Jul 1st 2008

The case for climate change optimism

by Angus McCrone

Angus McCrone is chief editor of New Energy Finance, a London-based specialist provider of information and research to investors in renewable energy, low-carbon technology and the carbon markets.

Finding grounds for optimism in the global warming debate isn't easy. But Angus McCrone points out that investment in clean renewable energy sources is rising much more quickly than human CO2 emissions. And game theory suggests that nations will eventually take unilateral steps to curb their carbon emissions

Put a panda in a room with a bald eagle, a bear, a kangaroo, a tiger, a Dachshund, a bulldog, a cockerel and a green pheasant and what do you get? The answer is a lot of noise, violence, feathers and fur − and very little harmony. Much the same can be said of international talks on climate change. Put the representatives of the countries symbolised by these animals in the same room and the results tend to be noise, division and recrimination.

The issue of how the world will curb its carbon emissions has, over recent years, certainly caused a huge amount of bickering. Everyone has insisted that others need to make much more painful sacrifices than they themselves have committed to. Meanwhile, human CO2 emissions have gone on climbing − according to the International Energy Agency (IEA) world emissions are likely to rise from 26.6bn tonnes in 2005 to 41.9bn tonnes in 2030, unless current policies are changed.

Against this backdrop, a mood of pessimism over climate change has become entrenched; no wonder, with Asian giants, the US and western Europe all calling each other names while failing to stem the construction of coal-fired power stations, the logging of rain forests or the spread of low cost airlines.

But it can be dangerous to bank too heavily on the pessimistic view simply because it is so widespread. Arguing the more optimistic side of the climate change debate can be lonely past time, but there are two good reasons for doing just that.

The first concerns the dynamics of how international negotiations are likely to play out over the long-term − and not just at international summits or high-profile conferences. Applying a branch of economics called game theory raises a number of unexpectedly optimistic possibilities. The second reason reflects the fact that the carbon emissions chart is not the only one with an upward sloping line. There is another chart, concerning investment growth in renewable energy, that's much steeper. More about that later.

But first, let's deal with the apparent intractability of international climate change negotiations. Attempting to view the negotiating positions of Europe, the US and the developing world through the prism of the "Prisoner's Dilemma" − a game theory scenario first described in 1950 − yields some interesting insights. Applying the Prisoner's Dilemma admittedly suggests that we can expect selfish short-term behaviour from the negotiating partners. This reflects the likelihood that, in theory, two prisoners will probably rat on each other under interrogation to avoid the worst outcome. That outcome being a long sentence made worse through refusing to talk and also finding out later that the second prisoner has, in any case, spilled the beans.

That kind of behaviour is clear enough to spot in climate change negotiations. The US and the developing world have each been avoiding a deal on curbing emissions. Each fears that signing up would open up a risk that the other side would refuse to sign, and would therefore gain economic advantage.

The good news about the Prisoner's Dilemma, however, is that this cynical calculation does not work well when repeated over the medium-term. If both the US and the developing world avoid cutting emissions, then both lose out because climate change intensifies. The breakthrough should come when the players begin to fully appreciate this.

Such potential catalysts appear to be growing more numerous. The Stern Review in November 2006, for example, reported on the potential cost if no one curbs emissions − at 5% to 20% of GDP, far higher than the 1% of annual GDP cost of tackling climate change if the main parties work together. Then, in November 2007, the Intergovernmental Panel on Climate Change warned: "Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global average sea level." Future effects, it said, would include increased disease, "water stress" and loss of bio-diversity in parts of every continent on Earth.

The greater the scientific consensus about the causes of climate change, and the greater the incidence of freak and threatening weather, the stronger will be the pressure on all the parties to take unilateral action. There is already evidence of this. In March 2007, for instance, the European Union targeted a 20% share of renewables by 2020 in its total energy use. Last September, China announced a $265bn investment plan for lifting renewable energy use to 15% of its total, also by 2020. And a whole string of US states have announced "renewable portfolio standards" to force electricity utilities to buy clean rather than dirty energy.

Apart from taking unilateral steps, countries will also find that it achieves good results in the long-term if they adopt an approach that is "retaliatory, forgiving and clear". In other words, when another country takes a negative step, be prepared to retaliate with trade policy or another sanction. When an erring country returns to the fold, countries should be forgiving and welcome it back. And the policies adopted to tackle climate change should be clear, so that others do not misinterpret the intention.

It could well be that this process never results in a formal international treaty, setting out precise actions for everyone. Diplomatic complexity and local political pressures may make that impossible. But this need not worry those who are concerned about climate change as the self-interest of each economic bloc will always be best served by eventually taking action and in seeing that its peers do the same.

Perhaps, then, the United Nations should takes this on board and spend less time trying to negotiate an all-encompassing treaty that may well prove impossible to obtain. Instead it should encourage each bloc to take the right negotiating positions that will encourage others to make unilateral curbs in emissions. Advancing towards a global solution to the greenhouse gas problem through a long series of small steps, in both individual countries and trading blocs, may prove far more effective.

But, as briefly mentioned earlier, there is a second reason for optimism. While the IEA forecasts that energy related CO2 emissions will rise by 1.8% per year for many years ahead, another trend is also underway and the gradient of its line is far steeper than that. This trend reflects investment growth in clean energy.

New investment in renewable energy and energy efficiency was estimated to be $33.4bn in 2004. This figure includes venture capital and private equity investment in newly formed clean energy companies, money raised by quoted companies from stock market investors, debt and equity finance raised for clean energy projects, research and development funded either by governments or by large companies (such as the oil majors and the utilities), and small scale projects − such as warehouses placing solar panels or their roofs, or farms building a micro-wind turbine.

From that modest base, investment in clean energy has been accelerating fast. Research suggests that this investment figure rose by 76% to $58.7bn in 2005, by 58% to $92.6bn in 2006, and is estimated to have ended up at $148.4bn in 2007 − up 60% on the previous year.

If policies such as obligations on electricity providers and tariff incentives for non-CO2 emitting power, are put in place by governments to enable those hefty growth rates to continue, then it shouldn't take too many years before clean energy generation reaches a scale where it begins to eat meaningfully into the IEA's carbon emission forecasts.

There are other factors at work that can further encourage this process. Renewable energy and efficiency technologies are improving very fast, as entrepreneurs and aggressive larger companies compete for dominance in markets which are expected to boom in the years ahead. The result should be much lower prices for clean energy hardware, making it easier for utilities and other buyers to choose the non-fossil fuel option in the next decade.

Supply and demand issues should also aid several of the key renewable technologies, and hit that key fossil fuel − oil. The cost of wind and solar power is at the moment being held up by shortages of hardware like turbines and such materials as silicon. Once production rises to meet these shortages, their cost competitiveness will improve. Meanwhile, global oil demand is growing, while supply from existing and new fields is likely by 2015 to be under pressure. The IEA admits that "a supply crunch" by then cannot be ruled out, boosting demand for sources of alternative energy.

So, against the backdrop of pessimistic media reports on climate change, there is a case for optimism. Although it's important to remain realistic − there is a high likelihood that, despite growing global efforts to curb greenhouse gas emissions in the next few years, there will still be substantial damage to the environment. It now looks almost certain that there will be a loss of plant and wildlife species, the degradation of many natural habitats and changing weather patterns that could hit vulnerable human communities hard. But there are also grounds for tempering today's almost universal mood of pessimism.

This article was provided by EUROPE'S WORLD.

See also GLOBAL WARMING - MAN-MADE OR NATURAL by Kenneth Rundt on this site.

If you wish to comment on this article, you can do so on-line.

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