Getting warmerA special report on climate change and the carbon economyDecember 5th 2009

Carboncov.indd 1 24/11/09 14:39:58

The Economist December 5th 2009 A special report on the carbon economy 1

So far the e�ort to tackle global warming has achieved little.Copenhagen o�ers the chance to do better, says Emma Duncan

gerous anthropogenic interference withthe climate system�. The Kyoto protocol,which set about realising those aims, wassigned in 1997 and came into force in 2005.Its �rst commitment period runs out in2012, and implementing a new one is ex­pected to take at least three years, which iswhy the 15th conference of the parties tothe UNFCCC that starts in Copenhagen onDecember 7th is such a big deal. Without anew global agreement, there is not muchchance of averting serious climate change.

Since the UNFCCC was signed, muchhas changed, though more in the bio­sphere than the human sphere. Accordingto the Intergovernmental Panel on ClimateChange (IPCC), the body set up to establisha scienti�c consensus on what is happen­ing, heat waves, droughts, �oods and seri­ous hurricanes have increased in frequen­cy over the past few decades; it reckonsthose trends are all likely or very likely tohave been caused by human activity andwill probably continue. Temperatures bythe end of the century might be up by any­thing from 1.1°C to 6.4°C.

In most of the world the climatechanges to date are barely perceptible orhard to pin on warming. In British Colum­bia and farther north the e�ects of climatechange are clearer. Air temperatures in theArctic are rising about twice as fast as in therest of the world. The summer sea ice isthinning and shrinking. The past threeyears have seen the biggest losses sinceproper record­keeping started in 1979. Ten

Getting warmer

THE mountain bark beetle is a familiarpest in the forests of British Columbia.

Its population rises and falls unpredict­ably, destroying clumps of pinewood as itpeaks which then regenerate as the bug re­cedes. But Scott Green, who studies forestecology at the University of Northern Brit­ish Columbia, says the current outbreak is�unprecedented in recorded history: a nat­ural background­noise disturbance has be­come a major outbreak. We’re looking atthe loss of 80% of our forest cover.� Otherparts of North America have also been af­fected, but the damage in British Columbiais particularly severe, and particularlytroubling in a province whose economy isdominated by timber.

Three main explanations for this disas­trous outbreak suggest themselves. It couldbe chance. Populations do �uctuate dra­matically and unexpectedly. It could be theresult of management practices. British Co­lumbia’s woodland is less varied than itused to be, which helps a beetle that pref­ers pine. Or it could be caused by the high­er temperatures that now prevail in north­ern areas, allowing beetles to breed moreoften in summer and survive in greaternumbers through the winter.

The Framework Convention on Cli­mate Change (UNFCCC), which the Un­ited Nations adopted at the Earth Summitin Rio de Janeiro, is now 17 years old. Its aimwas �to achieve stabilisation of green­house­gas concentrations in the atmo­sphere at a level that would prevent dan­

An audio interview with the author is at

Economist.com/audiovideo

A list of sources is at

Economist.com/specialreports

Is it worth it?What economists have to say about mitigat­ing climate change. Page 3

The green slumpWhy investors have been deserting cleanenergy. Page 4

Good policy, and badSome mitigation policies are e�ective, someare e�cient, and some are neither. Page 5

Vampires on a dietHow a boring gadget saved $2 billion­worthof electricity. Page 6

Cap and tiradeAmerica struggles with climate­changelegislation. Page 8

Who cares?Don’t count on public opinion to supportmitigation. Page 9

A long gameChina sees opportunities as well as dangersin climate change Page 10

Closing the gapsHow the world divides on a global deal.Page 11

What needs to changeThe prospects are gloomy, but they can bemade brighter. Page 13

Unpacking the problemThe attractions of a piecemeal approach toglobal warming. Page 13

Also in the section

AcknowledgmentsMany people who have not been quoted helped in the re­search for this special report. Thanks are due to all ofthem, but especially to Ulrika Barklund Larsson, ambassa­dor at the Swedish permanent representation to the EU,who worked on this issue until three weeks before herdeath from cancer at the age of 45.

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2 A special report on the carbon economy The Economist December 5th 2009

2 years ago scientists reckoned that summersea­ice would be gone by the end of thiscentury. Now they expect it to disappearwithin a decade or so.

Since sea­ice is already in the water, itsmelting has little e�ect on sea levels. Thoseare determined by temperature (warmerwater takes up more room) and the size ofthe Greenland and Antarctic ice caps. Theglaciers in south­eastern Greenland havepicked up speed. Jakobshavn Isbrae, thelargest of them, which drains 6% of Green­land’s ice, is now moving at 12km a year�twice as fast as it was when the UNFCCC

was signed�and its �calving front�, whereit breaks down into icebergs, has retreatedby 20km in six years. That is part of the rea­son why the sea level is now rising at 3­3.5mm a year, twice the average annualrate in the 20th century.

As with the mountain bark beetle, it isnot entirely clear why this is happening.The glaciers could be retreating because ofone of the countless natural oscillations inthe climate that scientists do not properlyunderstand. If so, the glacial retreat couldwell stop, as it did in the middle of the 20thcentury after a 100­year retreat. But theusual causes of natural variability do notseem to explain the current trend, so scien­tists incline to the view that it is man­made. It is therefore likely to persist unlessmankind starts to behave di�erently�andthere is not much sign of that happening.

Carbon­dioxide emissions are now30% higher than they were when theUNFCCC was signed 17 years ago. Atmo­spheric concentrations of CO2 equivalent(carbon dioxide and other greenhouse gas­es) reached 430 parts per million last year,compared with 280ppm before the indus­trial revolution. At the current rate of in­crease they could more than treble by theend of the century, which would mean a50% risk of a global temperature increaseof 5°C. To put that in context, the currentaverage global temperature is only 5°Cwarmer than the last ice age. Such a risewould probably lead to fast­melting icesheets, rising sea levels, drought, diseaseand collapsing agriculture in poor coun­tries, and mass migration. But nobody real­ly knows, and nobody wants to know.

Some scientists think that the planet isalready on an irreversible journey to dan­gerous warming. A few climate­changesceptics think the problem will right itself.Either may be correct. Predictions about amechanism as complex as the climate can­not be made with any certainty. But thebroad scienti�c consensus is that seriousclimate change is a danger, and this news­

paper believes that, as an insurance policyagainst a catastrophe that may never hap­pen, the world needs to adjust its behav­iour to try to avert that threat.

The problem is not a technological one.The human race has almost all the tools itneeds to continue leading much the sort oflife it has been enjoying without causing anet increase in greenhouse­gas concentra­tions in the atmosphere. Industrial and ag­ricultural processes can be changed. Elec­tricity can be produced by wind, sunlight,biomass or nuclear reactors, and cars canbe powered by biofuels and electricity. Bio­fuel engines for aircraft still need somework before they are suitable for long­haul�ights, but should be available soon.

Nor is it a question of economics. Econ­omists argue over the sums (see the nextarticle), but broadly agree that greenhouse­gas emissions can be curbed without �at­tening the world economy.

A hard sellIt is all about politics. Climate change is thehardest political problem the world hasever had to deal with. It is a prisoner’s di­lemma, a free­rider problem and the trage­dy of the commons all rolled into one. Atissue is the di�culty of allocating the costof collective action and trusting other par­ties to bear their share of the burden. At acity, state and national level, institutionsthat can resolve such problems have beenbuilt up over the centuries. But climatechange has been a worldwide worry foronly a couple of decades. Mankind has noframework for it. The UN is a useful talkingshop, but it does not get much done.

The closest parallel is the world tradingsystem. This has many achievements to itsname, but it is not an encouraging model.Not only is the latest round of negotiationsmired in di�culty, but the World Trade Or­ganisation’s task is child’s play comparedwith climate change. The bene�ts of con­

cluding trade deals are certain and accruein the short term. The bene�ts of mitigat­ing climate change are uncertain, since sci­entists are unsure of the scale and conse­quences of global warming, and willmostly accrue many years hence. The needfor action, by contrast, is urgent.

The problem will be solved only if theworld economy moves from carbon­inten­sive to low­carbon�and, in the long term,to zero­carbon�products and processes.That requires businesses to change their in­vestment patterns. And they will do soonly if governments give them clear, con­sistent signals. This special report will ar­gue that so far this has not happened. Thepolicies adopted to avoid dangerous cli­mate change have been partly miscon­ceived and largely inadequate. They havesent too many wrong signals and notenough of the right ones.

That is partly because of the way theKyoto protocol was designed. By trying toinclude all the greenhouse gases in a singleagreement, it has been less successful thanthe less ambitious Montreal protocol,which cut ozone­depleting gases fast andcheaply. By including too many countriesin detailed negotiations, it has reduced thechances of agreement. And by dividing theworld into developed and developingcountries, it has deepened a rift that isproving hard to close. Ultimately, though,the international agreement has fallen vic­tim to domestic politics. Voters do notwant to bear the cost of their elected lead­ers’ aspirations, and those leaders have notbeen brave enough to push them.

