The purpose of this paper is to lay out a policy framework to cope with climate change that will get us where we need to go.
That new framework builds on two new facts.
First, the private sector has committed sufficient capital to get the job done by relying more on market forces and adequate incentives to the innovators who increasingly see opportunities to do good by doing well.
Second, there is increasing recognition that fossil fuels are a necessary part of any transition to a greener economy. We must have adequate supplies of fossil fuels and the infrastructure to support their development and use. It is not possible to have economic growth by immediate stifling of this sector, or threatening to do so in a time frame that will the fossil fuel companies with stranded assets.
Climate Change Battle Takes A Right Turn
There is now light at the end of the climate-change tunnel, and it is not a planet in flames. Three lights in fact: the rising price of carbon credits; the advance of technologies to control emissions and mitigate their impact; and evidence that consumers, at times with a nudge from government, are ready to embrace change to lower-polluting products. We are not about to “incinerate” ourselves, as António Guterres, UN Secretary General, fears — life as a socialist politician and international bureaucrat leaves him unfamiliar with the powerful role of the price system and the innovative power of the private sector. Nor are we about to halt warming quickly and easily. But there is no reason for those aiming to do so to panic, or worse, abandon hope that progress can be made.
Start with what the trade calls carbon credits and are in fact penalties for sending CO2 into the atmosphere. The European Union’s Emission Trading System (ETS) in effect fines polluters €80 (about $84) for every metric ton they emit, a price the European Commission has at its limit: when price hit €90 in May, the EC added 200 million permits to the 1.45 billion in circulation to drive the price back to €80 – a sign that the permit prices are still highly politicized, bad news for the climate fight. Still, at one point in the development of the ETS, that fine was as low as €15. To avoid fines, or to earn carbon credits as the process is also called, polluters must change the way they produce stuff. If they do not, consumers will face higher prices for pollution-generating products, presumably reducing demand. The system is far from perfect. At present it limits emissions for around 10,000 installations in the power and manufacturing sectors, as well as from international airlines. That covers 40 per cent of EU greenhouse gas emissions. That feature is under review, with officials hoping to expand coverage, with international shipping (3 per cent of global emissions caused by human activity) in their sights,
The EU method of making emissions expensive is spreading beyond Europe, and due to spread faster: Japan will set up a national carbon market next year. The EU is preparing to protect those of its industries forking over euros to pay for emitting CO2 lest they get out-competed for business by foreign firms operating in countries that do not penalize such pollution. It plans to introduce tariffs on the carbon content of imports to give exporters tapping the vast EU market an incentive to clean up their production processes. America and other countries will be under great political pressure to emulate the European system and to introduce penalties on domestic manufacturers, thereby avoiding the EU tariffs.
It should be noted that the EU approach initially will not apply to all industries, and that the level set for the “pollution tariff” might not be high enough to be as effective as we might like in its early application. Like much else that is going on in the battle to constrain further warming, the front lines are fluid. What to some is seen as a holding action until reinforcements such as technology and mitigation techniques arrive, is seen by others as a last-ditch defense doomed to failure, impeding development of the weapons needed to win the war. Fortunately, this is not an either-or choice: we are capable of pursuing both approaches, with emphasis on whichever approach the politics of the day permit.
A host of startups in Canada and elsewhere are competing to find and market ways companies can earn exemption from penalties for polluting, credits for investing in carbon-eating forests, distributing cook stoves that reduce emissions, injecting captured carbon emissions into concrete. There will be claims for “nature-based” offsets that prove bogus, or that are well-intended but prove false. The rising price of commodities makes deforestation more attractive than maintaining a carbon sink. Techniques for checking these claims are in their infancy, as are methods for penalizing those who persist in talking the talk of offsets but not walking the walk. An area that bears watching, but one in which the direction seems favorable to those battling climate change: The Wall Street Journal reports that because of work by European officials and the SEC “The scope for variance in environmental ratings is starting to narrow.”
Enter The Private Sector, Stage Right, With Capital
Fortunately, the private sector is awash in capital hunting for opportunities to invest. The Glasgow Financial Alliance for Net Zero (alas, known or not by the acronym GFANZ), which includes 450 firms from 45 countries has committed over $130 trillion to transform the world economy to net zero over the next three decades. Some of the reduction will come from members who finance the transformation, some by reducing their own emissions. It is almost impossible to compare that $130 trillion commitment with what is needed to end the threat of disastrous climate change. Herewith a try.
Treasury Secretary Janet Yellen notes that the sum available from GFANZ exceeds the $100 trillion needed “… to supply the financing to set us on a course to avoid the worst effects of climate change”. GFANZ has since estimated that “an orderly transition to sustainability” will require investment of between $100 trillion and $150 trillion over the next three decades.
