NOTE: Q&A with Lord Nicholas Stern, author of The Global Deal and of the 2006 Stern Review, follows at the end of this post.

I now know the business strategy for the National Post. Hire a bunch of grumpy libertarian columnists (Peter Foster, Terence Corcoran) who hate Al Gore, David Suzuki and Nicholas Stern, and who don’t believe that man is causing global warming, and hope that the coal and petroleum industry will keep you alive with their advertising. Good luck with that.

Foster’s harsh critique of British economist Lord Nicholas Stern is a case in point (see link above).  Now, I fully admit that they and their supporters can criticize me just the same from the other side because, well, I admire the work and ideas that Lord Stern has offered the world. I agree with Stern that rich countries need to stop playing mathematical games with the developing world when it comes to greenhouse-gas reduction commitments. It’s a message that Stern, a former World Bank chief economist, brought to Toronto on Friday — you can read my story on the visit here.

Here’s an excerpt:

Stern said it’s crucial that developed nations not play games with the math when negotiating future commitments from developing countries. It’s not acceptable, for example, for rich countries to settle for 2050 emissions that are above the global average while expecting poorer countries to fall under the average.

But that’s exactly what happens, he explains, if Canada and China both commit to reduce emissions to 60 per cent below 1990s levels by 2050. Based on that target, Canadians would still emit far more greenhouse-gas emissions per capita than the Chinese.

“That will kill off a global agreement,” said Stern, adding that to convince a country such as China to act means a commitment by Canada and the United States to reduce emissions by “at least” 80 per cent below 1990 levels. “This is where I see the biggest arm wrestling in Copenhagen.”

I got a chance to sit down with Stern after his presentation Friday at the Economic Club of Canada. I wanted to get his thoughts on the trouble Europe has had with its carbon cap-and-trade system and on the use of carbon tariffs as a way to level the playing field between countries with a carbon tax (or the equivalent) and those without. Here’s some (actually quite a bit) of what he had to say:

CB: North America is moving closer to establishing a carbon cap-and-trade regime. Europe has had one for years but some critics have called it a failure. Are there lessons we can learn from the European experience with carbon trading?

NS: In looking at the European Union emissions trading scheme, you’ve got to recognize it’s a very young scheme and there’s a learning process. One of the things we did early on was to give away far too many permits. Well, you don’t have to study at the London School of Economics to work out that that might well have a depressing effect on the price, and that’s what happened. But we’re learning, and I think we’re learning pretty quickly. I wish we hadn’t made some of those mistakes, but they were teething mistake, and we’re now getting much more serious about keeping down the number of permits allocated and moving fairly quickly to allocating those through auctions. What we’re going to get with the strong ambitions for the third phase of the emissions trading scheme are much stronger targets, and it’s that that’s going to stop the price from dropping, keeping it high and reasonably steady. The first two phases, the second phase we’re in the middle of now, have been an intense learning process.

CB: So advice for Canada and the United States?

NS: Not to give away too many permits, and not to give them away for very long. To move very rapidly towards auctioning. One of the advantages of a cap-and-trade regime is there may be good reasons for adding different takes on moving toward auctioning in very different types of industries. If you’re got industries with very long-lived capital equipment and people make their investments well before this thing was in the offing then you can allow them longer time to move toward different kinds of technologies. If you move more slowly toward auctioning in those kinds of industries you’re going to help with the adjustment process. But we should be moving toward 100 per cent auctioning, certainly during the period between now and 2020 in Europe, and doing it quickly. Because why would you be giving it away? Nobody has a right to emit. They do have a right to be helped making adjustment to processes if the rules change.

CB: What about the role that carbon offsets, or what some call rip-offsets, should play? Concerns have been raised about the claims and credibility of these offset schemes, particularly if they involve projects in far-off places.

NS: Trade across boundaries makes sense, in the way your shirt was made. If it was made in China it was because the cost was lower than making it in Toronto, and that’s called trade — buying things where it can be produced more cheaply. It keeps costs down. So the basic idea is of real substance. It helps keep the cost of action down, which means you can be more ambitious. If you can buy it where it’s cheaper then you can do more with a given amount of resources. And it makes sense because it allows for financial flows to developing countries for investments they can make in reducing emissions. So it’s entirely sensible. Now, it will need monitoring. It will need regulation. But we don’t abandon financial markets because there are some regulatory issues that need to be sorted out. It would be extremely inefficient to give up one financial market for those reasons. Are we going to ban banks because we didn’t regulate them too cleverly over this last decade? If this story makes sense, as it does, in keeping costs down and helping the developing world come into the story, then we should do it. But we’ve got to think about how to manage it and regulate it. If we’re ambitious with our reduction targets then it will mean there is a strong price in our own countries, so we have strong incentives to act domestically and there will be occasions where many people will want to buy abroad, and that’s fine.

