Bertelsmann-Stiftung: Transatlantic Thinkers Part 2
Peter Goldmark and Ernst von Weizsäcker
This piece was written by a European and an American both deeply engaged in efforts to moderate global warming, and each of whom has lived in both Europe and the United States. We give a perspective on the present situation regarding climate change in Europe; a parallel perspective on the situation in the U.S.; and then close with a series of recommendations and policy opportunities that should be on the agenda of the transatlantic partnership, but which reflect the reality that Europe is the leading geopolitical unit today in defining and mobilizing global progress toward a regime of carbon limits that holds out the possibility of avoiding the most catastrophic consequences of global warming.
I: Grim facts on climate change
It has become clear to climate scientists that the carbon emission targets set by the Kyoto Protocol were not nearly ambitious enough to “prevent dangerous anthropogenic interference with the climate system”, as stated in Article 2 of the UN Framework Convention on Climate Change (FCCC).
The Arctic Climate Impact Assessment (2004) was perhaps the most powerful wake-up call of the past few years. It showed a picture of Greenland’s fresh water cover in summers 1992 and 2002 with the area of the latter being easily four times larger than the former and being nearly half the size of Greenland itself. Mighty vertical water currents tunnel down into the ice and appear to be lubricating the rocks on which the ice masses are sitting, thus accelerating the rate at which they move towards the sea beyond that which had been previously estimated.
This Assessment and other facts served as the scientific basis for the November, 2006 Review on the economic consequences of addressing or failing to act on climate change published by Sir Nicholas Stern, former chief economist of the World Bank. This report had been commissioned by British Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown.
The Review suggests that early action to reduce greenhouse gas emissions would be much cheaper than originally assumed, and that delaying action will risk horrendous damage that could amount to as much as 20 percent of world GDP.
Climatologists tend to converge around the conclusion that global warming of an average of 2°C above pre-industrial levels should be seen as the threshold beyond which the anthropogenic interference with the climate system would become “dangerous”, to quote Article 2 of the FCCC.
All this information was available at the FCCC’s 12th Conference of the Parties in Nairobi in November, 2006. One had hoped that a post-Kyoto architecture could be negotiated but nothing of the kind happened. Nairobi was basically a bureaucratic gathering with no visible political initiative, although some progress was made on policies aimed at discouraging deforestation and laying the groundwork to bring emissions from deforestation under the post-Kyoto framework.
The EU had nothing to contribute to the coming debate on post Kyoto.
II: The EU’s bumpy learning phase
Nevertheless, the EU considers itself in the vanguard of climate policy. It was instrumental in launching the FCCC, which was adopted in Rio de Janeiro. Five years later, at the third Conference of the Parties of FCCC in Kyoto, the EU was one of the major players and ultimately the decisive one, in urging adoption of the Kyoto Protocol.
And finally, it was the EU which adopted the first international regime of carbon trading, through its Emissions Trading Scheme, ETS (Directive 2003/87/EC).
The first phase of the ETS, from 2005 to 2007, intended as the “learning phase”, ends this year. Some lessons can certainly be drawn from this learning phase. The EU had seen economic growth and growth in carbon emissions since Kyoto’s adoption, leading to demand for higher volumes of carbon allowances than appeared available in 2003. Therefore despite the political decision, taken under heavy influence from the major emitters, to allocate the allowances free of charge, allowances had a positive price from the start.
Fig. 2 shows the development of the price per ton of CO2 emissions. The market price underwent a conspicuous collapse in May, 2006, due to the leaking of research data that major emitters were sitting on large quantities of unused allowances. At the time of the initial allocation they had claimed many more allowances than they actually needed.
What was more irritating than permit hoarding, not least to end-use consumers, was that some power utilities, notably in Germany, raised electricity prices in proportion to the market value of the allowances that they had obtained free of charge in the first place.
The power utilities argued that for every marginal kilowatt-hour generated above earlier production levels, additional costs would accrue in proportion to the permit prices. This led to calculations of horrendous marginal consumer prices above 1.000 Euros per ton of CO2 emitted (Schlemmermeier and Schwintowski, 2006).
Ironically, most of the major emitters flourished tremendously after the introduction of the ETS, although the causes of this prosperity are complex. Electric utilities benefited from acquiring an oligopoly position a few years after market liberalization, while non-ferrous metals producers benefited from rising commodity prices.