Perhaps Bank of America CEO Brian Moynihan provided the most useful perspective when he said that $4 trillion annually required to create a carbon-free economy, the estimate of the International Energy Agency and roughly the GFANZ target, is “not that much money. If there’s a revenue stream, the funding is infinite…. Government doesn’t have the money, it has to come from the private sector
And a group of tech companies – Alphabet (Google), Meta (Facebook), Shopify and Stripe, along with consultants McKinsey has pledged $925 million over nine years to fund carbon removal projects. Small change compared with what is needed. But throw in Bill Gates and his billionaire buddies ($15 billion), Jeff Bezos ($10 billion) and, most important, a burgeoning carbon-removal industry that has raised $2 billion I just two months – with more on tap – to remove carbon from the atmosphere, and the replacement, or at least the supplementing of government efforts surely is a reason for cautious optimism that, along with the assignment of Paris to the dustbin of history, emissions will be brought under control.
All these efforts might not get us to net zero, a questionable goal in any event: some claims for offsets will prove bogus as monitoring techniques improve, or some funding promises might not be kept. But at least we have moved beyond relying on strapped governments, diverted by fighting a war in Ukraine, a pandemic, inflation, fiscal problems and rising demands for an expanded welfare state. The UK government has already announced that to concentrate on an inflation that is eroding living standards (and voter support), it will cancel some of its green programs.
Some Technologies To Succeed, Some To Prove A Bust
Which brings us to another addition to the light visible at the end of the tunnel: technology. As emitting becomes more costly, and fossil fuels more expensive, alternative technologies become more financially attractive. We already know about the potential of wind and solar, less than their advocates claim, more than their derogators insist. Now, a host of methods for capturing carbon emissions are being developed and tested; processes for making “cleaner” steel are already in operation; injection of captured CO2 into concrete to reduce emissions and make the concrete stronger is promising; small modular reactors are planned for Britain and, with help from the U.S., in Romania, to test the economics of a return to reliance on non-CO2 -emitting nuclear power; the use of green hydrogen is being considered; the list goes on.
Not all will prove technically feasible and economic, but neither are all likely to prove failures. Some will prove less than advertised by their advocates, some will be technically feasible but uneconomic (one green nuclear skeptic calls nuclear “an expensive way to boil water”), some will prove technically possible but politically infeasible (imagine turning climate-control over to politicians via geoengineering), some will prove technically possible and cost-effective, especially in a world of elevated fossil-fuel prices and pollution charges. As always in a democracy, periodic adjustments to the direction and force of political winds will be required.
Enter A Truck
Finally, we have what this writer considers a harbinger, an omen, a very large and loud canary in the coal mine. For decades the burly Ford F-150 pickup truck has been the symbol of the gasoline age, the indispensable tool of Joe the Plumber and Joe Sixpack. Elon Musk’s swanky Tesla was for elitists and Hollywood celebrities. Now we are to have the Ford-150 Lightning, an electric vehicle that in its spare time can light a house and, with no upfront engine, a frunk to replace the trunk at what were once called tailgate parties. The 200,000 reservations Ford has booked for the F-150 Lightning tell us that resistance to the electrification of the transport sector is not what it once was.
At Last A Road To Somewhere, Pot Holes Included
We are abandoning the road to nowhere mapped out in Paris in 2015, a champagne- and caviar-fueled gathering of the great and the good. We are abandoning “net zero” as a goal because it can be met by data manipulation and substituting what one expert calls “do your best + amelioration”. We are abandoning the notion that we can limit warming to 1.5-2.0 Celsius, and relying more on mitigation strategies, many market-based such as the relative rise in the price of inland properties in the Miami area and insurance premia that reflect risks created by warming. Private-sector players are adding their financial heft to investments to throttle climate change, market-based pollution penalties are spreading, and the Ford F-150 Lightning is set to replace an important symbol of the gasoline age.
The new road down which we are traveling will, of course, have pot holes, many created by environmentalists who dislike
- the sight of high voltage transmission towers,
- the nasty environmental impact of the production of batteries,
- the amount of space required for solar farms, and most of all
- the concession to the reality that a transition to a less hot world cannot be fashioned and applied within the Paris framework.
The media will also produce their share of pot holes by concentration their reporting on unrealistic “worst-case” scenarios, and bleating that unless politically impossible steps are taken here and now, we are doomed. That discourages people who realize that “now” is an impossibility. And then there will be what one-time British Prime Minister Harold Macmillan replied when asked to name the greatest challenge facing statesmen, “Events, dear boy, events.” Surely Putin’s war, which has contributed to the roiling of energy markets and the resurgence of reliance on coal-fired electricity generation counts as one such.
The road to a reversal of current climate trends will not only prove bumpy. It also will be longer than many would wish. But at least we seem to be headed in the right direction, and at a quicker pace than in the past. Better-than-in-the-past might not be all we would wish for, but it is all we can get just now, and more rather than less likely to get us to an acceptable destination.