Europe and China should adopt an approach on setting an economic price for carbon for COP21

Europe and China: Working together at COP21

Address by Dr Eddie O’Connor to The Institute of International and European Affairs – Dublin, Friday 30 May 2014

KAZ7240-TOPMr. Chairman, Exellencies and Members of the Institute.

Climate change is the greatest challenge facing the world community.  It is caused by human activity in producing energy from fossil fuels.

Expressed in these terms there is a simple question to answer: how do we get people to stop burning coal, oil and gas and switch to other forms of energy that are free of carbon?

I believe the answer is to put a price on what is killing the planet; put a price on carbon and let markets respond as they always do to price signals.

The Key Message

In this presentation I will argue that the EU and China should develop a complimentary approach on setting an economic price for carbon and jointly adopt a leadership role at COP21 next year in pursuit of a global agreement on carbon pricing.

If this is achieved then the switch from fossil fuels to renewable energy will be assured and, if the price is high enough, will be achieved in full by 2050.

This would prevent the rise on global temperature from going beyond two degrees and so avoiding irreversible damage to the planet.

At present, the prospects of a complementary European/Chinese approach to carbon pricing look promising.  The lead has been taken by China in devising a cap and trade scheme that is currently being tested in seven major cities and regions.  If successful, as is expected, the scheme will be applied nationally by the end of next year.

Within Europe there is widespread recognition that the Emissions Treaty Scheme needs major revision and that the price of carbon must act as a market signal spurring the transition to a low carbon society.

With intensified dialogue between the EU and China their respective policies could be aligned and presented to the rest of the international community as the template for a global agreement.  So far, there is every reason to believe that this can be achieved in time for COP21.

In the light of the recent IPCC AR5 reports such an agreement is essential as the foundation for an effective mitigation strategy.

You had confirmation of that last Friday in the presentation by Richard Kline on the findings of Working Group 2.

In summary, a high carbon price will lead to a low carbon economy.

An Economic Approach

I take this approach because, while there are a number of ways to tackle greenhouse gas emissions, carbon pricing has many economic and political advantages over alternative schemes.

From an economic perspective, the following are the most decisive.

The first is the power of the market to motivate.

We have to motivate ourselves into taking common action at the COP negotiations against a background

–          Where there is mutual distrust between the developing and the developed world,

–          Where the emphasis is on differentiated responsibilities,

–          Where the US would not even sign the Kyoto Protocol,

–          Where others are dragging their feet, and

–          Where vested interests can sabotage Europe’s feeble attempt at an Emissions Trading Scheme.

We can use price signals as the means of creating change in human behaviour:  put a price on carbon and let the markets react by doing what they always do when price differentials are changed.

Resources will be allocated to sectors in which it is profitable to invest and will be denied to those where it is not.

The second benefit from putting a price on carbon is that the social or external costs of fossil fuels in the form of pollution, environmental degradation and global warming would be incorporated into the price of coal, oil and gas.

The failure to do so distorts the pricing of competing energy sources and results in a subsidy for the very forms of energy that are destroying the planet.  Current subsidies for fossil fuels are calculated to be circa €600,bn per year.

It would be hard to conceive of a more warped way of managing our affairs.

A further advantage in using pricing as a policy instrument is that markets react with speed to price changes.

And we need speed if we are to meet the 2050 deadline.

If allowed to operate freely in response to a level playing field, the market will achieve a complete transition from fossil fuels to renewables on time.

This is a challenge because major technical innovations are needed to effect the energy transition to renewables.

We need big grids, utility grade and distributed storage and demand side management.

Big grids are necessary because wind and solar resources are widely dispersed, usually at long distances from the centres of power consumption.  This would be particularly true of offshore wind, which will provide the bulk of Europe’s electricity in 2050.  The other reason for big grids is the geographic portfolio effect.  By capturing a storm along its length delivers a less variable electricity output.

By way of a technical solution we have proposed the building of a Supergrid which will not only cover the seas around our coasts but also the great continental land mass of Europe and will incorporate solar PV from the Mediterranean regions.

The Supergrid and SuperNode

The Supergrid will collect, transmit and distribute the electricity generated from wind and the sun.  Most of the technology already exists, like High Voltage Direct Current cabling, which is capable of

transmitting power over huge distances with only negligible transmission losses, unlike the High Voltage Alternating Current that most people are familiar with.

But wind and solar power have to be collected over wide geographic areas, then converted from AC to DC and distributed to wherever there is demand.  For this to happen, we need a piece of technology that does not yet exist.

It is called the SuperNode.  In practical terms, the Supergrid will operate on the basis of hundreds of these SuperNodes linking generation and distribution together on a continental scale.

A model of the SuperNode is being developed by my company right here in this city in the Dublin Institute of Technology.

Prices Drive Markets

Prices drive markets and markets can stimulate innovation whenever it is allowed to operate free from distortion.

We in Mainstream are ahead of the curve in that we believe the transition from fossils to renewables is inevitable, that big grids are essential and the SuperNode indispensable.

