Adding to the economic pressure to use coal, there is a political pressure for countries that might otherwise be importing gas, to use domestic coal to maintain or increase energy security. Deforestation also contributes to the emissions, but the motivations and institutional behaviours here are more complicated. There is a very long-term global trend in the loss of virgin forests and grasslands, also arising from their availability as common resources, so that their destruction for land or timber benefits individuals but the loss of the resource and the climate-change costs are collective.
Impacts of climate change
Knowledge about the potential impacts of climate change is provided by both The Stern Review (2007) and the IPCC 2007 Working Group 2 (IPCC, 2007b) Report.
Therefore to be reasonably sure of avoiding dangerous climate change defined as a 2 °C rise or less, the world should be aiming for complete decarbonisation by 2050 or earlier. All sectors in all countries should be aiming to stop emitting GHG into the atmosphere as soon as possible without excessive cost. We should be considering just how fast economies can reduced their emissions without any serious damage to government, business and household finances. Figure 2 from the Report shows the ranges from assumptions about climate sensitivity in converting from temperatures to GHG concentrations, and the implications of the concentrations for the GHG emission trajectories 2000-2100, with the range coming from the different models’ estimates. The link between the two charts in Figure 2 comes through the colour coding for groups of scenarios. Note that there are no estimates below about 450ppm CO2-eq, because there were too few studies in the literature for a reliable estimate.
Figure 3 shows various targets for climate stabilisation in terms of temperature increases above pre-industrial levels, and GHG concentrations in the atmosphere in CO2-equivalent parts per million (ppm). The current level is about 430ppm CO2-eq, but this is affected by SO2 and other non-GHG emissions that have a net cooling effect. The Stern Review range is 450-550ppm CO2-eq, but a feasible level for scientific study is assumed to be 400ppm CO2-eq, whilst the safe level for the 2 °C target, allowing for climate sensitivity, would be more like 380ppm CO2-eq (Hansen et al, 2008).
The central question for climate policy
So we must re-direct our economic thinking towards a risk assessment. The central question for climate policy is how to reduce all damaging emissions from human activity as soon as possible, recognising the risks and uncertainties and the opportunities for improving human well-being.
The costs and benefits of accelerated decarbonisation
We need short-term modelling to explore the costs and benefits of accelerated decarbonisation of the global economy, so I am very taken with Klaus Hasselmann’s call for an international forum to be established to provide information and help to explore details of the economic solutions (Hasselmann and Barker, 2008). Carbon trading is one of the critical policy instruments in that solution, which brings me to the main theme of my talk.
Political economy has been portrayed by Thomas Carlyle as the dismal science, but on the contrary, I am heartened by the fact that a new understanding of the economy leads me to assert that it need not cost much, and if we choose a good mix of policies such action will benefit economic performance and improve human well being.
Figure 4 shows the carbon prices as they have emerged in the scheme over the three years 2005-2007 covering Phase 1 of the ETS. It shows the actual prices of Phase 1 and the future prices for use of allowances in 2008 and 2011 during Phase 2. The future prices move together and have averaged between €20 and €25 per tonne of CO2.
It is in this context that I should like to consider carbon trading.
The European Union’s Emission Trading Scheme (EU ETS) for CO2 emissions
The European Union’s Emission Trading Scheme (EU ETS) for CO2 emissions is by far the largest and most comprehensive action yet taken in mitigation policy. It has the potential to achieve the 2 °C target, but it will have to become global and incorporated within national policy portfolios including regulation and perhaps ecotax reform if it is to be effective, efficient and equitable in doing so.