Copenhagen represents a secondchance to make a di�erence. The aspira­tions are high, but so are the hurdles. Thegap between the parties on the two crucialquestions�emissions levels and money�remains large. America’s failure so far topass climate­change legislation means thata legally binding agreement will not bereached at the conference. The talk is ofone in Bonn, in six months’ time, or inMexico City in a year.

To suggest that much has gone wrong isnot to denigrate the e�orts of the manypeople who have dedicated two decadesto this problem. For mankind to get even tothe threshold of a global agreement is amarvel. But any global climate deal willwork only if the domestic policies throughwhich it is implemented are both e�cientand e�ective. If they are ine�ective, noth­ing will change. If they are ine�cient, theywill waste money. And if taxpayers decidethat green policies are packed with pork,they will turn against them. 7

1It’s a wicked world

Source: WRI *2005

Greenhouse-gas emissions per person, 2007Tonnes of CO2 equivalent

0 5 10 15 20 25 30

Australia

United States

Japan

EU-27*

China*

Brazil*

India*

Total, tonnes bn

0.54

7.1

1.4

5.0

7.2

1.0

1.9

The Economist December 5th 2009 A special report on the carbon economy 3

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EVER since climate change became a sub­ject for public discourse, economists

have been making life di�cult for environ­mentalists. Their problem is that mitigat­ing climate change will require sizeable in­vestments. When making investments,governments and companies normallylook at rates of return. If an investmentlooks likely to deliver a decent return, it isworth making. If it doesn’t, it isn’t.

The trouble with mitigating climatechange is that the bene�ts are uncertainand distant. Compared with investmentsthat deliver clear bene�ts in the near fu­ture�such as education in developingcountries, for instance, which commonlyproduces returns of around 10% a year�they do not look worthwhile. Conven­tional analysis would therefore suggestthat those who want to make the planet abetter place should invest in schools in Ma­lawi rather than in clean energy.

Lord Stern, asked by Tony Blair, thenBritain’s prime minister, to look into theeconomics of climate change, devoted hisreport published in 2006 to the question ofwhether mitigation was worthwhile (or,according to some critics, to justifying a po­litical decision that had already beenmade). He came out in favour.

The Stern review has since been used asan intellectual prop by greenish politicianseverywhere. Economists have been morecritical, on two grounds. The �rst concernsthe discount rate�the annual rate at whichfuture costs and bene�ts are discounted.Lord Stern uses a rate close to zero. A higherrate, often the cost of borrowing money, ismore common. The higher the rate, thelower the value of future bene�ts or costs;and vice versa. Lord Stern agrees withFrank Ramsey, an economist who wrote 80years ago that discounting �later enjoy­ments in comparison with earlier onesðisethically indefensible and arises merelyfrom the weakness of the imagination�.

Other economists feel there is nothingwrong with their imaginations but plentywrong with Lord Stern’s near­zero rate.They think he should have used what Wil­liam Nordhaus, an economics professor atYale University, calls �assumptions that areconsistent with today’s marketplace realinterest rates and savings rates�. In a world

of limited resources, they point out, it is notobvious that spending them on future gen­erations rather than on the current one ismorally right. After all, since future genera­tions will probably be much richer thanwe are, it makes no more sense for us tosacri�ce our well­being for them than itwould to expect 18th­century peasants togo without gruel so we can buy more com­puters. Mr Nordhaus argues for a 3% dis­count rate, which implies that bene�ts ac­crued in 25 years’ time are worth abouthalf their current value. He would prefer tospend less money now, and live with morewarming, than Lord Stern would.

But others argue against using short­term rates in the long term. Paul Klemperer,an economics professor at Oxford Univer­sity, points out that very long­term securi­ties carry very low interest rates. When theBritish government recently issued 40­year index­linked bonds, for instance, itdid so at a 0.5% real rate. And over the verylong term standard discount rates lead tostrange conclusions. At a modest 2% rate,for instance, a single cent rendered untoCaesar in Jesus’s time is the equivalent ofabout $1.5 quadrillion (or 30 times the val­ue of the entire world economy) today.

Martin Weitzman, an economics pro­fessor at Harvard University, is less criticalof Lord Stern than Mr Nordhaus is: hethinks the review is �right for the wrongreasons�. Its Leitmotiv, he maintains, is �theimmorality of relegating future genera­tions to live under the shadow� of seriousclimate change �when for a mere annuitycost of a per cent or two (or at most three)of GDP each year we might have pur­chased an insurance policy on their be­half�. But, he says, such guilt feelings arelikely to lead to the choice of a discountrate that is hard to justify intellectually. �Ithink that rather than trying to go throughthe back door with [an] unreasonably low[discount rate]ðit is much better to go di­rectly through the front door with the le­gitimate concern that there is a chance,whose subjective probability is small butdi�use, that global warming may eventu­ally cause disastrous temperatures and en­vironmental catastrophes.�

A premium to buy peace of mindMost economic analyses of climate changeconcentrate on the likeliest outcome�thehighest point in the probability curve.That, on the basis of the IPCC’s data,would be 2.8°C over the next 100 years. MrWeitzman reckons they should look in­stead at events that are less likely to materi­alise but cannot be ruled out (the right­hand tail of the curve), such as a massivetemperature increase within a century.�Societies and ecosystems whose averagetemperature has changed in the course of acentury by more than 6°C are located inthe terra incognita of what any honest eco­nomic modeller would have to admit is aplanet Earth recon�gured as science �c­tion, since such high temperatures havenot existed for some tens of millions ofyears.� It is worth buying insurance againstsuch an eventuality, he says. Mr Weitzman,thus, succeeds where many others havefailed: he manages to reconcile economicswith normal human instincts.

Ken Caldeira, an atmospheric scientistat the Carnegie Institution, puts the samepoint a di�erent way. �If we already hadenergy and transportation systems thatmet our needs without using the atmo­sphere as a waste dump for our carbon­

Is it worth it?

What economists have to say about mitigating climate change

4 A special report on the carbon economy The Economist December 5th 2009

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dioxide pollution, and I told you that youcould be 2% richer, but all you had to dowas acidify the oceans and risk killing o�coral reefs and other marine ecosystems,risk melting the ice caps with rapid sea­lev­el rise, shifting weather patterns so thatfood­growing regions might not be able toproduce adequate amounts of food, andso on, would you take all of that environ­mental risk, just to be 2% richer?� He has,he says, often asked audiences this ques­tion; nobody has ever answered �yes�.

The second point on which economiststake issue with Lord Stern is his estimate ofthe cost of mitigating climate change. Thereview reckons that it would take some­where between ­2% and 5% of gdp peryear to limit them to 500­550ppm. At thebottom end of the range, in other words,shifting to clean energy would increaseeconomic growth, whereas at the top it

would shrink it. The review plumps for anaverage cost of around 1% of GDP per year.

The IPCC, the International EnergyAgency and McKinsey, a consultancy, tendto agree with Lord Stern. And a piece of re­cent research, which shows that the cost ofcutting pollution often turns out to be lessthan forecast, supports a modest estimate.Resources For the Future, an Americanthink­tank, looked at regulations on thingssuch as asbestos, power­station emissionsand CFCs (refrigerant gases) and foundthat 12 of the 25 sets of rules it looked atwere less expensive to implement than ex­pected and only six were dearer.

But some economists think Lord Stern’scost estimates are too low. Dieter Helm,professor of energy policy at Oxford Uni­versity, says the underlying assumptionsabout the costs of various technologies arelikely to prove overoptimistic because they

are produced by people who have an inter­est in exaggerating their viability.

Whether or not Lord Stern has won theargument economically, he has certainlywon it politically, for his 1% of GDP �gurefor the cost of mitigating climate change isnow widely used. But a large caveatshould accompany any use of that �gure,because it assumes that the policies em­ployed for mitigation will be both e�cientand e�ective�and so far that has not beentrue. As Mr Helm points out, �there is a vo­luminous literature of government failure,regulatory capture and the impact of rent­seeking behaviour within the policy pro­cess. Climate­change policy is likely to beone of the largest sources of economicrents from policy interventions. There is alarge and growing climate­change ‘porkbarrel’.� The larger the barrel, the higherthe costs of mitigation will be. 7

THE slogan that BP adopted in 2000,�Beyond Petroleum�, was brilliantly

unforgettable. It linked the company’sname with the bright, clean future which,the �ower/sun logo implied, was to befound on the far side of fossil fuels. Butthat, as it turned out, was unfortunate, forthe company is no longer hurrying to­wards those fresh green pastures.

BP insists that the role of renewable en­ergy in its strategy has not changed, but ad­mits that investment in it will fall from $1.4billion in 2008 to between $500m and $1billion this year. The company is sellingsome of its renewable­energy assets, in­cluding three wind farms in India, and hascut its solar­cell manufacturing capacity inSpain and America. The one renewable­energy source it still seems to be seriousabout is biofuels.

