05.12.2024

Prime ministers, presidents and ministers: photo op in Baku

Planning, not pricing

As Cop29 demonstrated, the world’s states have no solution to climate change. Michael Roberts shows the danger now that global temperatures will head to 20C and way beyond, with disastrous consequences

There was a tortuous and painful end to Cop29, the international climate change conference held in oil-rich Baku, Azerbaijan from November 11-22.

The main issue was how much the rich countries would hand over to the poor countries to pay for the measures to mitigate global warming and handle the damage caused by rising greenhouse gas emissions. The finance target set was for more than $1.3 trillion a year by 2035, but the final deal was based on just $300 billion in actual grants and low-interest loans from the developed world. The rest would have to come from private investors and perhaps levies on fossil fuels and frequent flyers - the details of which remained vague.

The offer from the ‘developed’ countries, funded from their national budgets and overseas aid, is supposed to form the inner core of a so-called ‘layered’ finance settlement, accompanied by a middle layer of new forms of finance, such as new taxes on fossil fuels and high-carbon activities, carbon trading and ‘innovative’ forms of finance, and an outermost layer of investment from the private sector, into projects such as solar and wind farms. This was a ‘Cop-out’ from providing real money transfers.

At Cop29, there was no further talk of “the transition away from burning fossil fuels”, as pledged by leaders of the world’s nations just a year ago, with 2024 on track to set another new record for global carbon emissions.

Emissions

The latest data indicate that the planet-heating emissions from coal, oil and gas will rise by 0.8% in 2024. In stark contrast, emissions have to fall by 43% by 2030 for the world to have any chance of keeping to the 1.5°C temperature rise target set by the Cop Paris agreement. That target is dead and the planet is heading fast towards a 2.0°C rise (and above) compared to pre-industrial times. Indeed, current policies put the temperature on track for a 2.7°C rise. The expected level of global heating by the end of the century has not changed since 2021, with “minimal progress” made this year, according to the Climate Action Tracker project.¹

Changes in average global temperatures that sound small can lead to massive human suffering. Last month, a study found that half of the 68,000 heat deaths in Europe in 2022 were the result of the 1.3°C of global heating the world has seen so far. At the higher temperatures that are projected for the end of the century, the risk of irreversible and catastrophic extremes is also set to soar. Researchers warned that their median warming estimate of 2.7°C by 2100 had a wide enough margin of error that it could translate into far hotter temperatures than scientists were expecting. “There is a 33% chance of our projection being 3°C or higher, and a 10% chance of it being 3.6°C or higher,” said Sophia Gonzales-Zuñiga of Climate Analytics. The latter would be “absolutely catastrophic”, she added.

And it is not just carbon emissions. The fossil fuel industry emits dangerous amounts of its methane emissions - the most damaging of the greenhouse gases. While it may not persist as long in the atmosphere as carbon dioxide, over a 20-year timescale methane is 80 times more potent at trapping heat. It has been responsible for an estimated 30% of the world’s warming since the industrial revolution.

Methane emissions are rising at a record rate, according to a study published in September in the journal Earth System Science Data. Over the past two decades, they have increased by around 20%. Atmospheric concentrations of the gas are now more than 2.6 times higher than in pre-industrial times - the highest they have been in at least 800,000 years. Fossil fuel air pollution is already responsible for one in five deaths worldwide - roughly the population of New York. In the US, 350,000 premature deaths are attributed to fossil fuel pollution. Mainstream economics has failed to recognise the scale and impact of greenhouse gas emissions on the world economy.

William Nordhaus was awarded a Nobel prize in economics in 2018 for modelling the costs and benefits of acting on climate change through limiting emissions - he pioneered the mainstream economic analysis of climate change.² Nordhaus constructed so-called integrated assessment models (IAMs) to estimate the social cost of carbon (SCC) and evaluate alternative abatement policies. IAMs attempt to model the incremental change in, or damage to, global economic output resulting from one tonne of anthropogenic carbon dioxide emissions or the equivalent. These SCC estimates are used by policymakers in cost-benefit analyses of climate-change mitigation policies. But, because the IAMs omit so many of the big risks, SCC estimates are often way too low. The values often depend crucially on the ‘discounting’ used to translate future costs to current dollars.

These discount rates are central to any discussion. Most current models of climate-change impacts make two flawed assumptions: that people will be much wealthier in the future; and that lives in the future are less important than lives now. The former assumption ignores the great risks of severe damage and disruption to livelihoods from climate change. The latter assumption is ‘discrimination by date of birth’. It is a value judgement that is rarely scrutinised, difficult to defend and in conflict with most moral codes.

The discount rate used to calculate the likely monetary damage to economies is arbitrary. If we use a 3% discount rate, that means the current rise in global warming would lead to $5 trillion of economic damage (loss of GDP), but the cost in current money of global warming would be no more than $400 billion. So, on this discount rate, global warming causes little economic damage and thus the SCC is only about $10/ton and mitigation action can be limited. This is what Nordhaus used in his model.

