If we humans want to have any chance of achieving a 45% reduction in greenhouse gas emissions by
2030, which is what the Intergovernmental Panel on Climate Change or IPCC tell us is essential,
then it's patently obvious that they'll need to be some kind of behavioural change
on a scale that hasn't been seen since the dawn of the industrial revolution itself.
The question is how on earth do we actually make that change happen in reality? Some argue
that only the wholesale destruction of our current growth paradigm will do the job...
"people like the OECD or the World Bank say 'oh we're not asking for a lot of
growth just three percent a year'. That means doubling in 24 years! We're bursting through
all the environmental boundaries and screwing the planet already. You want to double it?
Double all that? Double it again? Keep doubling it? It's madness. We've got to go straight to
the heart of capitalism and overthrow it". But others maintain that change will have to come from
within the current system however deeply flawed it may be. One suggestion is to implement market
regulating mechanisms like an international carbon pricing system to incentivize low carbon activity
and penalize high carbon emitters. And then there's the even more direct strategy of simply
ending fossil fuel subsidies... "but 2.5 trillion dollars in the last five years six years went into
subsidies for fossil fuel. That's a definition of insanity." That's about 500 billion a year. Sounds
like a lot doesn't it? But analysis published in September 2021 by the International Monetary Fund
points out that that's just the direct subsidies. When all the indirect unpriced impacts of fossil
fuels are factored in the IMF found that the effective subsidy number jumps up to more like six
trillion dollars a year. That's nearly seven percent of total global economic output dedicated
entirely to supporting fossil fuel greenhouse gas emissions going up into our atmosphere.
So do we really need an international carbon pricing mechanism or do we just need to get real
about the size of fossil fuel subsidies and get on with removing them as quickly as possible? Or
do we perhaps need the first initiative to achieve the second... okay my brains exploding!
Hello and welcome to Just Have a Think. Working out exactly where money comes from and where it
ultimately ends up in our global economic system it's about as easy as counting the grains of sand
on a beach... while the tide's coming in! And it's an even bigger challenge to identify all the
secondary costs associated with activities like the burning of fossil fuels. Things like local
air pollution and environmental damage are not generally factored into governmental fuel taxes
or corporate spreadsheets and so they're often not reflected in the pricing structure of those fuels.
The IMF analyzed 191 countries around the world and found that this so-called under-pricing
existed everywhere they looked. It was particularly noticeable for coal which is
the dirtiest of all fuels, not only emitting the most CO2 but also releasing extremely damaging
particulates wherever it gets burnt. Natural gas was found to be the second most underpriced,
followed by diesel and then gasoline or petrol as we call it here in the UK.
Taken as a whole that under pricing can be plotted as an absolute number in US dollars, which the IMF
very helpfully did in this chart starting in 2015 and projecting right through to 2025.
The light grey bars represent the amount of direct subsidy put into fossil fuels
globally in government support for oil and gas exploration and also in tax breaks for certain
activities. Roughly speaking it's somewhere in the region of half a trillion dollars each year.
But if all the implicit subsidies are taken into account like air pollution and health cost and
infrastructure damage from climate change and stuff like that then you get a very different
picture. On this basis fossil fuel subsidies globally were 5.9 trillion dollars in 2020.
If we plot that as a percentage of global output, better known as gross domestic product or GDP,
then those subsidies represented 6.8 percent of global GDP in 2020 and are expected to increase
to 7.4 percent by 2025 as the share of fuel consumption in emerging markets
continues to climb. That means that 92% of what are effectively fossil fuel subsidies are not
currently accounted for. The IMF report breaks those numbers down even further
to show that 42 percent of the under pricing can be attributed to air pollution followed by a lack
of compensation for the global warming effect at 29% and then other local hazards like congestion
and road accidents at fifteen percent before you even get to the eight percent of subsidies
that are actually declared. Now you can argue about whether or not all those criteria are valid
but if you were to adopt the clear-eyed objective logic of an insurance risk assessor then you'd
most likely conclude that if the hazard had not been there in the first place, in other words
if the world had not been burning fossil fuels, then those consequences and their associated costs
would not have occurred and therefore some or all of those consequent costs must be applicable
to the root cause of the hazard - i.e. fossil fuel production. Here's a chart that many of you will
already be familiar with. It shows the global CO2 pathways for temperature targets produced by the
IPCC in their most recent report. These three zones indicate where we actually need to be.
Anywhere in the light green zone will limit warming to 2 degrees Celsius above pre-industrial
levels. If we hit the mid green zone then we'll be on target to limit warming to 1.8 degrees,
and the dark green zone takes us down to the relative safety of only 1.5 degrees of warming.
