The core of the answer to the energy challenges may not come from modified energy supplies but from a systematic, long term strategy of increasing energy productivity, which essentially means curbing energy demand while further increasing prosperity.

As a matter of fact, huge efficiency increases are theoretically available. In a book, Factor Four, also available in Chinese [1], fifty examples were presented of a quadrupling of energy and material productivity. A more ambitious sequel, called Factor Five [2] is under preparation and will focus more on systemic productivity increases beyond isolated efficiency technologies. Eventually, even a factor of twenty should be feasible, which could solve most energy-related problems of climate, the local environment and social equity, both in China and world-wide.

A strategic increase of energy productivity looks like a highly attractive national goal for China.

Surprise lesson from history: resource prices have been falling

Despite basically well-known potentials, there are few signs in any country of aggressively pursuing the energy productivity agenda. Australia’s and other countries’ decisions of phasing out incandescent light bulbs, Japan’s top runner program, the EU’s emissions trading system ETS, and China’s commitment in the 11th Five Year Plan to increase energy productivity compare favourably with the inertia in other parts of the world. But even these laudable measures fall very far short of meeting the challenges.

The basic reason for inertia on this front, so it seems, is a world-wide policy of keeping energy prices as low as possible. This has understandable social reasons but it also sends a signal to consumers, manufacturers, and investors that energy efficiency and productivity will be mostly left to idealism or some mild state intervention. The trillions of yuans, dollars, and euros invested annually in new businesses and infrastructures have almost no commercial motive of addressing energy productivity. This is the reason why many of the of the Factor Four examples, such as Amory Lovins’ high tech ‘Hypercar’ needing less than 2 litres per 100 kilometres, have not made it to the market. For reaching the market in significant numbers, they require huge investments, which won’t pay off under present conditions.

To make such strategic investments in resource productivity profitable, resource prices should go up. But so far, the opposite has happened. Combined efforts by politicians, entrepreneurs and mining engineers have established a long term trend of continuous decreases of resource prices, as shown in Fig 1 for “raw industrials”, meaning natural resources of industrial importance, including energy. This comes as a big surprise to many who are accustomed to complaining about high resource prices. The price hikes of the past couple of years have just brought us back into the lower confidence interval of the long-term downward trend. (The picture does not reflect the development after 2004!)

Fig. 1: Industrial raw resource prices, inflation adjusted over 200 years. Prospecting, mining and transport technologies were the main drivers. The price hikes since 2000 have just brought us back into the lower confidence interval of the downward trend! Source: The Bank Credit Analyst, 2005

There have been a few periods during which resource prices increased, notably the two World Wars. More memorable in our times have been the oil price shocks of the 1970s, which can also be seen in Fig. 1. In 1973, the oil exporting countries managed to quadruple oil prices overnight and push it further up in 1978. However, the rest of the world reacted by stepping up prospecting and mining until, by 1982, oil prices had come down to pre-1973 levels.

During the first years of the 21st century, many people felt that now, finally, resource prices were now going up irrevocably. The new surge of oil, gas and other mineral resource prices was triggered by steeply rising demand from the rapidly developing Asian economies, led by China. But China and the world wide mining companies have immediately thrown a lot of money into new prospecting and mining, which brought the surge to a halt and there are indications that commodity prices come down again, at least in constant dollars.

Typically, it is the geological limits and extraction and refinery cost that ultimately determine prices. In earlier decades, also access and transport limitations played a major role, but the share of transport cost has been falling systematically over time. If the geological limits remain the main determinant factor for resource prices, it can be assumed that oil prices will come down to something like $80 per barrel, reflecting the price of coal (at a high estimate of $100 per short ton of coal) plus the liquefaction cost at industrial scale plus company profits. Clearly, this price would be a blow to all investors putting their money into high tech vehicles like the Hypercar.

Active policies of raising energy prices

If markets (plus socially motivated price subsidies) lead mostly to low prices and if low prices are seen as the main obstacle to the efficiency revolution, then it would seem evident that China and the world should go for a policy shift from keeping prices low to actively increasing them.

Different instruments are available to put price tags on energy or, for that matter, on carbon dioxide. Theoretically, prices can be fixed by the state, — although in the past this was mostly done to keep prices low. Fees and charges can be levied. The EU’s ETS, a cap and trade regime, serves to put a price tag on fossil fuels. Some states, notably in Europe, beginning in Scandinavia, have introduced energy taxes.

An interesting variant of energy taxation has been the “escalator” idea of adding small annual price signals that were agreed for many years in advance. This has been first introduced in Britain and copied in Germany with some modifications. In retrospect, it can be said that the escalator proved very effective in reducing demand, as can be seen in Fig 2, which compares the two countries with Canada and the USA with regard to fuel consumption/ CO2 emissions per capita and year.

Fig. 2: Steering effect of fuel tax escalators (Picture: FÖS, 2006, Database: DIW, 2005)

Increasing energy prices in parallel with energy productivity gains

Combining the escalator idea with the long term goal of increasing energy productivity, leads to a novel policy proposal, namely to politically establish a trajectory of steadily progressing energy and commodity prices, with the slope of the trajectory being determined by the statistically established increases of energy and resource productivity.

If energy prices increase only in line with average energy productivity gains, then, by definition, there would be no additional suffering. This is of highest political significance and contrasts favourably with experiences from the past of rising energy prices causing major hardship for families, small enterprises, and whole branches of industry. The negative effect, however, has always been associated with the size and suddenness of the price increase and with its unpredictability, allowing no advance adaptation.

Despite this socially most welcome feature, the long term escalator sends a strong signal to investors, manufacturers, consumers, and infrastructure planners to be prepared and to adapt. In all likelihood, the signal will actually accelerate investments into energy efficiency technologies and energy productivity creating systems.

The trajectory would have to be kept stable for many decades. Investors will be all the more courageous the longer they can rest assured of the trend. The time horizon of the measure should be at least as long as the payback time of the most important investments, meaning long lasting infrastructures. A glance back in history shows that under the conditions of the low gasoline prices in the USA, an investment like the Japanese bullet train (Shinkansen) would never have been possible.

Are there alternatives to a tax system for establishing the price corridor? Just theoretically, increasing resource prices can also be induced by an ambitious cap and trade regime with gradually tightened cap levels. However, past experiences with cap and trade regimes show very unpredictable fluctuations, resulting in part from speculation. There is no way of linking resulting prices to previous efficiency gains.

Is there a problem for the poor or industry or inflation?

Objections against an ecological tax escalator can come from advocates of the poor, from industry and from inflation fears.

Advocates of the poor will hint at the relative importance for the poor of the energy costs in the consumer basket. Energy and water taxes tend to be “regressive”, i.e. hitting the poor more than the rich. To answer this problem, it is possible to grant a tax free or tax reduced minimum tableau of, say, one gigajoule of energy per person and week. Then the really poor would actually benefit, while the burden would shift towards middle income and rich strata of the society.

Blue collar workers, too, have a tendency of opposing energy taxes. They typically use the lines of arguments of the poor and have apprehension that energy taxes might destroy industrial jobs. But as demand for industrial output is rising, a country like China need not fear net job losses if the price increase goes slowly and predictably.

Industry and investors are actually likely to benefit from the predictability of the transition. They can move into ambitious technological and infrastructural projects with very limited risks, leading eventually to major advantages over competitors working under conditions of fluctuating if somewhat lower resource prices who invariably giving too little attention to the long term scarcity of resources.

Another concern, very relevant in China today, is inflation. However, a tax shift could be made from value added taxes to energy, which a net neutral effect on inflation.

Evidently, it would be desirable for both ecological and economic reasons to find international agreement on price trajectories. But if the increase is linked to productivity gains, pioneering countries are likely to benefit, not loose because they will be at the forefront of a trend that will come world wide anyway.

The paradigm of a twenty-fold increase of labour productivity

The history of technological progress so far is the history of the increase of labour productivity. It has been a revolution indeed, the Industrial Revolution. Labour productivity grew easily twenty-fold over time. During the 19th century, the increase in what became to be the industrialised countries was some one percent per year, which is not all that spectacular. The rate increased to one and a half percent during the first half of the 20th century and to two percent thereafter. But there have been phases like Germany during the late 1950s, Japan during the 1960s and China after 2000, where it increased more than seven percent per year, — to a large extent by copying technologies that had been developed elsewhere.

One fact, well-known by organised labour and by employers, is that wage negotiations have always taken labour productivity gains as their yardstick. It was only during the recent neo-liberal and neo-conservative phase since the early 1980s, that wages began to lag behind productivity gains, due mostly, as the employers saw it, to competition from low wage countries. What is not so well known is that productivity gains also went up in parallel with gross labour cost. What was the hen and what was the egg? Empirically, we observe wages and productivity going up in parallel (Fig 3).

