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RESTRICTING CARBON EMISSIONS COSTS TO THE NORTH

Pointing to less resource intensive patterns of future Northern growth is no solution to global warming. The IPCC's 'accelerated policies scenario' requires that carbon emissions be halved from the present level by 2050 through 'aggressive abatement' (Cline 1992:289). What that means for the proportionate cut in emissions in 2050, as compared to what would otherwise happen ('business-as-usual'), depends on world growth between now and then. Even with the slowdown of Northern growth discussed earlier, cuts of emissions of the order of 70-80 per cent could be required in 2050. But most existing models, as reviewed by Cline (1992), Boero et al (1991), Weyant (1993) and OECD suggest that even such major reductions in carbon emissions trends have rather small costs in terms of reduced GDP. According to the OECD's survey, reductions in carbon emissions of 70 per cent in the North in 2050 relative to trend would reduce the level of GDP in 2050 of 1.5-5 per cent as compared to trend (foregoing a couple of years growth out of 60, say - Hoeller et al (1992) Table 7B). Without a major macroeconomic impact the problem of restricting emissions is the complex microeconomic and political one of designing and negotiating the appropriate policies.

Table 3.4 Backstop technologies in global warming models

As the surveys make very clear there are a number of vital assumptions involved in such projections including underlying growth rates, energy prices, energy efficiency and the development of 'backstop technologies' providing carbon-free fuel, the substitutability of energy in production and of energy-intensive products in consumption. These generate the business-as-usual paths for carbon emissions (typically rising by 1-2 per cent per year over the next century). Carbon taxes (and other policy instruments) are then calculated which, by bringing into use less (or non) carbon intensive energy or by leading to substitution away from energy use, lead to given reductions in emissions. The impact on real GDP of the use of more expensive energy sources is then calculated.

Two aspects about these models seem to be of central importance in assessing their results. First it is worth considering the assumptions about backstop technologies which provide fuel with infinitely elastic supply at the assumed prices. The assumptions used by OECD are reproduced above in Table 3.4. The prices assumed for carbon-free fuel, first for generating electricity and then for replacing petrol, represent increases in costs which are by no means incomparable to the oil price hikes in 1974 and 1980 (and of course the price increases implied would be more gradual).

These backstop technologies are playing a similar role to that of imported corn in Ricardo's model which eliminated the effects of diminishing returns in agriculture. Backstop technologies eliminate the effect of increasing costs in carbon energy (the increasing costs being partly due to diminishing returns in obtaining the energy but mainly due to environmental costs as reflected in carbon taxes). It is not surprising that if you assume that replacement fuels for those dependent on carbon are eventually available at moderate additional cost then the effects on GDP of substantial reductions in carbon emissions are relatively modest Particularly significant is the fact that it makes the costs of emissions abatement essentially linear. If it costs 1 per cent of GDP to reduce carbon emissions by 30 per cent it will cost around 3 per cent to reduce them by 90 per cent. 2 Those models reported by OECD which do not assume such backstop technologies do show strongly increasing costs. The ERM model shows the costs in the US of 30 per cent emission cuts (relative to baseline) are about 1 per cent of GDP while the costs of 90 per cent cuts are about 9 per cent of GDP. Whalley and Wigle (1992, Table 13) find that 40 per cent cuts in emissions on average up to 2100 compared to baseline reduce overall GDP by 3.2 per cent and 80 per cent cuts reduce GDP by 15.7 per cent. These results underline the importance of the assumptions about backstops in the estimation of the cost of emission reductions. Given the real uncertainties involved in the likely costs of carbon free fuels it should be recognized that drastic reductions in carbon use could have much larger impacts on GDP than those typically estimated.

The other fundamental assumption involved in most of these projections is that the world distribution of income will remain basically unaltered. In the OECD's own GREEN model for example, the analysis is conducted on the assumption that per capita income grows at the same rate in the North and South (just under 2 per cent per year up to 2050 - see Martin et al, 1992 Table 3). There is room for some redistribution within the North Japan's per capita income growing about 1 per cent per year faster than in the US and EC); and the same is true within the South (China, India, the 'Dynamic Asian Economies' and Brazil showing per capita growth of around 3 per cent per year whereas the rest of the South barely achieves 1 per cent per year). Thus even the more successful Southern countries are assumed to manage only a tiny amount of 'catchup', while the rest (Africa, much of Latin America, the Middle East and so forth) fall further behind. The South's share of total output grows, but only because of faster population growth (1.3 per cent per year as against 0.1 per cent per year in the North).

