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Capitalism and climate change

"The Market has failed. Long Live the Market!" is the illogical conclusion of the Stern Report on the Economics of Climate Change published at the end of October.

Climate change, the report says, presents a unique challenge to economics: it is the greatest and widest-ranging market failure ever seen. Further, if nothing is done if business-as-usual, or BAU as the report calls it, continues things will get worse: Our actions over the coming decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century.

This devastating description of one of the consequences of capitalism doesnt come from some socialist critic of the profit system, but from a pillar of the Establishment, Sir Nicholas Stern, a former chief economist at the World Bank and now an adviser to the Chancellor of the Exchequer.

The failure in question is that the spontaneous operation of the market has resulted in the release of so much carbon dioxide into the atmosphere that it has caused the average world temperature to rise and to go on rising (because of the time lag between cause and effect) for the next forty or fifty years. The market-oriented enterprises responsible coal, oil and gas burning power stations, heavy industry, airlines, rail and other transport firms, car producers have only had to pay for those costs that they have had to buy on the market; as releasing carbon dioxide costs them nothing it is not something they have had to take into account. So they havent, with the results described by Sir Nicholas Stern in the first part of his report.

As a conventional economist, he sees the solution as making the polluters from now on pay in one form or another. Traditionally this would have been through taxation and regulations. Stern still sees a role for these, but proposes to give spontaneous market forces a second chance via so-called carbon trading.

Carbon trading

Under this scheme there would be an international agreement fixing an overall level of carbon emissions for each country which would be less than what it currently emits; that country would then set enterprises within it an allowed level of emissions. If they exceed this level they would be fined. On the other hand, if they emit less carbon than allowed they can sell the unused part of their quota to some other enterprise even in another country. This other enterprise can then emit more carbon than allowed to it, without having to pay the fine.

Carbon trading is the buying and selling of such permits to pollute. It is supposed to help the environment by giving polluting firms a monetary incentive to reduce their emission even lower than the allowed level; the more they reduce their emissions below this level the more money they can make from selling their surplus permits. The buyers of these permits would be firms having difficulty reducing their emissions below the level allowed them; if they failed to reduce to this level they would still have to pay something, but the idea is that buying a permit would be cheaper than paying the fine.

A market for permits to emit carbon dioxide would thus develop. Where theres a market there will also be middlemen, who in this case will specialise in the buying and selling of these permits. There would also be the possibility of speculating on future changes in their price.

Two such schemes already exist. The Emission Trading Scheme, run by the European Union, and the Clean Development Mechanism provided for under the Kyoto Treaty. One carbon trader, James Cameron (who had helped negotiate the Kyoto Treaty), has said of such schemes:

What is happening in these markets is the creation of environmental value. The deals being done will mean large volumes of greenhouse gases are being taken out using the capitalist system (Times, 12 September).

Will it work?

Thats the theory and it is true that, to work, such schemes depend on the emergence of profit-seeking carbon traders like Cameron. Actually, however, these schemes are still bureaucratic attempts to manipulate the market and so are open to political interference, mismanagement and corruption, as the experience of the EUs scheme shows. Under it member-state governments and the European Commission negotiate quotas per country and then the countries allocate the quotas to individual enterprises (mainly power stations) within their borders.

But instead of governments vying with each other to reduce carbon emissions, they have sought to win advantages for their own industries by asking for, and then allocating, over-generous quotas, with a view to allowing their industries to profit by selling permits they never needed in the first place. The trouble is that, if the quotas are too generous, the supply of permits will far exceed the demand, so undermining the whole scheme. Which has threatened to happen, as the Times (9 October) reported:

“The future of Europe’s Emissions Trading System (ETS) hangs in the balance as officials in Brussels prepare to do battle this month with member states to uphold the credibility of a market in permits to pollute. The market stands accused of generating billions of euros in windfall profits for utilities at the expense of consumers.

The European Commission needs to clamp down hard on member states, market analysts say, if it is to rescue the ETS, which has fallen into disrepute over lax carbon emission targets set for the first phase of the scheme from 2005-07. The ETS was devised to create a market incentive to cut greenhouse gas emissions that cause climate change, but the market was undermined from the beginning by weak-willed governments. The system imposes a cap on emissions of carbon dioxide, forcing companies that exceed their allowance to buy ‘permits to pollute’ from companies that manage to cut emissions. European governments were too generous with the caps, causing the price of permits to collapse in May. Lack of confidence in the market encouraged power generators to switch from cleaner gas to dirty coal. The cap in the first phase was 100 million tonnes more than actual emissions in the first year...”

British capitalists have been complaining that the less stringent quotas proposed by other governments would give their enterprises a competitive edge over British ones:

“Britain has submitted its carbon allocation plans to the European Union before most other countries, generating fears that ministers will damage industry’s competitiveness through their eagerness to be in the vanguard of environmental improvements. ( . . .)

