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British Energy Policy and International Political Economy in Climate Change Stephen Stretton 19th April 2006 Judge Institute of Management, Cambridge University Contents Part I) The Problem: Global Warming and international political economy Part II) Positive Feedback in Climate and Society. Increasing Returns to scale. Part III) British Energy Policy. A Plan: Zero Carbon through Nuclear Energy. Part I: The Problem • • • • • • • • Climate Change Impacts The Long View Should We Worried Why We Must Aim to ‘Overreact’. Institutions Welfare Economics Perspective Management Perspective Impacts of Climate Change • Extent of anthropogenic Climate Change: – 0.6C warming already. – 2-5C over next century • Impact increases rapidly as temperature rise exceeds 2C: – – – – Collapse of Global heat Circulation system Collapse of Ecosystems (e.g. Amazon Rainforest) Acidification of Oceans Irreversible melting of Greenland (final 7m final sea level rise) and West Antarctic (also~7m) ice sheets – Massive changes in precipitation and temperature leading to increased water and food stress; refugees, war. Impacts of Climate Change • Widespread Desertification for a 5C increase in average global temperatures: Global Warming: The long view Hottest time in Earth’s History: “Paleocene-Oeocene Thermal Maximum” • 55m years ago. • Cause: Perhaps a massive volcanic eruption releasing greenhouse gases?. • Release of frozen Methane? • Increase in atmospheric CO2 concentrations to 30004000ppm • Temperatures rose to 20C in Arctic Regions • Acidification of oceans • Widespread extinctions including large mammals • Takes Earth 100,000 years to recover Should We be worried? • • • • • • GW is major threat. Rational ranking of risks: GW ranks above nuclear power risks. Still uncertainty over final emissions, final warmth, final outcomes ‘Russian roulette with our children?’ Collective action problem Mancur Olson (1982): “... If we finally get the information that the ecosystem can’t take any more, then it is important that we have the open-mindedness needed to change our views and policies the moment decisive information arrives. Those who shout wolf too often, and those who are sure there are no wolves around, could be our undoing” • (Olson, M. Environmental Indivisibilities and Information Costs: Fanaticism, Agnosticism and Intellectual Progress The American Economic Review Vol 72, No 2. Papers and Proceedings of the Ninety Fourth Annual Meeting of the American Economuc Association (May 1982) 262-266) ‘Aim to Over-react’ • Threats to earth are severe • To solve the problem requires a large change in behaviour across earth • Everyone needs to change (unfortunately each has particular circumstances) • Current trends going in opposite direction fast • Need to show self-interested actors can convert their economies. • Only by ‘aiming to overreact’ do we have a chance of making a sufficient difference. Institutions • Utilitarian or cost-benefit analysis assumes perfect institutions. • This is far from the case. There is no global government. • Need to look where we already have institutions • National self-determination, and national ownership of future is key, except where there are intrinsically global issues, like global warming. Welfare Economics Perspective • Have a Environmental Externality • Need a Binding International Agreement so that private costs = social costs e.g.: – Global Carbon Tax or – Global Emissions Trading BUT • No global government – no taxation • International agreement difficult • Agreements are in any case not enough • Incentives for countries to defect Management Perspective 1. Have a Problem 2. Need to find Solution • Keep it simple! • Importance of leadership. Part II: Positive Feedback • • • • • • • • • Climate Society: War Society: Hysteria Environment, Society & ‘Collapse’ Local and Global Environmental Problems Can we substitute? Technology Increasing Returns to Scale ‘Tipping Points’ Positive Feedbacks in Climate Negative Feedbacks: • CO2 increases rate of growth of plants Positive: • Increased temperature causes collapse of ecosystems, so sinks become sources • Reduction in albedo (so Earth absorbs more heat directly from Sun) • Release of frozen Methane (greenhouse gas) • Reduction in oceanic mixing due to changes in thermohaline circulation Positive Feedbacks in Society: War • Benevolence of Nation-state for last 50 years in the West is the exception rather than the rule. In the Congo, mineral wealth fuels a Hobbesian war. • Escalation in international conflict Positive Feedbacks in Society: Hysteria • Rational elements within society are fragile. Existing order can be overthrown. • Perceived inability of governments to protect people could lead to mass panic. • Panic further stretches government resources. Positive Feedbacks of