Another irritating effect came in in recent months. Under the Kyoto Clean Development Mechanism (CDM), emitters were allowed to trade some of their obligations outside Europe. Their favourite place were China and India, discovering that reducing Chlorofluorocarbons (CFC’s) was valued very high on the scale of greenhouse gas emissions because their Global Warming Potential (GWP) is several thousands times higher per kilogram than that of CO2.
To meet the phase out date of 2010 under the Montreal Protocol, developing countries are quite willing to reduce their production and stocks for good money from Europe. As the reduction of such substances is much cheaper per unit of GWP than CO2 emissions reduction this trade is profitable both for the developing countries and the EU firms in need of reducing greenhouse gas emissions. This bargain is the main reason for the continued fall of prices for carbon emissions permits, as seen in fig 2. The bargain is nevertheless irritating because it weakens the incentive to reduce coal, oil and gas intensity in Europe, while China and India swiftly substitute phased out CFS’s with HCFC’s, notably with HCFC-22, the production of which results in emissions of trifluoromethane (HFC23), as an unwanted by-product that is a super greenhouse gas with a GWP 11,700 times more than CO2.
The general impression in the European public is that not all went well with the “learning period” of the ETS. It will be politically difficult to repeat the free allocation of emission permits next time, and more voices are already being heard suggesting an auction of the allowances for the next phase.
The second phase of the ETS runs from 2008 to 2012, coterminous with the Kyoto Protocol. The EU intends to deliver the commitments assumed in the Kyoto Protocol.
Although it seems uncertain whether the ultimate target of an eight percent emissions reduction from levels in 1990 will be reached, the EU has performed far better in curbing greenhouse gas emissions than nearly all other Kyoto signatories. EU performance has also outpaced the US and Australia who have not ratified Kyoto and have had drastic increases in greenhouse gas emissions since 1997.
Post-Kyoto initiatives of the EU
It is clear now that Kyoto was just the first step toward a robust, global regime of carbon limits.
Everybody seems to agree that the post-Kyoto regime will have to be a lot more ambitious than Kyoto itself.
Greenhouse gas emissions will have to be reduced to at least 50% of expected business-as-usual levels if greenhouse gas concentrations are to be stabilised at a level low enough to keep global warming within roughly 2°C. Recent work (Vattenfall & McKinsey) suggests that stabilizing the climate at 450 ppm CO2 by 2030 is doable and affordable if we start very soon. This goal is roughly compatible with holding the warming increase to 2O°C.
Many believe that eventually we will have to get beyond that goal and reduce emissions to 80% below today’s level.
What can be done on the European side to reach this goal? Essentially three strategies are available and have to be combined:
- Increasing energy efficiency;
- Increasing the use of fossil-free energy; and
- Reducing the amount of carbon dioxide being released into the atmosphere.
The EU has been fairly cautious on energy efficiency.
The energy efficiency directive, 2006/32/EC (16 May 2006), requires member states to draw up national action plans to achieve 1% yearly energy savings in the retail, supply and distribution of electricity, natural gas, urban heating, and other energy products including transport fuels. The 1% target, however, is only indicative. The national action plans will need approval from the Commission and will be reviewed every three years, but there are no sanctions whatsoever. The process will be spread over nine years, starting in January 2008, although the first national efficiency action plans are due for submission on 30 June, 2007. The European Parliament had demanded binding targets but member states killed that proposal during a Council meeting in 2005.
On renewable energies, the EU is more progressive.
Its 1997 White Paper contained a commitment to double renewable energy supplies to 12% by 2010 from 6% in 1998. The EU seems to be nearly on track to reach this goal, not least because of the pioneering roles of Denmark, Austria and Germany and the adoption in Spain of the German model of feed-in tariffs for electricity from renewables that is piped into the power grid.
In January, 2007, the Commission published “An Energy Policy for Europe” (COM (2007) 1 final). Its most specific change against earlier policies is the proposal for a binding target for biofuels to reach 10% of vehicles fuel by 2020, twice as much as proposed in earlier documents. This ambitious goal seems like an attempt also to join the USA in reducing dependence on imported oil. However, it immediately met with fierce opposition by ecological and North-South NGO’s hinting at big dangers resulting from diverting land from food and from the last remaining nature reserves.