Shell, which also took a sizeable punton renewable energy, admits that its strat­egy has changed. Earlier this year its thenchief executive, Jeroen van der Veer, said ofwind, solar and hydrogen, �I don’t expectthem to grow much at Shell from here.�Further investments in renewable energy,he said, would focus on biofuels. LindaCook, who resigned in May as head ofShell’s gas and power business, said thatwind and solar �struggle to compete withthe other investment opportunities we

have in our portfolio�. Whereas policymakers have been scur­

rying from conference to conference tourge the world on towards a green future,investors have been walking away from it.For one businessman the attendance at theWorld Business Summit on ClimateChange in Copenhagen in May said it all.�There was the usual raft of bigwigs on thepanel, but the audience was just hangers­on�journalists, PR people and so forth.There were no serious delegates there.�

The clean­energy business has had ahard year. Investment in the sector tankedin late 2008, as did share prices (see chart

2). Private equity and venture capital heldup a little better, but not much. The begin­ning of 2009 was �scary�, according to Mi­chael Liebreich, chief executive of New En­ergy Finance, a consultancy.

The industry su�ered particularly bad­ly in the credit crunch. Almost by de�ni­tion, renewable energy sources have lowrunning costs but high up­front costs. Andbecause they are regulated assets withlong­term pre­de�ned revenue streams,they are particularly suited to debt �nance,and therefore tend to have high debt­to­equity ratios (typically 80­20). �When theproject �nance disappears, you’ve got aproblem,� says Robert Clover, director ofalternative­energy equity research atHSBC. He points out that some of thebanks that su�ered worst during the cri­sis�RBS, Lehman Brothers, WashingtonMutual and Fortis�were also among thebiggest in clean­energy �nance.

As the �ow of �nance to electricity gen­erators dried up, so did the orders to equip­ment manufacturers. Mr Clover reckonsthat wind­turbine manufacturers’ orderbooks so far this year are down by 55­60%on the same period in 2008.

But the problem was not just the short­age and cost of capital. The credit crisis alsorevealed a basic problem with the clean­energy business. Fossil fuels are, in terms

The green slump

Why investors have been deserting clean energy

2Recession-hit

Source: Thomson Reuters

Share prices, November 1st 2007=100

2007 08 0920

40

60

80

100

S&P 500

Wilderhill NewEnergy Global

Innovation index

The Economist December 5th 2009 A special report on the carbon economy 5

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of the energy they store, remarkably inex­pensive to get out of the ground and sell.That makes dirty industrial processes irre­sistibly cheap�so long as they are not re­quired to cover the costs of the pollutionthey cause. Companies cannot be expect­ed to abandon them unless they get a clearsignal from consumers or governmentsthat it is in their �nancial interest to do so.And they are not getting such a signal.

Public awareness of global warmingpicked up signi�cantly about three yearsago. Now most consumers claim to be con­cerned about it, and public concern is onereason why companies have been brand­ing themselves green. Energy companiesboasted of their diversi�cation out of fossilfuels. Businesses with small carbon foot­prints, such as banks and retailers, prom­ised to go carbon­neutral.

But consumers’ commitment to green­ery is rather doubtful. There is a big marketfor organic products (though it has gotsmaller since the recession), but shoppersare more concerned about their families’health than about the planet, and few areprepared to pay premium prices for greenproducts. BA, for instance, has been o�er­ing carbon o�sets with its �ights for thepast four years, but �nds that only around3% of customers buy them.

In the absence of pressure from con­sumers, governments need to give busi­nesses a shove. That was the idea behindthe Kyoto protocol, which aims to cutgreenhouse­gas emissions by getting coun­tries to accept binding targets with timeta­bles attached. It divided the world into de­veloped countries, which are required tocut their emissions, and developing coun­tries, which are not. When rich countries

ratify the protocol, they have to committhemselves to reducing their emissions bya certain percentage below a date of theirchoosing (mostly 1990)�Britain by 12.5%,Japan and Canada by 6%, and so on. Theidea is that in order to meet these targetsgovernments should introduce policiesthat send price signals to businesses toshift investment away from dirty productsand processes to cleaner ones.

Global carbon­dioxide emissions haverisen by 20% since the protocol was signedin 1997, so the plan has evidently notworked all that well. There are three mainreasons for that. First, rich countries haveexported some of their dirty industry tothe developing world. Steel, cement, cars,fridges, computers, toasters, kettles and allthe paraphernalia of modern life the pro­duction of which used to cause pollutionin developed countries are now made inChina and other developing countrieswhere emissions are not capped�andhave risen partly as a result of that shift.

Second, the world’s biggest emitterwhen Kyoto was signed, America, has notrati�ed the protocol, and the biggest pollut­er per person among countries with signif­icant emissions, Australia, did so only twoyears ago. It might reasonably be arguedthat the blame should fall on those coun­tries’ governments, rather than on thetreaty itself; but a treaty in which the mostimportant parties play no part cannot besaid to be a success.

Third, some countries have failed to cuttheir emissions as promised. In 2007 Cana­da’s emissions were 29% above their 1990level and Spain’s 57%. But there is no needfor them to miss their targets, thanks to thecountries of the former Soviet Union.Their dirty industries collapsed during the1990s, so they are awash with carbon cred­its that can be bought for a small consider­ation. Countries in danger of failing tomeet their Kyoto targets can simply buywhat is known in the industry as �Russianhot air�. As the 2012 deadline for meetingKyoto targets approaches, there is a grow­ing appetite for those meaningless credits.

Even in countries that have cut theiremissions substantially, business is not al­ways getting the right signals. Britain’s ap­parently creditable performance, for in­stance, is less the result of a well­designedpolicy than the �dash for gas� in the 1980s,spurred by the hostility to the coal industryof its then prime minister, MargaretThatcher. Attempts to get a renewable­en­ergy industry going have �opped.

Britain is not alone in �nding it hard towork out how to send business the rightsignals. Policies that are e�ective, e�cientand politically palatable have proved elu­sive everywhere. 7

3Short by a mile

Source: NewEnergy Finance

*To limit temperature increase to2°C above pre-industrial levels

Clean-energy capital investment, $bn

R E Q U I R E D*

0

100

200

300

400

500

600

2005 09080706 10 15 20 25 30

GREENHOUSE­GAS emissions targetscan be implemented through three

sorts of policy instruments�regulation,carbon­pricing and subsidies. Govern­ments generally like regulation (because itappears to be cost­free), economists likecarbon prices (because they are e�cient)and businesses like subsidies (becausethey get the handouts).

Regulation can be useful where themarket is not working well. Buildings arerarely designed to save energy, because

those who put them up do not usually paythe bills and those who occupy themchoose them for their views or their looks,not their energy­e�ciency. The same goesfor appliances, most of which do not useenough energy to a�ect consumers’choices. Small regulatory changes (seebox, next page) can cut energy consump­tion without distorting the market much.According to McKinsey, around one­thirdof the required greenhouse­gas reductionswill actually save money.

Two­thirds, however, will not. They canbe achieved only if companies invest inmore expensive, cleaner technology. Thatwill happen only if governments requirethem to do so, or tax dirty products andprocesses (through a carbon price), or sub­sidise clean ones.

Carbon pricing keeps government outof management decisions and allowsmanagers to choose between di�erentways of cutting carbon. According to a pa­per by Carolyn Fischer, of Resources for

Good policy, and bad

Some mitigation policies are e�ective, some are e�cient, and some are neither

6 A special report on the carbon economy The Economist December 5th 2009

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the Future, and Richard Newell, head ofAmerica’s Energy Information Adminis­tration, a carbon price is around twice ase�cient as a renewable portfolio standard(which requires power companies to gen­erate a certain proportion of the powerthey sell from renewable sources) andabout two­and­a­half times as e�cient asa renewable­energy subsidy.

A carbon price can be set either by a taxor through a cap­and­trade system. Europealready has such a system and America,Australia and Japan are trying to set oneup. Norway and Sweden have carbon tax­es and France soon will (though none ofthem covers much of those countries’economies). The European Commission isalso now looking at a tax. Both methodshave advantages and drawbacks, but taxwins out for simplicity and stability.

More important than the way the priceis set, though, is its level. It needs to be highenough to send an unmistakable signal tobusiness. According to Dimitri Zenghelis,one of the authors of the Stern Review anda senior adviser to Cisco and the Gran­tham Research Institute, a $40 carbon pricenow, doubling by 2050, and combinedwith non­price policies such as appliancestandards and R&D support, is needed tohit the 450ppm target.

The European Union’s Emissions­Trad­ing Scheme, which started up in 2005, isthe only large­scale attempt so far to set acarbon price. Under the ETS, EU countriesget national allocations which they thenparcel out to over 11,500 factories in �vedirty industries. Companies can buy andsell allocations amongst themselves, andcan also buy �certi�ed emission reduc­tions� from developing countries to meettheir caps through Kyoto’s �clean develop­ment mechanism�.

