Many thanks to CF40, for this great opportunity to speak during this prestigious Bund Summit. I will address the challenge of climate change in the Covid-19 environment. I will do it based on the activities of the “Task Force on Carbon Pricing in Europe” that I have created 2 years ago, which has ramifications in China thanks to a joint initiative launched with Chinese high personalities.
I will proceed by first giving a numerical order of magnitude of the damage caused by climate change, then by explaining why the price of carbon is so crucial, and third by looking with you at how China and Europe could join their endeavours to fight global warming through carbon pricing.
It seems hardly necessary to call for more efficient climate emergency action, when we see what happens on all the continents: forests burning in Amazonia, in Australia 100 000 square kilometres disappearing in smoke, forests in the US West coast devastated, the poles, permafrost in Siberia, oceans, all definitely harmed, populations in Africa suffering already from global warming in their day-to-day activities…
Let me give you a simple back of the envelope calculus of the current annual cost of global warming. There is a technique which you all know, the CCS (Carbon Capture and Storage), which feasibility has been successfully tested in different countries: carbon is sucked out of the atmosphere, made solid and buried underground. Many firms have already developed this technique. Total, the French oil utility, has estimated its cost to be around 100 € per ton of carbon. In other projects, the cost is higher, sometimes lower. To make it simple, let us take 100 € per ton as a basis for our calculus.
According to the International Energy Agency, the total amount of carbon emitted in the world for the year 2019 was 43 billion tons. Let us take as an assumption that it has been decided globally to completely stop the increase of the volume of carbon in the atmosphere through this technique. Then in 2019, the cost of it would have been 4 thousand 3 hundred billion euros (4 300 billion €). Germany’s GDP for the same year is 3 thousand 4 hundred billion euros (3 400 billion €). Comparing these two figures gives the order of magnitude of the annual damage due to global warming. Should we want to stop the increase in temperature, we should have every year to mobilise resources globally of an amount which is higher than the GDP of one of the most powerful economies in the world. Put in economic terms, the cost to the world every year of the rise of temperature is higher than the wealth created by a country like Germany!
Year after year, all countries, all populations, all sectors of our economies are hit. In the US, whose current administration is still climate sceptic (at least up to November 3rd), it is interesting to observe that a government regulator, the Commodity Futures Trading Commission (CFTC), published a report warning about the risks induced by climate change on financial markets. Its authors write: “A world wracked by frequent and devastating shocks from climate change cannot sustain the fundamental conditions supporting our financial system”.
The current global economic context characterized by the Covid-19 crisis does not seem to create the best political environment to fight global warming. Priority is given everywhere to the revival of the economies. The question is to know whether it can be done without harming policies which intend to curb carbon emissions. In this respect, it is interesting to observe that the European Union, which has launched a huge programme to boost the European economic activity, intends to do it as well through the so-called “Green Deal” which is precisely an important programme to fund investment in clean energy as well as in carbon free projects. As for China, which emits 28% of the world’s carbon emissions, while being at the same time a leader in renewable energy, it is worth hearing Chairman XI Jinping declare, in this current crisis context, that “humankind can no longer afford to ignore the repeated warnings of nature”. He announced that Chinese emissions peak will be advanced to a date before 2030, and that China will target carbon neutrality by 2060. Given the critical role of China in the success for taming global warming, these announcements were welcome all around the world.
On the contrary to what many suspected, the momentum among populations everywhere for supporting initiatives in favour of climate is not showing any sign of abating. On the contrary the whole planet which has been addicted to fossil fuels for so many decades now realises its danger for life on earth… More and more people understand the gravity of the challenge ahead. They are now aware that they will have to change the way they are living, the way they are consuming energy, the way they are commuting, the way food, cars, trucks are being produced, the way houses are being built…
In an event on carbon pricing in the world organised earlier this week by the International Energy Agency, Fatih Birol, its CEO, stressed the immense efforts ahead needed to cope with this challenge. He reminded us that even under the assumption that all carbon emissions in the world were all of a sudden fully stopped, given the existing infrastructures which are to last over time, we could not avoid an increase in temperature of 1.6 degree, which is higher than the 1.5 degree many experts consider as the upper limit to avoid major havoc.
