US vs. China on climate change

Given that the US has been so slow to come to the party to even think of seriously addressing climate change it seems almost hypocritical of it to threaten retaliatory tariffs on Chinese carbon intensive exports if China does not adequately price carbon.   Europe had already threatened to do the same to the US when Europe alone was pricing its carbon emissions. The move might force China to comply - I have written a paper analysing such outcomes in a  cut-and-dried game theory setting. The motivation is that by pricing carbon China then gets to collect the duties not the US.  Factors working against such an outcome are the abysmally low levels of energy consumption in a country plagued by extremes of climate and a country which is still distant from middle income status.

I prefer the Garnaut approach - tell China to cut its emissions growth to one half its GDP growth rate - not difficult at present - and then target rates of carbon emissions that converge to global uniformity by 2050.  Seems fairer given China's situation and more likely to be something China accepts.  China is already screaming 'protectionism' in relation to the US and vaguely suggesting a challenge at the WTO.  They are suggesting that destination accounting should prevail (customers not producers pay carbon taxes) with US consumers of Chinese carbon intensive goods being held to account. That is, of course, exactly what the US sees itself doing.

What is really to be feared is that attempts to clean up greenhouse gas emissions will become lost in beggar-thy-neighbour protectionism and a world trade war.

Chinese debt worries

China is 'worried about' its $1trillion holding of US Treasury Bills.  The Chinese Prime Minister, Mr Wen, complains that the US has spent too much and saved too little - without mentioning that the consumption boom was funded in large part by Chinese lending.  Mr Wen can't sell the debt - its price would collapse - and is presumably fearful that the world's public borrowing binge will eventually drive up interest rates and again inflict huge capital losses on the Chinese holding.  Indeed Mr Wen must continue to lend to the US in order to prevent this happening. I assume the possibility of a collapse in the US dollar, fostered in part by debt concerns and the US option to inflate it away, would also have crossed Mr Wen's mind.

This is interesting. Mr C wants to sell lots of gunk to Mr A. Mr A has a demand for the gunk and buys it by issuing Mr C IOUs at low interest rates. The IOUs are backed up by Mr A's reputation alone but Mr A finds himself in a bind and needs to borrow so much more that the value of the IOUs is called into place because interest rates might now need to be raised.  Even if Mr A defaulted on the IOUs (or more realistically forced their value down) he would not lose a lot. Eventually Mr C would find it in his interest to forgive Mr A and to resume selling gunk again.  Mr A, despite bewilderingly complex current problems, remains well and truly in the box seat.

Afterthought: This situation of the weak exploiting the strong has parallels but is not equivalent to the US Government bailout of firms like A.I.G..  The US bailed out A.I.G. with $170 billion because the firm was 'too big to fail' and threatened the failure of the international financial system.  The bargaining strength in this difficult situation lies with A.I.G. which is probably the reason they felt they could get away with applying hundreds of millions of the bailout in bonuses to the parts of AIG that created the problem.  And this strength infuriates the bailout-er. Larence Summers says “There are a lot of terrible things that have happened in the last 18 months, but what’s happened at A.I.G. is the most outrageous.” Ben Bernanke says similarly “Of all the events and all of the things we’ve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with A.I.G.” But the bailout must proceed!

Suntech's Shi Zhengrong

From being the son of a dirt-poor Chinese peasant, Shi has built one of the world's biggest solar power companies, Suntech. He learnt his stuff at the University of NSW. Suntech is threatened somewhat by the global financial crisis and by entry from competitors but still a great force.  This Fortune article is a fascinating story and a good illustration of how the market can help to tackle climate change issues.

Shi was (and perhaps still is) China's richest man. He holds an Aussi passport but lives in China - its a pity we could not hold him more firml;y here. However he is making financial contributions to Australia's underfunded solar program and initiating developments of solar power in Australia.

Chinese biodiversity

I've got in trouble before commenting on Chinese attitudes to nature and non-human life but, to return to a theme, many Chinese attitudes are, from a Western perspective, appallingly destructive despite official Chinese ideological claims about the need to live in 'balance with nature'.  Historically many of the forests of China were cleared in the 'great deforestation' and animal and plant species are often seen in Chinese culture purely in instrumental terms as things that can 'serve' people in the narrow sense of providing food or material products or caged amusements.  This has had dramatic consequences for the environmental history of China. China has also long been intensively cropped rather than ranched - an activity particularly inimical to biodiversity.

