The (not so) long view on the carbon transition

I chaired last Monday a fascinating conversation between Michael Spence and Diana Urge-Vorsatz, the first an economics Nobel laureate and the second a professor of climate science and policy and co-chair of a working group of the Intergovernmental Panel on Climate Change. As a moderator, I had hoped for clashing disciplinary perspectives — a pointy-headed bust-up between the efficiency evangelism so common in economics, and the absolutism of physical laws often wielded by scientists. Instead, they converged on a number of sometimes surprising (to me at least) points.

I asked them to imagine that we actually achieve the goal of net zero carbon emissions by 2050. What would the world look like then, for this to have become possible? How would our economies, societies and lifestyles have changed? Would life in that future feel radically different from how we live now, or — as was the case with the ozone layer — would success mean we live more or less like we are used to?

Before you read on, ponder your own answer — I find it a revealing exercise and would love to hear what you think.

I was surprised to hear both Spence and Urge-Vorsatz answer the question with a focus on values. If we get to net zero, each suggested, it would be because we care relatively less about material growth and more about other aspects of prosperity and wellbeing. That does not mean a “de-growth” vision of a hairshirt economy; both also agreed that the only politically viable way to net zero must be one that allows the poor of the world to reach a level of material comfort.

If we succeed, it would also be because we care more about the distributive aspects of the carbon transition. Here are three important facts that came up in the discussion. First, Spence pointed out that since about 1990, virtually all the growth in annual carbon emissions has come from emerging countries (see chart):

Second, however, per capita emissions remain much higher in rich countries:

And, third, rich individuals worldwide emit much more than poorer ones — shockingly so. According to research cited by Urge-Vorsatz, the richest 10 per cent of the world’s people were responsible for 46 per cent of the growth in total emissions in the 1990-2015 period, and the bottom half of the global population for a mere 6 per cent. The Stockholm Environment Institute’s work on “carbon inequality” includes the “dinosaur chart” below, showing just how much of the post-1990 emissions increases come from the consumption of the global top 10 per cent.

What are the policy implications of these facts? In my view, they are comprehensive, ranging from political economy and distributive questions to policy on technology and finance.

The political economy challenge is clear. Net zero will not be achieved if the poor — within and between countries — are expected to pay the cost of adjustment. In a recent op-ed, the economist Barry Eichengreen channels Mancur Olson’s classic analysis of collective action to explain the difficulty: positive social changes may not happen even if the benefits are widespread but the costs are concentrated among identifiable groups able to block change. In the climate case, those groups range from fossil-dependent sectors and regions to developing countries still aiming to industrialise and gilets jaunes-style protesters in rich ones. But the same logic points to the solution: buy off the losers.

That means rich countries must finally get serious about financing poor countries’ carbon transition. The G7 summit reiterated its “commitment” to the $100bn annual climate financing promise made at Copenhagen a decade ago; that amounts to continuing to fail to make good on its word. And within countries, a just transition requires carbon dividend policies, which raise the price of emissions and redistribute the revenue on a lump sum basis to the population.

Beyond compensating for costs, there is the imperative of allowing the world’s poor a higher level of prosperity. In our conversation, Spence brought up the relationship known as the Kaya Identity: total emissions depend on per capita income, total population, the energy intensity of economic output and the carbon content of energy. On the first two factors, many more people must be allowed greater incomes than today, so on the latter two, much better performance is needed. That means changing our consumption patterns, as Urge-Vorsatz urged, in a more energy- and carbon-efficient direction, and investing in the technology that achieves the efficiency we need.

Achieving this, in turn, depends on getting financial policies right. And on this we are making rapid intellectual progress, as the symposium our conversation was part of illustrates. In her opening speech, the European Central Bank’s Isabel Schnabel advanced the case against “market neutrality”, a conventional principle for central banking that says monetary policy should not get in the way of the efficient allocation of capital. Read the entire speech, but I would paraphrase the argument this way: when the market itself is distorted by underpriced carbon emissions, ostensible neutrality is not neutral at all but reinforces distortions, and central banks may be justified in adjusting policy to take this into account.

Central banks are wrapping their heads around how they could do this: an excellent overview of current thinking is a recent speech by the Bank of England’s Andrew Hauser. But much of the innovation we need will have to be provided by the private sector. More government investment will encourage private investors to put more of their money into green tech, too. But market structure matters too: there is evidence that stock markets are much better at funding green technological innovation than banks. For a bank-heavy region such as the eurozone, that is an important finding. In climate policy, everything hangs together, and if the EU is serious about its green ambitions, it must also get serious about its plans for a capital markets union.

Other readables

• After the G7 Cornwall summit, the ball passes to the G20, which includes the big emerging economies that need to be part of the solution to any of our global challenges. This means this is Italy’s international moment — the country holds the G20 presidency throughout 2021.

• It was never wise to hope for much progress in US-Russia relations from the two countries’ leaders this week. But in a moving account of the history of Russia’s struggle between “westerners” and “people of the soil”, Anna Nemtsova argues that US president Joe Biden has a role to play in helping Russian dissidents, “by strengthening the cause of democracy in the west itself”.

Numbers news

• The Federal Reserve’s last meeting finally brought monetary policy normalisation on to the horizon. But that horizon remains very distant indeed: US bond markets were jolted by Fed policymakers now expecting to raise rates by the end of . . . 2023!