Feature Stories | Mar 31 2008
By Greg Peel
It is now history that the Howard government was ousted in Australia after eleven years on a majority belief that John Howard had lost touch with the concerns of his people. Among many such concerns was the previous government’s refusal to ratify the Kyoto Protocol, which carried implications that Howard was favouring industry over the environment and remaining an acolyte to the US – the only other signatory nation not to have ratified Kyoto. The argument from both was that emissions reduction was meaningless in the developed world unless the emerging world was stripped of its Kyoto exemptions. This seemed like a convenient stand-off.
New prime minister Kevin Rudd ratified Kyoto almost on day one of his appointment, ahead of the new round of international negotiations that were due immediately in Bali. The Bali round was the first step in laying the foundation for a new global protocol required when Kyoto expires in 2012. It is clearly the Rudd government’s intention is to assert whatever influence it can in the international discussions, justifiably so given Australia’s high per-capita carbon emissions and significant exports of coal. However, even Mr Rudd would admit that the ratification of Kyoto was more symbolic than constructive, and that the challenge now lies ahead to get serious. Already Mr Rudd has expressed his frustration at the glacial pace of meaningful developments, speaking on his current trip to the the US and elsewhere.
By 2012 Mr Rudd plans to have established a fully operational “cap and trade” carbon scheme in Australia – a scheme that will be no doubt less inclined to offer significant exemptions to heavy polluters as the Howard government was preparing to do. Such a scheme sets emission reduction targets and then offers rewards in the form or carbon credits which are offered to those who reduce their emissions and those who can specifically offset emissions. The market then determines the value of those credits. This is the system which has been established for some time now in Europe, albeit after a shaky start. NSW, in particular, has just learnt the same lessons of Europe in watching the collapse of the value of its NSW Greenhouse Abatement Certificates (NGAC) for the very reason of excessive exemptions. Europe had previously suffered the same experience.
The cap and trade system has been targeted by many economies as the way forward, and preferable to a straight carbon tax. Whereas a tax would put money into government coffers which could then be used on “green” projects, cap and trade encourages the private sector to do exactly that by themselves without too much government interference. Such a system still requires legislated and meaningful emission reduction targets. In a sense the cap and trade system forces the emitters to fund the reduction of emissions.
Mr Rudd, amongst others leaders, may have bemoaned the slow pace of global carbon reform, but the truth is the people of the world have already taken matters into their own hands. Growing climate change awareness in the developed world has induced a change of attitude at the household level, and a change of practice at the business level. From the business perspective, some may be genuinely conscientious while others see the marketing value of appearing to be so, but the result is still beneficial either way. And companies are fully aware that if they are going to be hit with mandated emission reductions, there’s no sense in waiting until 2012 to start preparing.
Last weekend’s Earth Hour – the symbolic switching off of lights – has been criticised, as it was last year, of being pointless and undersubscribed. A suggestion has even been made that the numbers of families flocking to the Sydney harbourside, for example, to watch the lights go out, would have created more emissions from car exhausts than was saved. Such criticisms miss the point that Earth Hour is about awareness, and not net energy saving for one hour. Yet despite rising awareness Australia is still guilty of accelerated carbon emission this decade, as a recent study has found, at a rate twice that per capita of the supposedly Big Bad US. Indeed, according to a report from CIBC World Markets, US emission levels have changed little this decade. However, while Australia may need to lift its game by comparison to others in the West, it is not the West that is the problem.
The developed world, as defined by members of the Organization for Economic Cooperation and Development (OECD), which includes Australia, has seen its emissions increase by 5% this decade, as CIBC notes. The problem is total world emissions have increased by 25%. Non-OECD economies have increased emissions by 50%, and have accounted for 90% of the increase in emissions over the period. While the OECD is trying hard to “decarbonise”, the impact of the effort is being lost as emerging economies rapidly “carbonise”.
And there are no prizes for guessing the biggest culprit. It is indeed the host of the upcoming “green” Olympics.
Neither the Howard nor Bush governments were prepared to relent on Kyoto while China and other emerging economies were granted exemptions from emission targets. Emerging economies were provided with such exemptions when the Protocol was signed in 2005 on the basis it was unfair to slug the likes of China and India just as they were making their first steps towards the levels of industrialisation long enjoyed by the developed world. But while the Protocol may have been signed in 2005, it was written in 1997 – long before the world came to appreciate the extraordinary growth of China in such a brief period of time. Kyoto is now long out of date, which only emphasises the importance of Bali and subsequent rounds to create a “new Kyoto” for 2012 – one which addresses the imbalances of 1997.
A new Protocol will still require China as a signatory, otherwise it will be meaningless. What are the chances?
CIBC notes the non-OECD surpassed the OECD in total emissions in 2005. Non-OECD is now 55% of the total, and in another decade should be two-thirds. China surpassed the US as the world’s single largest emitter in 2006 and has now increased its emissions by 120% since 2000, to the point where it accounts for one fifth of the world’s total.