Marine and aquatic environments have been subject to particular damage. The probable extinction of the Yangtze River Dolphin was a notable loss. Historically Chairman Mao's policy of wiping out bird species because they ate grain was a supreme example of short-sightedness since a disasterous locust plague immediately followed as well as an errie bird-free silence in many Chinese cities.

China has high intrinsic biodiversity - for example 1329 bird species out of a global total of about 9000 - but a biodiversity which is under severe threat from rapid Chinese economic development, harvesting and pollution.  This affects non-Chinese because existence values on biodiversity are global. Non-Chinese experience discomfit when biodiversity is wiped out in China. In a more immediate  sense the conversion of mudflats and wetlands into commercial sites is endangering bird species that migrate between the northern and southern hemispheres along the East Asian-Australian Flyway.

A colleague working on conservation issues in the Flyway told me how angry he got when fellow Chinese 'conservationists' immediately discarded into the environment any litter they had generated - this view of the environment as an inexhaustible sink is clearly inappropriate in a Chinese setting.  I winced when he told me that the migratory waders the Chinese collect as food are attracted into nets by posting captured birds in wetlands with their eyes stitched together so they do not make alarm calls. OK these practises do reflect different values but, for sure, Chinese attitudes towards nature, create external costs for many non-Chinese.

This article on the critically-endangered Chinese crested tern (pictured above) sets out the issues well in terms of issues surrounding the conservation of an individual species. It is a good general read.

Things are improving in China due to official government policies but I question whether the improvements will offset the pace of so-called 'progress'.  It is pointless for the Chinese people to seek to become rich by living in a barren rubbish dump.

China impressions

I have had a fascinating and enjoyable visit to China. I spent a month here in 1988 but, Beijing at least, is an entirely new city now. I am sometimes not a great supporter of Chinese policies but, to their credit, the achievement of the Chinese authorities in constructing the new Beijing is in many respects remarkable. Beijing is modern, swanky and would be even an attractive place to visit as a tourist. Moreover, it is not just entrepreneurial spirit that is doing this - the ordered attractivess of Beijing contrasts starkly with unplanned city growth in the sub-continent and in cities such as Bangkok. Things work in Beijing and the city is highly liveable!

I have been am particularly fascinated by the beautiful Peking University Campus and by the happy youth here. Many foreign students are also here studying happily. The Chinese hospitality to visitors is superb. The Chinese postgraduate students are intelligent and have strong academic motivation. Their questions on my climate change policy were rewarding to me and valuable as a way of improving the paper. One perceptive student criticised global trading arrangements to implement low cost global carbon controls from the perspective of Coasian transactions costs! These students know a lot of economics. The students even have an 'on campus' group which studies climate change.

To be frank I can think of no comparable group in Australia. I wonder why not. Why the difference?

I also wonder why it is that Australia sees Chinese students as a source of university funding rather than a chance to interact with a great civilisation. Foreign students in China have a Chinese buddy who helps them with such things as language difficulties. Why doesn't Australia do the same thing?

I think Australia has things to learn and mimic from the new China.

My provisional overall impressions about China? Too many to blog about and far too contradictory at this stage - yes it was only a short visit. Nearly forty years ago I heard the Zen philosopher Alan Watts say that the two things that would most drive the world's future were LSD and China. I think he got the first one wrong but on the second point I feel he is right. China will be both the world power and the key global economic force - that is something I have long believed. But China will also be a world cultural and academic centre. The signs are all there. The Chinese place a high priority on education, on learning from the rest of the world and have a candidness about current Chinese problems.

The fact of Chinese wealth and power is vaguely known to many. The Chinese themselves see it more clearly and are already preparing for hickups in terms of perceived 'threats from China' as the world comes to see it more starkly as a reality. The world's economic institutions were designed without China's blessing - I am sure they will insist on more regulated structures. Many other things will change as the dominant role of the US and Europe fade.

