Bursting the carbon bubble

The world economy may be recovering, but inaction on climate change could cost far more than the current financial crisis

Kevin Gallagher
guardian.co.uk, Tuesday 5 May 2009 15.00 BST

A new Economist survey found over 100 articles in the month of April hailing "green shoots" of recovery for the world economy. Not so fast. Ultimately, recovery should be judged by the extent to which global demand is revived in the short term, global imbalances are corrected in the medium term and the world economy is put on a climate-friendly trajectory in the longer term.
As the IMF's recent World Economic Outlook shows, most economists predict growth for 2010, the glimmerings of which are now evident in such indicators as mortgage re-financings. Even if this is true, it is only the first step. If we stop here, the effort to date may be a mere bridge loan to the next bubble.
That's what happened last time, and what got us into this mess. After the dotcom bubble burst and the US slumped into a recession in 2001, low interest rates and fiscal stimulus (of tax cuts) followed. Such actions made credit cheap and spending in vogue.
So borrow and spend we did. We borrowed to buy homes. We filled them with goods from China. With the profits, China loaned us more. We spent even more. The results were massive and unsustainable global imbalances – a huge US current account deficit and an equally large Chinese surplus. This, along with deregulation and no regulation in the case of the shadow banking system, sowed the seeds of the crisis.
True, expansionary policy is needed in the short term to boost global demand. But in the medium and long term, the US has to consume less and the world's poorer countries have to consume more in order to correct global imbalances. Yet this has to be done in a cleaner way than ever before.
Global imbalances also swelled the carbon dioxide emissions bubble that is yet to burst. Since the turn of the century, emissions surged as China became the world's factory, and US emission remained large. China and the US are now the two largest emitters at 46% of the annual world total.
On climate change, there are true glimmerings of hope amid the response to the financial crisis. Yet we will need to be much more audacious in order to recover.
In the US, a new ICF study says $52bn of the $787bn stimulus package is "green" (6% of total). The report cites the home weatherisation programme, smart grid, loan guarantees for renewable energy and some of the transportation funding as examples of measures that will remove 61m tons of carbon dioxide from the atmosphere, the equivalent of taking 13m cars off the road.
Up to 12% of China's $500bn stimulus package is climate-friendly. China will be spending stimulus funds on high-speed rail, low-carbon car production, renewable energy and energy-efficient buildings. China already leads the world in installed renewable energy capacity with 42 gigawatts of capacity (compared to 23 in the US).
It is true that China and the US have stimulus packages with climate-friendly components that couldn't have been dreamed of in either country seven years ago. Yet these measures are far from adequate. China's green industrial policy is swamped by a "brown" energy policy based on cheap coal – a policy that accounts for over 80% of its emissions.
The US still hasn't passed climate legislation, let alone put together a green industrial policy.
Last week the journal Nature published a study that shows how we may exhaust our "carbon budget" in 20 years. In other words, without a drastic reduction in global emissions within the decade, we lose our chance to prevent dangerous climate change. This could lead to more than two degrees (celsius) of global warming – a tipping point that could trigger catastrophic global change.
Economist Frank Ackerman points out in a new book, Can We Afford the Future: The Economics of a Warming World, that most economists who look at climate change don't consider worst-case events. When factored in, the costs of doing nothing on climate change that have been put at 5-20% of global GDP by economists such as Nicholas Stern, don't look so out of this world.
In other words, the costs of inaction on climate change could be far worse than affects of the current financial crisis.
Some shoots may get us through the season, but we have to plant the seeds for medium- and long-run sustainability. Such efforts also need to be treated like a bank bailout. Rather than asking "How much does it cost?", we need to ask "What does it take?" The benefits of living in a more stable and healthy economy far outweigh the costs of a warming world more susceptible to crises.