Wednesday, January 28, 2009

Climate trilogy wrap-up

Today, the European Commission released a “Communication” about the post-Kyoto climate agreement to be negotiated at Copenhagen, so I figured this would be a good moment to deliver the promised third in my climate change trilogy of posts.

As it turns out, Obama is a Rorschach test for Europeans, too. In my travels this month in Brussels, one EU official said “Obama is our great hope,” and literally every person I talked with expressed some version of that sentiment. Today’s Commission communication is infused with that idea – it’s like a sprint out of the blocks after last Tuesday’s starter’s pistol. It calls for EU-US work towards an eventual international OECD carbon market, which echoes what I mentioned a few posts ago – that a number of people in the Commission talked to me about an immanent “transatlantic carbon market.” “The battle of words between Europe and the US over climate change is now over,” said John Bowis today, a member of the European Parliament. European policy-makers talk about the Bush-era dynamics of international climate negotiations in the past tense, which may be appropriate, but it still leaves open the question of what dynamics replace them, and this is where Europeans, like Americans, seem to see what they want to see in our new President (who is awesome, by the way.)

I really don’t think we are close to seeing a transatlantic carbon market. First of all, in order for two or more countries to have linked carbon markets, those countries have to have domestic carbon caps of comparable stringency. Otherwise, you’d have different prices in different countries, and the linking would simply lead to a wealth transfer from one country to another. I don’t think the US is about to jump into the cap and trade business at the same level as the EU. We don’t have to – the flip-side of our profligacy should be that we have available many more low-cost reductions than the Europeans. Of course, as discussed in my last post on the subject, if we really want to stimulate innovation we need to set a stringent-enough cap to get above the low-hanging fruit, but first things first. I just find it hard to believe that the domestic politics allow for a really big first step. Second, the EC communication talks about dedicating a significant portion of the revenues raised by auctioning of allowances under a linked developed-world cap and trade system to a technology, mitigation, and adaptation fund for developing countries, to help them start to slow their emissions growth. We’re talking about hundreds of billions of dollars through 2020. One American policy-maker said to me last week that he would bet his life that Congress will approve no wealth transfer to China. So as a next-decade strategy, I think the EU’s Copenhagen negotiating position is a pipe dream. Maybe they know that, and it’s simply a negotiating position. And maybe I’m wrong. I’m hedging because I’m new to this, but that’s what I think.

Nevertheless, I promised some good news, and it is simply this: For at least a little while longer, the slope of the curve matters more than absolute magnitude. I really, really doubt that the US is going to be doing its share to get a handle on this problem – to satisfy the 2 degrees – by 2020. The EU is not asking for more than is required; they may not even be asking for what is required. And I’ve just said that I don’t think there’s much of a chance that the US is going to go there. But I do think that we might get to a point, by 2020, where the slope of the curve is good; where we are starting to really abate emissions pretty rapidly. And if that’s the case, and by then we are charging towards an attractive mid-century global emissions level, then it probably won’t matter if it took a few marginal years to get serious.

This is where some good ole’ fashioned America-rocks thinking comes into play. I just think that once we really turn to this – once we get our first carbon price into the market, once we start innovating, once we start growing an industry that wants to make money globally, once we add, in Lincoln’s words, “the fuel of interest to the fire of genius” – we stand to make fast progress. We’re getting close to a “too late” moment – maybe we’ve passed it. But just like the EU ETS needed a few years to work out the wrinkles and start counting things, so does the US need a few years to find its footing at last, though late, on this problem. Europe will be frustrated during that time – today’s communication presages that – but I’m optimistic for what will happen once we do.

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