I'll try to sort out my ideas on these issues at a future date. At present I am typing these notes on the free internet service at Hong Kong airport. I like the fact that luggage trolleys within this airport (and Beijing) are also free - a courtesy appreciated by tired out travellers without local currency. A thought that occurs to me is the efficiency and courtesy in this airport compared to the disgracefully degraded facilities at airports such as Los Angeles with their incredibly rude and inefficient customs agents.

The US is squandering its wealth by dissaving and standing by as its infrastructure degrades. China has one of the highest savings rates in the world and is building a new society with high educational and cultural values. I am over-generalising but there seems to be some sort of lesson and sign for the future here.

China as leader in the global financial crisis

Peter Drysdale over at East Asia Forum exposits claims by historian Harold James that only action by China can rescue the global economy from US financial ineptitude.  Indeed, to James, China is the US of the 1920s and 1930s.  China should become the anchor of the modern international financial system.

 James' argument:

'China is today’s America...When the 1920s and ’30s crisis hit, America alone had the capacity to take the big public sector action at home that was needed to stem the panic and economic collapse and the reserves to save Europe and the rest of the world from massive contagion. Andrew Mellon, US Treasury Secretary of the time, resolutely stood back, determined to let markets collapse and ‘purge the rottenness out of the system’. The collateral economic and geopolitical damage from that adjustment path through the markets was well and truly done before Roosevelt’s New Deal was put in place. Then, and now, a globalised world means that the solution to such crises spans borders. Aside from the US, only China...has the firepower to rescue the global conglomerates at the heart of the global financial system now under stress.


China, of course, has already played a role in picking up some of the pieces as the wheels fell off the US financial bus. As the crisis unfolded, Chinese and Middle East sovereign wealth funds recapitalised some of the debt of US and European institutions. But more recently Chinese investment Co (CIC) backed away from bankrolling Lehmann Bros. ....CIC backed away from picking up the tabs on Lehmann Bros as pay-back for US failure to act in the East Asian financial crisis and that is fanciful. This is only the micro play. The big play is the geopolitical paradigm shift that needs to deal China into its new responsibilities in managing the international economic and financial system. China can’t be expected to play its role in these affairs until it is brought into the centre of the global economic decision-making processes.

Meanwhile, the US crisis comes at a time that highlights the peculiar measure of influence and responsibility that rests upon China. Here, even more than in the East Asian financial crisis, China has the chance of making its own constructive and strategic contribution through underwriting policies to support a stronger RMB and boost continued growth of its own domestic demand. This will buttress the efforts of policymakers in Washington, serve China’s own national interests and leverage China’s role as an anchor of the international system'.

China & India will end up complying with US demands on greenhouse gas mitigation

The current environmental situation in countries such as China and India is poor – China’s citizens are getting richer but increasingly living in a rubbish dump. But, with respect to climate change and other environmental problems, China is altering its policy view towards being much more environmentally protective. I don’t think it has altered its commitment to mainly pursuing ‘no regrets’ policies – it is just coming to understand that climate change will severely damage its agricultural sector. No regrets options now include contributing towards the global mitigation effort.

To quote The Economist:

‘The vast and sparsely populated Tibetan plateau is the origin of the great river systems of China, South-East and South Asia: the Yangzi and Yellow Rivers, the Brahmaputra, the Indus, the Mekong and the Salween. The Ganges rises on the Indian side of the plateau's Himalayan rim. These rivers, fed by thousands of Himalayan glaciers, are an ecological miracle. They support some 1.3 billion people.

But the glaciers are retreating. Chinese experts predict that by 2050 the icy area on their side of the Himalayas will have shrunk by more than a quarter since 1950. Predictions for the Indian side are gloomier still’.

China sees its agricultural output as declining 5-10% by 2030. In India the figure is estimated to be closer to a catastrophic 30-40%. China now recognises its role as the major contributor to greenhouse gas emissions and is committed to cutting emissions. India is dragging its feet partly because half its population is still not linked to electricity supplies and there are widespread fuel subsidies.

The attitude of India is foolish if understandable: A senior official in the India’s foreign ministry characterises the US line of urging developing countries to cut their emissions as: “Guys with gross obesity telling guys just emerging from emaciation to go on a major diet.”

This is foolish logic because, irrespective of the ‘rights’ of developing countries to damage the global environment to the same extent as the US, they will suffer much greater damages from failing to mitigate. The local benefits from mitigation are much greater in India and China than they are in the US.

Indeed, whatever the moral arguments advanced the US is in the box seat in terms of bargaining options for negotiating a global greenhouse agreement post-Kyoto. It will insist on developing country mitigation efforts and will get them.

Update: Of course the optimism about China must be tempered with some statistical realities - it has just extended its lead as the world's largest CO2 emitter. Last year it provided 2/3 of the worl'd increased CO2 emissions.

China's environment

As I have posted before the environmental situation in China is currently very bad. China burns 1/3 of the world's coal and a recent report estimated that 750,000 people per year die through the effects of pollution in China. China is already the world's largest emitter of greenhouse gas emissions - a leadership role that is likely to become more pronounced as demands for refrigeration, air conditioners and automobiles increase from low current levels.

But as this article in The Atlantic makes clear, the local situation is improving in some respects and China is serious about climate change. It is important in the west to acknowledge such improvements - and indeed to nurture them - if the right types of political signals are to be set in motion within China. The situation remains awful but is improving and the Chinese seem to want international approval and recognition for their efforts rather than ongoing condemnation.

Petitioning the Chinese on Tibet

I just signed an urgent petition calling on the Chinese government to respect human rights in Tibet and engage in meaningful dialogue with the Dalai Lama. This is really important, and I hope you will join me by signing the petition here.

After nearly 50 years of Chinese rule, the Tibetans are sending out a global cry for change. But violence is spreading across Tibet and neighbouring regions, and the Chinese regime is right now considering a choice between increasing brutality or dialogue, that could determine the future of Tibet and China.

Maybe we can affect this historic choice. China does care about its international reputation. Its economy is totally dependent on "Made in China" exports that we all buy, and it is keen to make the Olympics in Beijing this summer a celebration of a new China that is a respected world power.

President Hu needs to hear that 'Brand China' and the Olympics can succeed only if he makes the right choice. But it will take an avalanche of global people power to get his attention. Click on the link and sign the petition to President Hu calling for restraint in Tibet and dialogue with the Dalai Lama. Please tell absolutely everyone you can to consider doing the same.

The petition is aiming to reach 1 million signatures to deliver directly to Chinese officials.

Chinese steel-maker to bid $200 billion for Rio Tinto?

China’s biggest steel-maker, the state-owned Baosteel, claims it is contemplating a bid in excess of $200 billion to top BHP-Billiton’s $125 billion bid for Rio Tinto. The claim is that this would ensure Chinese supply of iron ore. Of course, even if this is all just talk (Baosteel is capitalised at only about $40 billion itself) it has the effect of at least temporarily driving up Rio Tinto’s share price and thwarting the chances of BHP-Billiton. The whole world resource sector is now in play on the back of expectations of enormous ongoing anticipated future growth in China.

I predicted months ago the likely bid by BHP-Billiton and still believe this is the bid most likely to succeed. It is BHP-Billiton that has all the synergies that make a successful huge bid viable. For a Chinese firm these synergies are not there - there are few synergies between an iron ore provider and steel mills - although there would be the potential to offset enhanced monopoly pricing power. Support for the notion of a PACMAN defence by Rio Tinto – Rio turning the tables on BHP-Billiton by seeking to take it over, seem to have faded. This rumour might have been fostered by Rio Tinto again to drive up its purchase price by BHP-Billiton.

2000 Chinese lives go up in smoke each day

I was interested to read last week that the world’s biggest national consumer of cigarettes – China has 350 million smokers - will totally ban the advertising of tobacco products from 2011.

I am pursuing a limited study of the incidence of smoking in China and three other developing countries - India, Pakistan and Bangladesh. On the face of it cigarette consumption is one of the most serious public (and perhaps general) health issues in the world today. In global terms it is primarily a developing country problem.

China signed the Framework Convention on Tobacco Control of the World Health Organization (WHO) in March 2003, ratified the convention in October 2005 with the convention coming into effect on January 9. 2006. China however still lacks a law prohibiting smoking in all public places though smoking is banned in cinemas, libraries, song and dance halls, and conference rooms in the country. Only 28 cities on the Chinese mainland are free of advertising of tobacco.