These observations show that we have to undertake a real revolution in our behaviours and also that all countries have to put into place radical policies which give the highest priority to the fight against global warming and use the best device to this effect. It was even stressed during this IEA event that we will not escape complementing these endeavours by a very expensive and complicated global policy of sucking carbon out of the air.
There is nevertheless a good news: the indispensable underlying mental breeding ground in the populations around the world is now fertile for strong public action to accelerate energy transition and invest in carbon-free infrastructure. Public authorities, either at the local or State levels, are now well aware that new less-emitting or carbon-free public infrastructures will have to replace the old ones in our districts, in our cities, in our countries. This will need time but it will need the right incentive as well.
The fight against global warming is an extremely complicated issue. To find the best approach to it, we have to go straight to the economic sources of carbon emissions which lie in the functioning of market economies. The market system (adopted by nearly all countries in the world) is, no doubt, a formidable machinery to create wealth. But it is unable to cope by itself with built-in negative externalities such as carbon emissions: the more people consume, the more the market is producing goods, , the more income is distributed and wealth created, the more energy is needed. But since fossil fuel energy is cheap, the more carbon is emitted, the more the market economy endogenously leads to a rise in temperature and in the meantime destroys wealth. In the long run, the market economy destroys itself and with it, destroys life on earth.
At the heart of the problem is therefore the cost of fossil fuels compared to the price of other energy sources that emit less or no carbon. In a nutshell, if we want to get rid of carbon we have to increase its price. What economists are telling us as well is that the price of carbon must incrementally and predictably rise over time, so that all behaviours in terms of consumption and investment can smoothly lead to carbon-free economies.
Putting a price to carbon can be realised through two techniques: taxing carbon is the simplest one, even though it can be politically costly. The other method is the creation by public authorities of a market for carbon: carbon emission certificates are available to companies which emit carbon. Such carbon markets exist in the EU as well as in China.
On these markets, I believe like the majority of economists that targeting the price is much more efficient than targeting the volume of emissions. Because when firms who emit carbon know that its price is going to rise, especially if this increase is known with sufficient certainty and therefore predictable, it provides a very strong signal for them to shift to less carbon or carbon-free production for the simple reason that the cost is becoming higher.
This observation explains why I have created the Task Force on Carbon Pricing in Europe. The European carbon market which used to target the volume instead of the price of carbon has been extremely volatile in the past, losing its power as a signal. It is encouraging in this respect to see that European authorities intervened during the Covid-19 crisis to avoid the collapse of the price of carbon which is now around 25 € / ton.
It is critical now to stress that climate change having a global dimension is therefore a global concern. It would be pointless to engage into ambitious and costly energy programmes if in other parts of the world countries refused to act accordingly.
Global action is therefore of the utmost importance. The Task Force has taken an initiative in this respect with a team of senior Chinese personalities gathered by the think-tank International Finance Forum, who have agreed to jointly advocate with it for a convergent carbon price between China and the European Union. In a meeting in New York last year, the two delegations signed a statement to this effect which has been published by China Daily.
The pledge to carbon neutrality in Europe by 2050 and in China by 2060 raises the question of how to reach these targets. Our objective is to push the idea of creating a level playing field based on the price of carbon which would be, if implemented, extremely efficient to attain these goals. It would be a game changer in the fight against global warming.
Needless to say, and it will be my concluding observation, that should the presidential election on November 3rd lead to a new leadership in the US, there will be a tremendous opportunity to enlarge this initiative to a trilateral promotion of a convergent price of carbon between the three main economic blocks of the world: a formidable device globally to fight global warming.
Thank you for your attention.