Nordhaus’s IAMs have flaws that make them close to useless as tools for policy analysis. They struggle to incorporate the scale of the scientific risks, such as the thawing of permafrost, the release of methane, and other potential tipping points. Furthermore, many of the largest potential impacts are omitted, such as widespread conflict as a result of large-scale human migration to escape the worst-affected areas. IAMs do not account for risks and uncertainty. These models estimate damages each year by some damage factor x, multiplied by T2 that year - meaning the very simple damage function is a gently upward-sloping line.

Recently deceased climate economist Martin Weitzman, a colleague of Nordhaus, disagreed with this approach to ‘discounting’ the future,. Weitzman pointed out the tremendous uncertainty in the forecasts of climate impacts, including tipping points, large error bars and ‘unknown unknowns’. In economics-speak, he characterised this as an enormous “downside risk”, including a potentially small - but fundamentally unknown - chance of total human annihilation.

Econometric calculations based on past behaviour ignore not only the ‘tipping points’, like methane releases from the melting permafrost, but also the ones that are far easier to see, like the Great Salt Lake running dry. Society, too, has tipping points; infrastructure has breaking points; ecosystems have thresholds; after some level of temperature rise, crops do not lose productivity - they just die (it is the same with humans).

Market ‘solutions’

Despite the huge flaws in IAMs, they continue to have influence on policy - in particular to advocate ‘market solutions’ to climate change that do not require public investment in climate control or public ownership of the fossil fuel industry.

Nordhaus’s IAMs assume that the world economy will have a much larger GDP in 50 years, so that, even if carbon emissions rise as predicted, governments can defer the cost of mitigation to the future. In contrast, if you apply stringent carbon abatement measures - eg, ending all coal production - you might lower growth rates and incomes and so make it more difficult to mitigate in the future. Instead, according to Nordhaus, with carbon pricing and taxes we can control and limit emissions without reducing fossil fuel production and consumption at source.

This is the tobacco/cigarette pricing and taxing solution. The higher the tax or price, the lower the consumption, without touching the tobacco industry. Leaving aside the question of whether smoking has really been eradicated globally by pricing adjustments, can global warming really be solved by market pricing? Market solutions to climate change are based on trying to correct ‘market failure’ by incorporating the nefarious effects of carbon emissions via a tax or quota system. The argument goes that, as mainstream economic theory does not incorporate the social costs of carbon into prices, the price mechanism must be ‘corrected’ through a tax or a new market.

Global market

Countries agreed a deal at Cop29 on rules for a global market to buy and sell carbon credits that proponents say will mobilise billions of dollars into new projects to help fight global warming. Yet carbon credits have proved to be faked.³ This approach is hopelessly inadequate and unworkable. The world’s clean energy plans (and they are only ‘plans’) still fall almost one-third short of what is needed to reach that figure. And to reach the necessary level of investment, climate finance will need to increase to about $9 trillion a year globally by 2030, according to the Climate Policy Initiative. The $1.3 trillion target set by Cop29 (and not met anyway) is miles short.

Why is the climate target not being met? Why is the necessary finance not forthcoming? It is not the cost price of renewables, which have fallen sharply in the last few years. The problem is that governments are insisting that private investment should lead the drive to renewable power. But private investment only takes place if it is profitable to invest.⁴

Profitability is the problem. Average profitability globally is at low levels and so investment growth in everything has similarly slowed. Ironically, lower prices for renewables drag down the profitability of such investments. Solar panel manufacturing is suffering a severe profit squeeze, along with operators of solar farms. This reveals the fundamental contradiction in capitalist investment between reducing costs through higher productivity and slowing investment because of falling profitability.

Market solutions will not work, because for capitalist companies it is just not profitable to invest in climate change mitigation. As the International Monetary Fund itself put it,

Private investment in productive capital and infrastructure faces high upfront costs and significant uncertainties that cannot always be priced. Investments for the transition to a low-carbon economy are additionally exposed to important political risks, illiquidity and uncertain returns, depending on policy approaches to mitigation as well as unpredictable technological advances.⁵

Indeed: “… there is not only a missing market for current climate mitigation, as carbon emissions are currently not priced, but also missing markets for future mitigation, which is relevant for the returns to private investment in future climate mitigation technology, infrastructure and capital.” In other words, it ain’t profitable to do anything significant.

A global plan could steer investments into things society needs, like renewable energy, organic farming, public transportation, public water systems, ecological remediation, public health, quality schools and other currently unmet needs. And it could equalise development the world over by shifting resources out of useless and harmful production in the north and into developing the south, building basic infrastructure, sanitation systems, public schools, healthcare. At the same time, a global plan could aim to provide equivalent jobs for workers displaced by the retrenchment or closure of unnecessary or harmful industries.

In other words, planning, not pricing. But Cop29 offered nothing like that!

Michael Roberts blogs at thenextrecession.wordpress.com