Europe’s �agshipThe ETS makes up the vast bulk of the glo­bal carbon market, which will be wortharound $122 billion this year. It is the princi­pal way of �nancing the shift from high­ tolow­carbon power and industrial process­es in the developing world. A wind farm inIndia; a methane­capture scheme for pigfarms in Brazil; a forestry project in Indone­sia; equipment to capture industrial gasesin China�the ETS can �nance them all.

Although it is still young, the ETS hashad some impact on emissions. Accordingto a 2008 study at the Massachusetts Insti­tute of Technology, in its �rst three years itprobably reduced them by 120m­300mtonnes, or 2­5% a year, below what theywould otherwise have been.

Power companies and manufacturersfactor a carbon price into their investmentdecisions these days. At ¤15 ($22) a tonnethe price is high enough to induce powercompanies to switch some generationfrom coal to gas at the margin, but not highenough to encourage much innovation.

Blame politics. The price is determinedby the cap, which is set by the EuropeanCommission in consultation with mem­ber states. Initially, member states overesti­mated their emissions in order to get lots ofpermits, so the carbon price was lowerthan the commission had expected. For thesecond phase of allocations, from 2008,member states fought vigorously to getmore permits than their neighbours. Somesued the commission and, in September2009, won. The price dipped again.

Thanks to a combination of recessionand lack of political will, most estimates ofthe future level of Europe’s carbon pricehave been revised sharply downwardsthis year. And if America gets a carbonprice, it is unlikely to be high enough tomake much di�erence. According to Amer­ica’s Environmental Protection Agency, thelegislation Congress is now consideringwould set it at $12 a tonne in 2012, rising to$20 in 2020. That, by itself, is unlikely to en­courage much new investment, so if Amer­

THE dullest bits of the many electronicdevices people plug into mains sockets

in their houses and o�ces are the poweradaptors. These are boxes that sit betweenthe plug and the device, or are sometimesintegrated with the plug. Their job is toconvert high­voltage alternating currentfrom the mains into low­voltage directcurrent for mobile phones, laptops, iPodsand other electronic gadgets. About 5 bil­lion such devices are in use worldwide.

Until recently the conversion wasmade using copper wire. Typically, halfthe power they drew from the wall, andsometimes as much as 80%, would be lostin conversion. As a result, electricity billsand carbon emissions were both higherthan necessary.

Making the conversion with integratedcircuits is much more e�cient, with as lit­tle as 20% of the power being lost. The

technology for this has been available formany years and costs only around 30%more than the copper­wire method, butthe market gave manufacturers little in­centive to switch. Power adaptors arecheap, usually costing $2 or less. Appli­ance­makers tend to buy them from com­panies in Taiwan or China. Contracts arewon and lost on a fraction of a cent perunit. And since consumers do not thinkabout power consumption when choos­ing a phone or laptop, manufacturerstended to stick with copper wire.

Seven years ago the Natural ResourcesDefence Council and Ecos Consulting, anenergy consultancy, got manufacturers,power utilities and the state and federalgovernments together to talk about shift­ing to integrated circuits. It took two yearsto get regulations in place in America.Once adopted in the world’s biggest mar­

ket, integrated­circuit adaptors spreadswiftly everywhere, because manufactur­ers cannot a�ord to make things that can­not be sold in America.

For consumers the switch has meantlower power bills and smaller, lighterpower adaptors. For the world as a wholeit has meant a drop in global power con­sumption worth around $2 billion a year�saving 13m tonnes of CO2 annually world­wide, the equivalent of closing downeight coal­�red power stations.

There are plenty more such savingsavailable, says Chris Calwell of Ecos Con­sulting. The biggest potential is in large­screen televisions, cable and satellite set­top boxes and battery chargers. Millionsof devices�known to energy­e�ciencyexperts as �vampires��continue to suckin electricity even when the device thatsits in them is fully charged.

How a boring gadget saved $2 billion­worth of electricity Vampires on a diet

The Economist December 5th 2009 A special report on the carbon economy 7

2 ica is to make a dent in its emissions, it willhave to rely mostly on subsidies.

There is an argument for some of those.Basic R&D in new energy technologies�incarbon capture and storage, for instance,which would allow the continued use ofcoal to generate electricity�is too risky formost companies to undertake on theirown, and o�ers enough social bene�ts todeserve government support. But the sub­sidies now on o�er go far beyond that.

Governments are spending heavily onencouraging the switch to low­carbontechnologies, especially wind and solarpower. �These policies are not particularlye�cient, but they have been quite e�ec­tive,� says Guy Turner, director of carbonmarkets at New Energy Finance. Some 50%of new power capacity added in the EU in2000­06 was renewable energy, comparedwith 29% in 1990­2000.

This sort of energy is expensive. Thebest indication of that is the carbon pricethat would be required to make invest­ment in renewables worthwhile withoutsubsidy. According to New Energy Finance,onshore wind energy needs a carbon priceof $38, o�shore of $136 and solar cells of$196. Europe’s target for generating 20% ofits energy from renewable sources there­fore looks pricey. According to RichardGreen, director of the Institute for EnergyResearch and Policy at Birmingham Uni­versity, the implied marginal cost of car­bon would be ¤129 a tonne�which sug­gests that allocating such large resources torenewable­energy subsidies is, as MrGreen says, �seriously sub­optimal�.

The worst example of a wasteful subsi­dy is America’s support programme forhome­grown corn ethanol, which is cou­pled with tari�s on cheaper sugar­caneethanol from Brazil. The programme hasraised global food prices (and thus in­creased malnutrition among the world’spoorest); lined the pockets of America’sfarmers; given policies to cut carbon a badname; and cut little, if any, carbon.

Solar �areEurope has yet to devise a policy quite sodisastrous, but Spain’s solar subsidycomes a close second. Its feed­in tari� forsolar energy, established in 2007, o�eredgenerators 44 euro cents per kilowatt­hour.Coal­�red power costs around 4 cents perkwh to generate. The tari� was supposedto be for small­scale projects, of 100kw orless; but generators found that they couldget it for larger ones if they installed banksof 100kw modules next to each other.

The resulting boom bene�ted manufac­

turers not just in Spain but also in Ger­many and China, the biggest producers ofsolar cells. Last year Spain accounted for40% of world demand. The governmenthad planned for 400MW of solar capacityto be built by 2010. In the event, 3GW wasbuilt. Panicking about the commitments itwas building up, the government an­nounced that rates would drop to 32 centson September 29th 2008. �There were allsorts of abuses,� says Jenny Chase, solaranalyst at New Energy Finance. �If youconnected a single module to the grid be­fore September 29th, your whole projectgot �nanced. So modules were changinghands for vast sums of money.� After thedeadline the market collapsed.

The Spanish crash hit silicon­wafer pro­ducers, the manufacturers of equipmentfor solar­cell producers and the makers ofcells across the world. Prices across the in­dustry crashed by 30­40%, and solar com­panies’ share prices fell by 50­75% in 2008,though they have picked up a bit this year.Some 20,000 jobs have been lost in the so­lar industry in Spain over the past year,and plenty more elsewhere.

Europe’s energy subsidies, unlikeAmerica’s, do not include nuclear, largelybecause of German opposition (whichmay change, following Angela Merkel’s re­cent election victory). Nuclear power ismore expensive than coal and gas, butprobably cheaper than most renewables�though nobody is sure, since political op­position has ensured that few plants havebeen built in the West in recent years. Nuc­lear power does, however, have the virtueof scale. For renewables a gigawatt of pow­er is a massive amount; for nuclear powerit is the basic unit.

Thanks to stimulus money to combatthe recession, subsidies are now �oodinginto the renewable­energy business faster

than ever before. Governments across theworld have trumpeted their stimulus pack­ages as a way of saving the world economyand the planet at the same time. Greenstimulus money globally adds up toaround $163 billion, according to New En­ergy Finance, of which more than $100 bil­lion is being spent in America and China.The biggest chunk, around a quarter, is go­ing on improving energy e�ciency. Griddevelopment is next, with a �fth.

The green stimulus money has beenslow in coming. In America it started to�ow in the second half of this year, just asthe economy began to recover. Some of ithas been used to extend the tax credits forwind and solar energy and to convertsome of the tax­credit schemes into grants.As a result, wind developers in Americanow get a cheque for 30% of the cost of theproject once they connect to the grid. Thatscheme runs out at the end of next year.

Mr Clover is concerned about the likelye�ect. �We’re expecting a stampede in2010. The danger is that you just bring for­ward demand. That’s been a key feature ofthe US market. We’ve already seen severalsubsidy cycles�very high installations fol­lowed by complete cessations of activity.All anybody wants is long­term regulatorystability.� He hopes that will come with theimposition of a federal renewable portfo­lio standard on generators, which wouldrequire them to sell a certain proportion ofrenewable electricity as part of the mix.