The IMF analysis shows that if all those implicit fossil fuel subsidies were removed
and what they refer to as 'efficient fuel pricing' was immediately applied globally,
then CO2 emissions would be reduced by 36 percent by 2025 taking us right down
into that safe zone. And they argue that this so-called efficient fuel pricing would also raise
substantial revenues worth about 3.8% of global GDP while also avoiding almost a million premature
deaths from local air pollution every year. But we're in a bit of a grey area here aren't we?
What one observer might regard as subsidy removal another observer might describe as a carbon tax,
which brings questions about potential economic impacts on businesses and livelihoods
and whether something like this can be achieved without simply shifting economic
activity and emissions from one part of the world to another, which is what's happened in the past.
Those are precisely the sorts of questions that are being posed in this insight report from the
World Economic Forum, published in November 2021 just ahead of the COP 26 climate conference.
It analyzes a mechanism called the International Carbon Price Floor, or ICPF, proposed by the
International Monetary Fund in June. The cost of carbon dioxide and other greenhouse gas emissions
is currently priced at anything from zero dollars to 130 dollars per ton, depending on geographical
location and it varies even more across different industrial and commercial sectors.
That variation creates an uneven playing field across territories and industries
which means there's less incentive for some countries to reduce their emissions
and a very large incentive for so-called carbon leakage when nations with high carbon prices
simply shift their carbon emissions to nations with low carbon prices. The ICPF mechanism
proposes different emissions price points for economies at different stages of development
to incentivize greater participation from all countries in all parts of the world. By 2030
the mechanism would set a price per tonne of carbon dioxide at $75 for high-income countries,
$50 for middle-income countries and twenty-five dollars for low-income countries. So what would
that actually do? Well the WEF found that the effect of the carbon price floor on greenhouse
gas emissions reductions relative to the business as usual baseline ranges from 9.5 percent in what
they refer to as the 'core scenario' through to 12.3 percent when every region every industrial
and commercial sector and all greenhouse gas emissions are included in the scheme.
I'm sure the economists in the audience are quietly wondering what effect those measures
would have on the commercial viability of those companies and therefore on the
economic output or GDP of each country. While it might not be as disastrous as you imagine
the analysis showed that the global reduction in GDP would be less than one percent even when all
industries territories and GHGs are included. And crucially by fully implementing the carbon pricing
floor the world would avoid the massively damaging costs of reduced agricultural productivity,
sea level rises and other health effects of global warming, all of which, even under the
most conservative projections, would offset most if not all of the direct GDP loss from the ICPF.
It's not a level playing field though. Lower income countries that rely more heavily on coal
are likely to be hit relatively harder, so the ICPF model redistributes its revenues as a sort of
carbon dividend to help fund the energy transition in developing nations. And those geographical
price gradients in the scheme that I mentioned earlier will also significantly reduce the problem
of carbon leakage. But just like everything else in our fight against climate change,
for the ICPF to work most effectively it really would need everyone to join in. This chart shows
how much carbon leakage there would be if there was only a $75 carbon price in the high income
countries and no carbon price at all in middle and low income countries. Quite clearly businesses
would simply shift as much of their activity as possible to those unpriced territories. But
once all three carbon prices are applied then the incentive to move almost completely disappears.
Now this all might seem a bit draconian and heavy-handed to some of the more libertarian
viewers in the audience, but in fact even this international carbon pricing floor mechanism still
doesn't go far enough. That 12.3% reduction in greenhouse gas emissions that I mentioned earlier
wouldn't keep global warming below 2 degrees Celsius. Even if all nationally determined
contributions were genuinely achieved and combined with ICPF carbon pricing then the overall
reduction of 22 percent by 2030 would still be at the upper limit of the two degrees Celsius range.
According to the 2020 UN emissions gap report, to give ourselves just a 66% chance of keeping
warming to 1.5 degrees then that 41 billion tonnes of annual CO2 equivalent emissions
would need to drop by another 39 percent right down to 25 billion tons by 2030.
I know that's a lot of numbers coming at you thick and fast and as always if you prefer
to quietly read and absorb the analysis in a darkened room with a strong coffee on the go
then I've left links to all the relevant papers in the description box below. The bottom line
though is that we've got approximately zero chance of staying within 1.5 degrees of warming
with current global policies. Arguably the only way to remove fossil fuels quickly enough
is to price them honestly and transparently. To borrow the rather brutal words of energy
industry expert Tony Seba in this November 2021 blog "Without those subsidies and monopolies,
left to the mercy of genuinely open and transparent electric energy markets,
these doomed industries would crumble under their own economic dead weight,
while allowing solar wind and batteries to scale even more rapidly than they are today."
See you in the comments section! That's it for this week though. As always a big thank you to the
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very much for watching, have a great week, and remember to just have a think. See you next week.