Fig. 3: Rise of wages and of labour productivity mostly in parallel. The picture shows this for a time span of fifty years in the USA, but very similar pictures are available for other countries and other periods of time.

This trend of labour costs spurring labour productivity is an exciting indication for the potential of using energy price signals for spurring energy productivity gains. As a matter of fact, the “oil crisis” of the 1970s served as an (unplanned) experiment for this hypothesis. As energy prices went up across the board, a new mentality set in that focused on energy efficiency. Fig 4 shows the effect.

Fig. 4: The oil price shocks of 1973 and 1978 triggered a steady increase of energy productivity in the USA. The new mindset of energy efficiency survived even the period 1981–2000 of receding energy prices.

A revenue neutral ecological tax reform

The paradigm of labour productivity seems to support the idea of a steady increase of energy prices. As said before, if energy prices increase in line with average energy productivity gains, there would be no average suffering. The situation can become even more attractive if the fiscal income from energy taxes is re-channelled into the economy by reducing the fiscal or parafiscal load on human labour thus giving an additional push to overcome unemployment. But if inflation is the highest concern, the reduction of VAT is a more plausible candidate.

The new idea is to make the trajectory of energy prices very predictable by compensating world market fluctuations. Downward fluctuations would be compensated upwards and upward fluctuations such as the painful price hikes of late 2007 could be compensated downwards, so as to bring prices back to a previously agreed price corridor. The slope of the upward corridor could be determined annually (or every five years by the cycle of Five Year Plans) in line with measured average efficiency gains over the previous year (or years). Adjustments could be allowed on a quarterly basis so as to make prices even more predictable.

The system could be differentiated for vehicle fuels, electricity, carbon content, and other criteria. It will be a matter of political priority setting weighed against simplicity.

This system of increase should be made a law that is valid for some twenty years or even fifty or more years, with fairly tough clauses for exemptions or deviations from the rule.

It is conceivable to develop a similar system for materials and for water. If prices for primary raw materials and for water extracted from nature go up steadily, the incentives increase for reuse of materials and for water purification. Simultaneously, the profitability of mining operations go down, — which is exactly what we want.

Long term price elasticity is high

Generally, it can be said that energy and resource consumption have a rather low price elasticity in the short term. (Otherwise, the upward curve in Fig. 4 would have started in 1973 or 1974, not in 1977!) In the long run, however, the price elasticity is astonishingly high, as can be seen from an observation made by Jochen Jesinghaus [3].

The picture shows a striking negative correlation between fuel prices and per capita fuel consumption. Ten years after the introduction in the US of the Corporate Average Fuel Economy (CAFE) standards, this country although admirably catching up on per mile fuel consumption was still the country with by far the highest per capita fuel consumption. In other words, under the condition of low fuel prices what CAFE conveyed to automobilists was: “Now you can drive more miles for your bucks”. Which they did.

Fig. 5: Even for petrol consumption which is often referred to as nearly inelastic to price changes, we observe a near perfect price elasticity – if we ask the right question. The question asked for this graph was: how much petrol is consumed per capita and year in different OECD countries that have nearly equal levels of wealth and mobility? Countries had more or less stable policies on domestic fuel prices for many years preceding the year (1988) in which the data were collected. The picture reflects long term price elasticity.

This experience is very valuable for determining a price trajectory overcoming the dilemma of short term instruments. We can safely rely on small signals if we give the society assurance of a long term upwards trend for energy and other resource prices.

[1] Von Weizsäcker, Ernst Ulrich, Amory Lovins, Hunter Lovins. Factor Four. Doubling Wealth, Halving Resource Use. London. Earthscan, 1997; also available in 12 other languages including Chinese.
[2] Von Weizsäcker, Ernst Ulrich, Charlie Hargroves, Michael Smith. Factor Five. London Earthscan, 2009.
[3] Ernst von Weizsäcker and Jochen Jesinghaus. 1992. Ecological Tax Reform. London, Zed Books.

CCICED Taskforce on Economic Instruments for Energy Efficiency and the Environment
Interim Report 2008, Draft segment submitted by Ernst Ulrich von Weizsäcker

Dear Professor Lu Mai, dear Professor Liu Shinjin, ladies and gentlemen,

It is an unusual honour for me to be invited to this keynote address, which I have put it under the title of Resource Productivity.

Fig 1

This title contrasts with the preoccupation with labour productivity during the last 200 years of technological progress. Labour productivity has been the melody of the first Industrial Revolution. It increased twentyfold or more during those 200 years. This has been the basis of prosperity and it is the main theme of China’s stunning economic progress.

During those same 200 years, the world has also seen a systematic decrease of prices of natural resources.

Fig 2

This invited mankind to a wasteful use of those resources. Small wonder, then, that resource productivity was stagnant or even decreasing during much of this time.

Let me submit to you that we cannot continue on this road. It may be wise, chiefly for the industrialized countries to slow down the further increase of labour productivity while forcing the increase of resource productivity.

Forcing resource productivity has become an imperative also for the developing countries that cannot afford a wasteful use scarce resources. Obviously, this consideration was at the roots of planning this conference. The new trend in technological development, namely a strong emphasis on resource productivity, may be triggered by the recent increase of resource prices:

Fig 3

For China in particular, the rising commodity prices were a signal of warning. But then, you have additional reasons to become more resource efficient. It would allow you to simultaneously reduce one major health problem, namely pollution-caused mortality in your industrial agglomerations:

Fig 4

Clearly, air pollution should also be addressed directly by appropriate pollution control measures. These have an additional cost, which however, is far exceeded by the economic benefits for China, according to Stefan Hirschberg et al (2003) of the Swiss Paul Scherrer Institute:

Fig 5

China is going through the standard development with regard to pollution: Countries start poor and clean. Then they industrialize and get rich and dirty. And then they rich enough so that they can afford pollution control and end up rich and clean:

Fig 6

It has been the traditional view of the developing countries that they are too poor to pay for pollution control. As Indira Gandhi said it in 1972 at the first UN Conference on the Human Environment in Stockholm: “Poverty is the biggest polluter”

Fig 7

Indira Gandhi’s slogan went down well not only with the political leaders of developing countries to whom it was a nice excuse for not acting on pollution control, but also for industry in the North that could conveniently say that they needed good profits for the sake of the environment.

The trouble is that today’s biggest environmental problems, biodiversity losses and climate change, are chiefly caused by the rich.

Fig 8

Regarding biodiversity, the biggest problem is habitat losses due to increased land use for agriculture, settlements, mining, energy and transport. You can estimate the acreage that is needed per person for a sustainable supply of all the daily goods and services. This is then the “ecological footprint” according to William Rees and Mathis Wackernagel, caricatured in the next picture:

Fig 9

The ecological footprints of average Chinese people are roughly one hectare. We in Western Europe have footprints four times as large, and in the US and Canada, footprints are even eight times that size. If all 6.3 billion people had US type lifestyles, we would need three to four planets Earth to accommodate all their footprints. This is obviously unsustainable.

The other big problem is global warming. Global temperatures have been rising and falling over the last 160.000 years in close correspondence with CO2 concentrations.

Fig 10
Based on the physics behind this correlation, the Intergovernmental Panel on Climate Change (IPCC) has projected temperatures to rise dramatically during our century:

Fig 11

The consequences could be alarming for water, food security and for biodiversity. You would also have to count with more devastating typhoons and, most dangerous perhaps, with a rising sea water table, indicated by the green line in the next picture.

Fig 12

The difference between high and low water tables is more than 100 metres, which means that coast lines will heavily vary. The next picture shows it for Italy. 20.000 years ago, during the last Ice Age, the Sea was lower and Italy was larger than today. But two million years ago there were no polar ice caps (and also the geological situation was different in the Mediterranean Basin) so that Italy was much smaller:

Fig 13

At present, we see a dramatic change of temperatures in the Arctic region, as has been discussed in the Arctic Climate Impact Assessment (2004). The summer freshwater coverage of Greenland has increased more than fourfold in ten years:

Fig 14

We are unable to predict the consequences of this development. But we know from historical records that ice masses can collapse or glide into the oceans in a very short period of time. This has been the case with the ice shield once covering Labrador and the Hudson Bay, which disintegrated during a few decades, perhaps even a few weeks some 7800 years ago, letting the sea water table rise by some 7 metres:

Fig 15

Imagine what such a mega-event would mean for China’s or Japan’s coastal areas, or for the Netherlands or Egypt or Florida!