Globally, New Energy Finance reckonsthat only $24 billion of green­stimulusmoney will be disbursed this year, withanother $58 billion to follow in 2010 and afurther $56 billion in 2011. So it looks asthough the money will come too late totemper the recession of 2008­09, and mayinstead fuel another in�ationary boom ina couple of years’ time. 7

8 A special report on the carbon economy The Economist December 5th 2009

�WHAT that means in code�, SenatorBob Corker, a conservative Repub­

lican from Tennessee, told the audience ata hearing of the Senate Committee on En­ergy and Natural Resources about Ameri­ca’s proposed climate­change legislation,�is we’re transferring wealth from ourcompanies and our citizensðto raise car­bon prices and send money abroad.�

Senator Maria Cantwell, a left­wingDemocrat from Washington, does not nor­mally agree with Mr Corker, but her line ofreasoning was similar. In costing the bill,she said, the Environmental ProtectionAgency had estimated that $1.4 trillion dol­lars a year would go abroad to cover thegenerous provision for o�sets in the bill.�What can we buy abroad for that? Can’twe spend this money on developing tech­nology at home?� Senator Corker was fair­ly sure that the foreigners would �ndthings to sell America. �When $1 trillioncomes around there are hucksters all overthe world who will do business with you.�

After eight years of resistance from theBush administration, America may beabout to get mandatory federal green­house­gas emissions controls. The Houseof Representatives has passed the Ameri­can Clean Energy and Security Act, other­wise known as the Waxman­Markey bill. Itis sponsored by two powerful Democrats,Henry Waxman, chairman of the HouseCommittee on Energy and Commerce, andEdward Markey, chairman of the Subcom­mittee on Energy and Environment.

The bill steers a di�cult course be­tween the demands of environmentalistsand those of business. In attempting tobring emissions down by 17% below 2005by 2020, or 4% below 1990 levels, it aimslow by the standards of other rich coun­tries, but is under attack in America on theground that it will hurt the economy. In acap­and­trade system designed purely fore�ciency all permits would be auctioned,which is what Mr Obama wanted. But as aresult of concessions made in committee,by the time it was passed, 85% were to begiven away initially (though some of thevalue of the giveaways will be returned topower consumers as rebates).

Even so, the bill is struggling. It gotthrough the House by a mere seven votes

and has got stuck in the Senate. The Kerry­Boxer bill (the Senate version of Waxman­Markey) has fallen victim to many factors.One is health care, which has used up a lotof political time and energy and generatedmuch ill will between the parties. Republi­can former supporters of cap­and­trade�such as John McCain, Richard Lugar andLisa Murkowski�have become unwillingto do the president any favours. Another ispublic attitudes (see box, next page).

The distribution of Senate seats doesnot help. Americans on the coasts are morewilling than those in the hinterland to miti­gate climate change, partly because theyare more liberal, partly because they areless reliant on coal and partly because theyare more worried by hurricanes and risingsea levels; yet coastal Americans are vastlyunder­represented because their states aremore heavily populated than those inlandand every state gets two Senate seats. Andsince a bill needs 60 votes out of 100 topass through the Senate, senators repre­senting a mere 11% of the population canblock that passage. The biggest problem forthe bill, however, is that much of businesshas weighed in against it.

Business, ironically, was largely respon­sible for Waxman­Markey’s inception. In2007 a group called USCAP, made up ofenvironmental organisations and compa­nies that wanted legislation, proposed acap­and­trade bill, and Waxman­Markeylooks a lot like their proposal. Some ofthose companies (such as Exelon and

PG&E) were power utilities with little or nocoal­�red generation; some (such as GE

and Alstom) were equipment companiesthat would bene�t from regulations re­quiring their customers to buy new kit.

Waking a sleeping bearBut oil companies and energy­intensivemanufacturers tend to fear carbon caps,and once the bill started trundling throughCongress those companies were stirredinto action. �It was like poking a sleepingbear,� says Elizabeth Moler at Exelon, thelargest nuclear­power generator in Ameri­ca. Powerful trade associations such as theNational Association of Manufacturers,the American Petroleum Institute and theUS Chamber of Commerce started to lob­by heavily against it.

The energy companies’ voices tend tobe heard loud and clear in Washington,DC. According to the Centre for ResponsivePolitics, the energy industry has been thefourth­biggest spender this year out of 13sectors. In the �rst ten months of this yearit lavished $300m on 2,225 lobbyists inWashington, DC. It handed twice as muchin campaign contributions to the bill’s op­ponents in Congress than to its supporters.

These days it is considered bad form tosay that the planet can go boil itself, so rath­er than denying that the globe is warming,corporate critics of the bill tend to arguethat cap­and­trade is the wrong remedy.Some, such as ExxonMobil, actually advo­cate a tax (which is unlikely to materialise).

The move to give away, rather than auc­tion, permits has been much criticised. Butperhaps the most contentious aspect of thebill is its generous provision for the use ofo�sets�the matter which exercised Sena­tors Corker and Cantwell. O�sets are pop­ular among developing countries becausethey provide an income, and among busi­nesses in rich countries because they keepdown the cost of compliance. The Environ­mental Protection Agency says that with­out the contribution from o�sets, the car­bon price under the cap­and­trade systemwould be twice as high as it is now.

Yet there are worries about the authen­ticity of o�sets. That is partly because theyare vulnerable to fraud, but mainly fordeeper and more philosophical reasons.

Cap and tirade

America struggles with climate­change legislation

1

The Economist December 5th 2009 A special report on the carbon economy 9

2 O�sets are based on the idea of �addition­ality��that the credit is being issued for acut in emissions which would not other­wise have taken place. Within the CleanDevelopment Mechanism (CDM) of theKyoto protocol, which creates most inter­national o�sets, projects have to be certi­�ed as producing �additional� cuts by theCDM’s executive board.

But Michael Wara, an expert on envi­ronmental law at Stanford University, ar­gues that it is in practice impossible for theboard to know that the projects they ap­prove would not have happened other­wise, and indeed some of the projects thathave been �nanced look as though theymight have. He cites some 20 gas­�redpower stations in China that were partly �­nanced by the CDM (and thus, indirectly,by European consumers). Given that Chi­na long ago announced its intention to div­ersify out of coal for reasons unconnectedwith climate change, he reckons that thosepower stations would have been built any­way, so the emissions cuts they led to werenot additional. Senator Corker shares hisscepticism about o�sets. �That’s not a mar­ket,� says the senator. �That’s Alice in Won­derland make­believe.�

The Waxman­Markey bill covers moreof the American economy than the ETS

does of Europe’s, and takes a far more gen­erous approach to o�sets. As a result, theAmerican o�set market would be 20­50times larger than the existing CDM market,says Mr Wara. This could pose problems.The CDM board’s approval rate has de­clined lately because it is determined notto issue dodgy credits. With a market aslarge as America promises to create, thereis a risk that there will not be enough o�­sets available, or that they will be suspect.Senator John Barrasso, a Republican fromWyoming who sits on the energy commit­tee, predicts that it will be �rife with green­collar crime�.

MarketphobiaArguments about o�sets and volatilityhave raged since cap­and­trade was in­vented. But this year its supporters face anew problem: a post­credit­crunch hostil­ity to markets in general. For Jason Grumet,who as executive director of America’s Na­tional Commission on Energy Policy hasbeen pushing cap­and­trade legislation foryears, �mistrust of the market is as big achallenge to getting the legislation throughas concerns about costs.� In the House itled to emendations of the bill to restricttrading in carbon derivatives�and thusboth the scope for banks to make money

and the usefulness of the market. Senator Murkowski, a Republican from

Alaska, co­sponsored a previous bill tocurb emissions because she was worriedabout the e�ect of climate change on thecoastline. But a bill like Waxman­Markeymay not get her support. �There’s a con­cern that we’re creating a new $1 trillionmarket that will be susceptible to beingmanipulated by Wall Street in the sameway as mortgage­backed securities were.�

This new­found scepticism about mar­ket mechanisms leaves supporters of car­bon curbs in some despair. �There’s noquestion that a tax would be much easierto implement,� Mr Grumet told the Sen­ate’s energy committee. �If there were a se­rious bipartisan e�ort to garner support forsuch a measure it would gather a head ofsteam.� But so far there isn’t.

Harry Reid, the Senate majority leader,

has said there will be a vote on an econ­omy­wide bill next spring. But given theopposition to such a system, other out­comes are possible. One is regulation. TheEPA is required by a Supreme Court deci­sion to regulate greenhouse­gases as pol­lutants under the Clean Air Act�a prospectso alarming to business that it increasesthe chances of legislation. There is also talkof a more limited cap­and­trade system,covering the power utilities, which are rec­onciled to the idea, but excluding the oil in­dustry, which is still �ercely resisting it.

