Why Global Warming Is an Opportunity for Bush

Climate change is unlikely to be high among President Bush's priorities for his second term. It should be. Judged on its merits, the issue calls for a much more purposeful approach than the one taken so far: Bolder action on global warming offers the United States a chance to advance its long-term economic interests. But it also offers the White House an opportunity of the kind it is normally alive to—an opportunity to gain political advantage, confound its critics, and acquire diplomatic capital that it can spend later, if need be, on other endeavors.

Bush has said that global warming poses a real, though uncertain, risk, and that steps to mitigate it are needed. He has also said that the Kyoto Protocol is a bad idea. He is right on both points. Still missing, however, is the American alternative he promised. So far as emissions of carbon dioxide and other greenhouse gases are concerned, the administration's proposals add up to business as usual.

Critics are right to accuse the administration of bad faith. America signed and ratified the United Nations Framework Convention on Climate Change, which came into force in 1994, and which advocated meaningful action to cut emissions of greenhouse gases. Kyoto was undoubtedly the wrong way to give substance to that commitment. But, having rejected Kyoto, the administration promised America and the world something else—which has yet to appear. Without American leadership, in fact, it is unlikely to.

The science of climate change is extraordinarily complex, and vast uncertainty surrounds long-range projections for carbon emissions and for their likely impact on climate. Think about the reliability of economic forecasts looking two years ahead, or five years. How many reputable economic forecasters (if there is such a thing) would willingly make forecasts that look, say, 20 years ahead? Well, the much-quoted "scenarios" for long-run changes in temperature prepared under the auspices of the International Panel on Climate Change, or IPCC, implicitly embody economic forecasts that look 100 years ahead. Despite the fact that some 2,000 experts around the world are involved in developing these scenarios, the truth is that nobody has a clue what the world economy will look like in 100 years.

If the forecasting problem were not difficult enough in its own right, the IPCC process has needlessly made things worse. Despite all that formidable forecasting power, the scenarios include too little economic expertise. The likely reason is that the enterprise is driven by environment ministries, environmental scientists, and energy analysts. Their special knowledge is necessary in this effort, of course, but it is not sufficient. (Economists may be bad at long-range economic forecasting, to be sure, but environmentalists have tended to be far, far worse.) Professional competence in economics is needed to think intelligently about long-term trends in economic growth. Finance and economics ministries—and, in the United States, the Council of Economic Advisers—should be much more closely involved in this work.

A meeting organized by the American Enterprise Institute in Washington this week heard how defensive and narrow-minded the IPCC has been when challenged on its economics. David Henderson, who was the chief economist of the Organization for Economic Cooperation and Development, and Ian Castles, formerly Australia's top official statistician, first wrote to the IPCC in 2002 pointing out a serious economic error in the preparation of some of its key scenarios—an error which, it so happened, led to increases in predicted temperatures. They also drew attention to the scenarios' generally poor standard of economic competence. Other economists and statisticians have since endorsed these criticisms.

Remarkably, the response of the IPCC's head was to issue a prickly press release complaining about the spread of "disinformation" and impugning the integrity of these two distinguished critics. Work on projecting trends in emissions is apparently moving ahead unchanged—and this exercise, remember, will provide the numbers that will underpin the case for spending potentially colossal sums on carbon abatement. One wonders whether the current leadership of the IPCC sees its role as mobilizing political support for the Kyoto Protocol, rather than disinterestedly providing the best possible science-based estimates of trends in emissions and impacts.

America's impatience with the IPCC process is understandable—but the fact remains that the IPCC's scenarios are widely reported and accepted by the press as unassailable scientific truth. That misconception needs to be corrected. More important, the IPCC's work needs to be properly exposed to a wider range of relevant expertise, and hence improved. If the White House decided to, it could start working to put this right. Its failure to do so arouses the suspicion that it does not care one way or the other, or that it prefers less discussion of the topic rather than a more intelligent discussion of the topic.

The failure to propose an effective alternative to the Kyoto Protocol points the same way. To repeat: The administration's complaints about Kyoto are justified. If you had set out to design a scheme that would achieve the smallest useful reduction in carbon emissions at the greatest cost, and with maximum opportunities for confusion, delay, and political grandstanding, you would have been hard-pressed to improve on Kyoto.

It will have little effect on emissions and a literally negligible effect on long-term stocks of carbon in the atmosphere. Bargaining to make the scheme at all workable has already introduced provisions that weaken it further. Had America complied with its obligations under the plan, the U.S. alone would have borne almost all the economic costs of this supposedly global agreement—a politically unsustainable course (as the Senate's overwhelming rejection of the plan had already proved). Future big emitters, such as China and India, are excluded from the agreement. Because Kyoto focused on fixed targets for emissions, it put no upper boundary on potential compliance costs; it involved large and contentious international transfers of wealth; and it provided no incentives for domestic enforcement of the targets, so cheating would be rife. Forget Kyoto.

But the danger of global warming, the risk of possibly catastrophic changes in climate, remains. Where is the administration's alternative to Kyoto? And what might it look like?

The Australian economist Warwick McKibbin, who also spoke at this week's meeting, has devised an alternative plan which, if Bush meant what he says about the dangers of climate change, he would want to adopt and to propose to the world at large. The plan was described in detail in Climate Change Policy After Kyoto, by McKibbin and his co-author, Peter Wilcoxen, published by the Brookings Institution in 2002.

The idea is to combine a fixed number of long-term tradable emissions permits—which could be auctioned, or given to owners of existing energy assets—with an unlimited supply of additional short-term (one-year, for example) permits, priced in such a way as to curb emissions. This approach combines the benefits of a straightforward permit scheme (notably, that it lets the government decide where the domestic fiscal burden of the restrictions should lie) and of a straightforward carbon tax (mainly, that it discourages emissions in an efficient way, while putting a cap on compliance costs).

The key decision in such a scheme is the price at which the short-term permits would be sold—this, in effect, would be the tax on marginal emissions of carbon. McKibbin suggests a price of $10 a ton (equivalent to a tax of $1.40 on a barrel of oil), to be collected from producers and importers of energy. This rate is quite low, and hence, one hopes, politically feasible. Given the uncertainties, starting with a low "tax" of this sort makes good sense. As the evidence on emissions and their climate impacts comes in, the price can be raised, if necessary. The important thing now is to set up a well-designed framework for carbon abatement. That is what Kyoto fails to do.

The beauty of the McKibbin approach is that, again unlike Kyoto, it is decentralized, and so does not require a complicated international agreement—a virtue that ought to commend it to the White House. At modest cost, the administration can do the right thing on climate change—and do it unilaterally. How would other countries then respond? They could choose to stick with Kyoto, troublesome and irrelevant as it will be to climate change, thanks to its design flaws. Or they could follow America's lead and move to a policy that would work and be seen to work. An internationally agreed price for short-term permits, which has some further economic advantages, might follow.

I'm betting that Bush won't do it. But if he meant what he has said on this subject, he would prove me wrong.