The big contribution towards an ambitious climate policy seems to be intended to come from a new initiative to aggressively promote and spread “Clean Coal Technologies”.
Important steps were the increase of plant efficiency, chiefly by combined- cycle coal and gas technologies, some CHP (combined heat and power) and, according to a new EU Communication, a massive drive towards CO2 capture and storage (CCS) in coal-based power generation. Bringing CCS to commercial viability in coal-fired power generation would pave the way to possible applications in combustion processes using other fossil fuels, notably gas. The new name of this game is “Sustainable Fossil Fuels” in power generation.
CO2 capture and storage is perhaps the strongest incentive for speeding up the introduction of the Integrated Gasification Combined Cycle (IGCC) because that technology involves the automated separation of CO2 as well as of sulfur and also allows the “syngas” from the gasification process to be used as feedstock for the hydrogen economy. However, all this comes at a cost, and many utilities, chiefly in non- Kyoto states such as the US, say that present market conditions leave IGCC non-competitive with conventional coal burning power plants.
Nevertheless, in light of the reality that coal is going to be burned one way or the other in China, India, other developing countries, and the U.S., and in the absence of an aggressive strategy on efficiency and renewables, CCS and IGCC may turn out to be lifelines for Europe and the world in curbing the release into the atmosphere of carbon dioxide.
Efficiency is more promising
It would be a lot more attractive, however, to have a well- orchestrated strategy to increase energy productivity.
On a macroeconomic scale, it is generally possible to extract at least four times, and in many sectors ten times, as much added value from one unit of energy than is presently achieved, be that unit kilowatt-hours, barrels of oil or gigajoules (Weizsäcker et al, 1997, Lovins et al 2005). The process may take 40 years but that is also the typical life-span of power plants. In addition, we are facing a new wave of decisions on the next generation of power supplies in Europe. Building too many dinosaurs now will make it virtually impossible for the next generation of politicians to shut them down or convert them without huge economic disruption.
The German grand coalition government has made energy efficiency its top priority and is trying during the twin Presidencies of the EU and G8 to popularize the concept.
III: The US and Climate Change
After years of dragging their feet, 2006 – 2007 will be seen as the years when Americans finally made up their mind that global warming was a serious crisis that required action.
American science helped to identify and highlight this issue in the 1980’s and 1990’s, and American NGO’s formulated the basic cap-andtrade policy model that underlies Kyoto and the ETS. American political timidity in the 1990’s and then outright obstructionism under the second President Bush slowed global progress on this issue. Fortunately, Europe took the lead – and did so relatively vigorously, sensibly, and with a careful eye to keeping the door open for the U.S. to rejoin the international process when it could.
That day is now near, and it will become a lot nearer when the US Congress enacts its own national cap-and-trade system.
There is a good chance that this will happen during this Congressional session, which means in the 18 months before the next Presidential campaign begins to paralyze the rest of the political process; and there is a good likelihood that if the law that is enacted is centrist and solid, President Bush will not veto it.
What has happened in the US to make this possibility imminent? Several things at once:
- The science became stronger, more visible, and more urgent.
- Business leaders, particularly the multinationals, came to understand that action on global warming was an imperative and began to remove the silent veto they exercise in American politics. General Electric, Wal-Mart, DuPont and others reflected a broad, silent change in mainstream American business attitudes toward global warming when they came out in favour of a mandatory national carbon cap.
- Thoughtful Americans noted that almost all of its allies with the quixotic exception of Australia, whose stance on this issue was quaint but not politically significant, were marching in the opposite direction.
- Many conservative evangelical Christian leaders decided that action on global warming was not only congruent with, but required by, their doctrinal beliefs.
- Former Vice-President Al Gore’s powerful movie, An Inconvenient Truth, ratcheted up the sense of urgency among those American opinion leaders already concerned about global warming. Intensity and urgency were the critical elements that had been missing in the American political discourse on global warming.
- The Democrats taking control of Congress by a thin margin now forces all stakeholders to reconsider their assessment of what may or may not be possible in the new Congress. That reassessment is by no means complete.
IV: The Impact on the Transatlantic Relationship
There are two pre-eminent reasons why climate change is both a critical and a formative issue for the most important geopolitical relationship in the world – that between Europe and the U.S.