What do we have to do to prevent such disasters from happening? It is plausible that at least we should try to stabilize CO2 concentrations. This, however, will require us to reduce annual CO2-emissions by 60-80 percent, according to the IPCC. Let us optimistically assume that 50 percent will do. But under the present trends, we shall get exactly the opposite. We are heading for a doubling of CO2-emissions:

Fig 16

China, India and other countries are drastically expanding their industrial outputs, their motorized transportation and their energy consuming housing and agriculture. So we shall see China and India to have emissions similar to those of the US:

Fig 17

Fig 18

The world energy pie shows that worldwide we have still an overwhelming dominance of fossil fuels.

Fig 19

In Europe, we have begun systematically to work on the reduction of CO2-emissions. The trading began in December, 2004. Initially, the prices paid per ton of CO2-emissions were at around 8 Euros. Meanwhile, prices have roughly doubled.

Fig 20

One component of our combating greenhouse gas emissions has been the increase of renewable sources of energy. In Germany, we have been quite successful in this:

Fig 21

We were very glad to see a large Chinese delegation at the Renewables 2004 conference in Bonn last year, and many said that China was about to copy the German system and is now planning another such conference this November. However, for all their merits, the renewables will not suffice to solve the problem. The energy pie is simply too large and must be reduced if we want to fight global warming and also avoid a dangerous dependence on nuclear power.

The key to the answer will be a Second Industrial Revolution focussing on the strategic increase of resource productivity. This has been the vision in the book “Factor Four. Doubling Wealth, Halving Resource Use”, which was also translated into Chinese:

Fig 22

It has been known for a long time that lower energy intensity is a sign of modernity:

Fig 23

We therefore see the Factor Four story as a true continuation of technological modernization and progress.

Let me now open a window for you to look into the new universe of eco-efficient technologies. The pictures will mostly compare existing technologies on the left hand side with new technologies on the right hand side that are some four times, or even ten or a hundred times more resource efficient than the old ones.

Fig 24

Let me start with my co-author’s Amory Lovins’ favourite idea, the “hypercar”, which allegedly does 150 miles a gallon, or needs only 1,5 litres per 100 kilometres.

Fig 25

Some remain a bit sceptical about its success but according to Amory, some 2 billion dollars have already been invested in the concept.

Fig 26

The next is Amory Lovins’ institute and home, the Rocky Mountain Institute, high up in the Rocky Mountains, which during much of the year is largely energy-self-sufficient and is easily a factor of ten better regarding energy than typical mountain.

Fig 27

The concept has been transferred ten years ago to ordinary apartment houses in Germany and elsewhere, as “passive houses” making use of solar heat and of heat exchange ventilation.

Fig 28

In my political constituency, Stuttgart, or rather in nearby Fellbach, we have a true zero-external-energy house. It has become a tourist attraction. And part of the excess energy it produces is channelled into a super-efficient car.

You all know the efficient light bulbs that need only a quarter of the electricity used in old incandescent bulbs. China has become the largest manufacturer worldwide of the efficiency bulbs. However, as most of you know, this is not yet the end of the road. Light diodes are coming up that are yet another factor of two or three better than the efficiency bulbs shown on the picture.

Fig 29

This is a small cooling chamber to replace the refrigerator that stands freely in the kitchen. Two weeks ago, I met with a Japanese gentleman who told me that even freely standing refrigerators have now been developed that are seven times more energy efficient that the old ones. The new development was probably triggered by the “Top runner programme” of Japan.

Fig 30

Fig 31

If you replace the old-fashioned filing cabinet technology by CD ROM’s you save more than a factor of ten and you have easier access to your data.

Fig 32

Water scarcity is one of the biggest problems of China. You may therefore be interested in a technology used in Germany that has reduced water consumption twelve fold in paper manufacturing, chiefly by systematically recycling and cleaning waste water.

Fig 33

My friend Professor Ryoichi Yamamoto of Tokyo once sent me the above picture showing a thin rod of steel that has the strength and capacities of otherwise ten times more resource consuming steel.

Fig 34

Video conferences are, of course, something like a factor of one hundred more energy efficient than the otherwise necessary business travel. I admit that video does not easily substitute for a business meeting on the Bahamas.

Fig 35

This is the story of modern, energy intensive agriculture. Winter tomato grown in greenhouses in Holland tend to need a hundred times more energy than they afterwards contain! With intensive cattle farming, the ratio is hardly better. Organic farming, on the other hand, is roughly by a factor of four more energy efficient.

Fig 36

This is the well-known strawberry yoghurt saga established by Stephanie Böge at the Wuppertal Institute. Lorries criss-cross Europe and drive some 8000 kilometres for the manufacturing of strawberry yoghurt. Obviously you could do at least ten times better.

So much perhaps to encourage you to think further about the upcoming technological revolution. Let me close by making a few remarks about methods to arrive there.

China is one of the countries that has established efficiency standards for cars. To meet the 2008 standards, many European and American car manufacturers have still to do considerable homework, while Toyota is well prepared.

Fig 37 [*]

In the business world we seem to see a slight competitive advantage of eco-efficient companies listed in the Dow Jones Sustainability Index over the average listed in the Dow Jones Group Index.

Fig 38

And if you compare different countries using the World Economic Forum’s Competitiveness Index you see a positive correlation with the Sustainable Development Index of countries.

Fig 39

So we seem to be on a good way. However, this is all too slow to reach the necessary factor of four. Let me in closing say a few words about instruments. I am impressed with what I heard in China about the determination with which you are creating incentives for more resource efficient technologies. Moreover, Douglas Ogden this morning mentioned the possibility of tax refunds for companies that achieve ambitious standards, and James Sweeney spoke about appropriate pricing.

Japan has gone a considerable step further with her “top runner programme” that makes the most energy efficient appliance or vehicle the top runner or standard and announces shame on those companies in a few years that still sell outdated, less efficient items. Ultimately they even have to pay a fine.

Germany and other countries have adopted an ecological tax reform to reduce the fiscal load on human labour while making natural resources more expensive.

And at the G 8 Summit that takes place in a few days, we hope countries agree on a geographical extension of climate policy beyond “Kyoto”. We hope that also China, India, Brazil etc will be invited under fair term to join international climate policy.

For this, the North has to understand that the present “grandfathering” approach is unfair to the developing countries and has to be replaced step by step by a system based on per capita allowances, – which would be good for China and India.

Mr. Chairman, ladies and gentlemen, I feel that the race is on worldwide among countries and among companies to take the lead in the Second Industrial Revolution that is driven by the second melody of progress, the melody of a revolutionary increase of resource productivity.

Thank you for your patience and attention!

References

• Hirschberg, Stefan, et al. 2003
• Rees, William and Mathis Wackernagel
• Von Weizsäcker, Ernst Ulrich, Amory Lovins and Hunter Lovins. 1997. Factor Four. Doubling Wealth, Halving Resource Use. A Report to the Club of Rome. London: Earthscan. Also available in Chinese and ten other languages.

[*] After the lecture, I was approached by a reresentative of General Motors who said that GM had also met the standards with cars exported to China.

In my role as Chairman of the parliamentary Select Committee on Economic Globalisation I learned with a degree of surprise that the term globalisation was brand new. It began to play a role in public life not earlier than in 1993. Fig 1 shows it for the German language but similar pictures are obtainable for other languages.

Fig. 1: The career of “Globalisierung”, i.e. globalisation in the German newspaper FAZ.

The strongest reason for the sudden appearance of the term globalisation has been the end around 1990 of the Cold War. 1990 was a real watershed date of history.

Nearly everybody was happy at the time. After all,

• We were freed from the spectre of a Third World War;
• Democracy, free speech and free press spread throughout the world;
• Well-positioned and well-governed countries enjoyed exciting new opportunities, e.g. the US (owning the largest amounts of capital which could be invested at the places of highest profitability world-wide) and China (with its immense labour force, emerging high technologies and high discipline).
• Stock markets soared, letting market capitalisation of the world’s total stocks triple within ten years. The sharp increase of foreign assets shows that this growth of value was interlinked with the globalisation of capital markets.
• Inflation was sent down in most countries to the lowest levels since the 1950s.
• The Internet became an immensely powerful tool of worldwide communication. It also massively spurred economic globalisation.

Fig. 2: The 1990s saw a jump in foreign assets. The picture shows foreign assets as percentage of the World GDP, Source: Nicholas Crafts, IMF in: Financial Times 01/23/03.

Fig. 3: The rise of the Internet, measured by the number of Internet hosts.

The downside of globalisation

However, for all the good news, there is also a downside to globalisation. During the Cold War, international capital had always to seek consensus with national governments and parliaments in the North and the South. In the South, governments used to play on the East-West tensions to induce the inflow of official development aid or of private capital.

In the North, the Cold War had forced governments to establish an attractive social security net to prove to the masses that capitalism took better care even for the poor than communism. In Germany it was the Social Market Economy launched by Ludwig Erhard in the 1950s. But the entire European Union was constructed around that model of an “inclusive” capitalism. Progressive income taxes and hefty corporate taxation were never seriously disputed. For business and for the rich this may have been annoying but it was anyway better than communism.

