Meltdown in The Age

I have a piece in The Age today on the financial meltdown and the Garnaut report (why not economise on the day’s big stories?).

Meltdown hurts climate for change

Joshua Gans, The Age

1st October 2008

BIG news day in economic circles – the release of the final report of the Garnaut climate change review and the dramatic events in the US. What is significant is that the underlying issues driving each are inexorably linked. At the moment, global agreement on climate change depends on the successful management of the US (and now global) financial crisis. So, not only are the prospects for global recession much stronger, the prospects for dealing expeditiously on climate change have diminished.

This is a double dose of sadness for our future.

The simple linkage is an easy story to tell. The recent surge in public pressure for dealing with climate change had as much to do with the relative economic prosperity of the past decade as it did on the resolution of key uncertainties in climate science. When economic times are good, consumers demand more environmental goods and are willing to pay for that demand with policies that might generate short-term economic harm. While this surge has not penetrated the top level of the US Government, there are key initiatives across many states that were implementing emissions reduction schemes.

Turn those economic fortunes around, and I fear the constituency for large-scale change also goes away. That said, with a recession comes a “natural” reduction in emissions but, let’s face it, that is the worst way to achieve it. It is also far from sustainable. So those pushing mitigation of climate change should be distressed at recent financial events.

But there is a broader and more important story here and it has to do with global management – both of climate change policy and the financial system. Yesterday, a few votes in the US Congress sent world financial markets into turmoil. Let’s face it, the bail-out package was bold but not guaranteed to bring about stability. To throw into the mix political risk as well is not what anyone needed.

The Garnaut report cleverly anticipates the difficulties of establishing a global agreement on climate change and allows Australia to hedge that risk. We can lead in terms of proposing the targets that need to be proposed but also hang back on meeting those targets unilaterally until an agreement is reached. In the meantime, Australia would move to establish institutions as well as bank some emissions reductions to ease future pain.

The likelihood that the US would do anything dramatic any time soon on climate change is surely at a low right now. If the Congress cannot even put together a bail-out package, how on earth will it agree to some future international treaty on climate change? And with that, I fear that the case for Australia investing along the lines of Garnaut, might also diminish. That policy is explicitly tied to a healthy economy by Garnaut and that health is at risk.

Standing back, there is a broad message in both our ability to achieve global agreements on climate change and the failure to contain the US financial crisis: the rest of the world, including Australia, is far too dependent on political risk in the US. Those machinations can cause financial turmoil and environmental ruin.

I have no grand vision as to how we might hedge that political risk. But my sense is that the rest of the world (particularly Europe, Japan and China) need to redouble support of global economic institutions. A few days ago, Yale’s Jeffrey Garten called for the establishment of a Global Monetary Authority to co-ordinate efforts to inject liquidity into individual economies. His argument was that the success of global economic integration depended on the ability of economies to have confidence in the management of other economies.

Similarly, there is the challenge of forging a global agreement on climate change that forces the US hand on its responsibility. If this is as urgent a matter as Garnaut claims, we have no choice but to devise institutions that get tough with even large economies. This is a matter for our Government beyond anything that was in the final report.

Joshua Gans is an economics professor at Melbourne Business School. He keeps a blog on these issues at economics.com.au.

One thought on “Meltdown in The Age”

  1. If it cost less to produce green energy (e.g. from geothermal or solar) than energy from burning fossil fuels then the ghg emissions would be reduced.

    Why are renewables more expensive? It costs more to build a geothermal energy plant and drill the holes than it costs to build a coal fired power station. Why is that? It is because we have built more coal fired power stations than geothermal power plants.

    Everytime we double the capacity of an engineering technology we drop the construction price by between 15% to 25%. By about 5 doublings of capacity of geothermal or solar the construction costs of these systems will be the same as the construction costs of coal and the running costs will be half.

    Capital costs are an artifact of the financial system as we are just observing – not a law of nature.

    So the solution is to drop the capital cost of renewables – which we can do – and let the improvement in technology take its course.

    Pretty simple really and a whole lot more effective than emissions permits trading.

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