Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Durban acid test for the planet's future

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By the end of next week we will know how far the world has fallen short, yet again, of rising to the greatest challenge of our day and age, at the latest United Nations climate conference in Durban.

Before considering what it might mean here, it's worth reflecting on why this keeps happening.

The reason is that the world is just no good at dealing with free-rider problems. At the most basic level the status quo is a gigantic exercise in free riding. There is a disconnect between where the benefits and costs of fossil fuel use fall.

Our emissions are diffused over the whole planet and accumulate in the atmosphere, a global commons.

The effect is the moral equivalent of a subsidy flowing from poor countries to rich ones and from future generations to the present.

Being on the bludger's end of this arrangement we naturally don't want it to end.

But it will. It is trivially true that what cannot continue indefinitely, won't.

The laws of nature and the laws of arithmetic are not going to change, so our behaviour will have to.

For all its flaws the Kyoto Protocol, whose future now hangs in the balance, recognises this.

By requiring countries to take financial responsibility for their emissions above a target level it encouraged them to introduce a price on carbon into their economies, shifting relative prices and making it a bit easier for clean technologies to gain a foothold.

Kyoto also recognised the value of market mechanisms as opposed to regulatory fiat - this is mandatory, that is forbidden - in effecting change efficiently.

If someone else can reduce emissions more cheaply than you, it is okay to pay them to do that in your stead. It makes no difference to the atmosphere or the climate where emissions reductions occur or who pays for them.

Kyoto also set up a programme, the Clean Development Mechanism, intended to facilitate the flow of money and clean technology to developing countries. It enables them to earn credits, which developed country emitters can buy and use to meet their obligations, for emission-reducing projects that would not otherwise go ahead. These are all features of the Kyoto system that are worth preserving. But the world has changed since 1997 when the Kyoto treaty was negotiated.

The binary distinction between developed and developing countries is seriously out of date.

Most global emissions and almost all the growth in emissions now come from non-Annex I or developing countries, which have no binding targets under Kyoto.

Within the developed world, the United States never ratified its Kyoto commitments, leaving a large hole in its coverage. The US position now is that any successor treaty must apply equally to all the main economies.

The leading non-European members of the Kyoto club - Japan, Russian and Canada - are taking a similar position.

They have said they will not sign up for a second commitment period after the current one expires at the end of next year. They are willing to undertake commitments, but not in the divided world Kyoto represents.

That leaves the European Union, source of only 11 per cent of global emissions, bearing the brunt of Third World insistence that Kyoto be extended to a second commitment period. Its Climate Commissioner, Connie Hedegaard, when in Auckland three months ago said that everyone was pressuring the EU to preserve Kyoto.

"But we ask, preserve it for whom? Who is planning to join it, and when?"

The EU has made its acceptance of new commitments conditional on an agreement in Durban from China, India and other emitting countries that they will adopt legally binding commitments by 2015, the Associated Press reports.

The US insists on knowing what such an agreement contains before agreeing to the principle of a binding treaty.

"Putting the form of the action before the substance doesn't make a great deal of sense," said chief US delegate Jonathan Pershing.

With a brittle economic recovery and a general election a year away, little progress can be expected from that quarter and US looks set to remain a much larger part of the problem than the solution.

New Zealand is one of the "Kyoto maybe" countries.

The offer it tabled at Copenhagen two years ago - a cut of 10 to 20 per cent by 2020 from 1990 levels - is highly conditional.

The conditions include a comprehensive global agreement in which developed countries make comparable efforts to New Zealand, and that it has full recourse to a broad and efficient international carbon market.

The international market is especially important to New Zealand because of the unusual profile of its greenhouse gas emissions and the limited options available for reducing them compared with countries where switching from coal to gas-fired electricity generation represents progress.

The future of the market should Kyoto expire is highly uncertain, however.

In principle the Clean Development Mechanism and the certified emission reduction units it generates could survive without binding national targets, as long as emitters are permitted to use them for compliance purposes under internal emissions trading schemes, as they can here.

But much the largest such scheme, Europe's, is to restrict the use of certified reductions after 2012.

It will ban offsets from hydrofluorocarbon and nitrous oxide projects, roughly two-thirds of those issued so far, over concerns about their environmental integrity. The New Zealand Government is considering a similar ban.

Europe also plans to limit access to its market to certified reductions from projects in least-developed countries.

It prefers a "sectoral" mechanism under which a developing country sets a sectoral emissions target or threshold below the business-as-usual trend.

If it does better than that it generates credits it can sell. If it falls short, under one variant there is no penalty, under another the developing country must buy credits to make up the difference.

The EU sees this approach as a stepping stone the more advanced developing countries could use towards internal cap-and-trade schemes.

In the meantime, however, uncertainty about the future of the mechanism has combined with a bleaker outlook for European economic growth to send international carbon prices lower.

Carbon markets generally tend to be long. This does not matter so much if surplus units can be banked and used when targets will be more stringent and prices higher.

But the more remote and uncertain that prospect becomes, the greater the incentive to dump units lest the price collapses altogether.

The opposite risk cannot be ruled out either: that there may be a period when the international supply dries up, driving domestic carbon prices higher, especially if direct trading linkages between the merging archipelago of carbon markets (including Australia and regional schemes within the US and China as well as Europe and New Zealand's) take a while to develop.

Hence the Government's decision to maintain a $25 price cap at which level the ETS turn into a carbon tax.

Given the hideous geopolitics of climate change, clarity on these issues is likely to remain some way off.

- NZ Herald

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