence leave me confident that trends toward a clean-energy economy that have emerged during my presidency will continue and that the economic opportunity for our country to harness that trend will only grow.” For Obama, the increasing use of renewable energies is leading us in the right direction; this is why, he said, after 2008 the US economy has had the first sustained period combining rapid reductions in greenhouse gas emissions with economic growth on record, so that “CO2 emissions from the energy sector fell by 9.5% from 2008 to 2015, while the economy grew by more than 10%.” For Obama, this represents a very important “decoupling” of emissions and economic growth, which “should put to rest the argument that combating climate change requires accepting lower growth or a lower standard of living.” Unfortunately, the available data for dozens of national economies and for the world economy since the 1960s demonstrate a very strong link between emissions and economic growth. In fact, Obama’s assertion was based on a faulty use of statistics for just a few years. (For those interested in the technicalities, references and details are given in the endnotes.) When properly analyzed, the data for the US economy in 2008-2014 show the same link between emissions and growth as do the data for other countries. There is no evidence of any decoupling.
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The rate of growth of the global economy is in fact a gauge measuring the speed of the runaway train that is carrying us toward the cliff. Faster economic growth implies more demand for fuels, more CO2 emissions, more emissions of methane (a very powerful greenhouse gas) from fracking, more deforestation that destroys CO2 sinks, more soil removal, which liberates methane, and, in general, more industrial, agricultural, and transportation activities that intensify the liberation of powerful greenhouse gasses. Economic growth is also destroying biodiversity, fisheries, coral reefs, pools of sweet water, and other natural systems not directly linked with climate change but essential for human life. Today, countries like Peru and Brazil contribute to climate change by transforming rainforest areas into agricultural or pasture land. These activities generate economic value and so add to GDP and help increase the per capita income of these countries, raising their positions in such amorphous indicators as the Human Development Index.
Intellectuals writing on climate change rarely discuss the link between economic growth and climate change. In general, among authors interested in social and economic issues very few reject the cherished idea that economic growth is the key to solving humanity’s problems. This is probably an indicator of how ingrained some general economic notions are in our collective psyche, particularly the modern idea of progress as a matter largely of increasing wealth, that is, availability of materials goods. The father of modern economics, Adam Smith, had nothing critical to say about slavery or the subordinate position of women in society; his focus was on material wealth, and from the general perspective of economics it is the increasing availability of goods that is considered as an objective standard of human welfare. The promise of capitalism was more goods for all, even if unequally distributed; and the promise of socialism, as imagined by social movements during the 19th century and then in the state-communist ideology of the Soviet bloc, was also to dominate nature and—in Marxist-Leninist parlance—to accelerate the development of the productive forces, hindered by the capitalist system of production. Thus socialism was conceived as a society not only more egalitarian but also, and perhaps more importantly (at least for Nikita Khrushchev!), more affluent than capitalism. In this respect, though, the centrally planned economies of the USSR and Eastern Europe largely failed, as they were never able to reach Western standards of affluence either in quality or in quantity.
Western capitalism only partially fulfilled its promise of producing affluence for the masses. In its two or three centuries of development, hindered by wars and recurrent economic crises, the market system brought material affluence to large sectors of the countries of Western Europe and North America and very small sectors of the population of the rest of the world. Safe drinking water and food, clothes, proper housing, comfortable temperature conditions for work and daily life activities, cars, international travel, and many other consumer commodities which are today affordable by most of the population in Europe, North America, and other high-income economies remain luxuries largely unaffordable by the large majorities living in Africa, Latin America, and many parts of Asia. Still future access to such goods remains an essential aspect of the notion of “development” preached by United Nations agencies, international financial institutions, governments of almost every kind, and most authors writing on social issues. Even a scientist like James Hansen, who understands the catastrophic path that the earth climate is following because of continuous greenhouse emissions, assumes that economic growth, with increasing access to these goods, cannot be renounced. Indeed, for Hansen, abundant nuclear energy is needed precisely to allow for such growth. But more cars, more travelling, more commodities today mean fewer human beings in the future, while indefinite growth is simply impossible in any physically restricted environment. The Romanian economist Nicholas Georgescu-Roegen and the American geophysicist Marion King Hubbert both noticed this general economic principle, though they were not thinking about climate change which was still unmentioned in their time, about the depletion of natural resources. Climate change has made the ideas of these and other authors, like the Greek economist Xenophon Zolotas, at various times interim Prime Minister and Governor of the Bank of Greece, much more compelling though, not surprisingly, such ideas never went beyond the threshold of marginality in economics.
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In December 2009, The New York Times published an article by James Hansen on policies to prevent catastrophic climate change, with a commentary by columnist and Nobel Prize-winning economist Paul Krugman. Hansen explained the cap-and-trade system defended by president Obama as “a market-based approach that does little to slow global warming … It merely allows polluters and Wall Street traders to fleece the public out of billions of dollars.” For Hansen (as discussed in Part 1 of this series), cap-and-trade schemes actually perpetuate the pollution that they are supposed to eliminate. “If every polluter’s emissions fell below the incrementally lowered cap, then the price of pollution credits would collapse and the economic rationale to keep reducing pollution would disappear.» Instead, Hansen favors taxation of carbon emissions.