The Chinese smoking situation is dire. China is the biggest source of smoking-related deaths in the world – around 2000 die per day. Some estimate this will increase to 8,000 per day or 3 million per year by 2050. In the West deaths are often due to heart disease whereas in China the deaths are often associated with tuberculosis, emphysema, stomach and liver cancer. Press reports commonly cite statistics saying that ¾ of Chinese men smoke – this seems an exaggeration - and that smoking is killing half of such men. Chinese women generally do not smoke.

An interesting WHO publication, Tobacco Control Country Profiles 2003 has interesting data on China. The figures provided contrast with some presented in the press and provide a possible glimmer of optimism but an overall picture of despair.

This source suggested that in 1998 about 53.4% of men smoked but only 4% of
women. Thus 29% of the overall adult (aged 15+) population smoke – about twice the prevalence of Australia.

Rates of youth smoking seem 'low' – 11.1% of male youth and 6.4% of female youth. While the women are becoming more represented in the population of smokers, men are becoming less so.These rates of youth smoking are comparable to the ‘ low’ levels now being experienced in Australia.

Putting these two bits of information together the bulge in smoking deaths in China looks like being a once-off. But the low youth rates and high adult rates of male smoking are partly due to the fact that initiation rates in China seem to be concentrated in the 20-25 age group among men.

Nevertheless per capita consumption of cigarettes has declined in China since 1990.
A smoking prevalence study of China was conducted in 1996 and seems to be about the best recently available information. A difficult feature of the Chinese problem is that the population of ex smokers is so small at only 2.3% of the population – in Australia it is larger than the population of current smokers. Nevertheless even in 1996 most Chinese were well aware of the risks of secondary and primary tobacco smoke.

I’ll post again on developing country smoking issues when I feel more confident about dealing with differences in data from different sources.

China to be a world centre for Christianity?

With 10,000 converting to (mainly pentacostal) Christianity each day and a predicted 200 million strong Christians by 2050 China will become a leading Christian nation. The ultimate Western export!

'China may be for the 21st century what Europe was during the 8th-11th centuries, and America has been during the past 200 years: the natural ground for mass evangelization. If this occurs, the world will change beyond our capacity to recognize it. Islam might defeat the western Europeans, simply by replacing their diminishing numbers with immigrants, but it will crumble beneath the challenge from the East. China, devoured by hunger so many times in its history, now feels a spiritual hunger beneath the neon exterior of its suddenly great cities.

Four hundred million Chinese on the prosperous coast have moved from poverty to affluence in a single generation, and 10 million to 15 million new migrants come from the countryside each year, the greatest movement of people in history. Despite a government stance that hovers somewhere between discouragement and persecution, more than 100 million of them have embraced a faith that regards this life as mere preparation for the next world. Given the immense effort the Chinese have devoted to achieving a tolerable life in the present world, this may seem anomalous. On the contrary: it is the great migration of peoples that prepares the ground for Christianity, just as it did during the barbarian invasions of Europe during the Middle Ages'.

Thanks JB

Growing rich in a rubbish dump

A couple of weeks ago I posted on the problems China faces in growing from being an authoritarian communist society where most people had brutalised, difficult lives to a modern, decent society. Here is Business Week’s shot at the same topic with a slightly different emphasis. (By the way, look at the slide slow accompanying this article, the photos are fantastic).

Business Week makes strong claims although it does qualify them with recognition of the scale of China’s achievements. China is portrayed as a mess of administrative failures that thwart its future prospects: endemic corruption, illegal and unsafe products, a stock market that is little more than a casino, an astonishingly despoiled environment that and no social safety net. The economic model used has a single objective – expand production. China’s power structure is one obvious obstacle to reform and yet it seems almost impervious to reform. Moreover, even the Chinese leadership are aware of the systemic problems. Premier Wen Jiabao recently labelled the economy "unstable, unbalanced, uncoordinated, and unsustainable."

Unbridled capitalism delivers the good and the bad – more consumption goods, more pollution – and in China it is delivering the positive benefits to a party-based power elite who will resist reform.

