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Climate Politics

Irwin Stelzer: What happens in Paris won’t stay in Paris

Stetzler
Stetzler
Senior Fellow Emeritus
Unesco headquarters in Paris. France will host the Climate change conference (Cop21) in Paris from November 30 to December 11, 2015. (Chesnot/Getty Images)
Caption
Unesco headquarters in Paris. France will host the Climate change conference (Cop21) in Paris from November 30 to December 11, 2015. (Chesnot/Getty Images)

At the end of this month representatives of some 200 nations will gather in Paris for the opening of a United Nations-sponsored conclave to prevent the cataclysm that President Barack Obama, backed by the moral authority of Pope Francis, believes will befall the world if we do not slow the pace of climate change. There will be no treaty to enshrine the deal, for the very good reason that such a treaty would not receive the consent of the U.S. Senate. Some who would oppose it do not believe the globe is warming; some fear the effect of measures to phase out fossil fuels on an already-slow-growing economy; some do not want to endorse a massive intrusion by the government into still another key sector of the economy, the energy industries; still others are determined to deny Obama a victory that in his mind will require history to treat him kindly—adding to his “legacy,” as his supporters would have it.

Most important to many members of Congress is a desire to put the world on notice that any agreement reached in Paris will be, to borrow from George Gershwin, “a sometime thing,” to be abrogated by an incoming Republican president on day one of his tenure. But such a move by a new president is highly unlikely and, more important, undesirable. It is one thing to promise to wipe the slate clean when campaigning for the nomination or for the office. It is quite another to sit in the Oval Office and announce to 200 countries that they cannot take the word of an American president, especially when it was that president who was the driving force in getting them to sign on to the Paris accord. The next president of the United States will have as one of his or her major tasks restoring the credibility of a country that has made a practice of abandoning its allies. Surely, voiding an agreement with our world partners is not a new president’s sensible first step on the road to renewed U.S. credibility.

There are economic as well as political reasons that any Paris deal, or at least its consequences, cannot simply be willed out of existence. Energy investments have long lives, many 40 years or more. Businessmen, even while cheering the victory of a successor who will have no truck with the Obama version of global warming, know that in four or eight short years he or she will be replaced, perhaps by a greener president—or that more evidence might have established that there is indeed a carbon-caused trend toward a warmer climate. So even if the EPA’s so-called Clean Power Plan does not survive the court challenge being mounted by a variety of business interests and more than two dozen states, it already has changed how many companies do business. Even those executives who doubt that their activities are causing floods, droughts, earthquakes, melting ice, and other unpleasantness are deeming it prudent to put in place compliant measures, rather than continue to invest in capital equipment that has a reasonable probability of becoming valueless before it is fully depreciated. No less a person than Mark Carney, governor of the Bank of England, has warned of such a possibility, and urged investors and insurers to take it into account. Some companies are doing just that by pricing carbon into capital allocation decisions, even as they continue to voice doubts about the evidence that we are headed towards hotter days. These executives are convinced that the anti-global-warming train has left the station. As they see it, they are faced with a Hobson’s choice: hop aboard or explain to shareholders why they are risking waving goodbye to billions in assets, as some in the utility and coal industries are finding themselves forced to do.

So there is a sense in which the state and corporate litigants—even those who profess confidence that the courts will find that the EPA has exceeded its authority under the Clean Air Act—for all practical purposes have lost their fight. Many states are accepting the EPA’s offer to develop compliance plans suitable to their particular circumstances—subject of course to EPA approval—with some likely to incorporate market-based cap and trade systems or taxes on carbon emissions in their plans. “The initial read is that a market-based approach is more workable,” says John McManus, vice president of American Electric Power, a utility serving 11 states. As for the corporate sector, 81 companies with a combined market capitalization of $5 trillion have pledged to reduce their carbon footprints by signing on to the “American Business Act on Climate Pledge” sponsored by the White House, some out of conviction, others out of fear of the consequences of snubbing the president.

But unless and until some market-based attack on carbon-dioxide emissions is formalized, the American contribution to the Paris deal will rely on an elaborate and costly regulatory mechanism. That is not entirely Obama’s fault. He initially proposed a more market-based plan, known as cap and trade, that would have allowed polluters to trade permits so that the least costly compliance methods would be adopted. His conservative opponents shot it down—and have continued to oppose an even more efficient system, urged on them by economists of all political persuasions: taxing or pricing carbon so that consumers and investors, rather than regulators, can decide which use of fossil fuels to reduce or eliminate.

As Obama and those who worry about the effect of the use of fossil fuels on our climate survey the horizon in advance of taking off for Paris, they cannot miss one worrying cloud on the horizon. The developing nations are arguing that we are in the mess in which we find ourselves because of the industrial activities of richer nations, and that any costs they are asked to bear to stem the rise in temperatures should be compensated by income transfers from richer to poorer. This is old wine in new bottles: Even before the problem of global warming was discovered, or invented if you deem that more accurate, the developing nations were demanding just such income transfers.