With the end of the Cold War, the need for consensus disappeared. Now the name of the game was catch as catch can. Competition got ever more brutal. You can see it from the number of business bankruptcies in many countries, including Germany.

Fig. 4: The rising tide of annual business bankruptcies after 1990 in Germany. 2003: HERMES-Prognosis.

Let me illustrate what happened by an anecdote from the automobile sector. Volkswagen got into deep troubles in 1993 because its cars were simply too expensive for the competitive world market. In response, Volkswagen hired a fairly controversial Spaniard, Mr. Ignacio Lopez whose task was to reduce costs, which he did by squeezing the last penny out of the parts suppliers, by saying they had to supply the same quantity and quality of parts next year, but at ten percent lower costs. If they complained hinting at their own costs, he coldly replied that Volkswagen would then go to another supply firm, maybe in Malaysia or Czechia.

It sounds brutal and it was brutal. But then, Fiat, which, I am sure, was much gentler to its part suppliers, ran into deadly difficulties a couple of years later.

For the state, the situation was not at all more comfortable. The increasing weakness of the state in negotiating with the private sector was soon felt in the field of taxation. Fig. 5 shows the steady decrease of corporate tax rates, resulting from ever-increasing pressures the private sector imposed on the states, in this case the OECD states.

Fig. 5: Corporate tax rates have been systematically reduced during the 1990s.
Source: KPMG Corporate Tax Rate Survey.

The joy of the winners and sadness of the losers

You can imagine that many people were truly happy with the new situation. The market philosophy originating with Adam Smith in the 18th century became something like a new religion. The Adam Smith Institute had a Christmas card recently showing the exuberant joy on the part of the new religion:

Fig. 6: A Christmas card from the Adam Smith Institute.

Unfortunately, there were also many losers, notably the poor in the developing countries. Fig. 7 shows the unfortunate dynamics of a growing gap between rich and poor in the world. Since the 1970s, the factor of the accumulated income of the richest 20 percent of the world population divided by the accumulated incomes of the poorest 20 percent rose from 30 to 75!

Fig. 7: The gap is growing between the rich and the poor.

During the 1980s, the reason for this growing gap were the “forerunners” of globalisation, the debt crisis and the “Washington Consensus”, which mandated the IMF to force liberalisation, privatisation and budget austerity upon countries needing IMF money. In the mean time, Joseph Stiglitz and others have brilliantly demasked the Washington Consensus as something that mostly benefits capital and rather impoverished the poor. In Latin America the effects were aggravated by the skyrocketing since 1979 of the US dollar interest rates leading in heavily indebted countries to what is now called the lost decade.

Keeping a balance between public and private interests

Before coming to solutions let me first recapitulate that Adam Smith himself made it clear that at least three conditions needed to be fulfilled before markets could become a blessing for all. (i)External peace and (ii) internally the rule of law are necessary to let the “invisible hand” work for the wealth of nations. Moreover, (iii) the state has to safeguard services and investments that are not by themselves profitable on the markets. Among them you would count mass education, infrastructure, social cohesion, culture or care for the environment.

“Inclusive” capitalism can be seen as one of the best ways of fulfilling Adam Smith’s conditions. When globalisation began to attack social justice and the provision of elementary infrastructure services, it thereby began to destroy the balance between public and private interests and thereby the very basis of healthy capitalism.

To visualise the idea of that balance, let us go through a small series of pictures symbolising the shift of power from the public to the private sector:

Fig. 8: In the 1970s the state was dominant but the business sector was happy.

Fig. 9: In the 1980s, the state was on the retreat.

Fig. 10: In the 1990s, globalisation set in and made the private sector dominant over public interests.

Let me submit that it is now high time to re-balance public and private interests.

Democracy, US unilateralism and WTO

To put it in more dramatic language: What we are up to is nothing less than a re-invention of democracy.

How that? Have I not said at the outset that the end of the Cold War helped the spreading of democracy? True enough, but at the same time nation states have lost much of their power to shape their own future because they have to obey the rules of world markets.

There is one country that feels differently about the new situation after 1990, the USA: Thomas Friedman, author of the brilliant book The Lexus and the Olive Tree wrote an enlightened article the New York Times (June 2, 2003) by, entitled Why the rest of the world hates America. He quotes a Pakistani saying that America is touching the daily lives of Pakistanis more than their own government does. This disturbing observation would not have been true before 1990 because it is only since 1990 that the US remained as the only superpower. If Washington judgments and decisions touch peoples lives more than their own parliament’s and government’s decisions do, the very meaning of democracy is at stake: What’s the use of going to the ballots if whom you vote for matters less than how some fellows on the Potomac behave?

To prevent too much of US unilateralism, many governments in the West – understandably – put their hopes on multilateral agreements. But then, what kind of agreements are there that have the capacity to impress America? America coldly disregards the International Criminal Court, the Kyoto Protocol and even the ABM treaty negotiated between the superpowers twenty years ago. The set of rules impressing America most are the free trade agreements. But there we are in a Catch 22 situation. Governments try further to strengthen the WTO, but in doing so sacrifice even more of their own democratic sovereignty. And regarding the aforementioned balance, WTO rather makes things worse by its inbuilt tendency of protecting the private sector at the expense of public sector needs.

As I write this, it is not clear yet whether the next WTO Ministerial at Cancún will make headway on global investment protection and the other “Singapore Issues”. There is no need for me to advise governments and NGOs from the South to be extremely cautious about the Singapore Issues, which further erode the shaping powers of national democracies.

NGOs have been active in challenging recent developments of the free trade agenda, including in particular GATS and TRIPS, both addenda to the old GATT during the “Uruguay Round” of negotiations.

I am not saying that trade in services (GATS) and patent protection (TRIPS) are per se undesirable, but we need a context of rules ensuring a reliable balance between public and private interests. How can that look like? Is there a chance of re-strengthening democracy, the public sector and the good sides of the nation state?

Global governance and civil society

I suggest that there are two mutually supportive strategies available for re-inventing democratic mechanisms:

• International rule-setting, often called “global governance” but also rules-based regional governance such as in the EU;
• The strengthening of a third actor, civil society, the NGOs, which can case by case line up on public issues with democracy thus strengthening both.

International rule setting and global governance should, of course chiefly address those aspects of political life that have come under that awful pressure of global competition. That is human rights, social equity, and environmental protection. The subordination under WTO rules of social and environmental treaties must under all circumstances be avoided. Shame on negotiators at the World Summit on Sustainable Development (Johannesburg, 2002) who tried to do exactly this! Climate change is likely to hit the poor far more than the rich. Also biodiversity losses could be disastrous for small farmers in developing countries. The ILO is right to insist on core labour standards that are essentially human rights protecting the weakest actors of the global economy. And the Forum on Financial Stability was right to establish recommendations (hopefully to become rules) against wild currency speculations.

Global governance also needs structures. The most important structure is the system of the United Nations. The UN are the hope also for those who are afraid of too much US unilateralism.

More realistic than global governance is regional governance. We see a number of regional economic groupings such as NAFTA, Mercosur or APEC. But none of them has so far attempted, let alone achieved a degree of democratic rule setting of the type built up in the process of European unification.

While deepening economic cooperation and integration, the EU (formerly the EEC and the EC) has created impressive mechanisms of democratic control, legal supervision, geographical spread of the benefits accruing, and political including environmental coordination. We have a European Parliament, a European Court of Justice, the “Cohesion Funds” and a regular coordination of policies at the Council level. Soon we shall even have a European Constitution. The EU is also reasonable open to cooperation with the NGOs, although so far the industrial lobbies are far stronger in Brussels than their NGO counterparts.

What is systematically deficient about global governance and even regional governance is direct and democratic participation of citizens. It is virtually impossible for “the man or the woman on the street” to influence the European Commission, the WTO or the Conference of the Parties to the Climate Convention.

This is where the NGOs come in forcefully. Everybody can join an NGO and strengthen its influence. Civil society can play and does play an increasingly important role in global affairs. NGOs can cry alarm whenever something scandalous goes on. Civil society consists of churches, trade unions, environmental NGOs, philanthropic clubs, scientific groupings, and the whole gamut of charitable or at least not-for-profit NGOs. Nearly all of them, almost by definition, defend some public good. In many cases have these groups made themselves heard and forced the private sector to withdraw from unacceptable practices. One of the earliest cases was the “Nestlé kills babies” campaign against Nestlé’s attempts to shift African mothers from breast-feeding to formula milk. In some case NGOs can cooperate with private companies on safeguarding particular public goods. A case in point is the “Marine Stewardship Council” formed by Unilever and WWF to ensure sustainable fishery by the firm.