Business Week asks:

‘After decades of efforts by reformers, why assume China will build the financial, legal, and administrative systems required to become a modern industrial society? The only way up is to tame the unregulated, raw self-interest that flows from Deng's historic compromise with the party and the people. That would require a legal system that doesn't let local cadres circumvent regulations, grading officials on metrics that go well beyond simple GDP growth, and capital markets that nurture and reward entrepreneurs. In short, it means getting the party out of business. At this stage, such revolutionary change seems politically impossible. So it's just as plausible that the flawed China we see today is basically what we will have a decade from now, after all’.

It seems to me that this argument is consistent with my earlier post. It is comparatively easy to develop a society from a low resource base by allowing wild-west capitalism. It is much more difficult for a society to escape its history and its social and political traditions.

Workers’ paradise in China

The peasant in China has received a raw deal for thousands of years. Now with China’s move to a market economy some of these brutalised peasants are running China in conjunction with their former communist bosses. Because former abused kids cause further abuse the oppression in China is continuing.

Chairman Mao, is still officially venerated as a demi-god. He was, in fact, the ‘biggest mass killer in human history’ being instrumental in having 70 million people killed thereby taking the title of king among mass murders, by a good margin, from Hitler and Stalin. Not someone to hero worship.

After Mao the new progressive ‘pro-market leadership’ has continued to manage a country steeped in barbarism. In the last few weeks it has been revealed that 1000s of Chinese peasants, including many young children, have been sold into slavery in brick kiln factories. Not in just one location but across the country and not by ‘capitalist roaders’ and criminals. Well not officially at least - police and party officials were actively involved in the enslavement of these unfortunates. The workers’ state?

Even refugees into China from North Korea are sold into prostitution in their thousands. It’s a measure of the desperation of the poor North Koreans that they would think of escaping to China.

Ghandi said we judge a society in terms of how it cares for non-human life. But non-human animal life has absolutely no protection under Chinese law. The consequent cruelty to animals is unimaginable.

China is the world’s largest greenhouse gas polluter and has 16 of the 20 most polluted cities on earth. It is the armpit of Asia. Desertification and destruction of water resources are occurring on a massive scale. This partly reflects incompetence as well as Chinese barbarian-peasant indifference to the environment.

What a curriculum vitae for a country!

I make these hostile remarks because I tire of being told of the Chinese ‘economic miracle’.

Tire of hearing about their ancient ‘culture’.
Tire of listening to the bigoted posturings of the Beijing tyrants.

Tired too of the Communist Party lies. The West is asked to tolerate Chinese enslavement of Tibet and to passively accept China’s planned takeover of Taiwan. The motherland has its ‘rights’. It even has the ‘right’ to tell our leaders not to even meet the Dalai Lama because he is a ‘splitist’. But the DL is a man with more humour, charisma and intelligence than the whole Chinese Communist Party.

It’s a simple observation: Ending communism in China is not enough. Democracy coupled with respect for human rights is essential. But even this isn’t enough if democracy means choosing from a field of formerly-abused children. Somehow an ethic needs to develop which eschews barbarism and xenophobia in relation to other peoples beliefs and hostility towards the natural environment. Economic development might eventually promote this but, in the interim, we should be suspicious. Given their origins the Chinese leaders and their potential replacement need serious therapy and education.

Otherwise, the nouveau riche barbarians who were themselves abused as children (in conjunction with aristocratic communist dictators) will run China. They will continue to damage their own people and the world.

Efficiency-driven policies to encourage the Chinese to clean up their CO2 act

China last year overtook the US as the largest national emitter of CO2. This will crystallize preexisting concerns among developed countries that China’s emissions (as well as those of Indonesia and India) will need eventually to be controlled.

I have suggested two approaches to dealing with this issue:

(i) Introducing an international carbon tax with sufficient bite to meet Greenhouse gas reduction targets internationally and to levy tariffs on imports from non-complying countries – those that do not adequately impose the carbon tax. This is the somewhat coercive Stiglitz enforcement mechanism proposal. Non-taxing polluters are excluded from free trade because they are unfairly leaning on the rest-of-the-world by not internalizing their emissions. They are being levied with import tariffs to compensate for their environmental theft in exactly the same way that France seeks to attack US non-compliance with Kyoto.

