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November 15th 2009 print

Peter Smith

After Versailles – The Copenhagen Treaty

No-one in those days, or up until recently, would have thought there might come a day when the debt of war would be replaced by the debt of climate ‘warming’, for which reparations were demanded.

Economic consequences of the Copenhagen Treaty 

In the Economic Consequences of the Peace, published in 1919, Keynes warned, among other things, of the ruinous consequences of war reparations imposed on Germany by the Versailles Treaty. 

No-one in those days, or up until recently, would have thought there might come a day when the debt of war would be replaced by the debt of climate ‘warming’, for which reparations were demanded. That day has certainly come with the UN’s “Framework Convention on Climate Change”, the so-called Copenhagen Treaty (‘the treaty’). 

The first thing to say is that the treaty will not be signed in one of its current forms. There are many square bracketed alternatives and options in the treaty but it is fair to say that none of them will prove palatable to the major countries. 

Leaving aside the posited creation of some kind of world ‘government’ and all of the administrative paraphernalia this entails, the treaty is basically about two obligations, both of which effectively fall on developed countries. The first is to cut emissions severely. The second is to pay developing countries – for past climate misdeeds of developed countries and for the efforts required of developing countries to contain their own future emissions. We are reminded though, in the treaty, that the “over riding priority” of developing countries “remains sustainable economic growth and poverty eradication, an effort which has been complicated by the effects of climate change”. So, the burden of cost and that of reducing emissions is squarely put on developed countries. 

The economic consequences of cutting emissions have been heavily debated here in Australia and elsewhere without, of course, any consensus emerging. The problem is that no one actually knows what the economic consequences will be; it is mostly conjecture. It is claimed on one side that the loss of jobs in emitting industries will be made up for by green jobs and, moreover, that the costs of doing nothing about emissions will outweigh the costs of acting resolutely to cut emissions. On the other side, it is claimed that cutting emissions will result in economic dislocation and loss of wealth and, moreover, will make very little difference to atmospheric CO2 levels. 

It might be possible for the two sides to get closer but for the apocalyptic vision of a world more submerged in water, with wild unparalleled storms and forest fires, tropical diseases in now temperate climes, and dead polar bears. The (almost) scientific fact that this vision is nonsense is by the way; it is believed passionately by many and it has become the accepted wisdom of governments. Our prime minister becomes apoplectic about views to the contrary, calling those who hold them sceptics and deniers. 

Almost any economic cost is trivial if the option is apocalypse soon. But we should be clear that shifting from an allocation of material and energy resources determined by the market, to one influenced significantly by government fiat will have large economic costs. An explicit tax on carbon emissions, or an implicit tax through a cap and trade system, will result in a loss of future wealth. If that were not the case, we wouldn’t have to try and persuade and bribe China and India to adopt ‘green’ technology.

The advantage of market economies is that they will eventually adjust and create those ‘green’ jobs that are talked about by Rudd and Obama and their political fellow travellers. But there will be adjustment costs and they will fall differentially on companies and on workers; and making something in the future will cost more because less efficient forms of energy will need to be applied. We ought at least to be able to get agreement on this because it is a matter of logic and common sense. It would be beneficial also, in designing policies of mitigation and adaption, to get agreement on the point that whatever is done, within practical limits, will make little difference to the future climate in this century– a point made well by Christopher Monckton, for example – but that is a forlorn hope while the apocalyptic vision remains intact and anything but a hair shirt is immoral. 

The second objective of the treaty is to oblige developed countries to provide ongoing aid to developing countries, in part recompense for ‘the burden on developing countries’ imposed ‘by the historical cumulative emissions of developed countries’. The envisaged size and character of this aid is an important key as to why the treaty will not be signed in its current form(s). Currently there is an agreed international aspirational target for developed countries to provide 0.7 percent of their national income for international aid. My understanding is that only the Scandinavians, Holland and Luxembourg, have met this target. On average, international aid in total is about Australia’s mark of 0.3 per cent of GDP. The US, the largest aid donor, provides less than 0.3 per cent. 

The treaty envisages a massive transfer of wealth from developed to developing countries on top of existing aid. Numbers of figures are thrown around in the treaty but, for example, 0.5 and 0.7 per cent of GDP per year for ‘adaption’ appear as two options on pages 40 and 43.  Adaption is only one of the imperatives. There is ‘mitigation’ and combating the impact of ‘deforestation’ and the free transfer of mitigating technology from companies in developed countries to companies in developing countries. The treaty says, as options, that developed countries will pay the ‘full’ costs of adaption and the ‘full’ costs of mitigation. The finance and technology that is expected to flow from developed countries will be ‘measurable’ ‘reportable’ and ‘verifiable’ according to the treaty. 

An option/alternative on page 133 reads as follows: 

An assessed contribution from developed country Parties based on the principles of equity, common but differentiated responsibilities, respective capabilities, GDP, GDP per capita, the polluter pays principle historical responsibility of Annex I Parties, historical climate debt, including adaptation debt, amounting to [[0.5–1][0.8][2] per cent of gross national product] at least [0.5–1 per cent of GDP]].

What we have then on top of the costs of cutting emissions is at least another additional, say, 0.7 per cent of GDP (to choose a lower end figure) on climate-related aid, when the developed world has singularly failed to deliver on the existing aspirational target of 0.7 per cent. Why has the developed world failed to deliver? Part may me due to the fact that much of the aid is wasted and is siphoned away corruptly (as undoubtedly would be climate aid) but it is also a significant impost on developed countries. There is an inclination to say well 0.7 per cent of GDP isn’t that much. In Australia, it is, for example, for measuring purposes, 25 per cent of public expenditure (federal, state and local government) on fixed capital formation; infrastructure, buildings, roads, ports etc. It is off the top and imposes real costs and choices. 

The question to be asked is whether the Australian Government, the US Government and other major industrialized country governments, would be willing to impose another 0.7 per cent of GDP on their taxpayers in these fraught economic times, and when the large costs of reducing emissions are in contemplation. The answer is surely no, and this leaves aside the impracticalities of ensuring free inter-company technology transfer. 

The international climate debate as expressed in the treaty has, at least in part, been high-jacked by those who support additional international aid. Aid because of colonial exploitation, aid because of unfair trading practices, has given way to aid to repay climate debt. It should, and undoubtedly will, be the undoing of the treaty. Without aid, there will be no buy-in from developing countries and we will be saved, for the time being, from the worst excesses of global-warming zealotry that currently holds sway. 

However, the momentum to do something is too great so we can expect something, albeit of a token nature, to come out of Copenhagen and maybe something of a more concrete nature at, or perhaps before, the scheduled UN meeting in Mexico at the end of next year. The only thing that can permanently undo the currently accepted wisdom is the force of objective and rigorous science and/or experience. Experience will take too long; another five years of cooling maybe, and even then it might not be enough. In science lays the only hope of preventing the imposition of economic cost and dislocation for no material gain.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics