SIMON MAXWELL REVIEWS DIETER HELM'S THE CARBON CRUNCH

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17 december 2012

Simon Maxwell, A Review of ‘The Carbon Crunch’ by Dieter Helm [original posting October 24, 2012]

[4C note: for an article by Dieter Helm presenting his proposal for a carbon tax on consumption and imports as the best approach to mitigating carbon emissions, click here; for another review of The Carbon Crunch, click here.]

Dieter Helm has not just thrown down the gauntlet in his polemic on climate change - he has entered the lists, scattered his enemies, and left them with bruised egos and broken bones. There will be quite a queue outside the hospital tent: the UN, the EU, the Kyoto Protocol, the global coal industry, and a great crowd of campaigning NGOs. They should not all abandon the field, however. There are one or two chinks in Dieter Helm's armour that offer some hope in a rematch.

The book presents a coherent over-arching argument, which can be summarised as follows:

First (Chapters 1-3), there is no ‘time to muck about’ (pg 235).

There is no absolute ‘truth’ in climate science, but a series of research-based conjectures and probabilities, which lead to the conclusions that ‘for all the caveats and uncertainties . . ., 1°C looks unlikely, and 3°C+ is now supported by a considerable amount of evidence. There is then a non-negligible possibility that we are in for significant warming. That is the best we have to go on.’ (Pg 24). Note that there will be winners as well as losers if moderate warming does happen: the benefits to countries in higher latitudes (including Russia and Canada) may explain negotiating positions.

Though oil and gas have played their part, coal is the main source of past increases in CO2 concentrations in the atmosphere, and the main future risk. With India, and especially China, basing future development largely on coal-fired electricity generation, there is no doubt, Helm argues, that ‘the burning of coal should be the most immediate focus of attention in climate change mitigation’ (Pg 38). Between them, India and China are likely to add three large coal-fired power stations a week. Each year, China adds twice the emissions of Britain’s entire electricity industry. Rising incomes and population growth will exacerbate the problem: what Helm describes as a ‘wall of demand’.

It would be easy to blame China, but Helm reminds us that China’s emissions are generated in large part by manufacturing goods which are then exported to the West. Thus, a reduction in emissions in developed countries may mask an increase in consumption. This is the case for the UK, for example. ‘Between 1990 and 2005, whilst carbon production fell by 15%, carbon consumption went up by over 19%. In other words, the British were causing an increase in global emissions, masked by the reduction in the amount produced in Britain’ (Pg 69).

Second (Chapter 4-8), ‘in almost a quarter of a century virtually nothing of substance has been achieved in addressing climate change’ (Pg ix).

Optimists might think that renewable technologies and energy efficiency offer a solution. Not so, says Helm. Regulation has been misguided, and the money spent on subsidising new technology has been wasted. On-shore wind is intermittent, expensive, and damaging to the landscape. Huge areas would have to be covered in turbines to cover even a small part of energy needs. Off-shore is prohibitively expensive. Helm quotes David Mackay’s calculation that putting a strip of turbines 4 Km wide all the way around Britain’s 3,000Km coastline would deliver 16 KWh per day per person, just half the power needed for the average driver (and never mind other needs) (Pg 87). Solar and bio-energy are equally unattractive and insufficient. Carbon capture and storage is unproven. Energy efficiency is a chimera, at least at household level, given the costs and disruption involved. Even nuclear can offer only a small part of the answer. ‘It is a remarkable achievement’, Helm concludes, ‘to drive up costs, reduce competitiveness and security of supply, and still make little impact on emissions’ (Pg 96).

The poor prospects for current renewables, and for nuclear, are partly driven by the fact that the world is not, contrary to common belief, running out of fossil fuels. As Helm points out ‘it is the fossil fuels price forecasts that hold the current polices on climate change together’ (Pg 138). In fact, forecasts of high and volatile gas and oil prices, based on peak oil forecasts, are plainly wrong. We live in a world of abundance of coal, oil and gas. The development of new technology which makes it possible to exploit shale gas is a key factor which transforms the economics of energy production – and makes the chosen avenues for transition to a low carbon economy all the more difficult.

International agreements do not help either. Helm is scathing about Kyoto, which erroneously focused on production targets not consumption targets, set targets for Annex 1 (developed) countries which were easy to reach (because of deindustrialisation), and excluded the fastest-growing emitters in emerging economies. Interestingly, he commends the US for not signing. He is equally dismissive of the Durban agreements, especially the role of the ‘grandstanding’ Europeans: ‘the cold reality of Durban was that the major countries agreed to do very little for another decade. In that period, the Chinese and Indian economies may well double in size, with all the associated emissions, notably from coal. What Durban really symbolized was an acceptance that the 2°C target was no longer feasible. Of course, this did not figure in the ludicrously triumphalist spin that European politicians put on the outcome’ (Pg 169).

Third (Chapters 9-11), ‘an alternative, more positive approach, is to . . . start bottom-up with three key policy instruments – the carbon price, the gas transition, and R & D’ (Pg 176).

Helm has three solutions to offer. The first is to impose a carbon price. Emissions trading is not the way to do this, since the experience of the European Emissions Trading Scheme shows that it is subject to regulatory capture and leads to low and volatile prices. Instead, there should be taxes on coal, oil and gas, domestically at first, backed up by border taxes and border carbon adjustments. The latter should be focused on the small number of industries responsible for the bulk of carbon imports: steel, chemicals, aluminium, cement and fertilisers.

The second solution is a new ‘dash for gas’, as the best short-term alternative to the current ‘dash for coal’. Gas is a carbon fuel, and damaging in the long run, but is attractive in the immediate future because it is in plentiful supply, at a low price, and has only half the carbon impact of coal. Helm is sensitive to the environmental challenges of shale gas, but optimistic that they can be managed. Shale gas is already driving a transformation of the US electricity industry, in turn driving a fall in US carbon emissions, which are ‘falling very fast’ (Pg 206).

The third solution is to invest in new technologies, not current ones. Helm is reluctant to pick winners, but is especially enthusiastic about smart grids, new battery technology and new forms of solar and bio-energy. ‘We should’, he says ‘be technological optimists’ (Pg 227).
A bald summary of the argument does not capture the vivacity of the writing, nor the pointed criticism of individuals and groups, from Lord Nicholas Stern and Jose Manuel Barroso, to Greenpeace and the financial whizz-kids from McKinsey. Helm is merciless in laying out the mendacity of politicians, the ruthless self-interest of business lobbies, and the (perceived) hypocrisy and wrong-headedness of campaigning NGOs. At the same time, there is clear evidence of underlying method and of sound economic analysis. We are taken by the hand and led though many complex topics: from the ethics of inter-generational equity, through the economics of energy system design and management, to the game theory of negotiations. Helm has a light touch, but he knows his stuff.

Why then, might there be chinks in the armour?

First, Helm is just a little coy at crucial moments on his journey. He writes approvingly of Rawls’ ‘veil of ignorance’, but draws just such a veil across the page when enlightenment is most needed. The best example is what should be an appropriate price of carbon. This is the first, and most important pillar, of Helms’ three-legged solution to the climate problem. He makes a strong case for a carbon tax as opposed to permits, on economic grounds. Simply put, it allows for greater margins of error and more uncertainty in the system.

But what should the price of carbon be? We’re told that the price generated by the European Emissions Trading Scheme is too low, at less than €10 a ton, but also that careful calculation by Professor David Pearce had suggested less than £10 per tonne, so not much different. Others have much higher figures. The Advisory Group on Climate Change Financing used a figure of $US20. Nick Stern, in his book, ‘Blueprint for a Safer Planet’, suggested about €40 per ton. Shell use a shadow price of $US 40/t. So, should a tax be set at the lower end of this range, or the higher? Helm says that it can start at a low level and rise, adjusted as it goes to achieve the desired end. But does that not sacrifice the certainty he also says investors need? And by the way, why does Helm think that the power of lobbies is any less with respect to tax than it is to quotas? If I was Jose Manuel Barroso, or one of Helm’s other victims, I would dig away at this chink, and see whether it could be enlarged.

Another case is what the discount rate should be. Helm is highly critical of the theoretical underpinning of a zero discount rate, as espoused by the Stern Report, but does not tell us what he thinks the discount rate should be. Ironically, for someone who argues so strongly for action on climate change, the lower the discount rate the better.
A second chink is that it would be interesting to test Dieter Helm’s scepticism about the current suite of technologies, including energy efficiency. Much of his critique of solar and wind is directed at Europe, but if he is right that the main emissions problems lie in China, India and other emerging countries, then a more relevant question is whether the latest versions of those technologies have legs in those countries – certainly sunnier than Europe, and at least as windy. South Africa, for example, has plentiful coal, as Helm suggests, but also has an ambitious programme for renewables, the South Africa Renewables Initiative, partly designed to prepare for the kind of border adjustment measure that Helm himself advocates.

When it comes to energy efficiency, Helm is scathing, probably rightly so, of over-ambitious estimates based on engineering rather than economic calculations. He may well be right that there is little low-lying fruit in developed countries, although incremental progress continues, for example in vehicles and in domestic appliances. Better urban design and improvements in public transport also help limit emissions. What Helm does not recognise, however, despite repeated references to their inefficient power generation and use, is the scope for energy efficiency measures in emerging economies, that are both technically sound and economically profitable. For example, the 2011 UNIDO Industrial Development Report, which examined energy efficiency, concluded that

‘Many energy-efficiency projects perform significantly better than the most lucrative financial investments, but their profitability varies widely and is sensitive to the time horizon of the investments. Of 119 industrial energy-efficiency projects that UNIDO assessed in developing countries, the average internal rate of return was slightly more than 40 percent for those with an expected lifetime of five years. Highly profitable projects often involve smaller investments, process reorganization and housekeeping measures, and minor changes to infrastructure. Projects that involve larger investments and require replacing machinery and equipment (mainly in process industries) are typically less profitable and take longer to mature.’.

Third, it would be useful to know whether Helm thinks the most recent science changes the economics of system design, perhaps especially with regard to the vulnerability/resilience of large, integrated systems. As Sam Bickersteth and I suggested in Open Democracy, recent evidence gives pause for thought:
· ‘Advances in the science of attribution suggest it is now more likely that extreme weather events are the results of long term climate change rather than just being random examples of shocks consistent with historic trends. The UK Met Office reports, for example, that November 2011 was the second warmest since records began in 1659, and was sixty times more likely to have occurred even than in the 1960s. Not all extreme weather events are climate-related, however. The 2011 floods in Thailand were just weather.
· Longer term transformation appears to be imminent. Professor Peter Wadhams observed in September not only that Arctic summer sea ice had shrunk to its lowest level ever, but that the Arctic would be ice-free in summer by as early as 2015-16. Prof Wadhams said that the implications would be ‘terrible’, because the melting of undersea permafrost would release huge quantities of methane, a powerful greenhouse gas. Research at the University of Reading has linked the wet UK summer of 2012 to warming of the Atlantic, partly cyclical and unrelated to climate change, but partly linked to long term increases in global concentrations of greenhouse gases.
· The global interconnections are increasingly evident. The US drought of 2012 is directly implicated in a food price spike affecting millions. Prices are not yet as high as in the major food crisis of 2008, but the FAO food price index rose 1.4% in September alone. According to the World Bank, maize prices more than doubled in some markets in Mozambique; sorghum prices tripled in Sudan and South Sudan. As the new President of the World Bank, Jim Yong Kim, has observed, ‘we cannot allow these historic price hikes to turn into a lifetime of perils as families take their children out of school and eat less nutritious food’.
· The economic costs are rising. The new Climate Vulnerability Monitor argues that climate change, and the associated costs of reliance on fossil fuels, already cost the world economy $US1.2 trillion a year, equivalent to 1.6% of global GDP. The losses are proportionately higher in least developed countries – already amounting to 7% of GDP in 2010. Higher temperatures will have a devastating impact on labour productivity in hot countries. Some five million lives a year are already lost to climate and carbon impacts. ‘

All these play to the idea that early action is desirable and profitable, even at higher discount rates than sometimes used. No doubt, we will hear more about the science when the next IPCC report is published in 2014.

These three issues – coyness about tax levels and discount rates, application of the analysis to emerging economies, and new evidence on short-term impacts – are chinks in the armour, not gaping rents. Give Dieter Helm a platform or right of reply, and he will no doubt have patches to supply. The important point is that the discussion should continue. It is time for those who disagree to adjust their stirrups and sharpen their lances.
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Simon Maxwell’s review will be published in a forthcoming number of Development Policy Review .


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