The deal we need from Copenhagen

As the FT pointed out in an editorial on Monday, scepticism of the reality of climate change is either unfounded or, when warranted, does not mean nothing needs be to be done. We cannot be certain (until it is too late) that continuing to emit carbon at our current pace will lead to disaster; but we do know that if we do, the chance of a catastrophic outcome is high enough to make insuring against worst-case scenarios the rational response. Surely the financial crisis has taught us that a low-probability tail risk is still a risk.

As there is no one onto whom planetary risk can be shifted, the only way to insure against climate change fall-out is to make it sufficiently improbable. The upcoming summit on climate change in Copenhagen is the world’s opportunity to do this, by making a mutual, binding commitment to global cuts in carbon emissions.

In order to prevent catastrophe, it does not matter how or by whom the reduction is achieved: it is the world as a whole whose emissions must peak in the next decade and more than halve by mid-century, according to scientists.

The “how” and “by whom” questions do, however, fundamentally determine the economic and political viability of any deal. The leaders meeting in Copenhagen must, therefore, agree not only to make ambitious global cuts, but to achieve them in the most cost-efficient way and divide the burden in a way everyone can live with.

No one should harbour illusions about the difficulty of reaching such a bargain. But it is not impossible. To succeed, negotiators must focus on the following principles.

The deal should not favour some technologies over others. Minimising the cost of necessary emissions cuts and containing the disruption they will cause requires setting the right price for carbon emissions: it must be high, and the same everywhere. That will create market incentives for cutting emissions efficiently – but politicians must tell their electorates the truth: power, transportation, and carbon-intensive products must become markedly more expensive.

In theory, a global carbon tax could do this. In the actual world, a global scheme of tradeable emissions quotas is the best solution. To work, such a scheme, which must form the core of any Copenhagen deal, has to meet three conditions: it must lay down a time-path for emissions cuts over several decades (to let businesses and households predict the net costs of such long-term investments as houses and power plants); allow for adjustments if – but only if – the science changes; and impose binding limits on all countries.

Some developing nations have fiercely resisted this, on the basis that now-rich countries created the problem by pumping the atmosphere full of greenhouse gases and should take sole responsibility for cleaning up after themselves. The argument is not without merit, but its time has passed. The emerging world is now part of the problem: China has surpassed the US as the world’s largest CO2 emitter.

Granted, the developing world should not have to cut emissions: the heaviest lifting must be done by richer countries. But that is a case for more generous quotas, not an excuse from signing up to a global emissions target. Within the context of such a target, Copenhagen should aim for a schedule of tradeable emissions quotas that start out higher for poor countries and gradually converge to the only fair solution in the long term: equal per capita emissions ceilings.

Developing countries ought to accept this solution, which would give most if not all of them emissions caps far above current levels. Even China and India, who resist ceilings, have said they can commit to lower carbon intensity (emissions per unit of production) or to curbing emissions growth from “business as usual”.

Selling unused quotas would, moreover, be hugely lucrative for poorer countries. At today’s European carbon price, yearly carbon emissions have a market value of more than €500bn, a figure which could increase significantly as the global ceiling took effect. The potential transfers from rich countries resulting from quota trading could easily swamp the €100bn per year the European Commission has estimated poor countries will need to tackle climate change.

Businesses buying emissions permits in a global market would be politically more palatable than official development aid. And technology transfers would be boosted by companies profiting from bringing carbon mitigation technology in fast-growing emerging countries.

Most countries seem to grasp the gravity of the challenge. If they can also see what is in it for them, a deal may yet be within reach.