The first reason climate change is a critical issue in the transatlantic partnership is because attitudes toward global warming specifically and environmental issues generally have their roots in fundamental values, life-styles, consumer habits and political outlooks.
It is one thing to share a broad consensus on democratic values and the market system, modulated to different degrees by state regulation or intervention; we grumble about each others’ political institutions and economic policies, but we do not differ fundamentally. But it is quite another thing for the European end of the transatlantic partnership to feel that environmental concerns are a bedrock and enduring priority for its own governments and a standard by which to judge the American government; and for Americans to feel vaguely that environmental issues constitute only one of many desirable agendas that need to be taken into account, and that on “green issues” the Europeans are “over the edge”. This rift becomes more serious as both ends of the partnership begin to understand that the “the environment” is really about “the economy, stupid.”
The second reason climate change is a critical and formative issue in the transatlantic relationship is because ultimately global warming requires that the Western industrial pattern, now imitated or imposed in virtually every part of the globe, undergo a carefully managed, full-scale, and relatively rapid transition to a low-carbon economy.
The process of decarbonizing our energy generation, our goods production, and our transportation systems on this planet is a task that is both daunting and imperative. It is one that will remain high, perhaps paramount, on our agenda and our children’s agenda for as long as they and we are alive.
What America must do is reasonably clear.
The US must pass a national carbon cap, with no “escape hatches” or other vitiating gimmicks.
It must then join Europe’s preliminary and fragile dialogue with China and the other giant economies of the South to build a bridge over which the US, China, Brazil, India and others can walk to join the young international regime of carbon limits.
In addition to these basic steps the US should, in concert with Europe, work on a plan of “carrots and sticks” in the trade area that will encourage other countries to join an eventual global carbon-reduction regime.
Such a plan should be linked to the evolving world trade system — for example, after a certain date requiring countries that have not taken a cap and joined the global carbon-reduction regime to accompany exports with certified carbon allowances to offset the CO2 emissions involved in their manufacture. Measures of this type will in any case be necessary for domestic political purposes in the US and Europe if they are to support a serious global regime with the ambitious measures necessary to avoid the worst consequences of global warming.
These steps are simple to describe but not easy politically for the US to adopt. Following this course will, however, allow the US to participate constructively in the formation of a successor to the Kyoto Protocol, and will also serve to align once more the stances of the two partners in the transatlantic partnership in regard to climate change.
We suggest that Europe, as the transatlantic partner that in fact presently leads this process, should consider even bolder steps.
What might an American who has lived in and admires Europe advise Europe to do in this context? The following ideas will strike some European observers (though surely not the European co-author of this piece!) as unnecessarily bold. The opposite is true; if anything, they are not bold enough.
- Europe should continue to advance and improve the European Trading System. This is the world’s only full-fledged carbon capand- trade system. If it is weakened rather than strengthened; if it does not develop strong and impartial enforcement mechanisms; if it becomes a political horse-trading where favoured industries can get cushiony allowances; or on the other hand if it pushes too far too fast and causes unnecessary job loss and economic dislocation – any of these “ifs” could slow down or imperil the development of a wider post-Kyoto global carbon-limits regime. The ETS must grow in rigor and solidity. It need not set quantitatively more ambitious CO2 reduction targets at this time. Both business and the public must be able to look at the ETS and say: “Yes, it is working, it is getting stronger, and we can live with it. This is the path of the future.”
- Europe should expand and intensify its dialogue with China. In the end only China’s self-interest will draw it into a global agreement. But the forces in China that want to do that need the exposure, the experience, and the analytic information necessary to make their political case domestically. An early objective should be discussion between the EU and China about an EU-supported financing scheme to make China’s next 100 coal plants “carbon-neutral”, with continuation of the scheme beyond 2012 conditional upon China joining the international system of carbon-restraints (which of course it will influence in large measure). Tony Blair, to his credit, started this process. Germany will now have to play a lead role in continuing and expanding it.
