March 4th, 2010

Brazil, where I´m currently living, has greatly improved its environmental policies recently under President Lula. His government took on and defeated the Amazonian rancher lobby, and deforestation has slowed. Lula does not seem to have paid a political price for this – most Brazilians live on the coast or in the south, and don´t care that much about the remote Amazon (they quite like having it, but not to the point of taking to the streets). The indifference allowed the lobby to get away with it for so long, but is now working in favour of good policy. 85% of Brazilian electricity is renewable: mainly from hydroelectricity (not environmentally pure I know, but carbon is the overriding problem), now joined by a rapidly growing wind sector. So the high-profile role that Brazilian diplomats played in Copenhagen was not hypocritical.

However, Brazil´s position there was not very different from the general one of the developing countries: the atmospheric carbon legacy is the fault of the rich countries (true), we need to grow fast to end poverty (true), even though you bastards have used up the cheap oil (true). So the rich countries must go first. Show you are serious, and give us lots of guilt money, then we will join in.

This argument sounds moral but it´s bad policy by the old, cynical standard of the national interest. Consider a policy game with two players, a rich country, ¨USA¨, and a fast-growing poorer one, ¨Brazil¨. There is a rest of the world, which looks like the one we have except that its carbon emissions are not significant. The policy options are a national cap-and-trade regime, open to international trade and deals if they are going, and business as usual. The payoff matrix for ¨Brazil¨ looks I think like this:

Some of this needs a little explanation. Absent a global cap-&-trade deal, it´s likely that there will still be some voluntary flows of funding driven by consumers like airline passengers or by local/regional/state governments like California´s. These would very probably be higher in the NE cell than the SW one, with more serious mitigation efforts by ¨Brazil¨. Anyway the transfers are not the key.

The central tradeoff for ¨Brazil¨ lies between the slightly higher growth offered by BAU and its much greater riskiness. A reasonably safe world requires caps by both rich and poor countries. Without both, the world is going to become a very nasty place, with high probabilities of mass deaths, revenge ecoterrorism, revolutions, and wars over oil and water. The only question is how fast. So outside the NW cell, disaster is inevitable. When it comes, the least bad place to be is with a low-carbon economy based on diversified local renewable energy sources, rather than a somewhat bigger but very vulnerable economy dependent on imported hydrocarbons.

As Nicholas Stern points out, the overall costs of a serious mitigation strategy – <2% of GDP – are less than those that countries routinely face from exchange rate movements, to which I would add, for developing countries, swings in commodities prices. A level playing field is desirable for both efficiency and morality, but you should still play on the bumpy pitch you´ve got. US industry (well, most of it) has not collapsed from its exceptional health costs, nor European industry from the burden of pension liabilities. If Vietnam and Morocco imposed carbon taxes, their textile factories would not migrate back to Lancashire and New England. The fear of loss of competitiveness from unilateral or incomplete cap-and-trade is not entirely groundless, but it´s a small and manageable problem.

In this ultra-simplified 2-player game, the right strategy for Brazil, and any typical developing country,  is clearly cap-and–trade, regardless of the actions of rich countries.

Does this change if we make the game more realistic? First, divide the rich team into two, with an unwilling USA and a participating Europe and Japan. This increases transfers to the South, and reinforces the argument.

Second, we add in Índia and China, very populous countries with large domestic reserves of coal, and therefore the option of a fairly secure BAU strategy. I would not claim my model offers them a convincing argument for unilateral mitigation. But suppose we just add them to the USA in the BAU camp. World disaster is now coming sooner rather than later, and the model´s argument for other developing countries is even stronger.

To come back to real Brazil. Going ahead unilaterally to set national carbon limits, and taking the lead for a partial cap-and trade regime, – a coalition of the sane – , would have the considerable further payoff of demonstrating the final emancipation of the brown poor from rich white men. Self-respect is not a trivial prize.

The strong objection to this strategy is moral hazard: it lets the USA off the hook and lowers the political incentive for Congress to act. This was a good argument last year and at Copenhagen, when Waxman-Markey looked doable. But the Washington combination of know-nothing, objectively pro-genocide Republicans and wet Democrats has made a serious climate bill very unlikely for a while. My guess would be that the negative political impact (an apparent free ride) would be outweighed by the effect of example, the fear of losing business opportunities, and the patent loss of soft power. In any case, the free ride is only apparent; it´s impossible to stabilise the climate without both China and the USA. The USA will come round some day. I just pray it won´t be too late for my granddaughters.

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