Economic Impacts of Climate Change Policy

I have a couple of posts sitting half completed, but felt compelled to write on a fascinating and insightful analysis that I picked up from Climate etc. It is an extract from a blog post called Our Finite World, and the relevant material can be found here and here. The author Gail Tverberg is an actuary and her primary area of interest is oil supply. In the first post, Gail looks at energy use and GDP for both emerging and developing economies. She notes that world-wide energy intensity in relation to GDP has been flat, and then asks how it is possible that several countries have been decreasing the energy intensity of their economies:

We are dealing with a large number of countries with very different energy intensities. The big issue would seem to be outsourcing of heavy manufacturing. This makes the energy intensity of the country losing the manufacturing look better. Outsourcing transfers manufacturing to a country with a much higher energy intensity, so even with the new manufacturing, its ratio can still look better (lower). It is hard to measure the overall impact of outsourcing, except by looking at world total energy intensities rather than individual country amounts.

In both of the posts, Gail fills the pages with charts, data and analysis, so I cannot do justice to her work in a summary. However, there are two points (of three) that I found to be of particular interest, and I quote these below:

1. The industrialization of Southeast Asia has allowed importers from around the world to reduce their energy intensity of GDP, but much of the savings has been offset by greater energy use (largely coal) in Southeast Asia. On a CO2 basis, we are likely  worse off, because of this transfer.

2. There is no evidence that the Kyoto Protocol reduced worldwide CO2 emissions. In fact, to the extent that it encouraged outsourcing of industrial production to the Far East and made goods from the Far East more competitive, it may have contributed to rising world CO2 emissions. It would appear that a different approach is needed that recognizes the fact that fuels are part of a world market. Fuel savings in one part of the world are not necessarily helpful for the world as a whole.

I have not read much else from the blog, but I would guess from the general discussions that Gail is on the ‘warmer’ side of the climate debate. However, she is capturing something that I (from a skeptic standpoint) have always been concerned about. In some respects, the negative economic impact of climate change mitigation upon the developed world has been discussed before. For example, this UK economics blog discusses the issue of the original Climategate emails in the context of economics, and cites an article from Christopher Booker (I have not found the original) as follows:

The real gain to Corus from stopping production at Redcar, however, is the saving it will make on its carbon allowances, allocated by the EU under its Emissions Trading Scheme (ETS). By ceasing to emit a potential six million tonnes of CO2 a year, Corus will benefit from carbon allowances which could soon, according to European Commission projections, be worth up to £600 million over the three years before current allocations expire.

But this is only half the story. In India, Corus’s owner, Tata, plans to increase steel production from 53 million tonnes to 124 million over the same period. By replacing inefficient old plants with new ones which emit only “European levels” of CO2, Tata could claim a further £600 million under the UN’s Clean Development Mechanism, which is operated by the UN Framework Convention on Climate Change – the organisers of the Copenhagen conference. Under this scheme, organisations in developed countries such as Britain – ranging from electricity supply companies to the NHS – can buy the right to exceed their CO2 allocations from those in developing countries, such as India. The huge but hidden cost of these “carbon permits” will be passed on to all of us, notably through our electricity bills.

It is all fairly obvious really; if you enact these carbon dioxide emission schemes in a lopsided way, energy usage will shift to those countries that are low cost. In essence, these schemes are a driver of the hollowing out of developed country energy intensive manufacturing, and have no doubt been a contributor to the rapid growth of emerging economies. The great thing about Gails’ posts are that they present the case with such startling clarity.

The broad economic impacts of this shift in energy intensive manufacturing from developed economies are fairly obvious; negative impact upon balance of trade and less economic growth than would be the case if Kyoto had not been enacted.

This is all well and good to point out, but it is another element of the impact of this shift that worries me. Manufacturing jobs employ large numbers of workers who earn a good wage in comparison to service industries, for example in compared to shop workers. In particular, manufacturing tends to develop highly paid skilled workers, and this is a concern I would like to highlight. When policy such as Kyoto are enacted, they have real impact on both the economy but also the potential for ordinary people in a developed economy to have a better standard of living.

The trouble is that, for most people, their main source of news is a media that has accepted the climate alarmist story, and often reports on climate change in a way that is clearly biased towards alarm (I have written several posts on this subject). They entirely neglect the potential for negative consequences, even though those consequences will eventually impact upon their readers/viewers. There are a few lonely voices such as Christopher Booker who point out these real impacts but most people will never hear of such impacts (unless it is their job that is being lost).

Instead, what we have is promises of ‘green jobs’ and the media seem to go along with this. However, as every country is using the same promise, we come to a point where it becomes impossible for every country to generate enough of these ‘green jobs’ to offset the losses. More disturbingly, if those jobs (e.g. manufacture of wind turbines) are reliant on intensive energy use, they will in any case end up being outsourced to developing economies. As such, it is interesting to find that five out of the ten largest manufacturers Chinese and Indian, and that they together have a large market share. They are getting the benefits of these ‘green jobs’ but with none of the associated pain. And that pain is the loss of highly skilled, well paid manufacturing jobs in developed economies.

Note: For this post, I am not going into some of the complexities of the knock on impacts of loss of manufacturing,  or how the impacts of ‘green’ policy are calculated/considered, as I want to keep the post focused.


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