Wednesday, January 04, 2006

Pricing pollution may hinder development

When a noble principle can generate the wrong outcome
What good is the Kyoto treaty really?
To set a backdrop from which I can commence, I start by stating that I support a reduction in global warming. It is not fair that we (the current users of the world’s resources) maximise our utility at the extreme expense of our future offspring. What lies ahead for our future generations is a world of climate-related disasters, from El niño to whatever other calamities await. It is plain immoral (religion aside) to cast such a sinister die into the lives the future. If our great grand parents did to us what we are doing to our future great grand children, there wouldn’t be much of a world to live in today.

Now comes the economics…

The last twenty years of world economic development place us in a completely different context as our great grand parents. Today it is evident, more than ever, that everything in life has a price; even the air we breathe. Corporations have exhausted the old money making routes and now crucially have to be very creative to survive. For example, these days, the most advanced of investors can trade in volatility options, a concept that is not easy to grasp today (unless you are the trader), let alone 20-odd years ago. However, this is a fine example of the "right" kind of creativity that has made the world economy more formidable.

Looking at the "wrong" kind of economic creativity…

The Kyoto treaty is basically the machine that will transform the free air we breathe into a cashable commodity. This will come about in the following way:
1. We all (poor, rich, young and old) agree that industrialised nations need to reduce their emissions of greenhouse gases, principally Carbon Dioxide, over the next decade. This concerns us all.
2. Because some of the world’s largest polluters are also some of the most powerful (and also the most self-satisfying) they can and have objected to a scheme that collectively makes the world a better place for everyone, including themselves.
3. The outcome is that the proper objectives of the Kyoto treaty cannot be met. Instead, we end up with a treaty version that is watered-down to appease the bully nations.
4. The Kyoto treaty will then provide a complex system, which will allow some countries to buy emission credits from others (from around 2008).
The Western nations have already developed (as far as industrialisation is concerned anyway). China is now heavily industrialising, the effect of which can be seen on the commodities markets. Once the Kyoto treaty is fully in play, the world’s poorest countries will only just be starting their development or will still be somewhat stagnant and requiring a lot of room for finessing.
Given that the poorest countries are literally held back by the richest through market distorting trade barriers, and that rich countries taunt the poor ones with the prospect of unattainable free trade, what will happen when poor countries finally get their act together but find that they can't manufacture or industrialise because there is a cap on the total amount of world pollution and developed countries have all the pollution permits?

The only outcome for poor countries will be to buy permit credits, leased to them by rich countries, so that they are not in infringement of the Kyoto treaty. Poor countries have not got the money to lease permits from developed countries, and it is a well-known fact that it is far easier to enforce the law on the poor than the rich. In fact, in some cases, rich countries ignore internationally agreed law, or side step it to suit themselves. But the same rich countries will gladly point-out an attempt by a poor country to ignore international law and aggressively pursue the matter until the poor country has been brought to "justice" so that a bad example is not set. This is just one example of the manifest disequilibria in today's world.

The above situation can be likened to the current focus on China as a major (negative) risk to world economic growth going forward. This is (partly) through its effect on the price of oil and where that consequently leaves developed economies and their highly energy reliant consumers. Given that alternative forms of energy are not yet at the point where the world can migrate away from oil-junkie status, China’s rapid economic development, and hence it’s massive reliance on oil, is not being celebrated as the move towards a global re-balancing that it is, instead, one would almost interpret it as wrong because it's progress presents oil supply issues for developed countries.
Therefore, one can infer that when poor countries start to develop, like China has, there will be two huge hindrances from the west:
1. Trade barriers and
2. Having to buy a right to pollute from the stewards of the polluting licences(essentially countries in the west that can afford the licences and have already done their industrialisation (their share of pollution)).
The argument that will be used to enforce the pollution issue against poor countries will be that the environment is at stake. However, right now, somehow this same argument is not good enough for some developed countries to agree to it.

Much like money itself is not the cause of evil, it is the greed for money that causes evil, the Kyoto treaty will not be the cause of the hindrance to economic growth in poor countries, but it will be the mechanism through which the personal agenda of developed nations will hide behind an emission law when it suits them, a move that will stifle the attempts of poor countries to break away from poverty following an economic development path similar to most western nations.
Being fully aware that poor countries don't strike many an analyst as prime candidates for rapid economic development, my conclusion assumes that poor countries would rather have the opportunity to develop lie somewhere in their future, rather than have their fate sealed tomorrow (figuratively).


Anonymous Anonymous said...

It's a good post, which raises a good point, which generalizes to other areas; it can be unjust to implement a Pareto-efficient pricing scheme against a background of unequal initial resources.

In theory, the solution to this is simple - to accompany pollution-pricing with a (one-off?) redistribution of wealth from rich to poor countries.

Maybe redistribution is a prerequisite for economic efficiency, not a hindrance to it. James Buchanan made a very similar point in The Limits of Liberty.

Friday, January 06, 2006 3:52:00 pm  

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