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Rx for a Planetary Fever

by Ross GelbspanThe American Prospect
May 8th, 2000

As the earth's temperature rises faster than at anytime in the last 10,000 years, the efforts of the world's policy makers to deal with global warming are withering into paralysis.

With our oil and coal burning, and the resulting carbon emissions into the atmosphere, we have heated the deep oceans. We have altered the timing of the seasons. We have burdened our atmosphere with carbon concentrations that have not been seen in the last 40,000 years and loosed a wave of violent and chaotic weather. Yet after five years of negotiations among the 160 nations that agreed in principle in Kyoto to reduce worldwide carbon emissions, we seem to be further than ever from implementing any specific climate-control strategy - or even getting the Kyoto agreement formally ratified as a treaty.


Diplomats expect an "emissions trading" market to solve global warming. It won't work. Here's what will.


The diplomatic fatigue that is overwhelming the Kyoto talks arises primarily from two sources. First, big oil and big coal have relentlessly obstructed the best-faith efforts of government negotiators. And second, the Kyoto negotiators have focused on a single, deeply flawed mechanism for achieving emission reductions. They have been trying to work out a system of global "emissions trading," and because such a system is excruciatingly complicated and fundamentally inequitable, the talks are collapsing.

This need not happen.

In 1998, a small group of economists, energy company presidents, and policy specialists (including the author of this article) met at the Center for Health and the Global Environment at Harvard Medical School and forged a different set of strategies for achieving a worldwide energy transition from oil and coal to renewable energy sources that produce no climate-changing carbon emissions. These strategies would be much simpler to negotiate and far more effective in averting environmental catastrophe than the present Kyoto approach. Moreover, far from inducing the global poverty that the fossil fuel lobby insists will come of any ambitious climate control effort, these strategies for a worldwide energy transition would, in fact, sow the seeds of an unprecedented worldwide economic boom.

At Kyoto, under intense pressure from the fossil fuel lobby, delegates adopted an extremely modest set of goals. The Kyoto treaty, if it is ever ratified, will commit the world's industrial nations to reduce their carbon emissions by a mere 5.5 percent below 1990 levels by the year 2012. (In a later phase, the developing nations will incur their own emission-reduction obligations.) That goal is at least an order of magnitude below what nature requires. The science is unambiguous: Stabilization of the earth's climate requires emissions reductions of about 70 percent.

Nevertheless, the Kyoto Protocol provides the necessary diplomatic framework for the nations of the world to begin to address the climate crisis. What is setting rich countries against poor and preventing agreement on even these puny first goals is the negotiators' reliance on emissions trading as the mechanism for achieving reductions. This is a scheme promoted by market-mesmerized economists under which each country would be allowed specific levels of carbon emissions and could sell its unused allotment to other countries, which could then emit that much more than their own allotment.

The idea is to allow the market to find the cheapest way to reach the desired emissions levels, and, to be sure, such "cap and trade" programs can be very effective within national borders. One promising scheme for the United States, called "Skytrust," was proposed in these pages by Peter Barnes, a founder of Working Assets Long Distance service ("The Pollution Dividend," TAP, May-June 1999).

On the international level, however, carbon emissions trading simply is not viable. Relatively successful domestic cap-and-trade programs, like the U.S. trading program set up to reduce acid rain-causing sulfur dioxide emissions, work because they are easy to monitor and enforce. Most of the sulfur dioxide emissions came from 2,000 smokestacks in the Midwest -- a manageable number to monitor. The program, moreover, was subject to an established system of national regulation. By contrast, carbon is emitted from millions of sources all over the world-far too many to monitor. And there is no binding international regulatory system to enforce emission limits.

The international cap-and-trade mechanism embedded in the Kyoto Protocol is also fraught with unresolvable equity problems. First, there is a profound dispute between industrial and developing countries over how to allocate emission rights. The industrial nations want each country to be allocated a percentage of its 1990 emission levels to ensure continuity of their economies. Developing countries contend that only a per capita allocation is fair and democratic. But if the emission quota for each U.S. citizen were no higher than for each citizen of India, that would decimate the U.S. economy.

A second equity issue, advanced by Anil Agarwal, head of the Centre for Science and Environment in New Delhi, focuses on provisions presently in the Kyoto Protocol which would allow industrial nations to buy limitless amounts of cheap emission reductions in poor countries and to bank them indefinitely into the future. This means that when developing nations eventually become obligated to cut their own emissions, they will be left with only the most expensive options. This clearly constitutes a form of environmental colonialism.

