What Do Governments Have to Do to Create Low-Carbon Economies?

June 26, 2015 – National governments today have a lot of balls in the air. They are dealing with trade liberalization and free trade zones, regulating and deregulating major industries, fighting drug wars which they seemingly never win, dealing with post-colonial religious terrorism threats, and trying to figure out how to handle other governments that flex their military muscles in pursuit of enlarging their territorial influence. Many countries have within them the seeds of growing class warfare, a “precariat” of under and unemployed youth, and workforces that are increasingly impacted by industrial and technological change leading to job losses or relocation to low-wage competitors. This is a world where political boundaries are no longer social boundaries because the Internet and social media have created online communities larger than any single nation, and online causes have become the focus for the discontented and disempowered.

And then there is climate change, a meeting in Paris this December, and expectation that collectively nations will commit to reducing carbon emissions or face a very altered world within a few generations. It all seems to be too much!

It’s no wonder, therefore, that some national leaders like those in Canada and Australia, choose to put on blinkers, operating under tunnel vision. It’s easier that way. Fortunately there are fewer Stephen Harper’s and Tony Abbott’s around in our world leaders.

We collectively know but appear timid in our resolve to alter the global economy so that it is less carbon dependent. We know it will take the re-channeling of trillions of dollars allocated presently to carbon-intensive industries. Both government and private enterprise need re-channeling.

Will the energy giants, currently heavily vested in building a world addicted to oil, make the sharp turn to non-carbon energy production? Right now these companies report quarterly profits in multibillion dollars based on extractive and production processes that spew gigatons of carbon into the atmosphere. And governments are dependent on them for royalties which help pay the billions spent on national programs. If governments lose these revenue sources, from where will they find the money to continue to operate?

So it is a good question to ask, just how governments will transition to a low-carbon world.

Here are five logical first steps:

1. Existing government subsidies of carbon-based extractive energy resources must end. Indirect and direct subsidies amount to tens of billions of dollars annually and withdrawing these “carrots” from the energy giants is a necessary first step in transitioning to low-carbon energy alternatives.
2. All government-based investment portfolios must measure their climate risk exposure. The current university-inspired divestment movement is one that government pension and investment funds must embrace. This necessary “stick” will motivate the carbon-extraction energy sector to understand that they have a life and death stake in transitioning to low-carbon output. Maybe this means they will finally put money into carbon capture and sequestration (CCS) projects which so many of them have bailed out on in the past. This is a strategy that could save their bacon but they have been reluctant players.
3. Governments need to set a price on carbon to drive change incrementally but at an accelerating rate over the next two decades. Pricing carbon will not be easy. Pricing has to be reflected at the point of extraction which will hit the energy industry, and then in production again hitting the industry, and then in use impacting business and consumers. Who will bear the greatest carbon price burden? The oil companies like Canada’s Suncorp, state they are not unreceptive to carbon pricing but want all to share equally in the added cost. That is not, however, how current carbon pricing models work. For example, the British Columbia government in Canada taxes carbon at the source of emissions. So run a car and pay a carbon tax on gasoline at the pump. If you mine coal, pay a carbon tax for every ton you extract. If you burn carbon in a power plant or a factory, pay a tax for every ton of CO2 you emit. But offsetting that British Columbia provides its citizens with lowered consumer and income tax rates. Carbon cap and trade systems are different. They set a volume cap that cannot be exceeded and reduce it from year to year. Emitters have to buy credits if they exceed their cap and the cost of those credits rise over time while the cap keeps getting reduced. So one thing is for sure, governments have a range of instruments and options that they can use to best fit particular national circumstances whether it be a straightforward tax or a carbon trading scheme.
4. Governments and companies, in making any policy or money decisions, need to provide a climate risk calculation subject to independent oversight by a committee of reviewers that include climate scientists, bankers and financial analysts. The tools for climate risk exist today. When I wrote about the Bloomberg Carbon Risk Valuation Tool a couple of years ago they were almost the only player in town. But now there are a number of companies with tools and expertise to help deliver policy and programs around low-carbon goals. In addition the major banks and financial investment companies are developing “green funds” instruments for advancing low-carbon and green infrastructure projects. “Green financing” is now being incorporated into company balance sheets. Insurance companies are measuring “climate risk” before issuing policies.
5. Governments with deeper pockets will help those with inadequate resources or expertise to address a low-carbon transition. This is the North and South issue, Developed World versus the Developing one. Adaptation, which may be affordable for western industrialized nations and China, will not be for many nations defined as Developing because they lack the expertise and financial resources to make the transition. A redistribution of financial resources, therefore, through a carbon reduction fund, will be a necessity. Something already exists in nascent form, the U.N. Green Climate Fund. But much more will be expected of richer nations helping poorer ones over the next two decades.

Finally, come December, when the conference on climate convenes in Paris, world governments must speak in one voice to all citizens of the planet. They must commit themselves to the statement that we are all in this together, that we sink or swim with unity of purpose, and that there is far greater value in a sustainable world then in one wracked by the consequences of a warming atmosphere and ocean.

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