Without NGO power both national democracies and international treaties such as the Climate treaty or the Universal Declaration of Human Rights can easily be marginalized or ignored!

NGOs can systematically cooperate with democrats in parliaments and political parties. I see lots of synergies. Parliaments can adopt transparency rules making it easier for NGOs to look into business practices including long and complex supply chains for consumer goods.

Fig. 11 symbolises the new and emerging coalitions that can be formed between the State and the NGOs.

Fig. 11: The NGOs can be seen as an emerging power helping the state defending public goods and services.

We have a long way to go both on national and international levels to develop a world society that is rooted in democratic control, in citizens’ participation and in international fairness. But then, when Charles de Montesquieu developed his fundamental ideas in the 1740s about the need for the division of power, no division of power existed in his own country, France. It took a couple of decades until, as the first country in the world, the USA took up his ideas and created a democracy built on the division of powers.

The answer to this question should be yes and no.

Yes, we are closer than ten years ago. During all of he 1990s, an irritatingly optimistic mindset was dominating the world. The very expression of ‘saving the planet’ would not have been politically correct in these days, because it sounds ‘pessimistic’.

What caused the air of optimism of the 1990s? The Cold War was over, alright, that was a great relief because it was also the end of the fear of a Third World War. Capitalism was celebrated as the only remaining ideology, constituting the ‘end of history’, as Francis Fukuyama put it. In its radical, Anglo-Saxon version it was politically hailed as the engine of growth and thereby as a cure-all, with slogans like “rising tide lift all boats”. ‘Creative destruction’ was seen as legitimate whenever what was to be destroyed had a smell of communism. Well, markets are a growth engine and a healthy cleansing mechanism, but at least two billion people felt outright cheated and exploited. They saw their ‘boats’ sinking, not rising at all.

Stock exchange quotations were another cause of optimism, as they seemed to rise without limits. That was a deception, too, as the collapse of the ‘dot com’ bubble showed in 2000. Concerning the environment, the prevailing paradigm was the optimistic Kuznets curve of pollution, meaning that once countries turn rich they will spend enough money on pollution control, and countries end up rich and clean. In terms of local pollution, the Kuznets curve was a reality, but for global warming and biodiversity losses the paradigm was dead wrong.

I must say, I was in a state of alarm during the late 1990s about the careless optimism and the uncompromising arrogance behind it. I felt rather helpless raising my voice against it.

So I see with a degree of relief that the days of the blatant type of arrogance are over and that it has become almost mainstream once again to address the real problems. What made this sea change happen? There were many different factors. The billions of people in their ‘sinking boats’ are no longer silent. The world community has addressed their situation in the Millennium Development Goals (MDG), acknowledging that markets will not do the trick. The end of the dot com bubble was a wake up call to some but the broader public did not hear the signals until the sub-prime mortgage crisis of 2007, originating in America but spreading worldwide. Some of the once celebrated investment gurus and their institutions got unmasked as irresponsible speculators using the money of credulous clients.

In the political arena, the military and ideological answer to the insidious attacks on the World Trade Center and other targets (‘9/11’), the “War on Terror”, more and more became a nightmare for all parties involved. The arrogant US unilateralism once impersonated by the Rumsfeld-Wolfowitz Pentagon lost its support even in the White House, let alone the US Congress after its mid term elections.

The environment is back on stage, after a quarter century of denial among the leading classes in the USA, and under the weight of evidence from the Intergovernmental Panel on Climate Change and the devastating pollution in the industrial centres of the high growth countries, notably China. The EU has taken the lead in politically addressing global warming, setting up the ETS, the European Trading System for carbon dioxide emissions. The two remaining candidates for the US presidency have expressed a clear commitment on mitigating global warming. China has become very serious about addressing pollution, climate, and energy efficiency. Renewable sources of energy constitute a dynamic growth sector. The Convention on Biological Diversity (CBD) is enjoying increasing visibility in the signatory states, i.e. nearly all states except the USA.

It is fair to summarise, then, that the last ten years have seen a tidal change in appreciation of the real problems the world community. Overcoming the arrogant optimism of the 1990 has been a huge and necessary progress.

It was necessary, but is surely not sufficient for an agenda of saving the planet. This is the core of the No answer.

Global warming got worse throughout the past ten years. New figures and extrapolations, e.g. from NASA’s James Hanson seem to show that stabilising atmospheric carbon dioxide at 450 ppm is far from sufficient and that we should rather aim at 350 ppm, which is still well above the pre-industrial levels of 280 ppm.

Biodiversity losses have accelerated, notably in the tropical countries. Fish stock depletion went on and partly accelerated. China aggressively began to access mineral and energy resources in Africa and elsewhere so as to continue its steep increase of resource consumption. India, Brazil, South Africa, Angola and a few other countries enjoy tremendous growth rates, all based on accelerated resource extraction, at a comfortably high price level. No end of the trend is in sight, not even a flattening of the curves. All countries of the world seem to work under the assumption that they have a right to the same kind of prosperity as the USA. And after many years of brainwashing that the American way of life was the best one could aim at, this assumption is hard to deny. But six or eventually ten billion people living by US American life styles is just not possible. We would need four or five planets Earth to accommodate their ecological footprints, according to the Global Footprints Network.

Thus in terms of climate and the ecological situation, the picture has become quite a bit grimmer, not better.

How can we now deal with this odd combination of the Yes and No answers? I submit that we can break out of the vicious circle of seeking wealth in material growth alone. I suppose we can decouple wealth creation from energy and material consumption very much like we decoupled wealth creation from the number of hours of human labour. The latter was the achievement of the Industrial Revolution. Labour productivity rose easily twenty fold in the course of 150 years of industrialisation. In other words, from one hour of human labour we learned to extract twenty times more wealth. Now is the time to do the same for energy and materials. We can learn and must learn to extract four times, ten times, and eventually twenty times as much wealth from one barrel of oil or from one ton of bauxite as we do today. Technologically speaking, this should not be more difficult than the rise of labour productivity. Resource productivity should become the core melody of the next industrial revolution.

Labour productivity rose in parallel with wages. Rising wages were justified by rising labour productivity, and rising labour cost stimulated ever further increases of labour productivity. Energy prices, on the other hand saw a secular decline (in constant dollars) over 200 years. The latest price hikes have not even brought us back to the price levels of some thirty years ago. Tragically, the political zeal has always been to keep energy prices as low as possible, thereby frustrating most attempts at increasing energy productivity. Energy price elasticity is very much a long term, not a short term affair. Infrastructure investments, which are crucial for an energy efficient society, take a lot of time.

What our societies ought to learn now is creating a long term trajectory of energy prices slowly but steadily and predictably rising in parallel with energy productivity. By definition, this would not cause any hardship, on average. But it would set a clear signal to investors and infrastructure planners that energy efficiency and productivity will become ever more profitable and necessary. It is bound to become more profitable and sexier even than the renewable energies.

If our societies, starting perhaps with the EU, embrace this new agenda of technological progress, and if later historians see the period between 1998 and 2008 the kick-off period for this new technological revolution, I suppose that those historians will agree that this time span has brought us closer to saving the planet.

Fig. 1: The career of the word “globalisation” in the German newspaper FAZ.

The strongest reason for the sudden appearance of the term globalisation has been the end of the Cold War. We all, I am sure, were glad about many things that happened in this context.

• We were freed from the spectre of a Third World War;
• Democracy, free speech and free press spread throughout the world;
• Well-positioned enjoyed exciting new opportunities, notably the US (owning the largest amounts of capital which could be placed at the places of highest profitability world-wide) and China (with its immense labour force, emerging high technologies and high discipline).
• Stock markets soared, letting market capitalisation of the world’s total stocks triple within ten years.
• Inflation was sent down in most countries to the lowest levels since the 1950s.
• The Internet became an immensely powerful tool of world-wide communication.

However, for all the good news, there is also a downside to globalisation. During the Cold War, international capital had always to seek consensus with national governments and parliaments in the North and South. In the South, governments used to play on the East-West tensions to induce the inflow of official development aid or private capital.

In the North, the Cold War forced governments to establish an attractive social security net to prove to the masses that capitalism took better care even for the poor than communism. Progressive income taxes and hefty corporate taxation were the rule. For private sector capital this may have been annoying but is was anyway better than any move towards communism.

With the end of the Cold War, the need for consensus disappeared. Now the name of the game was global competition not only among companies but also among states. Tightened cost competition was just too much for many companies. Business bankruptcies soared in many countries.

Fig. 2: The rising tide of business bancruptcies after 1990 in Germany.

In other countries, e.g. in Latin America, in Eastern Europe and in Africa, the situation was worse. The number of people living in poverty is on the rise. Least developed countries went through a demoralising period of de-industrialisation.

