Saturday, March 29, 2014

The Carbon Crunch: A book review

Last week Dr. Dieter Helm, a well-respected economist at the University of Oxford, agreed to meet with me regarding my masters thesis. To come prepared to the meeting, I read much of his work, including his most recent book, The Carbon Crunch: How We're Getting Climate Change Wrong - and How to Fix it. The book puts a very interesting spin on what we know about climate change mitigation policies and is well worth reading. 

The Cover of Dr. Helm's book

Dr. Helm's main point is that current policies and technologies are not enough to keep global warming below 2 degrees C, the threshold that most scientists agree would not cause catastrophic climate change. In the first chapters, he sets the scene with the following arguments:
  1. Coal is by far the dirtiest fossil fuel we have. Burning it releases twice as much CO2 as burning natural gas, in addition to other polluting gases from the NOx and SO­x family, as well as small particles. These cause major air pollution and cause the early deaths of millions of people every year. Coal mining is also a dangerous business: by far more people die every year from coal mining than from all nuclear power plant accidents to date combined.
  2. Because of its relative safety (compared to coal) and very low CO2 emissions (compared to all fossil fuels), nuclear power generation is a good option. However, nuclear is too unpopular and public and political sentiment about it changes very quickly. This was shown by the sudden German exit from nuclear after Fukushima, despite previous heavy investment into nuclear.
  3. Current renewables are too intermittent to be a reliable source of energy. When the wind is not blowing and the sun is not shining (which can be quite often in Europe, especially in the winter), coal- or gas-fired power plants need to make up for the gap. The more renewables in the system, the larger this gap becomes, and the larger the need for coal and gas. 
  4. Carbon consumption is the largest problem. Even if the power and manufacturing sectors in Europe decarbonizes completely (which is impossible due to the intermittency of renewable energy), Europeans will still import carbon-heavy goods from other countries, mainly China. China uses coal for 80% of its power generation and, together with India, adds 3 new coal power plants every week.
  5. Improving energy efficiency will not help us either, for three reasons. First Jevon’s Law dictates that as energy efficiency improves, so does energy consumption. Second, more energy will be consumed worldwide as living standards in developing countries rise. Millions of people in countries like China are already buying cars, fridges, and other energy-intensive goods.  Finally, at least 3 more billion people will be added to the world population by 2050, and they will also want to consume energy.
  6. New fossil fuel discoveries, such as the shale gas revolution, show that we will not run out of fossil fuels anytime soon. There is no peak coal, oil or gas in sight. We have plenty of fossil fuels left to warm the planet catastrophically.
  7. The Kyoto Protocol is not effective enough and there is going to be no international agreement on climate change that works for at least for another decade.
  8. The current EU ETS is ineffective because the price of carbon is too low. The free emissions permit allocation system leaves space for widespread lobbying.
Having set the scene, Dr. Helm recommends the following actions for climate change mitigation.
  1. Given that burning coal releases twice as much CO2 per unit of energy than burning gas, replacing coal with gas would be the best transition strategy.  In fact, it would cut our CO2 emissions more than using renewables. This is demonstrated by the fact that in the US, which replaced some of its coal capacity with cheaper shale gas, CO2 emissions fell down rapidly in the past five years.
  2. We must stop investing in intermittent renewables. They are not financially feasible and their intermittency means we are still heavily dependent on fossil fuels. Instead, we should invest into R&D for new renewable technologies.
  3. Decarbonizing our energy production is not enough—it may even make things worse as industries move to coal-intensive countries like China. We must address our consumption as well to truly cut our carbon emissions.
  4. To cut our consumption, a carbon tax must be implemented, taxing every good by its carbon content. To keep our exporters competitive, we will not tax our exports. We will also not tax imports that were taxed for carbon at home. A carbon tax will give us a fixed price of carbon that we can control and will remove the current space for lobbying.
  5. The carbon tax has another positive: it will put pressure on our trading partners to implement their own carbon tax. After all, why should they leave the tax revenue to us if they can keep it themselves? Thus the carbon tax will also lead to the creation of a bottom-up carbon pricing regime.
  6. The carbon tax will hurt. Consumers will substitute some of their consumption for less carbon-intensive goods, but their real income will fall nevertheless. Politicians are aware of this and must tell this to their electorates.
From my perspective, Dr. Helm's arguments make perfect sense. They are supported by convincing examples. The book's recommendations are in line with what I have argued in the past. The only problem I see is that there might be a strong international political backlash against a carbon tax. EU trading partners could see it as protectionism and sue the EU in the World Trade Organization (WTO). Although Article XX of the WTO does provide exceptions for environmental protection, a result in favor of the EU is far from certain given the past rulings of the WTO Appellate Body. Dr. Helm replied to my concern by saying that invoking the WTO is EU's excuse not to change its current, ineffective Emissions Trading Scheme (ETS), into which it has invested too much political capital.

That may be true. But no matter who is right, one thing is certain. If we do not try a border tax, we will never know if it works. The current EU ETS is not working and needs an update. Dr. Helm's recommendations might be a very good start.


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