24 May 2008

Malthus and Carbon Trading

My Economist "feed" has been interrupted by moving about. These articles from last week are worth a read. The first argues that Malthus was (and still is) wrong to worry that humans will "run out of resources," i.e.,
There may no longer be virgin lands to be settled and cultivated, as in the 19th century, but there is no reason to believe that agricultural productivity has hit a buffer. Indeed, one of the main barriers to another “green revolution” is unwarranted popular worries about genetically modified foods, which is holding back farm output not just in Europe, but in the developing countries that could use them to boost their exports.

As so often, governments are making matters worse. Food-export bans are proliferating. Although these may produce temporary relief for any one country, the more they spread the tighter global markets become. Another wrongheaded policy has been America's subsidy to domestic ethanol production in a bid to reduce dependence on imported oil. This misconceived attempt to grow more fuel rather than to curb demand is expected to gobble up a third of this year's maize (corn) crop.
They conclude with "There may be curbs on traditional forms of growth, but there is no limit to human ingenuity. That is why Malthus remains as wrong today as he was two centuries ago." I disagree with this conclusion not because I do not think humans are ingenious, but because I fear that we are hitting too many resource limits too fast. The difference, then, between us is that the Economist thinks that we will continue to consume more (GDP/cap rising), while I think we will have to get used to consuming less (GDP/cap falling). Besides all the problems with measuring GDP, happiness, etc., this difference will not be so important if people change the way they think about progress, GDP, the good life, etc.

In the second, the Economist discusses the troublesome details of trading carbon permits, i.e., the clean development mechanism (CDM) created out of the Kyoto treaty is leading to a lot of "credit gaming" by businesses in poor and rich countries that is making a lot of money but NOT reducing carbon outputs at all/in the cheapest way:
Michael Wara of Stanford University calculates that the credits from cleaning up refrigerant production are twice as valuable as the refrigerants themselves. This would have given firms an incentive to produce more trifluoromethane, simply for the sake of cleaning it up, had the UN not amended its rules to exclude new factories from participating in the CDM. Nonetheless, Mr Wara maintains, the riches on offer from the CDM are discouraging governments in the developing world from taking easy steps to reduce their countries' greenhouse-gas emissions.

[snip]

Some [bankers and brokers] say the UN should offer less onerous monitoring for projects that would be willing to accept fewer credits than originally requested. Others want the UN to abandon the concept of additionality, the stumbling block for about half the rejected applications. It is impossible to say with any certainty what would have happened in the absence of the CDM, they argue, so all decisions based on that premise are inevitably subjective. They would prefer that the UN simply set technical standards for qualification, allowing all cement plants of a certain efficiency to qualify, say, or all renewable-energy projects.
The carbon bureaucracy is learning by doing and will make mistakes. I think that these mistakes (and the gaming) are inevitable but necessary. Although a global market in carbon and climate credits is what we are after, issues of rights, measurement, transactions, etc. require some form of oversight for the market to function.

Bottom Line: With so much at stake and so little precedent, it's hard to get robust "spontaneous" solutions to the massive problems related to global resources (air, water, climate). That means that some "managed" coordination mechanism are necessary to get started. Although I am a market fundamentalist at heart, these early stumbles are not nearly as worrying as other disastrous government interventions (ethanol in the US, farm policy in most countries, carbon pricing) that we have seen recently. Governments are not bad all the time.

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