Martin Temple, director general of the EEF, the manufacturers’ organisation, said:

‘Yet again, the UK is in the vanguard whilst the rest of Europe remains in the starting blocks. Not only have we published targets ahead of the majority of our major European competitors, but set limits which are likely to be far more stringent.

While much of the immediate burden will be felt by the electricity generators, these costs will be passed on to industry and other energy consumers. At a time of rapidly rising energy prices, the Government’s desire to show leadership risks further eroding our competitiveness’” (Times, 22 August).

Some of this will be upping the ante in negotiations, and the scheme will survive, perhaps in a more rigorous form. But if such a scheme experiences difficulties like this in the EU which, with a relatively strong inter-governmental body in the Commission, reasonably reliable statistics and a relatively corruption-free civil service, is the part of the world where it stands the most chance of working, what is the likelihood of one working at world level, as Stern insists would be necessary?

Competition not cooperation

In fact, what are the chances of any world agreement to reduce carbon emissions being achieved? Clearly, climate change is a world problem and as such can only be tackled at world level. But, as the experience of the Kyoto Treaty of 1997 shows, the chances of the world’s major capitalist states agreeing on an adequate and effectively enforced programme are practically nil.

The reason for this is mentioned, but only in passing, in the Stern report:

Costs of mitigation of around 1% of GDP are small relative to the costs and risks of climate change that will be avoided. However, for some countries and some sectors the costs will be higher. There may be some impacts on the competitiveness of a small number of internationally traded products and processes (emphasis added).

Quite, but then Stern adds complacently, not to say idiotically, These should not be overestimated, and can be reduced or eliminated if countries or sectors act together.

If it is going to be that easy to get international cooperation on reducing carbon emissions why has the US consistently refused to sign the Kyoto Treaty? And why have most of the wars of the last century had oil as a factor either directly or indirectly? And what about the current war in Iraq and other conflicts in the Middle East and Central Asia , are these not evidence of the near impossibility of getting international concord and harmony about oil, the burning of which is the root of the problem of global warming?

President Bush, in a television interview with Trevor MacDonald when he was in Britain for the G8 Summit last year, bluntly stated the US governments view of Kyoto:

There was a debate over Kyoto, and I made the decision … that the Kyoto treaty didnt suit our needs. In other words, the Kyoto treaty would have wrecked our economy . . . I walked away from Kyoto because it would damage Americas economy, you bet. It would have destroyed our economy. It was a lousy deal for the American economy (ITV, 4 July).

The clue to why the Bush administration took this position can be found in the figures for carbon dioxide emissions per person by country. A map published in the Times (30 October) showed that only three countries exceed 15 tonnes per person the US, Canada and Australia. EU countries all fall in the 5-10 tonnes range. In fact the US releases more than twice as much carbon dioxide into the atmosphere per person than Britain: around 20 tonnes compared with 9.5. (Incidentally, such statistics are often interpreted wrongly to mean that the average individual American releases twice as much carbon as the average British individual; what in fact it means is that US industry releases twice as much carbon as European industry per head of population. If individuals in the US, or in Britain for that matter, were to reduce their personal release of carbon dioxide into the atmosphere, as for instance by not driving gas-guzzling cars or by turning off the lights when they leave a room, that would only marginally reduce the figures.)

Bush and his government are charged with looking after the overall, general interests of US capitalist corporations. They concluded that, because US industry depends proportionately more on energy derived from burning fossil fuels than most other countries and trading blocs, it would cost it comparatively more to reduce carbon emissions, so undermining its competitiveness vis-à-vis its main rivals on the world market, especially Europe. This is why US corporations have hired scientists to rubbish the proposition that the current global warming is mainly caused by human industrial activity (they suggest a natural cause such as a slight warming of the Sun). And is why the US government will walk away from any other scheme to reduce carbon emissions that would put its industries at a competitive disadvantage.

We are not in a position to judge who is right about what is causing global warming but it is happening and, whatever its cause, its consequences changing agricultural productivity in different parts of the world, population migrations, a rise in sea level can only be dealt with by planned and coordinated global action within the framework of a united world. Only in a frontierless world in which the Earths natural and industrial resources have become the common heritage of all humanity can the necessary measures be taken to stabilise carbon emissions and to deal with the consequences of global warming.

At one time even supporters of capitalism would have proposed, if not a world capitalist government, at least some world body with real powers to coordinate a response. Now, all they can come up with as in the Stern report is to rely on profit-seeking carbon traders to solve the problem. If thats all capitalism can offer, then, in the words of Private Fraser, we are all doomed unless, that is, we establish world socialism.

ADAM BUICK