The strengthened bargaining position of the private sector was able to force the states to systematically reduce corporate taxation.

Fig. 3: Corporate tax rates have been systematically reduced during the 1990s.

These few pictures and passages are just the beginning of the story of globalisation.

The German parliament, the Bundestag, has established a select committee on economic globalisation in December 1999. I was appointed chairman of the committee. In June 2002, we published a report of 600 pages and 200 recommendations. The full text is available online. English, German, French and Spanish summaries are also available.

The International Labour Organisation (ILO) has created the World Commission on the Social Dimensions of Globalisation. I was appointed member and am happy recommending their website where you will find the final report of the Commission which was released 24 February, 2004.

On my website you will also find a few papers I wrote on globalisation.

Introduction

This piece was written by a European and an American both deeply engaged in efforts to moderate global warming, and each of whom has lived in both Europe and the United States. We give a perspective on the present situation regarding climate change in Europe; a parallel perspective on the situation in the U.S.; and then close with a series of recommendations and policy opportunities that should be on the agenda of the transatlantic partnership, but which reflect the reality that Europe is the leading geopolitical unit today in defining and mobilizing global progress toward a regime of carbon limits that holds out the possibility of avoiding the most catastrophic consequences of global warming.

I: Grim facts on climate change

It has become clear to climate scientists that the carbon emission targets set by the Kyoto Protocol were not nearly ambitious enough to “prevent dangerous anthropogenic interference with the climate system”, as stated in Article 2 of the UN Framework Convention on Climate Change (FCCC).

The Arctic Climate Impact Assessment (2004) was perhaps the most powerful wake-up call of the past few years. It showed a picture of Greenland’s fresh water cover in summers 1992 and 2002 with the area of the latter being easily four times larger than the former and being nearly half the size of Greenland itself. Mighty vertical water currents tunnel down into the ice and appear to be lubricating the rocks on which the ice masses are sitting, thus accelerating the rate at which they move towards the sea beyond that which had been previously estimated.

Fig. 1: Freshwater lakes on Greenland during Summers 1992 and 2002.

This Assessment and other facts served as the scientific basis for the November, 2006 Review on the economic consequences of addressing or failing to act on climate change published by Sir Nicholas Stern, former chief economist of the World Bank. This report had been commissioned by British Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown.

The Review suggests that early action to reduce greenhouse gas emissions would be much cheaper than originally assumed, and that delaying action will risk horrendous damage that could amount to as much as 20 percent of world GDP.

Climatologists tend to converge around the conclusion that global warming of an average of 2°C above pre-industrial levels should be seen as the threshold beyond which the anthropogenic interference with the climate system would become “dangerous”, to quote Article 2 of the FCCC.

All this information was available at the FCCC’s 12th Conference of the Parties in Nairobi in November, 2006. One had hoped that a post-Kyoto architecture could be negotiated but nothing of the kind happened. Nairobi was basically a bureaucratic gathering with no visible political initiative, although some progress was made on policies aimed at discouraging deforestation and laying the groundwork to bring emissions from deforestation under the post-Kyoto framework.

The EU had nothing to contribute to the coming debate on post Kyoto.

II: The EU’s bumpy learning phase

Nevertheless, the EU considers itself in the vanguard of climate policy. It was instrumental in launching the FCCC, which was adopted in Rio de Janeiro. Five years later, at the third Conference of the Parties of FCCC in Kyoto, the EU was one of the major players and ultimately the decisive one, in urging adoption of the Kyoto Protocol.

And finally, it was the EU which adopted the first international regime of carbon trading, through its Emissions Trading Scheme, ETS (Directive 2003/87/EC).

The first phase of the ETS, from 2005 to 2007, intended as the “learning phase”, ends this year. Some lessons can certainly be drawn from this learning phase. The EU had seen economic growth and growth in carbon emissions since Kyoto’s adoption, leading to demand for higher volumes of carbon allowances than appeared available in 2003. Therefore despite the political decision, taken under heavy influence from the major emitters, to allocate the allowances free of charge, allowances had a positive price from the start.

Fig. 2 shows the development of the price per ton of CO₂ emissions. The market price underwent a conspicuous collapse in May, 2006, due to the leaking of research data that major emitters were sitting on large quantities of unused allowances. At the time of the initial allocation they had claimed many more allowances than they actually needed.

Fig. 2: ICE-ECX Carbon Financial Instrument Futures Contract

What was more irritating than permit hoarding, not least to end-use consumers, was that some power utilities, notably in Germany, raised electricity prices in proportion to the market value of the allowances that they had obtained free of charge in the first place.

The power utilities argued that for every marginal kilowatt-hour generated above earlier production levels, additional costs would accrue in proportion to the permit prices. This led to calculations of horrendous marginal consumer prices above 1.000 Euros per ton of CO₂ emitted (Schlemmermeier and Schwintowski, 2006).

Ironically, most of the major emitters flourished tremendously after the introduction of the ETS, although the causes of this prosperity are complex. Electric utilities benefited from acquiring an oligopoly position a few years after market liberalization, while non-ferrous metals producers benefited from rising commodity prices.

Another irritating effect came in in recent months. Under the Kyoto Clean Development Mechanism (CDM), emitters were allowed to trade some of their obligations outside Europe. Their favourite place were China and India, discovering that reducing Chlorofluorocarbons (CFC’s) was valued very high on the scale of greenhouse gas emissions because their Global Warming Potential (GWP) is several thousands times higher per kilogram than that of CO₂.

To meet the phase out date of 2010 under the Montreal Protocol, developing countries are quite willing to reduce their production and stocks for good money from Europe. As the reduction of such substances is much cheaper per unit of GWP than CO₂ emissions reduction this trade is profitable both for the developing countries and the EU firms in need of reducing greenhouse gas emissions. This bargain is the main reason for the continued fall of prices for carbon emissions permits, as seen in fig 2. The bargain is nevertheless irritating because it weakens the incentive to reduce coal, oil and gas intensity in Europe, while China and India swiftly substitute phased out CFS’s with HCFC’s, notably with HCFC-22, the production of which results in emissions of trifluoromethane (HFC23), as an unwanted by-product that is a super greenhouse gas with a GWP 11,700 times more than CO₂.

The general impression in the European public is that not all went well with the “learning period” of the ETS. It will be politically difficult to repeat the free allocation of emission permits next time, and more voices are already being heard suggesting an auction of the allowances for the next phase.

The second phase of the ETS runs from 2008 to 2012, coterminous with the Kyoto Protocol. The EU intends to deliver the commitments assumed in the Kyoto Protocol.

Although it seems uncertain whether the ultimate target of an eight percent emissions reduction from levels in 1990 will be reached, the EU has performed far better in curbing greenhouse gas emissions than nearly all other Kyoto signatories. EU performance has also outpaced the US and Australia who have not ratified Kyoto and have had drastic increases in greenhouse gas emissions since 1997.

Post-Kyoto initiatives of the EU

It is clear now that Kyoto was just the first step toward a robust, global regime of carbon limits.

Everybody seems to agree that the post-Kyoto regime will have to be a lot more ambitious than Kyoto itself.

Greenhouse gas emissions will have to be reduced to at least 50% of expected business-as-usual levels if greenhouse gas concentrations are to be stabilised at a level low enough to keep global warming within roughly 2°C. Recent work (Vattenfall & McKinsey) suggests that stabilizing the climate at 450 ppm CO₂ by 2030 is doable and affordable if we start very soon. This goal is roughly compatible with holding the warming increase to 2O°C.

Many believe that eventually we will have to get beyond that goal and reduce emissions to 80% below today’s level.

What can be done on the European side to reach this goal? Essentially three strategies are available and have to be combined:

• Increasing energy efficiency;
• Increasing the use of fossil-free energy; and
• Reducing the amount of carbon dioxide being released into the atmosphere.

The EU has been fairly cautious on energy efficiency.

The energy efficiency directive, 2006/32/EC (16 May 2006), requires member states to draw up national action plans to achieve 1% yearly energy savings in the retail, supply and distribution of electricity, natural gas, urban heating, and other energy products including transport fuels. The 1% target, however, is only indicative. The national action plans will need approval from the Commission and will be reviewed every three years, but there are no sanctions whatsoever. The process will be spread over nine years, starting in January 2008, although the first national efficiency action plans are due for submission on 30 June, 2007. The European Parliament had demanded binding targets but member states killed that proposal during a Council meeting in 2005.

On renewable energies, the EU is more progressive.

Its 1997 White Paper contained a commitment to double renewable energy supplies to 12% by 2010 from 6% in 1998. The EU seems to be nearly on track to reach this goal, not least because of the pioneering roles of Denmark, Austria and Germany and the adoption in Spain of the German model of feed-in tariffs for electricity from renewables that is piped into the power grid.