It rather puts Kyoto into perspective. However, one might also suggest it is not entirely China’s fault.
The past decade has seen a significant shift in the nature of the world economy as the developed world has relocated its manufacturing base to the emerging world. In so doing the developed world has taken advantage of substantially lower wages in the emerging world, which in turn has resulted in the developed world enjoying a decade of price deflation on everything from computers to fridges to heavy machinery. As the manufacturing process is where carbon emission is at its heaviest, and service industries and retained design/marketing/sales process at its least, a lot of China’s emissions can be attributed simply as the developed world outsourcing its emissions. And then pointing the finger. The developed world also recognised it was cheaper to manufacture in a country which to date had not established any emission controls of its own.
But this is not the extent of the story. China’s export economy accounts for only 27% of its total economy. The 27% still accounts for a significant level of emission – greater, in fact, than the total economies of either Japan, Germany or Russia. However, the problem lies in the fact China has experienced its extraordinary economic growth on a high level of energy intensity, coupled with a low level of emission control. As a manufacturing-based economy, China’s energy consumption per GDP is four times that of the US, which is now a largely service-based economy, while its carbon emissions per unit of energy consumed are three times that of the US. As CIBC puts it:
“Combine the energy intensity of the Chinese economy with poor carbon efficiency of its energy use and you have a powerful cocktail for exploding emissions growth”.
The biggest culprit is coal. Coal is a much cheaper energy source than oil or gas, but it accounts for twice the emission levels of gas and 20% more than oil. China has the largest reserves of coal in the world, and despite its phenomenal growth has been able to remain a net exporter of coal, at least so far. China relies on coal for nearly two-thirds of its total energy needs, and 80% of its electricity needs (China is far and away the world’s biggest producer of steel, the production of which requires coal). There are more coal-fired plants today in China than there are in all of the US, the UK and India combined.
While it is becoming increasingly difficult to get any new coal plant approved in the developed world, China plans to expand its number by 560 before 2012. The combined emissions of just those new plants will completely offset the combined target reductions set by Kyoto. It makes the efforts underway in the developed world, particularly in terms of an attempt to move away from coal, look pointless.
And it is very unlikely the new China will be rushing to sign up to new, more stringent reduction targets expected in the next Protocol in 2012. To do so would be to shoot its economic growth in the foot. China has countered by waving its green credentials in front of the world, including a target for green energy to account for 10% of the nation’s power generation by 2010. But it’s the growth in the other 90% that is the problem, and by 2007 China had fallen well short of reaching its green energy target anyway.
What is the world to do?
One response might be to wait until China pollutes itself almost to death, which might bring it around, but unfortunately carbon emissions do not only impact locally. Thus while half the world is preparing to pay a cost to produce carbon it seems somewhat unfair if the other half does not. And fruitless.
CIBC calculates that if the OECD were to introduce a cap and trade system with a target of only 10% carbon reduction the subsequent cost would shave 0.6% off the GDP growth of countries such as the US, Japan and Australia. One way to avoid becoming economically uncompetitive as a result of trying to be environmentally responsible is to not only introduce a “carbon tax” (or cap and trade system) but to simultaneously introduce a “carbon tariff”. A carbon tariff would be imposed upon goods imported from the Chinas of the world who have made no realistic effort to curb emissions growth, thus affecting a sharing of the global cost of carbon reduction. Suddenly China’s imports are not as cheap as they were when stacked up against local manufacture. Europe, which is ahead of the world on carbon taxing, is planning just such a scheme.
From a US perspective, CIBC calculates that were a tariff be introduced to directly offset the cost of carbon as determined by the value of a carbon credit (the analysts assume US$55/t) then the US would collect about US$55bn a year from Chinese imports or the equivalent of a 17% tariff. The US currently imposes only a 3% tariff, while a 17% tariff would amount to 60% of what the most strenuous US Senate lobbyists for a protectionist tariff are pushing for currently anyway.
While an offset tariff sounds all very equitable, and perhaps the only way to make China have a good hard look at its environmentally costly economic growth, one presumes such an enforcement would be less than smooth and spark some bitter conflicts and recriminations. It’s proving hard enough for the likes of BHP Billiton and Rio Tinto to raise their iron ore prices right now to China even though the world is undersupplied. Not only would a carbon cost to an iron ore producer (Australia) need to be passed on to a consumer (China) anyway, now we’re talking about putting a tariff on the fridge coming back.
The end result of all of which must be inflation. The world has been relatively immune from inflation until recently for the simple reason that while China has caused the price of commodities to sky-rocket it has also caused the price of manufactured goods to plummet. Australia, for example, has bathed in the luxury of cheap wide-screen TVs. A cap and trade carbon system across the OECD will increase inflation domestically to begin with, and by adding a carbon tariff inflation will be further increased from either imports, or a shift back to once more expensive domestic production.
Indeed, one could see at some time in the not-too-distant future that the great migration of production away from the Western world might actually reverse. World economic growth and inflation would again even out. But it’s sure to be a very bumpy road to reach that point.