With mid­term elections next autumn,a bill on such a sensitive issue will need topass before summer. Much depends on thepresident. If he puts his back behind Wax­man­Markey, America may get a weak­ened version of a second­best policy. If hedoesn’t, America may get somethingworse�or nothing at all. 7

AMERICANS support the idea of con­trolling emissions. In a poll published

in October by the Pew Research Centre,50% of those who had an opinion sup­ported limits, compared with 39% against.Other polls have shown higher levels ofsupport. But that apparent enthusiasm isquali�ed by a number of factors.

The �rst is price sensitivity. In a poll inAugust, 58% said they would support acap­and­trade system that increasedmonthly electricity bills by $10, but for anincrease of $25 the �gure dropped to 39%.

Second, ignorance and indi�erenceare rife. Whereas half of the respondentsto the Pew poll who knew about cap­and­trade supported the idea, 55% had neverheard of it. In a Gallup poll in September,1% cited the environment as America’smost important problem, 26% health careand 29% the economy.

Third, scepticism seems to be on therise. The Pew poll showed a fall in the pro­portion of Americans who thought therewas solid evidence of rising global tem­peratures, from 71% in April 2008 to 57% inOctober 2009. The proportion blamingrising temperatures on human activityalso fell over the period, from 47% to 36%.

It is hard to see how scienti�c develop­ments could be responsible for this shift.It seems more likely to be the result of eco­nomics. When people are poorer theymay be less willing to support policiesthat will cost them money, but feel un­comfortable about jeopardising the plan­et’s future to fatten their bank balance.Scepticism absolves them of sel�shness.

Figures from other countries supportthe idea that attitudes have changed dur­ing�and possibly as a result of�the reces­sion. A poll published by the EuropeanCommission showed a fall in the numberof EU citizens who saw climate change asthe world’s gravest problem from 62% inspring 2008 to 50% in July 2009. Over thesame period the proportion citing globalrecession as their main concern rose from24% to 52%.

In Australia, meanwhile, where KevinRudd’s support for mitigation helped himwin the 2007 election�probably the �rstelection anywhere in which climatechange played a serious part�a poll pub­lished in July by the Lowy Instituteshowed that the proportion of voterswho were prepared to shoulder �signi�­cant costs� to tackle global warming hadfallen to 48% from 68% in 2006.

Don’t count on public opinion to support mitigation

Who cares?

4A change of mind

Source: Gallup

With which statement do you most agree:“Protection of the environment should be givenpriority even at the risk of curbing economicgrowth”, or “economic growth has priority evenif the environment suffers to some extent”?

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10 A special report on the carbon economy The Economist December 5th 2009

1

UNLIKE America’s leaders, China’sbosses are not much troubled by recal­

citrant legislatures. The government hastherefore had no di�culty in executing asmart volte face on climate change.Around three years ago its �erce resistanceto the notion of any limit on its green­house­gas emissions started to soften. Itnow seems to be making serious e�orts tocontrol them.

One reason for this change is the coun­try’s growing awareness of its vulnerabili­ty to a warming world. The monsoonseems to be weakening, travelling less farinland and dumping its rainfall on thecoasts. As a result China is seeing �oods inthe south­east and droughts in the north­west. At the same time the country’s lead­ers are deeply concerned about the melt­ing of the glaciers on the Tibetan plateau,which feed not just the Ganges, the Indus,the Brahmaputra and the Mekong but alsothe Yangzi and Yellow rivers (see map).

A second reason is China’s growingsense of global responsibility. The countryis not only the world’s largest emitter ofgreenhouse gases; it now regards itself, andis regarded, as one of the world’s leadingpowers, and therefore expects to workwith the other big powers to tackle globalproblems such as the economic crisis, nuc­lear proliferation and climate change.

A third reason is energy security. Al­though China has large coal reserves, it isalso a big importer. Concerns about exces­sive dependence on foreign fossil fuelssharpened when China’s oil imports rock­eted and, in 2005, the attempt by CNOOC,China’s largest o�shore oil and gas com­pany, to buy America’s Unocal was re­bu�ed. China’s push into nuclear and re­newable energy has been driven by itsneed to diversify its energy sources.

The fourth reason is economic. TheKyoto protocol has given China an incen­tive to clean up its act. China has received$2 billion through the CDM for cleaning upits industrial processes and building clean­energy capacity�half the money that has�owed through the CDM. That is expectedto rise to $8 billion by 2012.

But a longer­term economic motivesprings from a shift in the way Chinathinks about growth. In the past, its all­out

drive for growth has led it to rebu� pres­sure to cut emissions. Attempts to controlpollution foundered on the performance­assessment system for o�cials at all levelsof government, which prioritises growth.But that has been adjusted to encourageenergy e�ciency, and at the same time theleadership has started to argue that growthand greenery are compatible.

Since Wen Jiabao took over as primeminister, the leadership has tried to de�neeconomic growth as something broaderand longer­term than GDP �gures imply:the emphasis has been on a �harmonioussociety� and �scienti�c development�. No­body was sure what the latter meant, butMr Wen has recently been talking about amore �resource­e�cient environmentallyfriendly society� and Hu Jintao, the presi­dent, has referred several times to a �low­carbon economy� and a �green economy�.

Local pollution may help to explain theshift. Residents are infuriated by �lthy airand water that kills people and damagesunborn children. Policies to cut carbon­di­oxide emissions�through reducing the en­ergy used to produce goods�can helpclean up China’s cities at the same time.

More interesting is the idea that cleanenergy might be a source of growth ratherthan a constraint on it. China, so the argu­ment goes, missed out on the computerrevolution. It makes hardware, but Ameri­can �rms own most of the valuable stu��the intellectual property for the software.�You can’t get rich making socks and toys,�explains Lin Jiang, director of the China

Sustainable Energy Programme at the En­ergy Foundation in San Francisco. �They’relooking for the next growth industry. Cleanenergy clearly has huge potential. And nocountry dominates the industry yet. It’s awide­open �eld.� Hu Angang, an econo­mist at Tsinghua University, calls this �ahuge opportunity for China. The countrywill become the largest renewable­energymarket, bio­energy market, clean­coal mar­ket, nuclear­power market, carbon­ex­change market, environmental­technol­ogy market, low­carbon economy,exporter of low­carbon products and low­carbon­technology innovator.�

The government is giving the economya shove in that direction. In 2006 the �ve­year plan set a target for a 20% cut in the en­ergy intensity of GDP by the end of 2010.The start was slow, but by the end of lastyear it had managed 10% and it now lookson track for its target. According to Mr Lin,that would mean a reduction in carbonemissions of 1.5 billion tonnes per year by2010, more than the Waxman­Markeybill’s caps for domestic industry wouldtake out of America’s economy by 2020.China has relatively tight vehicle fuel­e�­ciency standards (see chart 5). Electric vehi­cles are being generously subsidised($8,800 for a car and $73,500 for a bus) andthe government plans to build the capacityto produce half a million a year by 2012.

The most visible changes have come inrenewable energy. In 2005 the NationalPeople’s Congress passed legislation to of­fer subsidies for renewable energy�

A long game

China sees opportunities as well as dangers in climate change

5Abating thirst

Source: Lin Jiang,The Energy Foundation

*Dashed lines: proposed or contestedSolid lines: enacted

Fuel standards for new passenger vehicles, mpg

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California United StatesAustralia

F O R E C A S T

The Economist December 5th 2009 A special report on the carbon economy 11

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1

around twice the amount for coal. Forwind energy, the target was set at 20GW ofcapacity by 2020. The subsidy generatedso much building that China now expectsto hit that target by the end of this year andis aiming for 150GW by 2020. �It’s like agold rush right now,� says Mr Lin. The tar­get for solar energy, similarly, has beenraised from 1.8GW to 20GW by 2020.

To put this in context, wind currently

generates only 0.4% of Chinese electricity.Coal generates 80%. And, although Chi­na’s government does not have to jumpthe legislative hurdles faced by America’spresident, it sometimes struggles to getpolicy implemented on the ground. Yet ifChina’s many layers of government can bepersuaded that green means growth, theywill cleave to this policy; and the leader­ship seems keen to make that happen.

China, thus, is after the same �greenjobs� that Americans have been promisedas part of their road to economic recovery.America has huge advantages in terms oftechnology and capital, but China has acouple of things going for it too: cheaper la­bour and a leadership unconstrained bythe need to get re­elected every four years.China can play a long game, which helpswhen dealing with climate change. 7

BEYOND the planet­saving rhetoric, theargument at Copenhagen and beyond

will be about emissions levels and money.On both, large gaps need to be closed for adeal to be reached. The main gap on emis­sions levels is between America and therest of the world. The main gap on moneyis between the developed and the devel­oping world.

To establish the size of the emissionscuts needed, you have to start with whereyou want to end up and work backwards.The G8 group of nations agreed in Italy ear­lier this year that the increase in globaltemperatures should be no more than 2°Cabove pre­industrial levels. To achievethat, according to the models on which theIPCC bases its calculations, global emis­sions will have to be cut to half their 1990levels by 2050. For rich countries thatmeans an 80% cut in their emissions bythat date, a reduction to two tonnes of CO2

equivalent per head per year. At present,emissions in America are around 24tonnes per head; in Europe they are ten.

