The Economic Consequences of COP21

12/14/15
Irwin Stelzer

The international conference on climate change attracted thousands of delegates from almost 200 nations. The Conference of the Parties21, so named for the parties that signed the UN Framework Convention on Climate Change in 1992 and had come to Paris for what was their 21st conference, came to an end with the obligatory self-congratulatory photo op, linked arms raised in victory, cheers from some, tears of joy from others, applause for Al Gore, and a promise by Secretary of State John Kerry that we have seen the end of the age of fossil fuels.

The vast majority but not all of the nations submitted plans of action to reduce emissions, with Nicaragua refusing to do so and then symbolically objecting to the final draft – after it was approved – on the ground that “rich nations” are not doing enough to protect “Mother Earth.” India, a developing nation, finally signed, its prime minister Narendra Modi professing satisfaction that “justice” had been done, which included acceptance of his plan to construct some 455 coal-fired power stations, over 100 more than China. The number of signatories was increased by one at the last minute when the Palestinians became the 196th “state,” as they call themselves in their press release, to become a party to the Convention. ISIL has not yet been heard from.

The deal is far from what Obama and others would have preferred. If the plans filed by the signatories are indeed implemented, COP21 will reduce the growth in emissions only by about half as much as the 2 degrees Celsius (3.6 degrees Fahrenheit) scientists say is necessary to prevent flooding and droughts, terrible storms, food and water shortages, and other catastrophes. The Coalition of the Least Developed Nations and other developing countries – China continues to insist it be classified as “developing” – are more than a little concerned that the annual income transfer of at least $100 billion they (and, one must imagine, several Swiss bankers) sought from the rich countries is mentioned only in the preamble and not in the more binding portion of the final document. They must also be aware that Kerry’s promise to double to $860 million America’s assistance to climate change adaptation in 2020. The agreements are not legally binding and there is no formal enforcement mechanism, prompting Amber Rudd, UK energy and climate change secretary, to describe the 1.5C goal as merely “aspirational.” But the parties did agree to publish what they are doing to make good on their promises, which would subject them to “name-and-shame” obloquy that would undoubtedly make Western democracies a tad uncomfortable but does not seem likely to affect the behavior of nations such as Iran, which violates other UN resolutions, Vladimir Putin’s Russia, which worries very little about the views of what Obama calls “the international community,” or China, unembarrassed by the recent disclosure that it has systematically under-reported its emissions.

But these and other weaknesses in the deal cannot detract from the fundamental fact that 85 percent of the world’s CO2 emitters came together, laid out their individual plans to cut these emissions, and persuaded the developing countries to go along, something they have until now refused to do on the quite sensible grounds that economic development is more important to the well-being of their citizens, many without electricity, than cooling the planet, and that it is the rich countries that have caused the problem in their own dash to industrialization. Or that the parties have willingly recognized the shortcoming of the agreement and are pledged to accelerate their efforts to reduce emissions. Or, and this might be the most important outcome of COP 21 in the long run, that Bill Gates decided to join the fray. Convinced that nothing to which the parties have agreed can prevent dangerous increases in temperature, he has contributed $1 billion, and enlisted several of his billionaire friends to match his generosity, to a fund for research and development of new zero-emission energy-producing and using technologies. Perhaps Gates will “pick winners” more successfully than has the Department of Energy.

The French hosts deserve considerable credit for producing an agreement. Foreign minister Laurent Fabius, a socialist not committed to a belief in the efficacy of markets, wielded the right proportion of charm, patience and a willingness to remove from the draft agreement some of the more contentious favorites of several participants. The host committee replaced the long queues of previous meetings with quick movement through security checkpoints, and the typically dreadful fare of the previous twenty conferences with fine French cuisine served in cafés and restaurants scattered around the conference center. The Financial Times reports that a typical menu included poulet en persillade, washed down with a crisp Chardonnay, followed by crème caramel or tarte au chocolat. The hosts also set up relaxation rooms with sofas and soft lighting for the weary, and meditation rooms where delegates could presumably mull over the latest offer. Free transportation in electric vehicles and on the city’s metro was provided. In short, France deployed all the tools of what one delegate described as traditional French diplomacy that emphasized “cooperation,” or at least did until recent terrorist attacks in the capital. But greens are not easy to satisfy: there were reports that some of the delegates objected to the absence of vegetarian dining options.