It should hardly be surprising, then, that the Kyoto delegates trying to create a global emissions trading system are increasingly bogged down in arguments about everything from equity principles to accounting minutiae to how to deal with trees (which are absorbers of carbon from the atmosphere). At the end of 1999, negotiators were still searching for a "framework on the scope of the workshop to analyze the forthcoming [scientific] report on land use and forestry."

A number of governments-disappointed by the failure of the talks and disgusted by the obstructionist role the United States has been playing-are now moving ahead unilaterally. France is proposing to establish a carbon tax within its own borders. The Dutch are in the midst of a two-year planning process to reduce their carbon emissions by 80 percent in the next 50 years. But a patchwork of local initiatives is hardly the best option. Especially when there is an alternative - and that alternative is far simpler, far less divisive, and far more likely to achieve the 70 percent carbon reductions required to allow the global climate to restabilize.

The plan developed by the group meeting at the Center for Health and the Global Environment would give industrial countries the framework -- and developing countries the means -- to make the transition to climate-friendly energy sources. It involves four interacting strategies:

  • In industrial countries, the switch of national subsidies away from fossil fuels and to renewable energy technologies (as well as to job retraining for displaced coal miners).

  • Also in industrial countries, a two-part regulatory reform: the elimination of current regulatory barriers against new energy sources in tandem with a progressively more stringent Fossil Fuel Efficiency Standard. This would create open energy markets, in which climate-friendly energy sources could compete on the basis of cost and efficiency.

  • Internationally, the incorporation into the Kyoto Protocol of a global Fossil Fuel Efficiency Standard and a Renewable Energy Content Standard.

  • For developing nations, the creation of an Energy Modernization Fund of $200 to $300 billion a year for the acquisition of climate-friendly technologies. The fund would be best financed by a small tax on international currency transactions, which would also help damp a destructive volatility in the global financial structure.

The result would be a worldwide energy transition that not only would allow the global climate to restabilize, but would substantially expand the stability, equity, and wealth of the global economy. The Energy Modernization Fund would do for developing economies what the Marshall Plan did to revitalize the economies of Europe. The creation of climate-friendly energy sources in developing countries would allow them to grow unhampered by emissions limits - and unencumbered by the budgetary burden of imported oil. Moreover, with its large-scale creation of jobs, the worldwide energy transition would raise living standards in the developing nations without compromising economic achievements in the industrialized nations.

Each strand of this plan is critical to its success.

Today the U.S. government spends about $20 billion a year subsidizing the fossil fuels industry. Direct government support for oil and coal includes, for example, accelerated depreciation of machinery and equipment, tax deductions for oil investments that exceed their actual costs, public investment in clean coal technologies for the benefit of private coal companies, and government funding to insure oil companies against liability from abandoned oil wells. Globally, the annual subsidy for carbon fuels has been estimated at $300 billion. Removing those subsidies would raise the price of gasoline to discourage excessive consumption. Far more important, the establishment of equivalent subsidies for renewable technologies would provide significant incentives for the major energy companies to aggressively develop fuel cells, solar and photovoltaic energy, and wind power. This would reinforce the interest in renewables that companies like British Petroleum, Shell, Daimler-Chrysler, and Ford are already showing.

As renewable energies become economically competitive, these subsidies should be phased out.


A transition to climate-friendly energy sources would substantially increase global wealth.


The one subsidy that should be retained is fuel aid to low-income recipients (which amounts to about $275 million a year in the United States). Additionally, a portion of the subsidy money should be used to retrain the nation's 70,000 coal miners. The production of renewable energy is far more labor intensive than the extractive industries; a transition from extractive to renewable energies would create a surge in jobs all over the world. Nonetheless, there would be a loss of jobs in the coal industry, and those workers and their communities must be helped to new employment.

A global energy transition also requires a two-part regulatory modernization - eliminating old regulatory barriers that discourage energy competition and adopting new standards that require energy sources to be more climate-friendly. Today a host of regulations, especially in the industrialized countries, protect inefficient monopoly utilities, wasteful energy uses, and cheap, coal-burning technologies. For example, in the electricity-generating sector in the United States, there are "grandfathering" provisions that permit old, dirty coal-powered plants to keep operating, regulations that allow utilities to prevent grid access by competitors, and siting laws that prohibit small, decentralized, or free-standing new generating systems. Such impediments must be eliminated to create a level playing field for climate-friendly energy technologies.