Forty years is a long time. Governmentscan agree to meet distant targets in thecomfortable knowledge that they will notbe held responsible for failing to do so.Shorter­term targets are therefore more im­portant. The IPCC’s �gures suggest the de­veloped world should aim to cut by 25­40%below 1990 levels by 2020. That will be astretch, since the targets that developedcountries have put on the table so far addup to around 15% below 1990 (see chart 6).

The European Union is committed to a20% cut, rising to 30% if the rest of theworld promises signi�cant cuts. It has a de­tailed plan for getting there, including low­er country caps in its Emissions­TradingScheme and regulations on car emissions.Japan’s new government has promised a

reduction of 25% on 1990, but has revealedlittle about how it might manage that. Aus­tralia’s government struggled trying to getits legislation through parliament. Cana­da’s emissions continue to grow.

The two most important participantsare America and China. They are not onlythe biggest emitters but also the countrieswhose falling­out sank Kyoto. And neitherhas revealed what it is bringing to the table.

The target in the Senate’s Kerry­Boxerbill, its version of Waxman­Markey, wouldcommit America to a 20% reduction below2005 levels by 2020, which works outaround 4% below 1990 levels. But devel­oped countries are expected to o�er morelike 25­40% by 2020. What are America’snegotiators to do?

Stretch the dates, probably, and imply atrajectory with smaller cuts earlier on andbigger cuts later. On that basis, America’snegotiators reckon that the bill could pro­duce cuts of approximately 17% over 1990by 2025, or 30% savings over 1990 by 2030.

Those numbers are not o�cial, but Ameri­ca’s negotiating partners have a prettygood idea of what it is going to put on thetable. Todd Stern, America’s special envoyon climate change, reckons that they maybe acceptable. �Several di�erent countrieshave come up to me and said, ‘You’ve got apath that’s pretty good even if we don’t likeyour 2020 number’.�

America’s negotiators have to treadvery carefully because of the precariousposition of the legislation. The Senate re­acts badly to a sense that America is beingpushed around by foreigners. It voted 95­0to reject the Kyoto deal that the Clinton ad­ministration had negotiated. If it thinksthat the Obama administration is caving into international pressure it might reject notjust the treaty but also the legislation.

The administration’s chances of gettingthe legislation through will be much high­er if China makes a similarly signi�cant of­fer. Developing countries are still not ex­pected to commit themselves to particulartargets, but nor will they get o� scot­free, asthey did under Kyoto. According to the�road map� drawn up two years ago at theUNFCCC conference in Bali, they are re­quired to propose �nationally appropriatemitigation and adaptation actions�.

Hu Jintao promised on his visit to NewYork in September that China would comeup with a �notable� �gure for reducing thecarbon intensity of its economy. America’snegotiators reckon that needs to be a re­duction of around 30% in carbon intensityin the next �ve­year plan, or 50% over three�ve­year plans.

Assuming that both groups of coun­tries can produce satisfactory plans thatthe other signs o� on, there will then becarrots and sticks to hold them to theirpromises. In theory Kyoto is a legally bind­

Closing the gaps

How the world divides on a global deal

Promises, promises

Source: NewEnergy Finance

*Will go to 30% if othercountries make big cuts

†If Congress passes legislation

Pledged emission-reduction targets% decrease on 1990 levels by 2020

6

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IPCC

EU-27*

Japan

Australia

Developed-country average

United States†

Canada Range

12 A special report on the carbon economy The Economist December 5th 2009

2 ing agreement with a compliance mecha­nism. In practice it is toothless, partly be­cause of the availability of �hot air� fromthe countries of the former Soviet Unionfor rich countries to buy to meet their tar­gets. But even without the hot air, there isno e�ective way of holding non­comply­ing countries to account, for the compli­ance mechanism merely imposes puni­tively large cuts in the next period oncountries failing to meet their targets in thisone. That is not going to happen.

France would like something muchtoothier: trade sanctions, more politelyknown as �border­tax adjustments�.These, in the view of some, would serveboth to keep countries to the commit­ments they had made, and to prevent fac­tories moving from rich countries to poorones. The threat of tari�s has got some mo­mentum in America too, and the Waxman­Markey bill includes a provision for bor­der­tax adjustments.

Money­shaped carrotsTo most developing countries this is poi­son. China’s ministry of commerce saidthe measure �will not help any country’sendeavours during the climate­change ne­gotiations, and China is strongly opposedto it�. Mr Obama is with the Chinese. �At atime when the economy worldwide is stilldeep in recession and we’ve seen a signif­icant drop in global trade,� he said after theHouse of Representatives passed the Wax­man­Markey bill, �I think we have to bevery careful about sending any protection­ist signals out there.�

The carrot to get developing countriesto honour their commitments is money.There are two reasons for rich countries tocough up as part of a Copenhagen deal.The �rst is a moral one. It is widely accept­ed that since the developed world is re­sponsible for pumping 200 years­worth ofcarbon dioxide into the atmosphere, itshould help the developing world adapt toclimate change. The second is a pragmaticone. China aside, many developing coun­tries lack the capital to invest in cleaningup their economies, so if they cannot getaccess to rich­world capital, the invest­ment will not happen.

China says that the developed worldshould hand over 1% of its GDP, or about$400 billion a year. The African Unionwants $67 billion a year for Africa alone.Britain’s prime minister, Gordon Brown,has suggested that the developed worldshould pay $100 billion a year in total. TheEuropean Commission is proposing ¤100billion a year in 2020. The gap between the

numbers proposed is even larger thanthose �gures suggest, because the Chineseand the Africans seem to be talking aboutgovernment­to­government transfers only,whereas Mr Brown and the EuropeanCommission are talking about a combina­tion of those and private capital.

There is no objective way of establish­ing how much guilt money the rich worldshould come up with. The amount of in­vestment needed to clean up the worldeconomy is somewhat easier to deter­mine. According to the International Ener­gy Agency, the 2°C target will requirearound $1 trillion a year in investment. TheWorld Bank says around $475 billion ofthat total will need to be spent in develop­ing countries.

Various countries have made construc­tive suggestions about how to rustle upcash. Mexico wants a $10 billion GreenFund to which countries would contributeon the basis of both their emissions andtheir GDP; Norway is suggesting an auc­tion of 2% of carbon­market emissions al­lowances which could raise $15­25 billion;the poorest countries have proposed a taxon air travel which could raise $8­25 bil­lion; the World Bank has a $5 billion targetfor its climate investment funds. Altogeth­er those might raise $60 billion, which stillleaves a big hole.

How could it be �lled? �By private capi­tal,� says Cameron Hepburn of OxfordUniversity’s Smith School of Enterpriseand the Environment. �Rich governmentshave serious pressures on their �nances.But they can maximise the bang for theirbuck by mobilising their vast capital mar­kets.� And private­sector investment islikely to be more e�ciently used than gov­ernment­to­government transfers.

At present there is not much sign ofprivate capital investing in developing­world clean­energy infrastructure. But it isnot a mad idea. Energy infrastructure is along­term investment. That should suitpension and sovereign­wealth funds. Withassets of $12 trillion and $3.75 trillion re­spectively, they should be able to raisesome of the necessary funds.

But �rst developing countries need toput in place those �nationally appropriatemitigation actions�. In a tiny way that isstarting in China, where APG, a Dutch pen­sion fund with a portfolio of $200 billion,has put together an energy­e�ciency fundbecause the incentives the Chinese gov­ernment has put in place make it worth­while. �It washes its face �nancially,� saysRob Lake, head of sustainability at APG.

But China is not short of capital. Theproblem is elsewhere in the developingworld, where economic, political and cur­rency risks scare o� foreign investors. So alot of thinking is going on about how tomitigate those risks. The United NationsEnvironment Programme, in collaborationwith the P8, a group of big pension funds,and other institutional investors, has pro­duced a report on how to use public­sectormoney to leverage much larger amounts ofprivate­sector �nance into clean invest­ment in developing countries; the WorldEconomic Forum has produced another;Lord Stern a third.

The general idea is that the most e�­cient use for the public­sector funds whichrich countries are going to transfer to poorones would be to insure private moneyagainst the risks posed by volatile curren­cies, unreliable governments and the riskthat clean­investment policies will not sur­vive political change. Using public moneyto leverage private money to build infra­structure and transform economies is not anew idea, says Dominic Waughray of theWorld Economic Forum: it is the model theMarshall Fund used to rebuild Europe afterthe second world war. But it is still a con­tentious one. Some developing­countrygovernments suspect this is a ruse by richcountries to shirk their responsibilitieswhile making money out of the poor. Theytend to prefer the idea of the cash goingstraight into their co�ers.