But crème caramel and French diplomacy would have been for naught had President Obama not negotiated a what could be represented as a breakthrough with China and worked tirelessly, as he apparently is capable of doing for causes that move him, to make COP 21 happen. The president’s critics refuse to recognize the magnitude of his achievement or that his much-discussed ineptitude when it comes to matters of foreign policy belies the skill with which he develops and implements his progressive domestic economic agenda. No surprise there: his progressive progenitor, Woodrow Wilson, combined domestic achievements such as the establishment of the Federal Reserve Board and the Federal Trade Commission with the train wreck that was his stiff-necked insistence on his Fourteen Points and a League of Nations.

The technique Obama used to accomplish a government takeover of the health-care system should have been warming enough: it wasn’t. First, identify and rail against a “crisis.” In the case of health care it was the millions of Americans without health insurance, but in the case of low-income families not without health care, which they could obtain in hospital emergency rooms. In the case of energy, the crisis is climate change. Second, dismiss and vilify critics. Those who would deny the poor access to adequate medical care are hard-hearted, those who are not certain that the climate is indeed changing, that if it is changing the use of fossil fuels is the cause, and those who refuse to accept that “the science is settled” are anti-science at best, engaged in “calculated destruction” according to Kerry, climate change deniers at worst, right up there on the list of villains with Holocaust deniers. Third, invent studies that prove that the crisis can be eliminated by government measures that are better than costless – they actually accelerate economic growth, improve living standards, create jobs. Healthier Americans are more productive Americans, able to avoid long absences from the work place and expensive visits to the reduced roster of doctors available to them; eliminating the use of fossil fuels will create millions of jobs turning out wind machines and solar panels. Any cost will be indiscernible, buried in the recesses of the Affordable Care Act, and in the case of energy on consumers’ utility bills. Finally, avoid democratic accountability. Include in the ACA an open invitation to regulators to build into the health-care system features of which American voters would not approve, loss of their preferred health care plans and doctors among them. In the case of energy, rely on regulation and refusal to submit what is clearly a treaty – an agreement by the United States with other nations – to the congress.

The president’s critics console themselves with the thought that, once Obama is gone, Congress will repudiate the Paris deal, assuming of course that the Republican who survives the Trumped-up nominating process takes the White House, and that the McConnell- led Senate remains in Republican hands. And assuming that the next president believes that he can accomplish his number one task, restoring American credibility and the world’s faith in our reliability, by making his first act the repudiation of an agreement engineered by his predecessor.

Even if all those pieces for repudiation of COP21 fall into place, the president would still have achieved his major “progressive” goal. He would have converted the energy sector from market-driven to government-driven, politicizing the process of incentives and costs that guide the flow of capital into any sector. It is of course true that governments have never been able to keep their hands off the energy economy, providing a tax-incentive here, a subsidy there to bend it to their current notion of a good idea, either for the nation or for some important constituent. But by and large, decision-making rested in the hands of oil wildcatters and major oil companies, coal companies, and other private-sector players responding as efficiently as possible to the preferences of consumers. Those days are gone, and will not return even if a brave president and an aroused congress burn the paper enshrining COP21 on the steps of the White House and deny the developing nations the billions the president of the United States of America has solemnly promised them in return for what they feel are major concessions on their part.

The newly created government-determined rules will see to that. Assume that voters are not, as the polls suggest, by and large in favor of government action to save the planet from the climate change the consequences of which they have been told repeatedly by the President are already upon us. Assume, too, that the voters put in office all of the so-called deniers seeking their favor. Assume further that you are an investor considering putting your money into a long-lived energy project – drilling in a difficult area, opening a new coal mine, building a coal-fired electric generating station. Would you assume that the anti-fossil fuel party would not return to power sometime before your investment is fully recovered say, the next forty years? Or, as is more likely, would you factor such a risk into your calculations, and take your money elsewhere, perhaps to back several teenagers hot on the trail of a new cellphone app? Or perhaps respond to the lure of the subsidy-incentives provided for otherwise uneconomic solar and wind projects, ignore the objections of bird-loving environmentalists who fear the frying and slicing of our feathered friends, and put your money where the payback is more promising and assured? After all, it is rare that a constituency that exists only because of its access to the government teat cannot muster the political clout to perpetuate that source of nourishment. Doubt that and think sugar, or ethanol.

