Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Let's not turn disappointment into disaster

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So Copenhagen was a big disappointment.

What would turn disappointment into disaster is for dismay at the climate summit's meagre outcome to harden into cynical fatalism, futile recrimination and back-sliding.

It needs to be remembered that in the end it is national policies, not international commitments, which are the key to reducing greenhouse gas emissions.

From the standpoint of curbing global emissions, the next big thing that needs to happen is for the United States to step up.

The US Senate needs to pass cap and trade legislation similar to that which has already passed the House of Representatives, to set the country on a pathway to an 80 per cent reduction in its carbon emissions by mid-century.

That will not be easy. The opposition from vested interests will be ferocious and the context is 10 per cent unemployment and mid-term elections.

But it is encouraging that the Senate is on the brink of passing healthcare reform.

If the US can join the ranks of civilised countries on that score, it can on climate change too.

The US offer of a 3 to 4 per cent cut from 1990 levels by 2020, and an unquantified contribution to an eventual US$100 billion ($142 billion) a year fund for the third world, hardly set the scene for an ambitious outcome in Copenhagen.

Nonetheless, President Barack Obama deserves some credit for not doing what Al Gore did at Kyoto in 1997, promising more than he knew Congress would ever agree to. That would have been not only dishonest but counter-productive.

It is unfortunate he has had to return to Washington with nothing more substantive than the "Copenhagen Accord" to brandish at US lawmakers as evidence of what the rest of the world is ready to commit to.

How much the accord amounts to will not be clear until February, when the annexes of the document are populated with quantified offers to cut emissions in the case of developed countries and to curb the growth in emissions in the case of the major developing ones.

This is an area where words are cheap but numbers are expensive.

In terms of strengthening the President's hand at home, it is unhelpful for people to write off the accord - which does after all represent at least some degree of commitment, for the first time, from the major emerging economies - as not worth the paper it is written on.

And it is particularly unhelpful for the British Climate Change Secretary Ed Miliband to paint the Chinese as intransigent and hopeless.

In the end, though, what the US does is likely to be driven more by domestic politics than any kind of international peer pressure.

Which argument will prevail? The one that goes "Pricing carbon will only drive manufacturing jobs to Asia" or the President's line that "This is about energy security and not ceding technological supremacy to the Europeans and the Japanese, and the jobs that go with it".

Meanwhile there still needs to be by 2013 an international treaty to cut emissions that is broader and deeper than Kyoto.

It does not follow that it needs to be universal - a treaty, after all, is only a compact among those countries which sign and ratify it - or that it needs to be the outcome of the process set up under the United Nations Framework Convention on Climate Change.

In a world of around 200 sovereign states, the full multilateral process where nothing is agreed until everyone has agreed on everything may simply be irretrievably unworkable.

It does not seem to be working very well in the Doha trade round and with climate change the economic stakes are vastly higher.

But there does need to be a legally binding treaty to provide a basis for the property rights on which carbon trading depends.

And trading is key. Our best chance of dealing with climate change at an acceptable economic cost is to harness the power of prices and markets to spur innovation in pursuit of profit.

The alternative is to do things by regulatory fiat and have politicians taxing this, forbidding that and making the other compulsory. Not appealing.

So that feature of the Kyoto system needs to be preserved and strengthened.

From the standpoint of the New Zealand economy, the impact of the response to climate change over the coming decade will depend on the national emissions target, how international carbon prices track, how we allocate the national carbon bill between sectors and over time, and finally how much difference that makes to actual emissions.

Heading into the new decade, we are left with a sort of curds-and-whey mixture of certainty and uncertainty about those factors.

The Government has agreed a target of 10 to 20 per cent below 1990 levels. The low-yield outcome from Copenhagen suggests that if a point target has to be agreed next month it will be closer to the bottom than the top of that range.

On prices one of the big unknowns is what the US Senate will decide, in particular to what extent American emitters will be able to meet their obligations by buying offset credits on the international market. That is potentially a large increase on the demand side of the market.

However, it is expected to be met by an increase on the supply side in the form of deforestation credits. The Copenhagen Accord at least acknowledges the importance of developing a system whereby the likes of the Brazilians and the Indonesians can derive an income from not cutting down their forests.

But the devil will inevitably be in the detail, along with a host of lesser imps and demons.

What the net effect of these changes on carbon prices will be is anyone's guess at this stage.

On the domestic front the emissions trading scheme amendments were rushed into law ironically so that it could be "settled" before Copenhagen. Inevitably all sorts of defects will have to be remedied.

Overall it is an exercise in easing ever so gently into carbon pricing, and so pushing the cost of adjustment to a low-carbon economy out into the future.

The problem is that statesmen don't get to decide the laws of nature and legislators cannot amend the laws of mathematics.

Because emissions are cumulative, the easier we make things for ourselves in the short term, the higher and later the peak in emissions will be and therefore the steeper the subsequent decline will have to be, if the target of limiting warming to 2C above pre-industrial levels is to be met.

And that is one number Copenhagen was able to agree on.

- NZ Herald

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