We are responding to the future by becoming first movers in a technology that will be absolutely fundamental to the electricity era ahead.  The enhanced era of electricity has arrived and we intend to be leading it.

Similar developments are essential in building utility grade storage capacity, allied to distributed car batteries, to account for the variability of wind and the particular characteristics of solar.

They are also necessary in creating a real time demand management system based on smart grids and smart devices.

The trend in patent applications proves that business is anticipating fundamental change in the generation, distribution and sale of electricity and it is interesting that China heads the league table in the number of patent applications.

From the perspective of stimulating entrepreneurship, all that’s needed now is for the right price signals to be given.

No Losers

The other big advantage associated with carbon pricing arises from the logic of carbon pricing.   If the price is sufficiently high to induce real change then economies will be put on the same price path and carbon prices will tend to bunch together over time.

As a result, a global price range will emerge which will be broadly neutral in terms of its effects on national economies and will neither penalize nor benefit different countries.

There will be no big winners and no big losers, except those who bet on a fossil fuel future.

On the other hand, the perceived absence of neutrality is a political weakness in the COP form of negotiations. Invariably it produces winners and losers.

Governments seek to protect their self-interest and the problem with intergovernmental negotiations is that the parties are never equal in terms of bargaining power.

That is the cloud hanging over the COP process. Carbon pricing disperses it.

Political Advantages

In addition to the economic advantages I have just outlined, carbon pricing also has a number of political strengths as a negotiating framework.

It gets us away from the failed intergovernmental approach in which diplomats try to work out a global agreement as to which country should do what in terms of reductions.

This was the approach taken at COP 19 in Copenhagen. By common consent it is regarded as a diplomatic disaster.

COP 20 has given us little hope for progress.

It is no surprise that the expectations for next year’s COP 21 are low.

Now, Einstein is supposed to have said that madness consists of trying the same thing over and over again but expecting a different result each time.

It is a good rule in life that more of the same will produce more of the same.

Bilateral or even multilateral burden sharing has been proven not to work, so let’s get on with a global agreement.

Otherwise, temperatures will keep on rising.

Carbon pricing would get us away from a failed approach and open the door to progress by changing the context for devising a solution.

It was Monnet who advised that the way to find a solution to a political problem is to change the context – he didn’t believe in the madness of sticking with failed formulas.

World Opinion

The second political advantage arises from the fact that world opinion is actually moving in the direction of carbon pricing.

Since it is always a good negotiating rule to reinforce the positive and build on what is common, let us concentrate on what unites instead of focusing on what divides.

What unites the world community is the common threat caused by burning fossil fuels.

This has produced at least three encouraging developments

1) At the international level, the World Bank has explicitly called for greater international cooperation in bringing forward carbon pricing policies, and for strengthening them where they already exist.

It issued a draft statement on the 5th of this month entitled “Putting a Price on Carbon”, in which it said that “the latest report from the IPCC makes clear the importance of putting a price on carbon to help limit the increase in global mean temperature to two degrees Celsius above pre-industrial levels”

2)The impetus for carbon pricing has been further strengthened by the UN Secretary General’s decision to convene a Climate Summit this September to build what he calls “a solid foundation for successful negotiations on reducing emissions”.

Using unusual language for an international diplomat, he has challenged world leaders to come to the Summit with “bold pledges and concrete action that will close the emissions gap”.

The Summit is not to be part of the current negotiating process, which is a clever manoeuvre on his part.   Rather he wants it “to help the world shift towards a low carbon economy”.

So carbon pricing fits in with the latest international thinking on how to get progress on climate change.

China

But the strongest political argument in favour of carbon pricing is that it aligns with a series of measures recently taken by the Chinese government. The most significant initiative is the introduction of a cap and trade scheme on an experimental basis in five cities and two regions, which together account for about 30% of the country’s emissions.

This is of profound significance because it means that the Chinese authorities have chosen a cap and trade scheme as their preferred policy instrument for reducing emissions.

Those who have studied China have a further reason for regarding this move as significant.

They know that an experimental approach is the way China always prepares for a major shift in economic policy: it is their unique planning methodology, an example of which is their Special Economic Zones.

The Chinese authorities have indicated they will apply the lessons of these experiments to the whole of the economy by the end of next year, which, incidentally, would coincide with the opening of COP 21.

That expectation should be taken at face value because it follows from a long period of policy gestation. As far back as the 10th Five Year Plan the Chinese authorities signaled their concerns about environmental damage and in the current Plan they developed ambitious measures to combat climate change.

Preparatory work on the 13th Five Year Plan indicates that this will be one of the top priorities for China over the next three to four decades.

As I said in previous lectures here, the Chinese planning system is unique in terms of the way it mobilises the collective intelligence of a society and applies it to devising and implementing long-term development strategies.

For example, China set out on the path to a renewables future and by 2008 had become the world’s largest solar-panel producer and the largest producer of wind towers.  Today it produces approximately 25% of the wind turbine rotor blades.

According to the US Energy Information Administration, China is the world’s largest and fastest-growing market for renewables with a cumulative capacity of 91.4 gigawatts in wind and 20.3 gigawatts in solar.

