Kyoto Is Good for Business

Article excerpt

America's refusal to mend its ways in the face of climate change is foolish in every sense. In the long term, Adair Turner writes, being green pays

When George W Bush rejected the Kyoto accord, he said American jobs were his overriding concern. Many saw this as the triumph of market economics over environmental responsibility. But Bush's economics are confused. Action to curtail [CO.sub.2] emissions does not threaten jobs, and failure to act would be a rejection rather than embrace of market economics.

There is no absolute certainty that global warming is occurring- but there is a very high probability that the world is warming up and that the cause is the big increase in [CO.sub.2] atmospheric concentrations which has occurred since the industrial revolution.

Rapid climate change will cause great economic and social harm. Sometimes the impact could be catastrophic -- low-lying areas flooded by rising sea levels; sometimes simply regrettable - low-level skiing resorts made untenable. But the total cost is likely to be huge. Even on the narrow calculus of economics, the case for taking forceful action to limit climate change is overwhelming.

The required scale of action is also huge. Present emission levels are causing rising atmospheric concentrations. To stabilise concentrations will therefore require total global emissions to be brought below present levels. But the 4.5 billion people of the poor and developing world currently produce emissions that are, per capita, a quarter of those of the one billion rich. Since the only equitable and politically feasible long-term vision would give each country a roughly equal right to emissions per capita, the emissions of the developed world will ultimately have to fall not by the 5-10 per cent agreed in the Kyoto protocol, but by 70 per cent or more.

Cutting emissions by that amount will entail costs. Switching to non-fossil fuels would require us to commit more economic resources to energy-producing sectors. Cutting energy consumption would reduce productivity unless we invest more in capital equipment, higher skills and improved techniques. Both effects will tend marginally to reduce measured prosperity.

These prosperity costs will be manageable, however, because we enjoy two great advantages -- time and the power of market economics. We don't need to cut immediately, but steadily and at an increasing pace over 50 to 100 years; and the price mechanism is a powerful tool for achieving that adjustment at minimal cost.

The market-friendly policy, indeed, is not to reject Kyoto, but for governments to ensure a high and rising price of fossil fuels through the imposition of high and rising taxes. This would bring forward and smooth the rise in energy cost that would otherwise occur later and in a more disruptive step-change fashion. It would ensure that prices reflect the true costs that fossil fuel use imposes on the economy; and it would unleash the myriad adjustments that would enable us to cut emissions at only a small cost to growth. A petrol price rise produces only a small immediate cut in journeys made, but over the long term it influences whether people buy fuel-efficient cars, whether car manufacturers make fuel efficiency a priority in product development, whether their suppliers research new lightweight materials, and how intensely distribution companies focus on fuel costs in decisions on warehouse location. Price-elasticity estimates suggest that a petrol price rise of 10 per cent produces in the short term onl y a 1 per cent fall in miles travelled, but over the long run a 10 per cent or greater fall in petrol consumed. The more and the earlier we use market instruments -- tax in particular -- to stimulate action, the lower will be the total cost of adjustment.

Costs can therefore be made manageable. Studies by Cambridge Econometrics show that the cost of a 17 per cent reduction in Britain's [CO. …