Sunday, September 14, 2008

When economists start to cook with gas...

MY NON-RANDOM sample of economists says many of them are deeply pessimistic about the chances of achieving a comprehensive global agreement on action to reduce greenhouse gas emissions.

But I think there are good grounds for optimism - many of which can be seen in the findings of Professor Ross Garnaut's inquiry. What's more, some favourite economist arguments are ill-conceived.

For a start, surprisingly little attention has been paid to Garnaut's finding - based on Treasury modelling - that the opportunity cost of action to reduce emissions is quite small.

Treasury estimates that reducing our emissions by 10% of their 2000 level by 2020 would cause real gross domestic product per person to grow by 0.1% a year less than otherwise.

This tiny cost is positively dwarfed by the benefits we'd receive: reduced risk of passing irreversible tipping points (such as melting ice caps) and the conservation of species and other environmental features (such as coral reefs).

Treasury's modelling also confirms that action to reduce emissions involves "increasing returns for effort". That is, should we adopt the much bigger target of reducing emissions by 25% by 2020, the cost in economic growth forgone rises only to about 0.15% of GDP a year.

Both those modelling results assume our participation in an international agreement where all the major economies pull their weight. With everyone in the tent, the costs to all parties are reduced and the fears of our emissions-intensive, trade-exposed industries becoming uncompetitive disappear.

Another cause for optimism is that an effective agreement requires participation only by the major emitting countries - counting the European Union as one, fewer than 18 rather than 180.

This is important because it reduces a problem that seems to worry economists: the temptation for countries to be "free-riders" on the efforts of others.

But people free-ride when they know they can shirk their mutual obligations with impunity - that is, at no cost to themselves.

The point is that each of the handful of major emitters accounts for such a significant share of global emissions that for any of them to believe they could get away with free-riding would be an act of self- delusion.

Many economists' faith in the possibility of a deal has been shaken by the recent failure of the Doha Round of multilateral trade negotiations. If we can't agree to capture the mutual gains from reduced protection that are before our eyes, what hope is there of nations agreeing to seek the less certain gains from reduced emissions?

But this analogy is also misplaced. With Doha, the only cost of failure is an opportunity cost - the gains from trade forgone. With climate change, the likely cost of failure is actual and huge: widespread destruction of farmland, inundation of costal areas, mass migration of refugees and extreme weather events. There's no comparison.

Politicians act when they're being pressed to act by their electorates. That's clearly the story in Europe. In Australia, Newspoll reveals that a comfortable majority of the population supports an emissions trading scheme (61%), even at personal cost (56%) and even if Australia is going it alone (60%).

Why such strong support? Because persistent drought has convinced Australians climate change is already happening. All it would take for a similar response in the US would be another hurricane Katrina or two.

Economists see the glass as half empty because they can't get it out of their minds that any economic sacrifice we make in reducing our emissions will be an utter waste in the absence of an effective global agreement.

But it's just as easy to see the glass as half full: the economic and social gains to us from an effective global agreement are so great that anyone with any sense would be willing to invest in success by putting a big offer on the table and getting on with doing our bit locally.

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