This is confirmation of its economic capacity to deliver on a political commitment.

Putting it simply, if the Chinese authorities decide on a course of action and commit themselves to stated goals it should be accepted that the necessary resources will be mobilized and that the goals will be achieved. That is what history tells us.

But let’s say there are some delays in introducing a national scheme cap and trade scheme; that’s not important.  What is important is that China has chosen its pathway to a low carbon economy.  Since it is already the world’s largest economy when measured in terms of purchasing power parity, that decision has created an irreversible momentum in favour of emission trading schemes.

According to the World Bank, countries operating cap and trade schemes already cover 22% of world emissions. And that figure will rise to over 50% when they are joined by China.

Even the US would have to and is believe is taking note.

The US

This is more than wishful thinking given the shift in public attitudes within the United States.

Because Americans distrust international organisations and don’t like outsiders telling them what to do, it follows that warnings about the climate change have to come from insiders in their own community if they are to be taken seriously.

That’s why the Climate Assessment Report just published by the US government is so important. It sets out a state by state examination of the damage being inflicted by climate change and looks at future damage under a “business as usual” scenario.

It is an alarming prognosis of widespread devastation and got a lot of media coverage. Then NASA held a press conference on expert reports confirming the urgency of the IPCC findings.

Because its credibility is so high the media reaction was extensive, in particular, reflecting the growing public concern at the threat posed by rising sea levels to coastal cities like New York, New Orleans, Miami, Tampa and Boston, to name but five of the most vulnerable cities.

That concern has been heightened by the huge losses to the Western Antarctic Ice Shelf and by the realisation that no matter what we do, then, as Michael Mann says, sea levels will rise by one and a half metres.

That explains why President Obama has indicated he may take executive action on reducing emissions if Congress fails to act.  In the meantime, a number of states and cities have introduced their own carbon reduction measures, including cap and trade schemes.

The US is now in a different frame of mind on climate change action than it was in Copenhagen.

This has been confirmed by the climate change talks going on in Washington between the US and China, which one of the Chinese negotiators described as making good progress.

The process is helped by John Kerry’s commitment to combating climate change.

EU and China Acting Together

As things now stand, the world community can be separated into four groups on reducing carbon emissions:

– Those who have already introduced a cap and trade scheme, however imperfect.  Here, the EU is the obvious example.

– Those who are in the process of introducing a cap and trade scheme, notably China.

– Those who are waiting for a lead and would most likely follow the majority if an agreement began to emerge. These would include most of the developing world.

– Finally, those who have yet to take a position.  These are the refusniks, such as the US, the coal users and oil producers.

If the first two groups were to come to a joint position they would account for over half the world’s carbon emissions.  And were they to agree on using an Emissions Trading Scheme as the way to reduce emissions then they would have created a de facto global carbon price, which others would eventually follow.

There is consensus within Europe that the carbon price needs to be around €40 per tonne to be an effective market signal.  Within China, the price emerging is around €23 per tonne.  These figures are not that far apart when differences in purchasing power are taken into account.

My proposal is that the EU and China should build on this policy convergence and develop a common approach to COP 21 based on a shared cap and trade framework.

Commissioner Connie Hedegaard has said she is impressed by the action China is taking domestically to cut emissions.  This is the proper starting point for an agreement.

We Europeans should take China’s political commitments on carbon reductions at face value and enter into a strategic partnership with the aim of jointly providing global leadership at COP 21 on an agreement to which most countries could subscribe.

For reasons of history, China is reluctant to play a leading role at the global level and clearly does not wish to take unilateral action that would make its domestic targets binding internationally. On the other hand, the US, Japan and Canada won’t move unless China does simultaneously.

The way to address this impasse to be broken is for Europe to propose common action in Paris.

It is open to question whether Europe has sufficient credibility with the Chinese authorities for them to accept such a proposition but in my view the potential exists for concluding a long-term partnership.

Europe has a strong starting position: France will chair the conference, Europe will be negotiating as an entity and the EU already has an ETS in place, even if it’s imperfect.

These are good reasons for approaching the one world power that could help turn COP 21 into a success rather than another installment of global failure.

If a European/Chinese accord gathered momentum then it would strengthen the hand of those who, like the US administration, wish to become a party to a new agreement in Paris .

Conclusion

The economic route to political objectives was pioneered by Monnet, as was a strategy of finding a solution by changing the context.

Europe can apply the Monnet method by proposing carbon pricing as the most effective means of reducing emissions.

Monnet famously said that nothing happens without individuals but that nothing endures without institutions.

In this instance, Europe can be the individual who takes action.

If COP 21 is a success then a new institution would emerge, one that would endure for decades ahead.

But we have little time to make all this happen.

Already the carbon concentration in the atmosphere has gone beyond 400 ppm.  It is increasing at an annual rate of about 2½ ppm, which leaves us with about 20 years before the threshold of 450 ppm is reached.

Beyond that point, the damage to our planet will be catastrophic and irreversible.

The best way to prevent that is to tax the thing that is killing the planet.

Put a price on carbon, and let human ingenuity do the rest.

Thank you for listening.

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