CIIM Professors speak out
By Ivetta Gerasimchuk and Theodore Panayotou
The climate talks in Copenhagen have exacerbated the controversy between climate skeptics and environmentalists. The arguments used by both “denialists” and supporters of the anthropogenic climate change idea have hardly changed since the late 80s when the effect of greenhouse gases on the atmosphere first hit the headlines.
The truth is that, no matter how much we know about climate change, there never will be an agreement among scientists on all the aspects – because when there is full agreement and absolute truth about something, this cannot be science, this can only be religion. Therefore economists and politicians have to handle the issue under circumstances of uncertainty – which is a typical, but not unique feature of climate change policies.
An excellent example of addressing probabilities of unfavorable outcomes is buying airbags for your car. Purchase of airbags reduces the risk of an injury or death in a car accident, even though there are chances that the people who have airbags do not get into accidents and that the airbags do not help if there is a car crash.
In decision sciences this approach is known as a “minimax” solution, or assessing the maximum possible losses and trying to minimise them usually at a cost much lower that the value at risk. In the language of the UN Framework Convention on Climate Change “minimax” is explained as the “precautionary principle”: “Where there are threats of serious or irreversible damage, lack of full scientific certainty should not be used as a reason for postponing such measures, taking into account that policies and measures to deal with climate change should be cost-effective so as to ensure global benefits at the lowest possible cost” (Article 3). However, while the threat of a car accident is immediate, most of the severe climate change risks are projected to mature in several decades.
This explains why urgent individual and collective actions and expenditures on climate change are much more frequently called into question than those on car safety. In this context, the ups and downs of the current climate change controversies can be largely explained by a rough division of the stakeholders into three large, internally heterogeneous categories: those who are guided, respectively, by short-, medium- and long-term interests.
GROUP I: GIVING AWAY MONEY
While the politicians in the first group wear the election cycle eye-flaps, for the businesses the eyesight is limited by what is known as “the tyranny of discount”. If calculated at the market rate (e.g. 10%), the net present value of any costs or benefits is insignificantly low. That is why most private businesses do not think of their operating environment more than 2 – 3 years ahead. Moreover, while benefits of any kind of mitigation measures taken by companies are mostly external and distributed across different groups and continents, the cost is direct in internal. Therefore, representatives of this group see immediate expenditures on climate change mitigation measures as ‘giving away money’ rather than investment, especially compared with other needs currently reinforced by the financial crisis. Furthermore, climate change-related measures such as carbon taxes and quotas directly restrict “business as usual” operations of companies producing carbon (in the form of oil, gas, coal and cement) or businesses with a considerable carbon footprint (steel manufacturing, transport, etc.). That is why it is not unusual to hear this group’s allegations that climate change mitigation measures are designed by their competitors to destroy carbon-based companies and economies.
GROUP II: LEADERSHIP THROUGH INNOVATION
The second group comprises both businesses and governments who are interested in leadership through innovation. They see the medium-term need for energy-efficiency and renewable energy development not only for the reasons of climate change mitigation, but also in a competitive context. This includes depletion of energy in other resources in ‘traditional’ deposits and the political, technological and economic cost of dependence on new oil and gas exploration and production in “frontier” areas such as tar sands of Canada or the Barents Sea. Furthermore, energy efficiency requirements create a market for high-tech solutions where European and some other companies can compete more favourably than in labour- or resource-intensive industries. This group has been consistently working on bringing down the cost of climate-friendly technologies and is already earning profits under the Emissions Trading, Clean Development Mechanism or Joint Implementation Projects of the Kyoto Protocol.
GROUP III: SCIENTISTS AND GREENS
Scientists and “greens” belong to the third group that argues that decisions on global challenges such as climate change can be taken only using long-term considerations and a very low or even negative discount rate. This approach is well-known through the definition given by the UN Bruntland Commission to sustainable development, “a development which meets the needs of the present without compromising the ability of future generations to meet their own needs”. Following similar logic, the United Nation Convention on Climate Change aims at “stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”. The majority of scientists represented through the Intergovernmental Panel on Climate Change (IPCC) now consider this level to be the rise of the global average temperature by no more than 2C from the pre-industrial levels, while a rise of approximately 0.74C has already occurred over the past 100 years. The famous Stern Review commissioned by the UK Treasury also represents the logic of this group and assesses the required annual investments into climate change mitigation and adaptation measures at approximately 1% of GDP, while it puts the cost of inaction at above 5% of GDP.
Which group, do you think, is the real driving force behind the international climate talks? If it was for the first one, they would have never happened. If it was for the third one, they would have never been translated into practical solutions such as the Kyoto Protocol. The actual impellent is the second group, and this is going to take the lead because the innovators have always done so through the entire history of humankind. General Motors, which first developed a prototype of electric cars in late 80s, but then literally crashed it in order to keep the mainstream production line competitive, has now gone bankrupt. Toyota and Tesla Motors have taken the lead in entering the new market of climate-friendly cars and are currently performing better than many of their competitors under financial crisis conditions in Copenhagen, Bonn or Mexico. This year or some time later, the innovators will succeed in building coalitions with factions within the first and third groups, and install an improved version of planetary airbags replacing the Kyoto Protocol. Next time you select a driver, make sure you choose the right one.
Ivetta Gerasimchuk is Research Fellow, CIIM, and Senior Advisor, WWF-Russia. Prof. Theodore Panayotou is Director, CIIM Business School, and Professor, Harvard University.
