June 14, 2016
By: Andrew Simms
Six months and counting
BP’s Statistical Review of World Energy is a standard industry reference document. It’s a useful indicator of trends, if occasionally the victim of politics.
But the newest edition brings welcome news that the growth of global carbon emissions paused in 2015, partly to do with a shift to renewables, and partly the result of passing economic conditions, both notable in China.
But BP, the company that once promised to go “beyond petroleum”, is sticking firmly with oil and gas. Its get-out strategy from appearing over-fossilised in attitude, is to call for a “meaningful carbon price,” advocated by its chief economist, Spencer Dale.
Superficially, that seems a safe, sensible and increasingly popular option. The idea of carbon pricing is widely supported across the political, campaign and expert spectrum. But there is reason to doubt either the sincerity or analytical rigour of BP’s faith in carbon pricing as the principal tool for tackling climate change. A curious by-product of the EU referendum has been an unprecedented level of scrutiny and scepticism given to economic models.
Lurid claims by both sides about possible costs and benefits rely on them. An uncritical mantra of headline statistics about the economy is a staple of daily news. We are meant to just accept simple interpretations of a rise or fall in growth, the deficit, a movement in prices or the reaction of “markets”, however bizarre may be the presence or absence of various assumptions buried in the underlying models.
To aid forecasting and hence the setting of interest rates, the Bank of England, for example, uses a general equilibrium model of the economy called Compass which, it is true but hard to believe, leaves out the role of banks. Staff have to estimate the impact of finance “pragmatically” by other means. Assumptions behind the theory explaining why markets are meant to be efficient, mean suspending disbelief that our tastes and habits are unchanging, there is full employment, all firms face identical cost conditions, there is perfect competition, perfect information, and perfect mobility of what you need to produce things between places and occupations.
In this market utopia it seems, as Voltaire almost said, “everything is perfect in the most perfect of all possible worlds”. The beating heart of theoretically efficient markets is the price mechanism. It is the supposed magic wand that through the forces of demand and supply efficiently allocates resources, variously rations consumption, incentivises behaviour and sends signals to producers and consumers.
It sounds perfectly suited to tackling climate change. Price environmentally damaging emissions, and they will go down while more alternative energy sources come on stream. But there are problems.
First of all, actually existing markets are unsurprisingly, and often hilariously, divorced from their theoretical underpinnings. How they are set up matters absolutely. The European Emissions Trading System (ETS) is the most prominent carbon market. But it has been an almost complete failure. Polluter lobbying at the design stage meant the market wouldn’t work. More permits to pollute were issued than there were emissions, ensuring the price stayed low.
Estimates for an effective carbon price vary enormously. France is to set a “floor price” of €30/tonne ($33.95) in 2017. Academic estimates vary enormously from $32-$103 in the work of Simon Dietz and Nicholas Stern, to $220 in work published by Nature Climate Change.
But Prof Kevin Anderson of the Tyndall Centre for Climate Change Research at Manchester University makes the point that, “price signals from even high estimates of carbon prices would not seem to be sufficient to produce the required effect.” This is the case because where some types of consumption are concerned, like flying for business, the price is said to be relatively “inelastic”. In other words, raising the price does not significantly change the amount people do it.
Just tackling aviation, argues Anderson, would require prices well above €300/tonne. To put that into perspective, since its introduction the price of carbon in the ETS hit €30 for a time back in 2008, since then it has been stubbornly below €10, and recently between €7-8. The diplomatic success of the Paris climate accord was expected to drive the carbon price up – in fact it fell from €8.60 before the conference, to €7.60 after.
But, even when pricing works in practice, driving energy efficiency for example, the result may not be straightforward in terms of reducing consumption. The “Jevons” or so-called rebound effect can kick-in. Greater efficiency lowers costs, lower costs in turn leaves more to spend on higher consumption, losing much of the initial benefit – between 30% and 80% in the case of commercial vehicle fleets.
Relying heavily on pricing can be very socially regressive too, with the rich able to absorb high environmental prices and the poor disproportionately hurt. This explains why many argue for equal per capita quotas to be used where limited resources are concerned, as the only fair way to allocate them.
The paradox of environmental economics is that we feel compelled to price nature to make its loss visible on the balance sheet, but in doing so we legitimise its commodification and validate its critical overconsumption in an unbounded market system. No carbon market is yet designed to work within a precautionary limit on global emissions. That means that currently it would be possible to pay to emit the notional extra tonne of carbon that might push us over the edge into irreversible climatic upheaval.
What price should that tonne of carbon carry? The more goods you pile onto a ship, the more likely it is to sink. You can price the relative risk of different levels of load, and insure it accordingly, and you can put a price on the economic cost of lost goods should the ship turn turtle. But if your life depends on keeping the boat afloat, pricing ultimately becomes irrelevant. The point is to stay on the surface. That is why the Plimsoll safety line on the side of ships was introduced to prevent overloading (easy to spot, it looks exactly like the London Underground symbol).
There are many economic and scientific problems in pricing nature and the environment, such as around offsetting, and there are philosophical ones too. In deciding whether or not to build a new road through a community woodland, how is the value of the woodland arrived at in any cost benefit analysis done by planners? Asking how much the community is prepared to pay to keep it would be constrained by ability to pay, but ask what amount would be needed to compensate for its intrinsic worth might, in theory, yield an infinite price.
Fiona Reynolds, former chief of the National Trust, is the latest to argue that we need whole other ways to assess the value of the natural world. When the economist Dieter Helm, chair of the Natural Capital Committee, wrote that: “the environment is part of the economy and needs to be properly integrated into it so that growth opportunities will not be missed,” he both gave the game away about pricing as a hostage to fortune, and made a category error.
It is the economy that needs to be properly integrated into the environment so that its limits to growth can be understood.
Under a system which ultimately measures our wellbeing by how much we spend on goods and services – in other words the growth of the economy – more is always better. So even if the price mechanism applied to nature makes us more aware of nature’s potential financial worth, it does so in a market system that is geared to, and judges its success by rising consumption. In a world already transgressing planetary boundaries, it means we measure our success by our failure.
We may become more efficient in the use of resources, but we do so in circumstances where growth drowns out efficiency. Price ascribed to something is an expression of the values we allow to dominate, too often it proves perverse – giving the destructive, gambling banker more worth than the nurse. It needs to be done with extreme caution and awareness of limitations.
Read more at the Guardian.