But supporters of the wealth transfer have a new arrow in their quiver. They contend that the fight against poverty is in essence the fight against global warming. Pope Francis, who has replaced Karl Marx as the world’s most famous opponent of the distributional and ecological consequences of market capitalism, has made just such a case in his encyclical Laudato Si. Cardinals, patriarchs, and bishops from five continents, key leaders of the pope’s divisions, inspired by that encyclical, gathered recently in Vatican City to appeal to the negotiators to craft a “fair, legally binding and truly transformational climate agreement .  .  . linking climate change to social injustice and the social exclusion of the poorest and most vulnerable of our citizens.” They also called for “an end to the fossil fuel era.” Satisfied with their work, they boarded planes and returned home. And Nicholas (Lord) Stern, a longtime and influential proponent of action to prevent climate change, writes, “A low-carbon transition in the coming decades .  .  . must be linked with .  .  . the challenge of world poverty.” At this writing, the intended beneficiaries of the income transfers, set to reach $100 billion annually by 2020, are not satisfied with the quality of the guarantees of payment: They want specifics on how the money will be raised before they sign on the dotted line. A worry for Obama, but not a crushing concern. Neither this nor any other problem will be allowed to stand in the way of an agreement: The income-transfer guarantees will be strengthened or the problem papered over.

The president and his Paris colleagues will not be able to claim complete victory. Not that they want to do that anyway: To say that we came to Paris, we met, we talked, we haggled, and we solved the problem of climate change would be to sheathe the regulatory sword, no longer needed to slay opponents, offensively dubbed climate change “deniers,” a word until recently reserved for those who deny that the Holocaust occurred. It is not the habit of politicians and regulators to declare victory and themselves no longer relevant. In the case of the Paris meeting, they have a good excuse to declare the conference a mere first step in the fight to prevent further warming. The goal of the meeting was to limit increases in global temperatures to less than 2 degrees Celsius. Judging from the plans filed by China, the EU, and the United States, along with about 150 other countries that together account for 86 percent of emissions, the combined effect of all the plans will fall short of that goal—in part because China, which has misreported its coal usage since 2000 and is emitting a billion more tons of CO2 than it has reported, Japan and Russia have offered a mere fraction of the reductions promised by the United States and the EU.

At a recent meeting in Berlin, U.N. officials assessed all the plans then available and concluded that “fully implemented, .  .  . the INDCs [Intended Nationally Determined Contributions] have the capability of limiting the forecast temperature rise to around 2.7 degrees Celsius by 2100, by no means enough.” This provides the climate-change activists with a basis for arguing that peace with “deniers” is not to be had in Paris. As the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, chaired by Lord Stern, puts it, the Paris deal should “encourage countries to upscale their ambition every few years” as new technologies become available, an ominous warning that the ambitions of the green interventionists are not limited to whatever the outcome of the Paris get-together might be.

It would be churlish to deny that the president and his international colleagues have succeeded in much of what they set out to do—put in place a system, imperfect and yet to be proved capable of implementation—that accepts that climate change is a threat to the Earth’s survival, and that the nations of the world can be persuaded to participate in a program to reduce that threat. That is no small achievement, and the president is entitled to claim the Paris deal will be as much a part of his legacy as the free trade agreements he has negotiated and the deal with Iran that will purportedly delay the day when that theocracy will be found to have obtained nuclear weapons.

Here is the sting in the tail, or several stings, for that matter. The plans contain no penalties for nonperformance. They are in essence promises by the signatories to take certain steps to reduce greenhouse gas emissions. While government delegates to the Paris meeting are congratulating themselves on their cool accomplishments, their colleagues at home and the energy markets are creating a reality that will eventually make it more difficult than they now imagine to achieve their goals. The promises made may very well not turn out to be promises kept when they come into contact with the harsher political, technological, and economic realities that await their return home.

The first such reality is the stalled growth of many industrial economies and the disastrous condition of developing countries as they cope with capital flight to the safe haven of the dollar, the debilitating effect of corruption, and the collapse of commodity prices in the face of a fall-off of demand from China and a strengthening dollar. Combined with the increase in inequality being experienced in many countries, slow growth is an invitation to social discontent, often resulting in the one thing politicians fear most—being turfed out of office. No matter what unenforceable promises are made, if implementation of the plans threatens to reduce already feeble growth rates, or noticeably and significantly drive up the cost of energy for many families, those promises will not be kept. And there won’t be very much the complying signatories can do about it, with the possible exception of imposing tariffs on imported goods manufactured in emissions-producing plants, which would involve a round of litigation with the World Trade Organization.