The Stiglitz proposal moreover is designed to switch the tax base internationally from taxing socially-desirable pursuits (work-effort, saving) to pursuing double-dividend advantages from taxing social ‘bads’ such as pollution.

The attractive feature of this program is that it prevents 'carbon leakage'. By imposing direct restrictions on countries such as China it becomes impossible for pollution firms in developed countries to simply relocate to developing countries. Carbon leakage means jobs are lost in developed country and there is no improvement in the global environmental situation. This is the weakness of unilateral moves toward dealing with climate change - and indeed a weakness of the Kyoto Protocol.

Ultimately all countries need to tax carbon emissions or to be penalised by being excluded from trade.

(ii) Setting strict enough carbon emission quotas on complying developed countries (but not seeking to cap emissions from developing countries) to meet very stringent aggregate global emission targets but allowing developed countries to buy carbon credits from emission reductions that achieve via investments in developing countries. This is equivalent to the Clean Development Mechanism proposed (and used) under Kyoto. The difficulty with this proposal is that, as discussed in an earlier post, incentives can be distorted in developing countries. For example, incentives can be created to generate lots of pollution in order to make a sale.

I haven’t thought through the details of these respective viewpoints. My views might back-flip – I suspect there are intricacies here - and I might well have missed something entirely obvious. But I am increasingly coming to the view that option (ii) – despite its problems – has a much to recommend it. Aut least in the short-term before policy option (i) can be seriously considered.

Think of an analogy with conserving biodiversity existence values. These are the values associated with the happiness people experience from knowing that biodiversity species remain extant and can be thought of as a global public good. A species conserved in China contributes as much happiness as one conserved in Australia. Reflecting this suppose wealthy countries value the conservation of biodiversity irrespective of where it is located for existence value reasons and that these wealthy countries have a higher preference for conservation than do poorer developing countries. Suppose too that the options for conservation are better in developing than developed countries – there are lower cost conservation options in developing countries simply because very little conservation effort has been made. Then on efficiency grounds there is a case for resource transfers from rich to poor countries to effect good conservation outcomes on cost-efficiency grounds. These are not ‘charitable’ contributions but simply a consequence of seeking to best allocate conservation expenditures and where taxes to fund such conservation effort are set equal to marginal biodiversity conservation values in providing the global public good.

Roughly speaking developed countries have high willingness-to-pay reflecting their high marginal valuations on conservation. Moreover, the best opportunities to conserve are in developing countries where willingness-to-pay is lower. A resource transfer from rich to poor countries resolves this imbalance. (I once spelt out the analytics of this in a couple of published papers – unfortunately no online versions are available).

Does not an equivalent argument apply to CO2 emissions? Using the argument that the ‘environment is a luxury good’ (there are higher demands for environmental prissiness from rich countries) suggests that countries like the US and Australia have a higher demand for environmental prissiness than will (for example) the Chinese who are mainly targeting their quest for material wealth – they will kill* any animal that moves and have probably one of the environmentally dirtiest societies on earth. Being non-emotive, the Chinese have a low preference for conserving the natural environment – they want growth that will move them out of their miserable current circumstances.

Chinese energy consumption is low relative to developed countries but energy efficiencies are also low so that the opportunities for energy conservation in China are abundant and cheap as China moves toward higher energy consumption levels. Given the disparity in objectives between rich and poor countries and given that CO2 emissions are a global public bad it might make sense for there to be a transfer from wealthy to poor countries such as China to clean up the damage they are creating.

Proposal (ii) creates the incentives for the private sector to do this via a huge investment program that makes money by expanding the clean energy generation technologies in the west by cleaning up the dirt in the developing world. Yes there are huge incentive problems but the proposal to generate a developed country capital market response to cleaning up in the developing world will at least help to deal constructively with global warming issues.

This is a broad sketch since one needs to account for growing Chinese energy demands even if energy conservation is promoted. Moreover, while China has been singled out, many developing countries fit into the Chinese situation. In the longer-term it is essential to seek a transition whereby all countries take care of their own environmental damages. Indeed unless that happens measures to control emissions in deverloped countries will simply be swamped by environmental grubs in the developing world.

* The Chinese have no animal protection laws and their treatment of nature is appalling. See this YouTube if you have a strong stomach.