CB: Canada and other rich nations have been exploring the idea of a carbon tariff that, if a domestic carbon tax was applied, would protect local industries by making it more expensive to import from other countries, and the industries within them, that aren’t penalizing carbon emissions to the same degree. A carbon tariff, they argue, would level the playing field and make a carbon tax more politically saleable. What’s your take?

NS: If we’re talking about fairness, the rich world has been massively unfair to the poor world in terms of making it much more difficult for the poor world to grow and overcome poverty… so let’s not get on our high horses about fairness too readily. But if we’re talking about countries which stay dirty as having a cost advantage over countries that don’t, the first thing we should do is get quantitative. This (reducing domestic emissions) will cost 1 or 2 per cent of GDP. That’s like a cost increase of 1 or 2 per cent on average across the economy. A tariff of 1 or 2 per cent is unlikely to make a huge difference as to where people source their purchases. People look at all kinds of things. They look at the availability of the right kind of labour force. They look at the functioning of the ports and the infrastructure. They look at the basic regimes of governance. They’ve got transport costs. There’s so much that people look at that a tariff of 1 or 2 per cent wouldn’t make a huge difference. So most of this stuff is slogans without numbers and it’s covert protectionism.

There will be a few industries where it’s more relevent, where the numbers are bigger. We can point to where those are — essentially steel, cement, aluminium, paper — half a dozen maybe — which are more energy-intensive. In those industries it makes some sense to try to come to international agreements on standards. That kind of thing is being discussed in the steel industry, and it’s the kind of thing you could establish. People point to China readily on this, but China doesn’t want to be the dirty producer of the world. It wants to move as quickly as it can to higher technologies.

So the constructive way to do this is not to give into green protectionism and slogans without numbers or analysis. It’s to try to identify where the issues arise and see if we can get an international agreement on those issues. At some point you might want to hold in reserve this kind of action if after all your efforts to get people to move together there’s still a few places where it turns out to be impossible, but it should never be the first means of action.

CB: But clearly politicians are talking about carbon tariffs as a way to sell controversial ideas like a carbon tax, to assuage concerns that domestic industry won’t be at a competitive disadvantage internationally.

NS: Yes, but it’s usually not very analytical. If you talk about what increase in costs you’re going to get, primary energy in the GDP of a rich country is probably three or five per cent of GDP. So if that went up by 50 per cent, your costs might go up by 1.5 to 2.5 per cent. The Canadian dollar fluctuates. You see bigger changes in that over quite long periods of time. These arguments usually come without serious calculation of what the issues are and without serious consideration of better ways of doing that.

If you pursue clean policies domestically fostered either through regulation or a carbon tax, you will be putting up your cost of production overall by, on average, 1, 2, 2.5 per cent. Most of the time that would not be the kind of price change that would lead to massive changes in the patterns (of trade)… Now, when most people talk about a carbon tax they don’t talk 2 per cent. They want 20 per cent, 30 per cent. They want to keep this stuff out. This is protectionism. Good political decisions come with good analysis and discussion. But there are some industries where this number is bigger. The challenge then is in those industries to come to an agreement on standards, so your own industries — whether it’s fostered by a carbon tax or fostered by standards — your own industries will be doing things and you want to try to encourage industries elsewhere to do them. But if you want to hold something like that (a carbon tariff) in reserve as a failsafe in case these more constructive ways of doing things don’t work, I think that’s something that would be economically and politically okay. But people have to be clear about the numbers, because you could use this to exaggerate exactly how much costs have to go up.

CB: Do you have any technology favourites when it comes to mitigating climate change

NS: We have to start by saying beware of technology favourites, because we’re going to have a whole range of things. We should assess carefully and in a dispassionate way the pros and cons of all these things. Nuclear has the problem of nuclear waste. Onshore wind has the problem of people not liking the look of windmills. The first generation biofuels may be very inefficient at the task that they set for themselves at going low carbon, but also if you grow them on very good land they’re in competition with food. You’ve got to look honestly and clearly at all these things. I think solar has great long-term potential and probably less worries than other things, but if you’re going to use that on a big scale you’re probably going to cover a lot of land and you’ve got to work out how are you going to do that. We have to analyze all these things and look at them very carefully and different countries will do different things. What we also need to do is look at all these things and see how they perform at scale. If the world is going to go zero-carbon electricity, which it has to do, and if it’s going to get richer, which we hope it will, it’s going to be a story of using a lot of electricity. We’ve got to ask ourselves how we handle that.

Tags: Nicholas Stern

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