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Cold Feet on Climate Change

By Daniel Schwanen

As governments all over the world struggle to find viable carbon reduction policies, business leaders can seek solutions that make sense both for the environment and the economy.

One of the biggest uncertainties hanging over the global economy concerns what governments might or might not do to address climate change.

While governments all over the world have promised to curb greenhouse gas emissions, too often what they have promised has flown in the face of common sense. Industrial economies enshrined promises to reduce or limit emissions by specific amounts in an internationally “binding” commitment, the 1997 Kyoto Protocol. But many did so without sufficient thought or consensus-building about how they would reach these goals, or accounting for the possibility of changing economic circumstances or evolving technology.

For example, the global recession has made many governments prefer the jobs and tax revenue that come with more plentiful energy over hard short-term emissions reduction targets. A number of economies, such as the US and some in Europe, are seeking to benefit from new technologies that allow the exploitation of shale oil and gas deposits, while many are looking more skeptically than before at the cost and unpredictability of less emissions-intensive wind power, whose immediate economic benefits may, so to speak, look overblown by comparison.

The 2011 Fukushima nuclear disaster in Japan has also had a profound impact on the energy portfolio tradeoffs, as nuclear is one of the options for significantly reducing reliance on carbon.

Not surprisingly, given the impracticability of implementing promised reductions in emissions, the US, after signing the Kyoto Protocol, did not ratify it, Canada dropped out and others such as Japan, New Zealand and Russia are now saying that they will not commit to similar future reduction objectives being discussed among the world’s governments.

The top-down approach to reducing emissions — countries making big promises without thinking through how they will be carried out given economic and technological unpredictability — has only contributed to damaging business uncertainty and public cynicism, with businesses and consumers the world over wondering even more than usual where energy will come from, and at what price.

A fundamental problem is that there is no agreement on who should bear the costs of global action. Naked self-interest is rampant, with emissions-intensive developing countries blaming rich countries for past emissions, and countries possessing “cleaner” energy sources trying to cash in on the plight of trading partners that depend on “dirtier” energy.

Understandably, the public in countries that do make substantial efforts to reduce emissions — typically at a cost to their treasuries, to industrial investment or to consumers — looks askance at those where, for whatever reason, a similar effort is not occurring. Protectionism is rearing its head as a result: the global economy may face future trade wars due to some countries wanting to tax imports from others based on emissions created by those products.

The cost to jobs and incomes of quickly trying to discard our current carbon-intensive economic infrastructure would be unbearably high. So a workable solution requires time. Sadly, as mentioned, governments are having trouble adopting clear and workable policies with a long-term perspective.

One thing governments should do is look at solutions that are both environmentally and economically efficient. The most obvious is the reduction of remaining public subsidies to fossil fuels. Governments forgo an astonishing $2 trillion per year — 8% of all government revenues globally — trying to shelter consumers (mainly in developing countries) and producers of fossil fuels. Reducing these subsidies will only be a first step, but a concrete one and one of the most significant tests of governments’ ability to deliver on this file.

Politically speaking, climate change remains a global hot potato. Business leaders should cast a wary eye on governments’ over-the-top promises to reduce emissions and seek to favour solutions that are consistent with what the economy can bear and what technology can deliver.

Daniel Schwanen is assistant vice-president, research, at the C.D. Howe Institute in Toronto.

This article was originally published in the March 2014 issue of CPA Magazine.