Slow growth has another consequence not favorable to compliance: fiscal stringency. A shortfall in tax revenues needed to fund welfare states and military budgets inevitably causes treasury officials to hunt for cash. New taxes are politically unpopular, and the international mobility of the rich, and of major corporations, makes them a less promising source of added revenue than they once were. So nations short of cash have taken to reducing subsidies, often inefficiently deployed, to the renewable sources of energy that Obama and friends are counting on to replace fossil fuels. Renewable sources—wind and sun especially—already suffer from the disadvantage of their intermittent availability and from storage costs (batteries) that are currently some three-to-five times higher than levels that would make them economic. The issue with existing batteries is “they are expensive, unreliable, and bad in every way,” says Elon Musk, who will sell you a battery-powered Tesla SUV for $135,000, or a sporty sedan for around $80,000, less if you net out the subsidy federal and some state governments pay to those who buy these vehicles.

In Britain, budget caps have superseded promises of subsidies intended to fund decarbonization. In Spain, long a leader in producing and exporting solar-based energy, budget shortfalls and threats to the viability of the grid still needed for reliability by solar-panel-roofed-consumers led not only to the end of subsidies but to the introduction of a “sun tax” on solar-generated electricity. Germany, which on one day last summer got almost 80 percent of its energy from renewables—the sun shone on the solar panels in its south, and storms turned the wind machines in its north—is finding that it is more expensive to phase out its nuclear plants than originally thought, driving businesses to expand overseas and forcing utilities to use more emission-heavy dirty coal. In America, regulators who thought it a good idea to force electric utilities to pay consumers for any excess solar power their rooftop panels generated at the same rates those consumers paid the utilities at night or when the sun doesn’t shine (“net metering” in the jargon of the trade) now realize that such consumers are contributing nothing to the cost of the grid on which they remain dependent for reliable supplies. Customers subsidizing the solar users have become increasingly restive as middle-class incomes stagnate, but rent, food, and other things they must have—electricity among them—become more expensive.

Most important, although the costs of solar panels and wind machines are falling, so is the cost of natural gas, the fossil fuel of choice of electric utilities. It has plunged from a peak of almost $12 per thousand cubic feet in 2005 to a bit more than $3 today. The American Council on Renewable Energy notes that the growth in investment in renewables is likely to come to a screeching halt in 2017: When the full impact of the end of subsidies is felt, that investment will plunge by 73 percent, according to a study by Bloomberg New Energy Finance. And if solar subsidies expire at the end of next year as now scheduled, solar photovoltaic installations are forecast to drop 46 percent. The Economist sums it up: “How far renewable energy can develop without further subsidy is one of the world’s hottest questions. It will surely need to become a lot more economic if the world is to stop using fossil fuels by 2100.” And more environmentally friendly. Massive solar installations gobble huge quantities of land and fry unsuspecting birds, incinerating one every two minutes in the case of the $2.2 billion (backed by $1.6 billion in government loan guarantees) BrightSource solar plant in California’s Mojave Desert, according to the Fish and Wildlife Service.

My guess is that when the unenforceable political promises made in Paris collide with slow growth, the high cost of renewables, the difficulty of persuading voters with stagnant incomes to pay now for difficult-or-impossible-to-measure benefits in the far distant future, and the low cost of natural gas and oil, it is the political promises that will be reexamined.

But that does not mean the Paris conference is doomed to failure. It has already accomplished some of its goals. It has established a process for coordinated international action to reduce carbon emissions. It has forced countries to at least describe a plan to contribute to reducing their emissions. It has helped those who want to make the case for still further action to do just that. These successes, and polls showing that the vast majority of voters favor reducing emissions and a revenue-neutral tax to accomplish that objective, should persuade conservatives that, whatever their pique at a president who derides them as “deniers” of a “settled science” and says they threaten national security—climate change being a greater danger than ISIS—they cannot simply stand in front of the environmental express train and yell “Stop!” Moreover, conservatives can now see the cost of opposing prudential market-based solutions—creation of a costly and inefficient regulatory regime that vastly expands the reach into, and the power of government over, perhaps the most important sector of our economy. Pressures on Paris promises will create an opportunity to reconsider how those promises are to be redeemed.

Time to take a deep breath, as Republicans did when supporting the use of markets to clean our air at minimal cost—to internalize externalities, as economists of all persuasions would have us do—and ask, “If there is even a slim chance that the globe is warming, and given the facts that a carbon tax makes it possible to stimulate growth by lowering marginal tax rates on businesses and workers, and that a $16 per ton tax, according to Jerry Taylor of the Niskanen Center, would add only about 16 cents per gallon to the plunging price of gasoline, which could be offset in whole or part by reducing payroll taxes, should we use the tax reform that may be in our future to replace the long arm of the EPA with an approximation of Adam Smith’s invisible hand?” That’s a long and loaded question, I know. But it does need answering.