- The EU should take the bold and innovative step of inviting selected sub-national American political jurisdictions to join the ETS on a limited basis. That would include the state of California; the New England states that have limited CO2 emissions from utilities; a forthcoming initiative of five Western US states to establish a regional carbon cap; and a growing number of other states or regional groupings that are now considering carbon limitations of various kinds. The participation should be limited in the amount of trading allowed so that it does not distort the European system, and the talks preparing this will necessarily be difficult because of the thorny American legal issues it will raise. But moving in this direction is important for creation of an international system, and its effect on American politics will be positive. The worst thing would be for Europeans to conclude that in order to “keep America in the game” they must move more slowly. On the contrary, the only thing that will “get America in the game” is to keep the pace of movement steady and serious.
- While one of the greatest virtues of cap-and-trade systems is that it treats all emissions as equal and drives economic actors to “hunt” vigorously for the lowest-cost, most efficient ways of reducing carbon, the world-wide stampede to build dirty coal plants is so large, and promises to lock in such a high level of carbon emissions, that special attention is required. The present EU discussion on when and how to seek carbon-neutral fossil fuel energy generation is the single most important debate on this issue, and if Europeans can drive it to a bold and successful conclusion, this will have enormous impact on both the U.S. and China. Recent work in many quarters, including a notable study on the costs of global abatement by Vattenfall and McKinsey, concludes that “dirty coal” can be tamed in terms of global warming if we move firmly and soon. Only Europe is now capable of defining and implementing that vital new direction.
V: The Transatlantic Partnership to Combat Climate Change
We divide our list of policy choices and opportunities that now lie before the transatlantic partnership in the area of climate change into three categories.
The first category consists of directions and adjustments that will help make it attractive for those countries now outside the system of Kyoto carbon reductions to participate in such a system. We call this category “carbon diplomacy”.
The second category, “slow and steady”, contains policies that contribute to climate stabilization, and which must be pursued steadily so that the costs of low-carbon systems come down and new technologies are refined, but in such a way that the they do not drive a country’s or region’s marginal cost of energy generation or goods production far outside the relevant global marginal cost curves. These policies, however, both help lay the ground for, and contain the potential for rapid acceleration within, a successor global carbon-limit regime once that is put into place.
The third and final category we call “win/win”: they are policies that both contribute to climate stabilization and increase the global economic competitiveness of whichever countries adopt them.
Generally, the faster these options are adopted and pursued, the greater the gain, both in greenhouse gas emission reductions and in economic performance. At the present time, Europe and Japan are broadly best positioned to pursue them.
a) “Carbon Diplomacy”
- Modify the ETS to provide quantity-limited “docking stations” so that sub-national jurisdictions such as American, Brazilian, Indian or Australian states and Chinese provinces that “take a cap” could trade a limited amount of allowances on the European carbon market.
- Europe should get on board wholeheartedly with the global effort to develop a system of “Compensated Reductions” under which the rainforest nations can receive credits in the international trading system if they arrest deforestation. (Deforestation accounts for roughly 20% of global greenhouse gas emissions.)
- Europe should expand its dialogue with China on climate and energy security to include:
- Exploration of a “low-carbon zone” that would provide advantageous financing and low-barrier IP arrangements for the globe’s largest consumer market and its largest provider of goods.
- Exploration of ways in which Europe could provide financing to cover the marginal debt service costs of making China’s next generation of coal plants carbon-neutral as long as China joins and remains part of a global system of carbon caps.
b) “Slow and steady” options:
- Set energy portfolio standards that require more renewables.
- Make Carbon Capture and Sequestration safe and affordable, and thereby break the back of the coal problem. Europe is presently in a strong position to extend its technological and IP lead in this area. The present internal debate in Europe over whether to require carbon neutrality for all fossil fuel plants by 2020 is one of the most important and exciting discussions currently ongoing in the climate arena, and its outcome will have enormous impact around the world.
- Set more demanding but reasonable carbon reduction targets within the framework of the ETS, but this time with the long time horizons necessary to affect capital investment decisions.
c) Win/win options:
- Sharply accelerating the drive for energy efficiency. Europe is in a position to ramp up its efficiency targets now. The U.S. cannot do so easily on an economic basis without either a national carbon cap or financial incentives that encourage utilities to “sell” efficiency to their customers , or both, in place.