In January, 2007, the Commission published “An Energy Policy for Europe” (COM (2007) 1 final). Its most specific change against earlier policies is the proposal for a binding target for biofuels to reach 10% of vehicles fuel by 2020, twice as much as proposed in earlier documents. This ambitious goal seems like an attempt also to join the USA in reducing dependence on imported oil. However, it immediately met with fierce opposition by ecological and North-South NGO’s hinting at big dangers resulting from diverting land from food and from the last remaining nature reserves.

The big contribution towards an ambitious climate policy seems to be intended to come from a new initiative to aggressively promote and spread “Clean Coal Technologies”.

Important steps were the increase of plant efficiency, chiefly by combined- cycle coal and gas technologies, some CHP (combined heat and power) and, according to a new EU Communication, a massive drive towards CO₂ capture and storage (CCS) in coal-based power generation. Bringing CCS to commercial viability in coal-fired power generation would pave the way to possible applications in combustion processes using other fossil fuels, notably gas. The new name of this game is “Sustainable Fossil Fuels” in power generation.

CO₂ capture and storage is perhaps the strongest incentive for speeding up the introduction of the Integrated Gasification Combined Cycle (IGCC) because that technology involves the automated separation of CO₂ as well as of sulfur and also allows the “syngas” from the gasification process to be used as feedstock for the hydrogen economy. However, all this comes at a cost, and many utilities, chiefly in non- Kyoto states such as the US, say that present market conditions leave IGCC non-competitive with conventional coal burning power plants.

Nevertheless, in light of the reality that coal is going to be burned one way or the other in China, India, other developing countries, and the U.S., and in the absence of an aggressive strategy on efficiency and renewables, CCS and IGCC may turn out to be lifelines for Europe and the world in curbing the release into the atmosphere of carbon dioxide.

Efficiency is more promising

It would be a lot more attractive, however, to have a well- orchestrated strategy to increase energy productivity.

On a macroeconomic scale, it is generally possible to extract at least four times, and in many sectors ten times, as much added value from one unit of energy than is presently achieved, be that unit kilowatt-hours, barrels of oil or gigajoules (Weizsäcker et al, 1997, Lovins et al 2005). The process may take 40 years but that is also the typical life-span of power plants. In addition, we are facing a new wave of decisions on the next generation of power supplies in Europe. Building too many dinosaurs now will make it virtually impossible for the next generation of politicians to shut them down or convert them without huge economic disruption.

The German grand coalition government has made energy efficiency its top priority and is trying during the twin Presidencies of the EU and G8 to popularize the concept.

III: The US and Climate Change

After years of dragging their feet, 2006 – 2007 will be seen as the years when Americans finally made up their mind that global warming was a serious crisis that required action.

American science helped to identify and highlight this issue in the 1980’s and 1990’s, and American NGO’s formulated the basic cap-andtrade policy model that underlies Kyoto and the ETS. American political timidity in the 1990’s and then outright obstructionism under the second President Bush slowed global progress on this issue. Fortunately, Europe took the lead – and did so relatively vigorously, sensibly, and with a careful eye to keeping the door open for the U.S. to rejoin the international process when it could.

That day is now near, and it will become a lot nearer when the US Congress enacts its own national cap-and-trade system.

There is a good chance that this will happen during this Congressional session, which means in the 18 months before the next Presidential campaign begins to paralyze the rest of the political process; and there is a good likelihood that if the law that is enacted is centrist and solid, President Bush will not veto it.

What has happened in the US to make this possibility imminent? Several things at once:

• The science became stronger, more visible, and more urgent.
• Business leaders, particularly the multinationals, came to understand that action on global warming was an imperative and began to remove the silent veto they exercise in American politics. General Electric, Wal-Mart, DuPont and others reflected a broad, silent change in mainstream American business attitudes toward global warming when they came out in favour of a mandatory national carbon cap.
• Thoughtful Americans noted that almost all of its allies with the quixotic exception of Australia, whose stance on this issue was quaint but not politically significant, were marching in the opposite direction.
• Many conservative evangelical Christian leaders decided that action on global warming was not only congruent with, but required by, their doctrinal beliefs.
• Former Vice-President Al Gore’s powerful movie, An Inconvenient Truth, ratcheted up the sense of urgency among those American opinion leaders already concerned about global warming. Intensity and urgency were the critical elements that had been missing in the American political discourse on global warming.
• The Democrats taking control of Congress by a thin margin now forces all stakeholders to reconsider their assessment of what may or may not be possible in the new Congress. That reassessment is by no means complete.

IV: The Impact on the Transatlantic Relationship

There are two pre-eminent reasons why climate change is both a critical and a formative issue for the most important geopolitical relationship in the world – that between Europe and the U.S.

The first reason climate change is a critical issue in the transatlantic partnership is because attitudes toward global warming specifically and environmental issues generally have their roots in fundamental values, life-styles, consumer habits and political outlooks.

It is one thing to share a broad consensus on democratic values and the market system, modulated to different degrees by state regulation or intervention; we grumble about each others’ political institutions and economic policies, but we do not differ fundamentally. But it is quite another thing for the European end of the transatlantic partnership to feel that environmental concerns are a bedrock and enduring priority for its own governments and a standard by which to judge the American government; and for Americans to feel vaguely that environmental issues constitute only one of many desirable agendas that need to be taken into account, and that on “green issues” the Europeans are “over the edge”. This rift becomes more serious as both ends of the partnership begin to understand that the “the environment” is really about “the economy, stupid.”

The second reason climate change is a critical and formative issue in the transatlantic relationship is because ultimately global warming requires that the Western industrial pattern, now imitated or imposed in virtually every part of the globe, undergo a carefully managed, full-scale, and relatively rapid transition to a low-carbon economy.

The process of decarbonizing our energy generation, our goods production, and our transportation systems on this planet is a task that is both daunting and imperative. It is one that will remain high, perhaps paramount, on our agenda and our children’s agenda for as long as they and we are alive.

What America must do is reasonably clear.

The US must pass a national carbon cap, with no “escape hatches” or other vitiating gimmicks.

It must then join Europe’s preliminary and fragile dialogue with China and the other giant economies of the South to build a bridge over which the US, China, Brazil, India and others can walk to join the young international regime of carbon limits.

In addition to these basic steps the US should, in concert with Europe, work on a plan of “carrots and sticks” in the trade area that will encourage other countries to join an eventual global carbon-reduction regime.

Such a plan should be linked to the evolving world trade system — for example, after a certain date requiring countries that have not taken a cap and joined the global carbon-reduction regime to accompany exports with certified carbon allowances to offset the CO₂ emissions involved in their manufacture. Measures of this type will in any case be necessary for domestic political purposes in the US and Europe if they are to support a serious global regime with the ambitious measures necessary to avoid the worst consequences of global warming.

These steps are simple to describe but not easy politically for the US to adopt. Following this course will, however, allow the US to participate constructively in the formation of a successor to the Kyoto Protocol, and will also serve to align once more the stances of the two partners in the transatlantic partnership in regard to climate change.

We suggest that Europe, as the transatlantic partner that in fact presently leads this process, should consider even bolder steps.

What might an American who has lived in and admires Europe advise Europe to do in this context? The following ideas will strike some European observers (though surely not the European co-author of this piece!) as unnecessarily bold. The opposite is true; if anything, they are not bold enough.

• Europe should continue to advance and improve the European Trading System. This is the world’s only full-fledged carbon capand- trade system. If it is weakened rather than strengthened; if it does not develop strong and impartial enforcement mechanisms; if it becomes a political horse-trading where favoured industries can get cushiony allowances; or on the other hand if it pushes too far too fast and causes unnecessary job loss and economic dislocation – any of these “ifs” could slow down or imperil the development of a wider post-Kyoto global carbon-limits regime. The ETS must grow in rigor and solidity. It need not set quantitatively more ambitious CO₂ reduction targets at this time. Both business and the public must be able to look at the ETS and say: “Yes, it is working, it is getting stronger, and we can live with it. This is the path of the future.”
• Europe should expand and intensify its dialogue with China. In the end only China’s self-interest will draw it into a global agreement. But the forces in China that want to do that need the exposure, the experience, and the analytic information necessary to make their political case domestically. An early objective should be discussion between the EU and China about an EU-supported financing scheme to make China’s next 100 coal plants “carbon-neutral”, with continuation of the scheme beyond 2012 conditional upon China joining the international system of carbon-restraints (which of course it will influence in large measure). Tony Blair, to his credit, started this process. Germany will now have to play a lead role in continuing and expanding it.
• The EU should take the bold and innovative step of inviting selected sub-national American political jurisdictions to join the ETS on a limited basis. That would include the state of California; the New England states that have limited CO₂ emissions from utilities; a forthcoming initiative of five Western US states to establish a regional carbon cap; and a growing number of other states or regional groupings that are now considering carbon limitations of various kinds. The participation should be limited in the amount of trading allowed so that it does not distort the European system, and the talks preparing this will necessarily be difficult because of the thorny American legal issues it will raise. But moving in this direction is important for creation of an international system, and its effect on American politics will be positive. The worst thing would be for Europeans to conclude that in order to “keep America in the game” they must move more slowly. On the contrary, the only thing that will “get America in the game” is to keep the pace of movement steady and serious.

