Terra Firma

An historic commitment

In March this year, the European Council of Ministers took an historic step forward in tackling the great challenge of our times – climate change. The Council agreed a unilateral target for a 20% reduction in emissions by 2020 from the 1990 level. In doing so, the scene has been set for Europe to take the lead in negotiating an international agreement to run from 2012 when the first period of the Kyoto Protocol runs out. And on such an agreement, our future hangs.

The commitment is not as great as many environmentalists had hoped for, but even here the Council proposed going further – to 30% – if the US followed suit. That, sadly, is unlikely to happen, even if the Democrats capture the White House next year. But Europe at least has stolen a march by taking the moral high ground – taking responsibility for putting much of the carbon up into the atmosphere since the Industrial Revolution.

This matters greatly for the simple reason that, without this commitment, China, India and other developing countries would be unlikely to do much themselves. They reasonably ask why they should make sacrifices now in the process of industrialisation if we do not. So, the finger is pointing starkly at the US as the pariah. The refusal of the US to take responsibility means that it cannot lead these difficult international negotiations, even if it will be essential to bring it into the fold.

China and India matter

The facts are stark: the US, China and India together are responsible for over 50% of total emissions already; all three have a substantial (and, even more worryingly, growing) reliance on coal; and China and India will double their populations by 2050. By 2050, world population will have increased from 6 to over 9 billion, and of that 9 billion, 2 billion will be in each of China, India and Africa. China alone opened over 100GW of new coal-fired plant last year (compared with Britain’s total installed capacity in electricity generation of around 60GW), and it plans some 1,000GW of new capacity by 2030. Between now and 2030, world emissions of carbon are projected to rise by around 50 – 60%.

What these numbers mean is that climate change cannot be dealt with unless there is some way of persuading China (and to a lesser extent India) to industrialise in a less environmentally damaging way. The reality is that Europe and the US will have to pay them not to burn the coal in conventional power stations. That means that there will have to be large financial transfers – in the case of China, to a Communist dictatorship – and the monies will be used to industrialise in a more benign way such that, in a low-carbon world, China (and India) can better compete with the US and others in world markets.

New institutions required

By any reckoning, this is a very tough thing to ask. It would require not only the US to sign up to the financial transfers, but institutional guarantees that the money would actually buy carbon emissions – that they would in fact be delivered. New institutions would be required. This is not something the UN could credibly do, especially after the debacle over the oil-for-food programme in Iraq.

This is where Europe comes in. Whilst in the post-Second World War period, the US was the only major power left intact, and hence could lead the international institutional building through the creation of the Bretton Woods framework and the IMF, this time the baton has passed to Europe. The new European unilateral 2020 target gives Europe the credibility, and of course Europe (or at least France and Germany) is less tainted in the international community by the Iraq occupation.

But any new agreement at the international level will take time. Coalitions-of-the-willing will need to be slowly built, and this process will depend in part on how well Europe does in meeting its own targets. This is far from obvious from the EU March Summit: Europe has a reputation for setting grand goals and objectives – there is no lack of ambition – but not necessarily for delivery. Notwithstanding that the same March summit also adopted a target of 20% renewables by 2020, there is a yawning gap between the aspiration and the instruments to deliver the results.

Building on the EU Emissions Trading Scheme

At the heart of the Europeans’ efforts lies the EU Emissions Trading Scheme (“EU ETS”). As the first initial period (2005-08) draws towards a conclusion, the jury is out on its success and its future. So far, the caps on emissions have been soft, companies have made windfall profits from the grandfathering of permits, and the actual carbon reductions have been slight. Not surprisingly, the prices that have emerged have been low – too low to provide much incentive to de-carbonise.

It is, however, too early to call time of the EU ETS. It is pregnant with the possibility of being a core mechanism on the international stage. For all the faults in its initial set-up, carbon trading is a good market-based mechanism, with a flexibility that can be exploited. In principle, more sectors and more countries can gradually join in – it is a natural way for the coalition-of-the-willing to come on board.

Crucially, the Clean Development Mechanism under the Kyoto Protocol allows reductions in carbon to be brought in from outside: from China, India, Africa – indeed anywhere. By paying for emissions reductions outside the EU, financial transfers take place. It can, literally, be the mechanism to pay for others to reduce their emissions even if they do not sign up to a tight cap in a post-Kyoto international agreement.

A no-regrets strategy

This possibility has yet to be grasped, and it is entirely possible that it will pass the negotiators by. An international agreement is, in the end, a political act requiring the developed world to pay. It is perfectly possible that the negotiations go on interminably, and that in the end the US baulks at propping up the Chinese dictatorship. But, on the other hand, the EU ETS, backed up by the EU’s new commitment to the 2020 20% target is the only main game in town – so far. And even if a global agreement is elusive, Europe will have gained a head start on low-carbon technology. That it needs to do, for the completely different reason that it is otherwise very exposed to Russian gas and Middle Eastern oil supplies. If these get even more expensive, de-carbonising might just turn out to be a good idea, aside from the obvious benefit in terms of climate change.

Dieter Helm, Professor of Energy Policy, University of Oxford & Fellow in Economics, New College, Oxford

Dieter Helm is an economist, specialising in utilities, infrastructure, regulation and the environment, and concentrates on the energy, water and transport sectors in Britain and Europe.

© Dieter Helm