These assumptions are the more surprising given the fact that developing countries have showed faster per capita growth since 1970 (2.9 per cent per year as compared to 2.4 per cent per year in the high income countries), and are expected by the World Bank to increase this differential to 1.5 per cent per year in the 1990s (World Bank 1992). This would be far from constituting a generalization to the South of Northern consumption but it would represent definite catch-up. According to the UN's data (UN 1993, based on exchange rates) the per capita income gap between North and South would be reduced from 21:1 to 9:1 by 2050 if per capita growth was 1.5 per cent faster in the South than in the North (with growth of 1.2 per cent per year as projected above). If per capita growth was 4 per cent per year the ratio would be 4.1:1 in 2050; it would take per capita growth 5 per cent per year faster in the South than in the North to bring similar income levels by 2050. So rates of growth in the South that would represent very considerable degrees of catch-up are not large compared to those achieved for example in Korea and China over recent (much shorter) periods. There is really no basis whatsoever on which to make projections of the likely degree of catch-up over very long periods. However convergence of income levels is the almost universal aspiration. It is surely desirable, therefore, to evaluate its environmental consequences.

If entitlements to emissions were to be determined entirely on the egalitarian principle of a per capita allocation (see the chapter by Bhaskar), then the fact that the North had a higher or lower share in world GDP would be irrelevant to its emissions limit. If total emissions in 2050 were at the same level as in 1988, their equal distribution per capita would imply cuts of by 89 per cent in the US, 75 per cent in Europe and Japan while they could be unchanged in China and increased to three times the existing level in India (calculated from Grubler and Nakicenovic 1992). The lower baseline growth in the North the smaller would be the cuts in emissions required to reach the given emission target. Thus the costs of curbing emissions would be smaller; the impact on growth would be correspondingly less. Slow underlying growth in the North would unambiguously reduce the costs to the North of meeting any given emissions limits; only Northern emissions and thus the level of Northern GDP (not its share of world GDP) would be relevant to the size of the reduction required.

But an egalitarian allocation of emissions per capita may well not be realized. Among many other competing criteria (see UNCTAD, 1992), one alternative, much more favourable to the North, would be to allocate emissions in proportion to the share of world GDP. Production would confer 'squatter's rights' to emit. If this was the case, a lower share of world GDP would reduce the North's entitlement to emit. A lower level of Northern GDP (than conventionally projected), if it was just counterbalanced by higher GDP in the South, would imply an equal proportionate cut in the North's share of world GDP. Allowable emissions would thus fall just in line with the North's GDP, suggesting little or no change in the percentage cost to GDP in the North of reducing its emissions as compared to the conventional estimates. If Southern catch-up more than made up for Northern slowdown then the North's share of world GDP, and thus its right to emit, would be further reduced. The cost to the North of meeting given emissions limits would be greater.

Cline (1992) suggests that a weighted average of a country's shares in world population and world GDP might be used to allocate emissions (with the weights reflecting the degree of egalitarianism). The greater the weight of population in the formula the lower the North's right to emit in 2050. It might be that the faster the South catches up, and thus the greater its weight in the world economy, the stronger its position at the bargaining table and thus the greater the weight of population in the formula. This would imply lower Northern emissions and thus greater costs.

Thus serious catch-up in the South would impose greater costs in the North if given global emissions targets were to be met and this would be true even if slower than normally contemplated growth of Northern GDP reduced its baseline emissions. The greater impact on the North would still hold even if the total costs are minimized by some system of trading these entitlements (see UNCTAD, 1992).

If the costs of cutting emissions in terms of reduction of GDP were both moderate initially and linear up to very large reductions then it would not matter very much what proportion of the reductions took place in (or entitlements were allocated to) the North as against the South. Indeed the overall size of emission reductions remains a relatively minor issue. Arguments about the odd per cent or two of GDP are far from trivial (compare current aid flows for example), but the whole structure of economies is not at stake. If however costs were to increase rapidly with very large reductions in emissions then the overall extent of emission reduction together with its distribution, become crucial. Acceptance by the North of anything approaching an egalitarian distribution of much reduced carbon emissions on a world scale would then have important effects on the structure of its economy. Unless rapid catch-up in the South is to be precluded from the discussion (illustrating the old claim that the standard of living in the North is directly dependent on poverty in the South) then it is necessary to explore the implications of much more similar levels of per capita resource use in North and South.

It appears that only one model has attempted to estimate the effect of an egalitarian distribution of emissions. Whalley and Wigle (1991), whose model has strong non-linearities due to their assumption of little role for substitution by non-carbon fuels, simulate the effect of a 50 per cent reduction in overall emissions as compared to baseline in 2030 with the emissions equalized on a per capita basis. Not surprisingly they find (1991, Table 7.9) large losses in GDP in the advanced countries (18.4 per cent for North America, 6.4 per cent for the EC and 2.5 per cent for Japan) but very small ones in developing countries (1.2 per cent). The distribution of the costs is quite different if emissions are cut proportionately within each country. Then North America loses 1.2 per cent of GDP and the developing countries 4.5 per cent.

It may be concluded that the widely accepted estimates of moderate costs to the North of very deep cuts in carbon emissions could prove to be grave underestimates if the following combination of circumstances arose:

• rapid growth in the South required greater cuts in Northern emissions than typically assumed;
• backstop technologies to provide non-carbon based fuel proved more expensive than typically assumed.

Similar considerations apply to other potential resource limitations on growth. How far costs rise (diminishing returns, substitutes in production and consumption etc), how far demand rises (where a major uncertainty surrounds Southern growth), and how available supplies are allocated between North and South determine the potential impact on growth of energy and materials problems in general.

Some data for energy and metals presented by Slade (1991) helps to underline these points. Table 3.5 shows that the low-income countries with over half the world's population at present absorb around 1/3 as much energy and metals per capita as the middle income countries with around 5 times their per capita incomes. These in turn consume around 1/5 of the resources per capita of the high income countries with per capita incomes over ten times as great.

Suppose:

1. over next 60 years resource use per capita in the high income countries stayed unchanged but is generalized throughout the rest of the world;

Table 3.5 GNP, population, per capita resources 1989

Note: Middle Income Group excludes Eastern Europe (calculated using Slade 1991 Table v)

2. population doubles outside the high income countries but is unchanged in them (close to the OECD's assumptions).

If the discrepancies in resource use were eliminated in this way, and the whole population of the world was consuming resources at the current rate in the North, then energy use would reach six times its present level, steel use five times its present level and non-ferrous metals nine times its present level. It is hard to envisage that increases in resource use of such orders of magnitude would not lead to much sharper increase in costs, and thus constraints on growth, than are conventionally predicted (as in Nordhaus' 1992 estimate that increasing fuel costs will reduce growth by some 0.15 per cent per year). Alternatively, an equal per capita distribution of resources, but with only the same total use as at present, would require per capita consumption of resources in the North to be at quite a small fraction of present levels. Of course technical progress could allow such changes to be absorbed relatively inexpensively (as in the case of cheap carbon-free backstops) but it is surely important to contemplate the implications of more costly outcomes.

CONCLUSIONS

Nordhaus (1992:39) reviews the limits to growth debate and concludes that the 'estimated drag from resources' over the next 60 years which would reduce Northern growth by about 0.3 per cent per year on average, an effect only a little stronger than that applying over the past twenty years, constituting 'a small but noticeable impediment to economic growth over the next few decades in advanced industrial countries - although an obstacle that will continue to be surmounted by technological advance'.

This paper has concentrated on the 'downside risk' in such projections. The impact of continuing structural change combined with demographic developments could lead to growth in the North that was very slow, possibly zero by the middle of the next century, even without any tightening of environmental constraints. Such slow growth would reduce
demands on the environment. But such a favourable side benefit of slower growth in the North could be outweighed if major inroads were made into existing disparities in the world distribution of income by rapid growth in the South, the possibility of which is never even discussed in mainstream treatments (see Nordhaus 1992 for example). Unless alternative technologies are developed at relatively little cost, there is the possibility, therefore, of serious environmental pressures on living standards.

Implicit in a projection of very low growth of GDP is that the accumulation of capital in the North will drastically slow down. If there is little possibility for increasing productivity in much of the services sector, then their expansion is predominantly an extensive form of growth. It depends upon growing employment, but this is constrained by a declining labour force and diminishing possibilities for obtaining labour from industry and agriculture. Intensive growth within industry (and some dynamic service sectors - see Rowthorn, 1992), which involves rapid accumulation of capital per worker, becomes of decreasing significance as the share of employment in these activities declines. Attempting to maintain rate of accumulation would lead to a position similar to that envisaged by Marx in his Law of the Tendency of the Rate of Profit to Fall. Capital accumulated in excess of the productive possibilities leads to declining output- capital ratios, profitability and growth rates of capital and output.

The responses to this slowdown might include:

• A general push for universalizing market solutions. Activities carried out by the state offer opportunities for profitable transfer to the private sector. There would be a continued drive to capture the expanding sector of social and community services, both in terms of production (private hospitals, schools, prisons) and financing (private health insurance, school fees financing and so on). e Declines in the total amount of labour time available to the market sector could be stemmed by attempts to further increase labour force participation (better child care facilities, increasing the retirement age, halting the reduction of the working week). a Immigration provides an alternative and longer-lasting solution to a declining domestic labour force; it would represent the generalization to a minute proportion of the South of Northern levels of consumption, but in a fashion which allowed the sustaining in the North of higher growth rates (as in Europe in the 1960s).
• Very slow overall growth would tend to imply intensifying competition within Northern markets, but substantial growth in Southern markets would render them increasingly important in the world economy and thus for the investment plans of multinationals.
• For many of the better off in the North the only way to maintain growth of their incomes within a stagnant economy would be through deliberately increasing inequality (cuts in state provision, reduction of minimum wages) which offloads a disproportionate share of the costs of slow growth on to poorer sections of society.

With the exceptions of immigration, these possibilities are just extrapolations from the experience of the North during the slower growth of the 1980s (see Glyn, 1994). They hardly provide an auspicious backdrop for implementing policies which further constrain conventionally measured living standards in the name of environmental protection. But if living standards In the North are stagnating anyway then a quite different attitude to consumption, and in particular to matters of distribution, would be the only way to circumvent the social conflicts which seem inevitably to result at present from economic slowdown. Such new attitudes would then have the additional, very important benefit of facilitating acceptance of the measures necessary to combat environmental degradation. The next chapter discusses whether the basis currently exists in the North for such a change in attitudes.

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