• While one of the greatest virtues of cap-and-trade systems is that it treats all emissions as equal and drives economic actors to “hunt” vigorously for the lowest-cost, most efficient ways of reducing carbon, the world-wide stampede to build dirty coal plants is so large, and promises to lock in such a high level of carbon emissions, that special attention is required. The present EU discussion on when and how to seek carbon-neutral fossil fuel energy generation is the single most important debate on this issue, and if Europeans can drive it to a bold and successful conclusion, this will have enormous impact on both the U.S. and China. Recent work in many quarters, including a notable study on the costs of global abatement by Vattenfall and McKinsey, concludes that “dirty coal” can be tamed in terms of global warming if we move firmly and soon. Only Europe is now capable of defining and implementing that vital new direction.

Fig. 3: Marginal abatement cost in the different demand scenarios (assuming opportunities are adressed in order of increasing cost).

V: The Transatlantic Partnership to Combat Climate Change

We divide our list of policy choices and opportunities that now lie before the transatlantic partnership in the area of climate change into three categories.

The first category consists of directions and adjustments that will help make it attractive for those countries now outside the system of Kyoto carbon reductions to participate in such a system. We call this category “carbon diplomacy”.

The second category, “slow and steady”, contains policies that contribute to climate stabilization, and which must be pursued steadily so that the costs of low-carbon systems come down and new technologies are refined, but in such a way that the they do not drive a country’s or region’s marginal cost of energy generation or goods production far outside the relevant global marginal cost curves. These policies, however, both help lay the ground for, and contain the potential for rapid acceleration within, a successor global carbon-limit regime once that is put into place.

The third and final category we call “win/win”: they are policies that both contribute to climate stabilization and increase the global economic competitiveness of whichever countries adopt them.

Generally, the faster these options are adopted and pursued, the greater the gain, both in greenhouse gas emission reductions and in economic performance. At the present time, Europe and Japan are broadly best positioned to pursue them.

a) “Carbon Diplomacy”

• Modify the ETS to provide quantity-limited “docking stations” so that sub-national jurisdictions such as American, Brazilian, Indian or Australian states and Chinese provinces that “take a cap” could trade a limited amount of allowances on the European carbon market.
• Europe should get on board wholeheartedly with the global effort to develop a system of “Compensated Reductions” under which the rainforest nations can receive credits in the international trading system if they arrest deforestation. (Deforestation accounts for roughly 20% of global greenhouse gas emissions.)
• Europe should expand its dialogue with China on climate and energy security to include:
  • Exploration of a “low-carbon zone” that would provide advantageous financing and low-barrier IP arrangements for the globe’s largest consumer market and its largest provider of goods.
  • Exploration of ways in which Europe could provide financing to cover the marginal debt service costs of making China’s next generation of coal plants carbon-neutral as long as China joins and remains part of a global system of carbon caps.

b) “Slow and steady” options:

• Set energy portfolio standards that require more renewables.
• Make Carbon Capture and Sequestration safe and affordable, and thereby break the back of the coal problem. Europe is presently in a strong position to extend its technological and IP lead in this area. The present internal debate in Europe over whether to require carbon neutrality for all fossil fuel plants by 2020 is one of the most important and exciting discussions currently ongoing in the climate arena, and its outcome will have enormous impact around the world.
• Set more demanding but reasonable carbon reduction targets within the framework of the ETS, but this time with the long time horizons necessary to affect capital investment decisions.

c) Win/win options:

• Sharply accelerating the drive for energy efficiency. Europe is in a position to ramp up its efficiency targets now. The U.S. cannot do so easily on an economic basis without either a national carbon cap or financial incentives that encourage utilities to “sell” efficiency to their customers [2], or both, in place.
• Begin to shift agricultural subsidies from payments for surplus or non-production to payments for carbon sequestration. Agricultural sequestration will be necessary as a “bridging” device over the next quarter century for offsetting carbon emissions from traditional sources until they can be replaced with low-carbon sources. The US and Europe between them pay their farmers several hundred billion dollars per year in counter-productive subsidies for various forms of economically useless behaviour or inactivity. It will be far easier to redirect these politically sensitive subsidy systems than to dismantle them. China, India, the US, Europe, Canada, Brazil and others will all, before we are done, be supporting “carbon farmers” of one sort or another. Designing the terms, institutions and enforcement systems of such a system needs to begin now. Either Europe or the U.S. could take the lead, or they could launch the first “study” phase together as an adjunct to the Doha Round now underway. (As this article goes to press, Europe and the US are working feverishly to find ways to “save” the Doha Round.)
• Begin to set efficiency standards for vehicles and aircraft which sharply increase mileage efficiency, achieve significant net carbon emission reductions, and sharply decrease reliance on imported fuel. (It is possible to have vehicles that will get as much as 500 miles per gallon of imported hydrocarbons). It will be possible with a single set of aggressive transportation policies to modernize the automotive sector, trigger development of a new generation of aircraft that are more efficient and emit less greenhouse gases, and provide increased income for the agricultural sector through national production of low-carbon fuels. Almost all of the world’s major auto companies are multinational, and it makes most sense if Europe, the U.S. and Japan start down this path together. However, any one of the three could begin alone.

Conclusion

In the trade-off between the aggressiveness of the steps required, and the time remaining in which to take them, it is clearly in the interest of humanity to start early and carefully, rather than late and drastically. Europe has grasped this; as of this writing the US is just beginning to awaken to that fact.

Every previous experiment with market-based systems suggests that once we adopt the system and unleash human ingenuity, commercial inertia, financial greed and naked ambition in the service of avoiding climate meltdown, it will happen faster, more easily, and more cheaply than even the shrewdest economists and pundits predict.

However, a difficult and fateful conversation with the large and growing economies of the South remains in front of us.

The one issue on which the US and Europe have no time to lose, then, is to get themselves facing in the same direction and working together once again on this vital issue.

Only in this manner will they be strong enough to insist wisely but firmly upon a set of incentives and constraints likely to make it in the self-interest of the developing countries to join a carbon-reduction framework that will, at last, be truly global. Let us remember that unlike past problems, the brutal reality that underlies the threat of global warming is that either we all succeed in avoiding the worst, or none of us will.

References

• Arctic Climate Impact Assessment (ACIA). 2005. Cambridge University Press.
• IPCC. Fourth Assessment Report (Summary), Feb 2007. www.ipcc.ch
• Lovins, Amory, Kyle Datta, Odd-Even Bustnes, Jonathan Kooney, Nathan Glasgow. 2005. Winning the Oil Endgame. 2007 edition by Rocky Mountain Institute, Snowmass Colorado.
• McKinsey and Vattenfall. 2006
• Schlemmermeier, Ben and Hans-Peter Schwintowski. 2006. Das deutsche Handelssystem für Emissionszertifikate: Rechtswidrig?, Zeitschr. f. neues Energierecht 10/3, p 195-199.
• Stern, Nicholas. 2007. The Stern Review on the Economics of Climate Change. London. Download: www.sternreview.org.uk.
• Weizsäcker, Ernst Ulrich von, Amory Lovins and Hunter Lovins. 1997. Factor Four. Doubling Wealth, Halving Resource Use. London: Earthscan.

[*] Peter Goldmark directs the Climate and Air program for Environmental Defense, a Washingtonbased NGO. Most recently the chairman and CEO of the International Herald Tribune, Goldmark has served as executive director of the Port Authority of New York and NJ and as budget director for the State of New York. He was president of the Rockefeller Foundation and encouraged their involvement in environmental issues, particularly energy.

Ernst Ulrich von Weizsäcker is dean of the Donald Bren School of Environmental Science and Management at the University of California, Santa Barbara. A professor of interdisciplinary biology who was the founding president of the University of Kassel in Germany, Weizsäcker has served two terms as a member of the German Parliament. He also acted as director of the United Nations Centre for Science and Technology for Development and president of the Wuppertal Institute for Climate, Environment, and Energy.

[2] In the U.S., “decoupling” means rewarding utilities for efficiency rather than for volume, i.e. “decoupling” utility profits from the volume of energy sold. Only California has “decoupled”; this step is responsible for the astonishing fact that California has experienced no increase in per capita energy usage for thirty years.