31 October, 2007
German economics professor Hans-Werner Sinn has an eye-opening article on the Vox-EU-blog. According to the well-known economist, the EU’s policies to reduce fossil fuels consumption are insufficient as they forget about the supply-side of the energy market:
“The European Union’s consumption-reducing measures will be in vain if oil sheiks and other owners of fossil fuels do not cut back their supply. Without supply cuts, world energy prices fall by so much that other countries consume and burn exactly the quantities not demanded by the EU. Countries doing nothing with regard to climate protection enjoy an implicit subsidy on their energy demand, resulting from the restraint of the EU countries. The Chinese continue to step up their CO2-intensive expansion policies and the Americans drive even more SUVs than they otherwise would do“.
Not the EU leaders “will determine the pace of climate change but Hugo Chávez, Mahmoud Ahmadinejad, Putin’s oligarchs, the Arabian oil sheiks and a few other potentates“, says professor Sinn provocatively.
His explanation: the more suppliers will foresee stricter demand reductions in the future, the more they will intensify extraction today.
So, what measures are needed according to the German academic?
“Meaningful measures would include the introduction of worldwide source taxes on capital income along with a closing of tax havens so that the resource owners would lose their investment alternatives. In addition, an emissions trading system with no loopholes that would unite all customer countries into a worldwide monopsony could force the desired amounts from the resource exporters. It would make particular sense to exploit the technical possibilities of sequestering carbon dioxide.
A top priority should be rebuilding forests, which are the largest absorbers of carbon under human control. Currently deforestation is leading to the release of more carbon dioxide than from the whole transportation sector. If reforestation were to replace forest destruction, global warming could be slowed down significantly“. [my highlighting]
Conclusion: “The economics of climate change and the economics of exhaustible resources are closely intertwined, for in essence the problem of global warming is the problem of gradually transporting the available stock of carbon from underground into the atmosphere, with useful oxidisation on the way. Unfortunately, most policy proposals ignore this insight and seek to reduce carbon demand without concern for the price path of carbon and the corresponding supply reactions“.
Addendum 1 November: the Economist’s FreeExchange blog has an interesting reaction to Sinn’s article raising the question whether “conserving nations [should] impose carbon tariffs on imported goods from non-conserving nations?”
Willy De Backer