Uncharted Territory

October 19, 2009

50 Days to Save the World!

Filed under: Concepts, Economics, Global warming, International climate deals — Tim Joslin @ 12:59 pm

It sounds like Gordon Brown now inhabits a comic-strip world. His retreat from reality began when he metamorphosed from Stalin to Mr Bean. He’s now a comic-strip character, Flash, aah-aah saving the universe (OK, world) on a regular basis.

Some guy on Radio 4 this morning was arguing that the Copenhagen climate talks are irrelevant because nations will not agree to something that is not in their narrow national interests. He’s probably right.

But there is a much more fundamental problem with the way the discussion is going.

In yesterday’s Observer, Nicholas Stern wrote how “The world’s future is being decided this weekend” (wot, no 50 days? – clearly we need an entire team of superheros!). But the way Supernick – he can bash out a 500 page report faster than a civil servant on speed! – frames the problem makes it insoluble. In Stern’s words:

“Rich countries must give their backing to these plans by providing developing countries with $100bn a year by the early 2020s, for measures to reduce emissions (much of which could be delivered by the operation of carbon markets), and a further $100bn to help them adapt to the effects of climate change that cannot now be avoided. Developing countries are likely to doubt the credibility of such commitments unless the rich countries also set an intermediate target of $50bn per year by 2015.”

Let’s analyse the first couple of words. What does “rich” mean? Well, usually it refers to those who have a lot of money. Who are we talking about, then, when we refer to “rich countries”? China? Apparently China has a couple of $trillions stashed away. No, we’re not referring to China. China, it seems is one of the “developing countries” pressing for a “credible agreement”.

What Stern seems to be arguing is that the price of a global agreement to limit carbon emissions is a tax on the current citizens of countries with “historic responsibility” for carbon emissions. The idea is that this tax is distributed to “developing countries”.

Let’s not get into a discussion of the morality of the tax, though in my opinion the blame game is an obstacle in the way of solving the problem. Here I’m just concerned about the practicalities.

It seems to me that Stern and the Superheroes need to take a look around the world.

A number of developing countries – China being the prime example – are currently holding their currencies artificially low, with the result that they have a massive trade surplus and huge foreign exchange reserves. Do they really need another $100bn a year?

Further, several of the developed countries who are supposedly to find this money are in fiscal difficulties. That is, in several cases, the state – who would have to be the agent transferring this money – is at the limit of what it can actually raise in taxes from its own citizens, or even “non-doms”.

Stern, it seems, wants to transfer money from those who have a lot of it to those who don’t have enough.

But perhaps there is a way to raise an extra $100bn a year. Developed countries’ currencies could be devalued compared to those of developing countries, such as China, so that they import less and export more, making it easier to find some surplus cash. This would lead to more economic activity in developed countries at the expense of developing countries. Is that what Stern wants?

Or we could simply transfer the $100bn – by printing money (aka QE), for example. Besides simply providing cash for imports, such a transfer would tend to devalue the $ (or other developed countries’ currencies used), tending to encourage greater imports into developing countries and making it more difficult for them to export. Is that what Stern wants?

What Stern presumably does want is to achieve less carbon-intensive economic growth in developing countries – wind turbines rather than coal-mines – not merely less economic growth in developing countries. Transferring $100bn a year will not make this happen. The only policies that will make low carbon growth happen are ones that create greater incentives to employ low-emission technologies than those causing high levels of emissions.

We have to be careful not to confuse cash with actual activity. On the micro scale, I can, if I have the cash, go out and buy some product or service. But when we start to consider the global scale you can’t simply translate cash into material. The amount of both cash and material available determines the rate of exchange between the two.

Providing developing countries with $100bn a year – or whatever number – does nothing for the supply side of developing countries economies. And it is the supply-side that we are trying to change. Cash injections merely create demand for goods and services denominated in dollars (or whatever developed country currency is used). Ultimately this will lead to more economic activity in developed countries and less in developing countries.

Development is a very tricky business. You can’t measure “development” by how much money a country has in the bank. It follows that you can’t promote development simply by transferring some wealth in the form of money.

If we define a country’s level of development as some sort of quantification of its ability to produce goods and services, then we might realise that the problem can’t be simply solved. Developing countries are fearful of limits on their carbon emissions because such limits might limit the rate at which they can acquire the ability to produce goods and services. Cash is simply not a substitute for such ability.

The “Copenhagen” discourse seems to entwine the problems of climate change and development ever more tightly. But in fact the two problems must be disentangled – we’d be a lot better off if we dealt with the two issues as separate problems.

It might seem that all we have to do is pay developing countries not to emit carbon, but the world is not quite that simple.

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2 Comments »

  1. […] International climate deals, Oil price, Regulation — Tim Joslin @ 6:40 pm My previous post, 50 Days to Save the World! made a simple point. If we’re planning an economic solution to the climate change problem, […]

    Pingback by Paper Dragons: The Nature of Currencies, with Particular Reference to China’s $2trn Problem « Uncharted Territory — October 19, 2009 @ 6:40 pm

  2. […] in return it seems for some kind of ineffectual agreement to reduce emissions. As I’ve mentioned already, Lord Stern is a keen proponent of such […]

    Pingback by Copenhagen and a Cornucopia of Conundrums « Uncharted Territory — October 20, 2009 @ 5:40 pm


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