Money Talks, Carbon Walks

A commercial intercourse with Africa opens an inexhaustible source of wealth to the manufacturing interests of Great Britain, and to all which the slave-trade is an objection.

[I]t lays open an endless field of commerce to the British manufacturers and merchant adventurers. The manufacturing interest and the general interests are synonymous. The abolition of slavery would be in reality an [sic] universal good.

Olaudah Equiano, a freed slave campaigning for the abolition of the slave trade in the late 18^th century, understood that the slave trade was as much an economic issue as it was a moral one. Hence the campaign for its abolition would need to stretch beyond moral reasoning and embrace economic interests. Over two centuries later, a combination of ethical obligations and financial incentives is once again spurring the global community into action.

The adverse changes in the environment triggered by the burning of fossil fuels have been a focus of continuing debate within scientific, political and business circles. There is a growing consensus that modern society’s insatiable appetite for energy is eroding the climate’s delicate balance, with wide-ranging effects from rising temperatures and sea levels to devastating tsunamis and hurricanes.

However, while the moral case for preserving the environment for future generations is compelling, the socioeconomic costs of reducing greenhouse gas emissions hinder the implementation of corrective measures. In E&E TV's OnPoint interview program aired on 13 December 2005, Margo Thorning, managing director of the International Council for Capital Formation, argues that European governments do not have the political will to impose energy taxes high enough, across all sectors of the economy, to force energy use down. “We found, using a broad macroeconomic analysis, that the gross domestic product of four major EU countries would be significantly reduced [if they imposed taxes high enough to hit their targets],” says Ms. Thorning. “So the economic consequences of actually trying to hit the targets are quite significant.”

The Kyoto Protocol establishes a mechanism for international trading in emissions as well as project-based mechanisms including the Clean Development Mechanism and Joint Implementation. These provide a strong incentive for economies to invest both domestically and internationally in clean energy. In addition to energy savings that would be achieved, some of the cost could be recouped by trading their emissions credits. The EU estimates that with its Emissions Trading Scheme, the cost of meeting its Kyoto targets should be between €2.9 billion and €3.7 billion annually, less than 0.1 per cent of GDP. The cost of meeting the targets without the scheme could spiral to €6.8 billion annually.

Economic activities are based on scarcity in relation to supply and demand, so placing a limit on carbon emissions provides the price mechanism on which a carbon market can be built. Using the cap-and-trade system, the EU ETS rewards energy-efficient companies while simultaneously sanctioning companies that breach their carbon emissions quota. This encourages companies to develop processes and technologies that reduce carbon emissions, to the mutual benefit of both the economy and the environment.

Rapidly developing economies such as China and India – major sources of emissions growth – are excluded from emissions targets under the Kyoto Protocol. The Development Research Centre of China’s State Council forecasts 8 per cent GDP growth annually from 2006 to 2010. The country’s energy requirement, dominated by coal and oil, is set to keep pace with its GDP growth. “If China alone just develops on business as usual, no special environmental policies or changes, all the coal plants that it will build in the next 20 years will make it impossible to reach any of the targets to prevent the worst damage from climate change,” says Vijay Vaitheeswaran, energy and environment correspondent for The Economist in the 18 October 2005 episode of OnPoint.

The CDM provides the financial incentives for technologically advanced countries to share their emission-saving technologies with less developed countries that do not have emissions targets. The savings resulting from the technology transfer can be credited towards their own emissions targets. Mr. Vaitheeswaran adds that rich countries like the US can bear the cost of developing new technologies such as IGCC, which is a way of producing cleaner energy from coal: “We can make [these technologies] commonplace and then the Chinese and the Indians will adopt [them].”

Certainly, the US federal government, who still shuns the Kyoto Protocol, is not convinced of the viability of emissions trading. However, their agreement to participate in further talks on international cooperation on climate change signifies willingness to confront the issue as long as the economy is not harmed. Meanwhile, less suspicious state governments are jumping on board, with nine Northeastern and Mid-Atlantic states participating in the Regional Greenhouse Gas Initiative.

While environmental activists continue to pressurize governments and businesses to fulfill their moral obligations, the sound of the cash register just might convert boardroom executives into eco-warriors. Like Olaudah Equiano figured, actually.