Conservatives are in no position to deny responsibility for this outcome. The president gave them an opportunity to adopt a more market-based approach to controlling greenhouse gases and they turned him down, opening the road to the massive regulatory regime now being put in place. Yes, cap-and-trade, Obama’s original proposal, is not as efficient a way to reduce emissions as a tax on those emissions, but as a second-best solution it is far superior to what the Environmental Protection Agency has in store for the American economy, already struggling to get out of the 2 percent-growth rut that has become the new normal. And yes, it is not unreasonable to “deny” that the climate is changing, with possible damage to the planet. But it is unreasonable to be as certain that it isn’t as the Obamaites are certain that it is, and to allow the senate majority leader to put his interest in pleasing a relatively few constituents over the broader interest of the Republican party in retaining control of the senate, and the nation in taking prudential steps to cope with the possibility that complete inaction is not in the nation’s best interest, however pleasing it might be to Kentucky’s coal industry.

So it is game, set and match to the president.

And to China, which has been handed as clear-cut and significant an economic victory as the geopolitical victory the Obama team handed Iran only a few months ago. Two victories, in fact. The first was the right to continue using carbon-emitting fossil fuels to keep its factories running at a low cost while we force ours to switch to more costly fuels – or in some cases to close, victims of the administration’s war on coal. China is building a new coal plant approximately every week and has agreed only to peak its CO2 emissions around 2030, or earlier if it can manage it, but not to reduce them now or even fifteen years from now.

The second Chinese win is in the competition to provide new power plants for developing countries. The Obama administration has ended most public financing of coal-fired power plants. Not China. According to a tabulation by The New York Times, subsidized loans from state-owned banks to state-owned manufacturing companies such as the Shanghai Electric Group are financing the construction of 92 coal-powered plants in 27 countries, to the probable tune of over $100 billion reckons the San Francisco-based Climate Policy Initiative. That is enough coal-burning capacity to offset all of the plant closures and consequent emissions reductions planned in the United States for the rest of this decade. The bargain-basement prices China gets for these overseas plants reflect the fact that the facilities are less efficient and more emissions-intensive than Western plants, and the regime’s need to keep the country’s manufacturing sector from increasing the layoffs already resulting from the nation’s slower growth. Little wonder that Xie Zhenhua, China’s senior climate change negotiator, expressed satisfaction with an agreement he labels “fair and just, comprehensive and balanced.”

But there is the possibility of snatching a partial victory from the jaws of the present total defeat. A new president could express agreement with the goal of reducing carbon emissions but propose to accomplish that goal by other means – a revenue-neutral carbon tax the most important among them. Republicans who believe that the entire climate change contention is something between misguided and a political hoax can hold their ground, and support such a tax as a move in the direction of the long-held conservative goal of replacing taxes on work with a tax on consumption, and demand (and I am told by some greens, get) repeal of regulations made redundant by the effect of the carbon tax on emission levels. Democrats surely can rally around an approach that lowers the bite taxes take out of middle-class paychecks, and provides a more progressive tax system by concentrating relief at the lower end of the income scale. Republicans can hardly refuse to go along with a plan that enriches lower earners without creating a new entitlement. The competitive disadvantage created by a carbon tax can be offset by a border tax on imports of goods produced with higher-emitting technologies, or in countries that fail to adhere to the promises made in Paris.

Best of all, with Barack Obama and his ill-advised demonization of opponents gone – it causes many of us to dig in our heels and set embarrassment of the President as a priority over sensible policy – an era of good will might possibly return to Washington. Well, not good will, but willingness to compromise. Only perhaps.

For Questions or Comments please email Irwin Stelzer at irwin@irwinstelzer.com