Society AND Environment • World is potentially already overpopulated for a +5C world. (Land, Water & Energy shortages). • Massive time delay (50 years) between decisions and their effects. • At each stage, future environmental constraints do not bind existing behaviour. • Existing needs, however, will become more pressing at each future time. • Democratic governments will be more pressed to service needs of existing generations in the future. • Air-conditioning and desalination require more energy in a hotter climate rather than less. Local and Global Environmental Problems • Local environmental problems require local knowledge and local institutions • Impossibility of central planner having sufficient knowledge to solve them • Hence we rely on local institutions, including but not limited to property rights • Global environmental problems require global knowledge and global institutions: CO2 is a commodity. • Ecological Macroeconomics? Can we substitute? Can we substitute physical capital for natural capital? …Perhaps not: There are critical commodities with limited substitution possibilities e.g.: • Water • Land • Energy Property rights require peace which may be lacking if critical commodities become short. What is technology? A set of patterns used to solve problems. • Technological improvement produces economic growth • Technologies can be copied Positive Feedback in Technology • ‘Learning by Doing’ effects: Increasing Returns to Scale • Adoption of technology reduces uncertainty for future investors • Network externalities: advantage of having a unique standard Constraints on CO2 emission • Conventional oil & gas production constrained by monopolistic behaviour and by finite reserves • (Non-clean) coal produces local environmental problems (SO2 NOx) • Governments require a secure source of energy. A ‘Tipping point’? • Increasing price of oil will encourage investment in: 1. Extracting unconventional oil and gas 2. Non-carbon technologies • Government needs to do enough to ensure that option (2) is dominant Part III: British Energy Policy 2006 • Background: DTI Energy Review • Main Goals: – CO2 Reduction Target – Security of Supply – Economic Efficiency • Future Energy Mix – Fossil Fuels – Renewables – Nuclear CO2 Reduction Target • UK Target: CO2 emissions 60% reduction on 1990 levels by 2050 • Sweden recently adopted same target • Significant progress (30% reduction) by 2030 • Aim is that such cuts, if adopted worldwide, would avoid ‘Dangerous’ Climate Change • Follows recommendations of Royal Society • More recent evidence suggests even deeper cuts may be required • Some countries may not cooperate, so perhaps UK cuts need to be even deeper to compensate/lead? • Is a near-zero carbon economy economically feasible? Security of Supply • North Sea oil and gas are running down. • Natural Gas provides a large and increasing proportion of our supplies • Britain now net importer of gas • Possible Fuels: – Natural Gas from Algeria, Russia... – Oil from Middle East… – Coal: reserves are local (but most mines have closed; environmentally very damaging). – Uranium from Australia and Canada. Economic Efficiency A solution that maintains material prosperity: a) People wish to maintain a comfortable standard of living b) British policy will be more influential if we are seen to be prosperous c) Balance of payments d) Sustainability and demographic transition requires ‘genuine saving’ (capital investment). UK is uniquely placed to lead • Strong Scientific Community • Member of EU & so called ‘Transatlantic Alliance’, • Historical & Cultural links with China & India • International Outlook • Amenable Philosophical tradition • Large Economy • London as a global city • Needs an Energy Policy for national selfinterest, independently A Plan to Save the World? Go fully nuclear! • 100 GW of new nuclear capacity in UK • Cost: £10bn pa over 10 years • Electricity market design to encourage private investors in nuclear. • Some direct public investment? British Energy • • • • • British Energy currently de facto nationalised Since social benefits of new build greater than private benefits, public ownership and control is no bad thing. National industries capable of greater investment. Problem: Cost Control in Nationalised industries Solution: Duopoly in public provision: e.g. also consider Advanced CANDU Conclusion: Positive Effects of this Plan a) Economies of scale ensure investment would be repaid b) Britain would have secure sufficient low cost energy for 40-50 years c) ‘Learning by doing’ would reduce price of nuclear worldwide. In particular, nuclear would become more attractive to market investors in US. d) Britain would give a moral example on CO2 emissions to the rest of Europe and world. (Sweden has adopted same CO2 target already). e) Market Design innovations would aid US policy makers