The gaps that remain between rich andpoor countries on these issues are huge. Itis clear that some will remain after Copen­hagen. That does not mean the world isgiving up on a deal. It means that there willbe a lot of work to do next year. That workwill be easier if the world goes about it in adi�erent way. 7

The Economist December 5th 2009 A special report on the carbon economy 13

1

THOSE who have had the misfortune tobe closely involved in climate­change

negotiations are not short of ideas on howthe process might be made more produc­tive. One improvement would be to stoptrying to deal with so many gases at once(see box). Another would be to stop tryingto deal with so many countries.

With 192 participants, the annualUNFCCC conferences are too big to doanything very useful. But most green­house­gas emissions are produced by the17 countries that meet in the Major Econo­mies Forum, a group put together byGeorge Bush in what was widely regarded

as an attempt to sabotage the UNFCCC.The MEF has, ironically, turned out to be agood forum for tackling di�cult questions.The UNFCCC should therefore stick to bigstatements of principle and leave the de­tails to the MEF or other small groups.

The negotiations also divide the worldinto two halves. The idea of �common butdi�erentiated responsibilities� on whichthe UNFCCC is based�that everybody is init together but some countries are more re­sponsible than others�is reasonable. Butthe way it is being applied means that thedeveloped (�Annex 1�) countries bear allthe burden of mitigation whereas develop­

ing (�non­Annex 1�) countries bene�t fromthe CDM and are not required to limit theiremissions at all.

This binary division has fostered an us­and­them attitude that gets in the way ofagreement and forces together countriesthat have little in common. The worldeconomy has changed a lot in 17 years. Forexample, Mexico and South Korea are non­Annex 1countries, but also members of theOECD, the club of rich countries. The non­Annex 1 countries now have widely di�er­ing concerns. China wants money for cut­ting industrial emissions. Africa wantsgenerous provisions for forestry. Brazil has

What needs to change

The prospects are gloomy, but they can be made brighter

ONLY half of man­made global warm­ing comes from CO2. The rest comes

from a variety of sources, includinghydro�uorocarbons (HFCs), black carbon(soot), methane and nitrogen compounds.Packing them all up together gives theKyoto protocol an elegant frameworkwhich in theory should solve the problemwith a single set of numbers�the nationalcaps that are designed to cut the wholerange of greenhouse gases.

Critics point out that the Kyoto proto­col has achieved a great deal less than theMontreal protocol, which was designed toprevent the use of ozone­depleting CFCs.Montreal, implemented in 1987, was origi­nally expected to cut half of its gases in 12years. In the event it got rid of all of themin ten years. It has had a huge global­warming side­bene�t. CFCs are green­house, as well as ozone­depleting, gases.According to a study in 2007, the Montrealprotocol prevented the emission of 189 bil­lion tonnes of CO2 equivalent. Kyoto hasabated around 10 billion tonnes.

Montreal worked better than Kyotolargely because the problem was a man­ageable size and the gases similar in na­ture and origin. Some people therefore ar­

gue that the greenhouse­gas problemshould be unpacked and dealt with underdi�erent agreements.

Methane and nitrous oxides producedby agriculture account for about 10% ofman­made warming. Most of that comesfrom the guts of cattle and sheep. Thatcould be cut through breeding pro­grammes and less gassy diets.

Black carbon is a particular problem inthe Arctic and the Himalayan glaciers; itmelts snow and ice and thus increases thetendency to absorb heat from the sun. It

contributes somewhere between aneighth and a quarter of global warming.Unlike CO2, which stays in the atmo­sphere for centuries, it disappears withinweeks. Cutting emissions would there­fore make an instant di�erence.

Black carbon is produced by diesel en­gines and primitive stoves burning woodand cow dung. Mechanisms appropriatefor dealing with large­scale emissionsfrom power plants and factories will havelittle impact on peasants’ cooking tech­niques. Providing villagers with cheap,cleaner stoves would be more e�ective.

HFCs�industrial gases with 1,440times the global­warming potential ofcarbon dioxide�are another candidate.Like CFCs, they are produced by a small­ish number of industrial processes, andcutting emissions of them is cheap andeasy. America, Mexico, Canada and abunch of other countries have indicatedthat they support the idea of dealing withHFCs under the Montreal protocol.

Those in favour of a more holistic ap­proach argue that disaggregating green­house gases could undermine the e�ort tosolve the problem as a whole. But better toget some signi�cant cuts made than none.

The attractions of a piecemealapproach to global warmingUnpacking the problem

7Kyoto’s mouse

Source: D. Zaelke, IGSD 2009

Greenhouse-gas reductions, gigatonnes of CO2

equivalent, 100-year global-warming potential

0 50 100 150 200 250Montreal protocolphase-out of ozone-depleting substances1990-2010

Kyoto protocol2008-12

Estimated potentialHFC mitigation2012-50

Range

14 A special report on the carbon economy The Economist December 5th 2009

2

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hydro power and biofuels, so it wants a re­gime that favours those. South Africa’seconomy is based on coal, so it wants in­vestment in carbon capture and storage.

Most developing countries cling to thisdivision because they have done well outof it, but some middle­income countriesare trying to get rid of it. �Mexico’s maingoal�, says Mario Molina, a Nobel prize­winning chemist and a key �gure in thesuccessful campaign to cut ozone­deplet­ing gases, �is to make a di�erence in the im­passe between developed and developingcountries.� Mexico has made a commit­ment along developed­country lines tohalve emissions by 2050, and proposesthat prosperous heavy­emitting develop­ing countries�including Mexico�be netcontributors to its �Green Fund�. Chinadislikes the idea, but it is gaining traction.

A further problem with the frameworkcreated at Kyoto is that it ignored some cru­cial sources of emissions�chief amongthem deforestation, the source of around12% of man­made greenhouse­gas emis­sions, more than the EU contributes in to­tal. Dealing with it is also one of the cheap­est ways of cutting emissions. But workingout how to do that is di�cult, which is whydeforestation got left out of Kyoto.

Cutting emissions from factoriesmeans paying people to do things di�er­ently. Stopping deforestation, by contrast,means paying people for not doing some­thing they might otherwise have done.This is tricky. Should people be paid foreach year in which they have refrainedfrom cutting down trees? If so, how much?And who, exactly, should be paid? Theowners or occupants of forests that are be­ing cut down? Or the owners or occupantsof all the forests in the world? That wouldeither be prohibitively expensive, sinceforests cover 30% of the Earth’s landmass,or the payments would not be highenough to protect the most endangered ar­eas of forest.

The UN programme for Reducing Emis­sions from Deforestation and Forest Degra­dation in Developing Countries (REDD),the main model under discussion at Co­

penhagen, favours the more limited ap­proach. But that, its opponents argue,would create a perverse incentive. AsBharrat Jagdeo, Guyana’s president, says,�You can’t have a sustainable strategy thatfocuses only on those places that have highrates of deforestation, otherwise you’ll getleakage. The logging companies will havean incentive to move to countries that haveconserved their forests,� as Guyana has.Creating a sensible mechanism to dealwith deforestation is going to require dif­ferent levels of payment�higher ones forareas vulnerable to being cut down forfarming and lower ones for the rest.

Despite the di�culties, avoiding defor­estation is regarded as a crucial tool for cut­ting emissions. Indonesia, for instance, hassaid that with REDD in place, it could cut itsemissions in two decades by 40% from2005 levels. A deal on deforestation there­fore looks likely�if not at Copenhagen,then in the near future.

Hold the champagneThat the world is gathering in Copenhagennext week to try to decarbonise the globaleconomy is a good thing in itself, and aconsequence of other reasons for opti­mism. It is now widely accepted that avert­

ing serious climate change is technicallyfeasible and economically a�ordable.Everybody has a good idea of what isneeded, in terms of money and emissionscuts, to get a deal. Most big emitters have ei­ther started on, or promised, serious reduc­tion programmes, and all of those coun­tries’ leaders have invested a lot of politicalcapital in being seen to make a success ofaverting serious climate change.

Copenhagen will not produce a de­tailed, comprehensive, legally bindingagreement. But with good luck and goodwill, something positive may come out ofit: a political agreement, which would beturned into a legally binding agreementwhen the fate of America’s climate­changelegislation has been decided, and a deal onsome speci�cs, such as forestry.

But even if Copenhagen’s participantsend up toasting their e�orts over the headof the little mermaid, what really matters ishow any international agreement is imple­mented at a national level. And there, al­though progress has been made, somethings are also going awry. Too little e�ortis going into carbon pricing and too muchmoney into subsidies. The system is get­ting fat with pork; and the more pork thereis, the smaller the chance that the worldcan cut its emissions without causing seri­ous damage to its economy.

And yet it can be done. Most of the nec­essary technologies are available. The eco­nomics can be made to work. Everythingdepends, in the end, on the voters andtheir political leaders. Willing voters andbraver politicians will mean better poli­cies. And better policies will enable man­kind to make a big di�erence to the planet’sfuture at a surprisingly small cost. 7