Global Warming and the Free Market

Chris Waller - August 2007
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Nothing, ostensibly, currently occupies the minds of politicians like global warming, its having become the vehicle for a second career by no less than a former American presidential candidate. Politicians wishing to be seen to rise above domestic concerns and achieve the exalted rank of 'statesman' express their concerns about the global environment and their views on climate change.

In 1997 the Kyoto Protocols were signed, with ratifying nations due to implement the required measures beginning in 2005. A major element of these are the 'emissions trading' schemes, of which there are two major types, one being the 'cap and trade' system, the other being the 'baseline and credit' system. While both cover a number of greenhouse gases, carbon dioxide from the combustion of fossil fuels is by far the greatest component in the trading schemes.

The exact details of the differences between the two types of emissions trading schemes need not concern us, both being in essence programmes under which countries are allocated credits which they may use or trade. The credits are set by agreement under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC). These credits are expressed in terms of the tonnes of carbon dioxide which that country is allowed to produce by the combustion of fuels. Any country which emits less than its allocation of carbon dioxide may sell its surplus credits to another nation. Under these schemes the countries which emit the least carbon dioxide, typically Third World or developing nations, will be able to sell their credits to the polluting countries, mainly the developed world, thus directing funds to the less developed countries and allowing them to develop their economies.

At first glance, the carbon trading system seems a laudable approach to capping global emissions of greenhouse gases while at the same time providing a mechanism whereby the economic growth of less developed and Third World countries is not impeded. Secondly, emissions trading is presented as a free market approach to tackling the problem of greenhouse gas emissions. But is it really a free market solution? And how effective is it likely to be?

Firstly, the United States, the world's biggest producer of greenhouse gases, refused to sign the Kyoto Protocol. A number of states in the USA have implemented their own emission reduction schemes, the most recent being that signed into law in California by its Governor, Arnold Schwarzenegger.

Australia signed the Protocol but did not ratify it, asserting that since the US had not signed, the scheme would be ineffective in significantly reducing global greenhouse gas emissions, although it must be noted that the Australian Prime Minister, John Howard, was a sceptic on the global warming issue. That said, only this year, in June, John Howard announced the Australian Carbon Trading Scheme, to come into effect in 2012. Critics have denounced this as 'too little, too late' and one has to ask whether the drought in Australia, claimed by some to be the worst in a thousand years, has not caused John Howard to review his scepticism.

Secondly, all of these emission trading schemes are highly bureaucratic, requiring massive resources to first determine an appropriate allocation of carbon credits to each country and then even more resources to police the schemes to ensure that each country is keeping to its bargain. Furthermore, any such schemes are open to bribery and corruption.

There is also the more technical aspect of greenhouse gases to be considered. While carbon dioxide may be the greatest greenhouse gas we emit in terms of tonnage, methane is twenty times more damaging weight for weight. Indeed when one looks at the Global Warming Potential (GWP) of a number of gases, carbon dioxide looks positively benign.

Carbon DioxideFossil fuel, combustion1
MethaneCoal mines, rice paddies, livestock21
Sulphur HexafluorideCoolant/dielectric in large transformers<23,000

While we may be able to control our emissions of carbon dioxide from the combustion of fossil fuels, we can do little about the emissions of methane from ruminants, save all becoming vegetarians - but then we would probably consume more rice and still the problem would remain!

On top of all this is the most common greenhouse gas of all, water vapour, about which we can do absolutely nothing.

There are those who remain sceptical about global warming, or more specifically, our contribution to it, but that is another debate. The point here is to consider whether the current Emission Trading Schemes (ETSs) are the best mechanism for tackling the ostensible problem.

I would argue that the normal mechanisms of free markets will solve the problem for us.

Currently, the fastest growing economies in the world are those of Brazil, Russia, India and China (known among economists by the acronym 'BRIC'). Of these, China is by far the most vigorous, expanding at rates of 8-10 percent per annum over the past few years. China is currently constructing and bringing into service two coal-fired power-stations every week, in a programme which will see a total of 554 stations constructed. By way of comparison, Britain has 18 coal-fired power-stations which between them still make the largest contribution to our electricity needs. China has doubled its coal production in the last six years, but with reserves estimated at one trillion (1012 ) tonnes, there is no fear of an impending shortage.

China has signed the Kyoto Protocol, as indeed has India, but both are exempt from its strictures due to their current economic status. Despite its massive population, China's emissions of carbon dioxide are still only half of those of the USA, though it is expected to equal the USA within the next three years. The USA alone accounts for a quarter of all global emissions thus, in the next three years, it and China will be producing half of all global emissions. China is currently engaged in a number of projects to introduce 'clean burn' technology to its power-stations and to extend its production of electricity from renewable sources. While China's position on global warming is to be applauded, there may be an element of self-interest in that decision.

Even though there is still, in some quarters, doubt about the ultimate causes of global warming, we should perhaps take Pascal's Wager and act as if human agency is the cause and thus take action. If nothing else, it will reduce our consumption of fossil fuels and so extend the lifetime of the reserves.

However, there is another aspect to this question and one where the mechanisms of the free market will solve the problem. In recent years we have seen extensive flooding in Britain, this year's being the most destructive and claimed by many to be a further manifestation of global warming. The cost of the recent floods in put at around 6 billion, money which we have to find and which we cannot spend on other things - imports from China for example. So, if it is in fact the case that Chiina's emissions of greenhouse gases are causing global warming then sooner or later it will hit them in the pocket. Extend this argument globally and it becomes apparent that if we do not take action to combat global warming the global economic impact will be massively deleterious, ultimately frustrating the attempts of China, India and others to achieve economic growth.

At this very moment, the demand for resources by the BRIC group of economies, China most notably, is pushing the price of commodities higher and higher - the price of copper, for example, has doubled in the last year. The world economy has its limits and there is a point at which economic development will be constrained by lack of resources. If, as is conjectured, global warming is set to worsen, then the loss of land, and thus the loss of crops, due to flooding will increase. World food prices will rise even faster than they are doing now and thus world economic growth will be curtailed. Add to this the consequences of the outbreak of blacks stem rust currently devastating grain crops in East Africa and the Middle East, and predicted to spread as the virus is carried on the wind, and we face the prospect of food shortages and hugely elevated prices in the next few years.

I would argue therefore that emissions trading schemes are merely an unnecessary veneer on top of an economic system which is intrinsically capable of solving the problem. The only question that then remains is whether the mechanisms of the free market can act with sufficient speed to prevent a catastrophe.

Chris Waller - Permission granted to freely distribute this article for non-commercial purposes if attributed to Chris Waller, unedited and copied in full, including this nottice.

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