In his commentary, Krugman eulogized Hansen as a climate scientist, but deplored his views on policy, arguing that Hansen was misguided in thrashing cap and trade. For Krugman, a cap-and-trade system for CO2 emissions would be able to reduce them because a tax:
puts a price on emissions, leading to less pollution. Cap and trade puts a quantitative limit on emissions, but from the point of view of any individual, emitting requires that you buy more permits . . . so the incentives are the same as if you faced a tax. Contrary to what Hansen seems to believe, the incentives for individual action to reduce emissions are the same under the two systems.
For Krugman, the only difference between cap and trade and the taxation scheme proposed by Hansen “is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price.” (Note the amazing degree of confidence on the predictability of the effect that would be elicited by policies). Krugman concluded his commentary by stating that
we have a real chance of getting a serious cap and trade program in place within a year or two. We have no chance of getting a carbon tax for the foreseeable future. It’s just destructive to denounce the program we can actually get—a program that won’t be perfect, won’t be enough, but can be made increasingly effective over time—in favor of something that can’t possibly happen in time to avoid disaster.
Eight years have passed since then. The United States has no cap-and-trade system, but now much more experience is available about the working of this kind of system, which has been in place in the European Union. Hansen’s prediction that the price of credits would collapse, eliminating the incentive to reduce pollution, was fulfilled in Europe, where, since 2008 permits for CO2 emissions have been often trading at prices close to zero. The overall effect of the cap-and-trade system is estimated to have been at best small and at worst null. Furthermore, the system has put in place “offset mechanisms” (such as allowing a power station to burn coal because an investment has been made to reforest some land in Africa) that are basically scams. As the Australian economist Clive Spash and the British physicist Kevin Anderson have observed, the system offers plenty of opportunities for businesses to make rainfall profits but it is useless for reducing emissions.
Of course, the time that has passed since the Hansen-Krugman exchange in the Times has also demonstrated that Krugman was quite right about the political impossibility of the carbon-tax-paid-out-to-the-citizens scheme that Hansen proposed. Hansen continues to defend his carbon fee with full reimbursement, arguing that support for this idea from economists of diverse inclinations, such as George Shultz, Gary Becker, Gregory Mankiw, Art Laffer, and Nicholas Stern, demonstrates its viability. It seems to me, however, that the weight of these “big names” is rather slight for political purposes. Actual politicians worldwide are quite uninterested. Australia, unusually, saw an actual attempt to implement carbon taxes to reduce emissions. The results were rather discouraging: the taxes were passed through to high electricity bills, which were very unpopular, and the taxes were soon eliminated.
There are two main reasons why politicians are not interested in this scheme. First, as Hansen himself maintains, a carbon fee with full reimbursement would redistribute income to low-income people from the rich, who consume large quantities of high-carbon goods and services (such as airplane flights, yachts, and big houses). And it is these people who decide what is to be done politically, be they American moguls, Russian oligarchs, British financiers, or high officials of the Communist Party of China. The second reason is that, apart from its direct effects on the wealthy, a carbon fee, like any other form of business tax, would have a negative effect on business profits, and so be adamantly opposed by the business community.
If Hansen’s proposal were ever put in place, increasing prices of such goods as gasoline or air travel might have unexpected effects, because of the so-called Veblen effect, in which high prices raise demand rather than reduce it. The Veblen effect is probably more important than economists usually allow, particularly in the transformation of luxury goods into mass consumption goods. For instance, tobacco products were a luxury enjoyed by the rich in the nineteenth century, so that workers probably envied those who could smoke cigarettes or cigars at will. High demand, high prices in relation to costs, and high rates of profit for cigarette sales probably were an important factor in stimulating the growth of the tobacco industry, which eventually reduced the prices of tobacco products, making them affordable even by the less affluent. By the 1950s, when it was discovered that smoking is deleterious to health, tobacco products were already mass consumption “goods” in most advanced capitalist economies, where a large fraction of the population was now addicted to nicotine. Since that time, most rich people have stopped smoking, so that now it is the working class and the outcast poor who smoke. The Veblen effect may have operated in a similar way in the transformation of many other goods that appeared as luxury products into mass consumption items. That was probably the case with sugar, coffee, tea, cars, air conditioning, entertainment in the form of performing arts and recorded sound and movies, and international travel. These were luxuries when they first appeared as commodities, and are now to a greater or lesser extent consumed by most of the population in high-income countries. For the billions who have never flown in an airplane or experienced an air-conditioned environment, these are luxury goods that advertisement and media make extremely desirable. It is difficult to know what the effect of rising prices of these goods might be, but it seems likely that, in spite of environmental reasons, hard opposition from consumers would rise, at least in the short run (see for example, the present-day insistence on air conditioning in India and other hot countries).
Considering all relevant factors, it seems that Hansen’s policy of carbon fee with full reimbursement is presently politically unviable, while cap-and-trade schemes that are much more palatable to business and politicians do nothing to reduce emissions. If that is the case, what is to be done to prevent climate catastrophe? The next and final article in this series will look beyond this kind of policy suggestions for answers to the question.
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