Having your carbon cake and eating it too

Alex Evans at the Global Dashboard writes about Bono’s recent endorsement the climate change concept of contraction and convergence. In short the idea is this: give countries the equal rights to emit carbon and allow them to trade those rights for cash while slowly reducing the sum total of the rights. As Bono puts it:

One smart suggestion I’ve heard, sort of a riff on cap-and-trade, is that each person has an equal right to pollute and that there might somehow be a way to monetize this. By this accounting, your average Ethiopian can sell her underpolluting ways (people in Ethiopia emit about 0.1 ton of carbon a year) to the average American (about 20 tons a year) and use the proceeds to deal with the effects of climate change (like drought), educate her kids and send them to university. (Trust in capitalism — we’ll find a way.)

Distributing equal rights to carbon emissions is an attractive idea. Its most desirable properties are those that pertain to the efficiency of the resulting allocation: Since countries can trade off their rights to pollute for cash such series of exchanges would, theoretically, end only when improving the lot of one country would make another worse off, given some basic (but not uncontroversial) assumptions about preferences.

In theory, the contraction and convergence system should also result in outcomes that are desirable on equity grounds, but these are undermined by a number of realities. For one, while poor countries are given an equal right to pollute, their purchasing power is obviously tiny relative to developed nations. This means that while the final distribution of rights will be efficient, it is likely to leave many countries far from their desirable allotment of emission rights.

Furthermore, an ideal system should be governed by a competitive price that reflects the relative valuations of carbon emissions of each country, which is nigh a possible. Given that actual carbon trading between nations would be piecemeal in nature, we wouldn’t expect such a price to be generated endogenously, and so late-movers (which are more likely to be poor nations) might find themselves shut out of a satiated market.

These issues are nerdy and theoretic. What worries me most is the alignment of preferences between the governments of developing nations and their own people when these deals are made.

There are dozens of complex reasons that the poorest countries have not experienced sustained growth, but part of the story is inevitably due to misaligned incentives. In much of the developed world and in the few development success stories, leaders have had a political incentive to deliver growth. Even China’s incredibly repressive government understands that their survival depends on maintaining strong growth at all costs, hence their general hostility at reducing carbon emissions.

Unfortunately, some governments aren’t subject to even this minimal level of accountability. Many are primarily concerned with either the extraction of natural resources or securing foreign aid as their method of survival eschewing the complexities of building a sound economy.

For these governments that are more concerned with securing further fungible financing than spurring economic growth the allocation of an equal division of emissions rights will allow them to make a very easy decision: sell off their country’s right to emit (which currently is nearly equivalent to its right to sustained growth) in exchange for more cash.

The benevolence of the government is irrelevant; even if the financing goes directly to admirable expenses (hospitals, schools, etc) and not slowly and quietly into the pockets of rent-seekers, the poorest will have forsaken the only way we currently know that we can permanently reduce poverty, through equitable growth.

This is acceptable for those of us that are convinced that many of the bottom billion will never see growth and that we should be concerned primarily with financing a good enough welfare system to guarantee a minimal standard of living. I see this as pessimism. Those of us who still think poor countries have a chance to escape poverty through growth should be more wary.

One thought on “Having your carbon cake and eating it too

  1. bsanchez

    January 5, 2010 at 3:26pm

    Matt,

    This approach would require poor countries to agree to a specific overall limit to their emissions (per capita or otherwise) and none of the feable agreements to reduce carbon intensity that were being offered at Copenhague. If those limits were agreed then it would be as simple as it currently is under the Kyoto protocol – and I am not talking of the dodgy Clean Development Mechanism. I am talking of trading national rights to emit between countries as has already been happening with some Eastern European countries’ huge stock of “unused emissions”. See for example this 30 million ton deal between Japan and Ukraine early last year: http://www.reuters.com/article/idUSTRE52H4C620090318.

    Of course, as you state, there are broader problems with this approach, but at a technical level it is very simple, and is happening already.

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