While the removal of those barriers would unleash a surge of competition, there is nothing intrinsic in price competition that ensures environmental protection and climate stabilization. So a second element of regulatory modernization is needed: the establishment of progressively more stringent fossil fuel efficiency requirements.

The concept of fossil fuel efficiency is easy to grasp. Coal-burning generating plants operate at about 35 percent efficiency. This means that for every unit of energy produced, roughly two units of fuel are wasted. By contrast, gas-fired cogeneration plants (which use both gas and their own waste heat to generate electricity, as well as heating and air conditioning) achieve 70 to 90 percent efficiency rates. Gas contains about half the carbon of coal, and gas-fired cogeneration achieves about double the efficiency of conventional generating plants. Since most electricity in the United States is coal-generated, we could cut carbon emissions in the electricity sector by nearly 75 percent simply by switching technologies. Similar gains are obtainable in transportation (by increasing mileage standards) and in industrial and thermal fuel use.

In the industrial world, the institution of progressively stricter fossil fuel efficiency standards - when combined with subsidy reform and the elimination of competitive barriers -- would jump-start a near-total transition in energy sources. International adoption of these standards would do even more. If every nation began at its current baseline to increase its efficiency by specified amounts at designated intervals, that would simply sidestep the equity controversies of international emissions trading.

The idea of calculating a nation's fossil fuel efficiency rate - or the rate for each energy sector within a country - and steadily increasing these rates over time was conceived by Thomas Casten, longtime CEO of Trigen Corporation and a member of the group that formulated this energy modernization plan. The strategy has the advantage over any international emissions trading scheme of being inherently equitable and easily monitorable. Indeed, rather than monitoring emissions from millions of separate exhaust pipes, fossil fuel efficiency monitoring would simply mean calculating changes in the ratio of a nation's (or a sector's) annual energy use to its production.

While emissions trading is, at bottom, no more than a grab-bag of loopholes to be exploited by carbon interests and recalcitrant governments, the incorporation of a Fossil Fuel Energy Standard into the Kyoto Protocol would create an immediate worldwide market for renewable energy technologies - wind farms, photovoltaic generators, small-scale hydropower, and fuel cells - since all are fossil fuel efficient, using no or minimal carbon fuel and producing no or minimal carbon emissions. The surge in demand would also, in short order, bring down their costs. (While the efficiency standard alone would make a mass market for renewable technologies, the Renewable Content Standard is necessary to ensure that nuclear energy is not substituted for fossil fuels. Nuclear energy is carbon-free, but given its life cycle and unsolved waste-disposal problems and environmental hazards, this is not a sustainable energy technology.)

Virtually all developing nations would be happy to switch to a solar, wind, and hydrogen economy. Virtually none can afford it. Without significant financing for the technology transfer, education, and capacity building, this energy switch will not happen, and any reductions in carbon emissions by the industrial nations will be overwhelmed by the coming pulse of carbon from India, China, and other coal-rich developing countries. Thus, the creation of an Energy Modernization Fund is essential to the plan.

This is not a soft-hearted, liberal giveaway program. The global climate envelops us all. Ensuring that developing countries make a full energy transition represents a critical investment in our own national security and our own economic future.

There are a number of possible funding sources with substantial revenue-raising potential: among others, taxes on carbon-based fuels, taxes on airline tickets, and diversions of those portions of defense budgets currently dedicated to protecting oil security.

The most attractive, however, seems to be a tax on international currency transactions. That tax was first conceived by economist James Tobin, a Nobel Laureate, as a way to stabilize capital flows. In addition to this benefit, it appears to have the broadest-based, least discriminatory, and least regressive impact of the possible sources for funding the Energy Modernization Fund. One finance executive, noting that the costs of such a tax would be spread throughout the whole international capital structure, described it as "virtually invisible."