- Begin to shift agricultural subsidies from payments for surplus or non-production to payments for carbon sequestration. Agricultural sequestration will be necessary as a “bridging” device over the next quarter century for offsetting carbon emissions from traditional sources until they can be replaced with low-carbon sources. The US and Europe between them pay their farmers several hundred billion dollars per year in counter-productive subsidies for various forms of economically useless behaviour or inactivity. It will be far easier to redirect these politically sensitive subsidy systems than to dismantle them. China, India, the US, Europe, Canada, Brazil and others will all, before we are done, be supporting “carbon farmers” of one sort or another. Designing the terms, institutions and enforcement systems of such a system needs to begin now. Either Europe or the U.S. could take the lead, or they could launch the first “study” phase together as an adjunct to the Doha Round now underway. (As this article goes to press, Europe and the US are working feverishly to find ways to “save” the Doha Round.)
- Begin to set efficiency standards for vehicles and aircraft which sharply increase mileage efficiency, achieve significant net carbon emission reductions, and sharply decrease reliance on imported fuel. (It is possible to have vehicles that will get as much as 500 miles per gallon of imported hydrocarbons). It will be possible with a single set of aggressive transportation policies to modernize the automotive sector, trigger development of a new generation of aircraft that are more efficient and emit less greenhouse gases, and provide increased income for the agricultural sector through national production of low-carbon fuels. Almost all of the world’s major auto companies are multinational, and it makes most sense if Europe, the U.S. and Japan start down this path together. However, any one of the three could begin alone.
In the trade-off between the aggressiveness of the steps required, and the time remaining in which to take them, it is clearly in the interest of humanity to start early and carefully, rather than late and drastically. Europe has grasped this; as of this writing the US is just beginning to awaken to that fact.
Every previous experiment with market-based systems suggests that once we adopt the system and unleash human ingenuity, commercial inertia, financial greed and naked ambition in the service of avoiding climate meltdown, it will happen faster, more easily, and more cheaply than even the shrewdest economists and pundits predict.
However, a difficult and fateful conversation with the large and growing economies of the South remains in front of us.
The one issue on which the US and Europe have no time to lose, then, is to get themselves facing in the same direction and working together once again on this vital issue.
Only in this manner will they be strong enough to insist wisely but firmly upon a set of incentives and constraints likely to make it in the self-interest of the developing countries to join a carbon-reduction framework that will, at last, be truly global. Let us remember that unlike past problems, the brutal reality that underlies the threat of global warming is that either we all succeed in avoiding the worst, or none of us will.
- Arctic Climate Impact Assessment (ACIA). 2005. Cambridge University Press.
- IPCC. Fourth Assessment Report (Summary), Feb 2007. www.ipcc.ch
- Lovins, Amory, Kyle Datta, Odd-Even Bustnes, Jonathan Kooney, Nathan Glasgow. 2005. Winning the Oil Endgame. 2007 edition by Rocky Mountain Institute, Snowmass Colorado.
- McKinsey and Vattenfall. 2006
- Schlemmermeier, Ben and Hans-Peter Schwintowski. 2006. Das deutsche Handelssystem für Emissionszertifikate: Rechtswidrig?, Zeitschr. f. neues Energierecht 10/3, p 195-199.
- Stern, Nicholas. 2007. The Stern Review on the Economics of Climate Change. London. Download: www.sternreview.org.uk.
- Weizsäcker, Ernst Ulrich von, Amory Lovins and Hunter Lovins. 1997. Factor Four. Doubling Wealth, Halving Resource Use. London: Earthscan.
[*] Peter Goldmark directs the Climate and Air program for Environmental Defense, a Washingtonbased NGO. Most recently the chairman and CEO of the International Herald Tribune, Goldmark has served as executive director of the Port Authority of New York and NJ and as budget director for the State of New York. He was president of the Rockefeller Foundation and encouraged their involvement in environmental issues, particularly energy.
Ernst Ulrich von Weizsäcker is dean of the Donald Bren School of Environmental Science and Management at the University of California, Santa Barbara. A professor of interdisciplinary biology who was the founding president of the University of Kassel in Germany, Weizsäcker has served two terms as a member of the German Parliament. He also acted as director of the United Nations Centre for Science and Technology for Development and president of the Wuppertal Institute for Climate, Environment, and Energy.
 In the U.S., “decoupling” means rewarding utilities for efficiency rather than for volume, i.e. “decoupling” utility profits from the volume of energy sold. Only California has “decoupled”; this step is responsible for the astonishing fact that California has experienced no increase in per capita energy usage for thirty years.