Since the late 1970s, when Tobin first introduced the concept of taxing currency transactions, the volume of currency trading has skyrocketed. Today these transactions total about $1.5 trillion per day. A quarter-of-a-penny tax per U.S. dollar on such transactions - or more specifically, a 0.25 percent tax only on the "close of day" positions in the international currency markets -- would yield $200 to $300 billion a year to developing nations for purchasing, producing, and deploying climate-friendly energy sources. This is a tremendous sum. By comparison, this year's proposed U.S. foreign aid budget is about $19 billion. But the Tellus Institute estimates the costs of a global energy transition to be of the same order of magnitude - hundreds of billions a year. Many economists, moreover, see a 0.25 percent tax as the optimal size to exert a stabilizing effect on capital flows. Finally, an investment on the order of $300 billion a year is appropriate to the scope of the climate crisis and the scale of its consequences. Such an investment will prove relatively negligible compared to the economic, social, and public health costs of inaction in the face of an increasingly turbulent climate and the alteration of massive systems that have kept this planet hospitable for thousands of years.

Currency transaction taxes are in the wind today. Last March, the Canadian House of Commons in Ottawa voted to enact "a tax on financial transactions in concert with the international community." Currently, variations of a tax on currency transactions are under discussion in France, Britain, and the European Union.

Former World Bank executive director Morris Miller argues that a currency transactions tax would increase long-term, productive investment while damping speculation, which aggravates financial instabilities and adds nothing of value to the world's economies. Moreover, the use of the proceeds specifically for energy projects in developing countries would be particularly effective in accelerating the pace and scale of development, according to Miller.

Most commentators agree that the problems involved in collecting such a tax are political, not technical. Several institutions currently perform tasks which, if linked, would constitute a de facto collection mechanism. The Clearinghouse Inter-bank Payment system (CHIPS) electronically tracks the transactions of a number of major banks. The Bank for International Settlements (BIS) acts as a central settlement point for many international currency transactions. A system that combined these two functions could track the collection of currency transaction taxes. In exchange for a small percentage, private banks could collect and disburse the proceeds. Whatever the administrative mechanism, the funds would be allocated to developing nations according to criteria determined by the United Nations. Since it is probably desirable to limit the size of any new bureaucracy, the function of the governing international agency (one candidate is the Global Environment Facility) should be confined primarily to monitoring and auditing.

The international governing agency would have to certify that all energy technologies transferred under the Fund result in increased fossil fuel efficiency rates in recipient nations. It also would have to monitor Fund transactions to prevent corruption and secure fair access to all technology providers. And it should ensure that the Fund is administered transparently by entities that are financially accountable and experienced in carbon abatement.

Finally, the fund must be structured - at least for developing, if not for transitional, economies-to provide grants rather than loans. Loans would push developing economies further into debt and exacerbate divisions in countries already overburdened by poverty and social instability.

Is such a plan politically feasible? One argument against relying on a Tobin Tax is that there are increasing numbers of claims on its revenue. Various groups are calling for the use of Tobin Tax revenues to fund the United Nations, finance AIDS treatment in Africa, and fund poverty alleviation in developing countries.

But given the growing instability of the global climate, the warming-driven deterioration of a number of planetary systems, and the centrality of energy to poverty abatement, a strong case can be made for using at least the initial revenues of a Tobin Tax to fund the global energy transition. Once that transition has taken root, Tobin Tax revenues could be gradually redirected toward other environmental, public health, and development goals.

As climatic instability escalates, so does the potential for a rapid change in political attitudes. Already, last February, the world's political leaders, opinion leaders, and the CEOs of the 1,000 largest corporations surprised organizers of the annual meeting of the World Economic Forum in Davos, Switzerland, by declaring climate change to be the paramount challenge facing humanity. Meanwhile, the recent splits within the fossil fuel industry -- with companies like British Petroleum, Shell, Daimler-Chrysler, and Ford breaking ranks with more recalcitrant companies -- indicate a significant weakening of opposition to the need for a new energy diet.

With a continuing succession of traumatic and costly severe whether events, a proposal that may sound somewhat visionary today could very quickly come to seem practical -- especially if the residual political energy generated in Seattle last December were to be mobilized around the issue of global warming. And that is not unlikely. The solution to the climate crisis requires the regulation of multi-national oil companies by the world's governments. It entails the creation of massive numbers of jobs in the renewable energy industry. And it requires addressing fundamental global economic inequities. That combination should surely appeal to the labor, environmental, and human rights constituencies that made themselves heard in Seattle.

Finally, there is a very strong economic motivation to adopt policies like those discussed here, since the costs of business as usual are economically and environmentally disastrous, and since a transition to climate-friendly energy sources would generate a substantial increase in the total wealth of the global economy. To the extent that those costs and benefits become apparent to policymakers, business leaders, and the larger public, some variant of a plan of the same scope and scale as this plan could very quickly become not only desirable, but inevitable.