Interview with Richard Tol | Prometheus Archive

The German magazine WirtschaftsWoche has posted online (auf Deutsch) an interview with economist Richard Tol discussing the economics of climate change. Benny Peiser has provided an English translation which we are happy to re-post here in full.

“WE’VE GOT ENOUGH TIME” – AN INTERVIEW WITH RICHARD TOL

WirtschaftsWoche, 11 November 2006

The eminent climate economist Richard Tol on climate alarmism and the right strategies for the reduction of greenhouse gas emissions

WirtschaftsWoche (WiWo): Mr. Tol, You have called the report on the financial consequences of climate change by economics professor Sir Nicholas Stern “alarmist”. How did you arrive at this judgement?

Tol: I speak of alarmism because Stern, in the summary of his report, estimated the damage [from climate change] to cost between 5 to 20 per cent of global GDP, but he is basing this on extremely pessimistic scenarios. He ignored other studies that estimate damages to be far below one per cent. This is how he arrives at the scary numbers. At the same time, the summary also gives the impression that the five per cent [of GDP damage] commences immediately and will continue for eternity if noting is done to counter it immediately. In the unabridged version, however, it is stated that the five per cent will be reached in 2075 at the earliest. This procedure is temerarious and an unacceptable way of political advice-giving.

WiWo: Now that the ice caps of the poles melt faster than even the leading sceptics have feared, isn’t it essential to ring the alarm bells?

Tol: First of all, the report does not review these developments at all, and secondly any alarm does not help. It will take 50 to 100 years to lower the emission of greenhouse gases to an agreeable level. In order to achieve this goal, soberness is demanded.

WiWo: Why did Nicholas Stern sound the alarm nevertheless? He was the chief economist at the World Bank and is generally considered to be a sober person.

Tol: At the outset, the study was a purely academic exercise. Then the British Chancellor of the Exchequer, Gordon Brown, who commissioned the Stern Review, discerned that the leader of the Conservative Party, David Cameron, put the Labour Party increasingly under environmental pressure by portraying himself greener than the government. In order to raise its [environmental] profile, the government thus strongly influenced the tenor of the study.

WiWo: The fact that the earth is warming up due to human behaviour is scientifically beyond doubt. Isn’t it then sensible to forcefully steer against it, as Nicholas Stern suggests?

Tol: We must do something and should now begin, that’s where I agree with Stern. But there is no risk of damage that would force us to act injudiciously. We’ve got enough time to look for the economically most effective options rather than dash into ‘actionism’ which then becomes very expensive.

WiWo: Stern calculates that a forceful fight against global warming is today twenty times cheaper than doing nothing.

Tol: That is completely exaggerated. Stern has set the costs of damage much too high and the costs of emission reduction much too low. This employment of incorrect numbers makes it easy for opponents of climatic protection to evade accepting a consensus. They correctly assert: What the Stern Review claims is rubbish. You can only have an effective climate policy if everyone takes part. We need a long-term solution, and it has to be global one. The Stern Review perturbs this agreement process to the extent that it performs a disservice to the goals of climate protection.

WiWo: How seriously, according to your estimates, are the economic consequences of global warming?

Tol: The situation is serious, but definitely not as seriously as Stern claims. According to my computations the greenhouse effect can cause annual damage of around 0,5 per cent of global GDP. In the next century, when the impact of global warming will be felt fully, the damage could amount to two to four per cent, if nothing would be done about it.

WiWo: What do you suggest as counter measure?

Tol: The means of my choice would be to raise world-wide taxes on emissions. But that is politically not feasible. Thus, emission trading remains as the second best solution. The state allocates certificates to businesses which – at the outset – permit them free emissions of carbon dioxide, as they do today, and without setting secondary costs. However, if they want to produce more, they must either produce more [energy] efficiently or buy from other businesses (which have reduced their carbon dioxide output) certificates at a kind stock exchange. Such a free market system helps the environment.

WiWo: In Europe, such a regulatory system has been in place since last year. Nevertheless, it hasn’t had much of an effect.

Tol: That is because of the fact that too many certificates were allocated. Consequently, little money can be made from the sales of certificates at the moment. Thus there are no incentives for lowering CO2-emissions. In order to have any lasting effect, the certificate trade would have to incorporate traffic, households and agriculture, additional greenhouse gases and the whole world economy. Europe alone cannot save the climate.

WiWo: Why should China and India, whose industries still produce a great deal with outdated technologies, join in the certificate trade?

Tol: It is exactly this outdated technology that makes it possible for China and India to achieve large CO2 reductions by way of relatively small investments. They could sell the emissions they reduce to Europe or the USA and could thus make a lot of money.

WiWo: The United Nations is currently trying to agree a new international climate treaty. How promising are such agreements?

Tol: They don’t accomplish much as the Kyoto Treaty has already revealed. Only few countries committed themselves to concrete goals at all, only few uphold their obligations, and some, like Canada recently, simply pull out again. And why not – there is no threat of sanctions!

WiWo: Does that mean that 6000 UN delegates in Nairobi are gathering for a useless chit-chat?

Tol: They should concentrate on organising an international trade with certificates and close co-operation regarding the introduction of low-carbon technologies. Unfortunately neither issue is on the agenda. In fact, according to our calculations, world-wide greenhouse gas emissions could be halved in one fell swoop if the world would employ the best available technologies.

WiWo: Isn’t it rather utopian to believe that all the countries in the world would agree on uniform technical standards?

Tol: It would often be sufficient if few market-dominating countries made advances in this direction. All the cars of this world, for example, are manufactured in just ten countries. If these countries would agree to reduce pollution output per HP by half in say ten years, that would relieve the environment enormously. The rest of the world would have no choice than to join in. Something similar applies to power stations, for which even fewer countries possess the technology. A bulk of problems would be solved if we succeeded to decouple energy consumption and emission output by means of modern technologies.

WiWo: Should the governments subsidise certain technologies financially?

Tol: We should certainly prevent civil servants to determine what is good or bad in this respect. Policy should be limited to determine certain goals, just like California, for instance, did with regards to car emissions. This would accelerate research and development most effectively.

WiWo: The German government reinforces the employment of renewable energies such as wind and sun. Wouldn’t a rapid expansion of nuclear energy protect global climate substantially better?

Tol: The huge amount of money that is flowing into wind energy in Germany is an off-putting example of what happens when governments select the technology. The people who are now earning very well on account of wind turbines had most excellent relations to the formerly Green [Party run] Department of the Environment. Much money is flowing although wind energy is very unreliable and will never provide more than ten per cent of the total energy requirement. In addition, wind energy is expensive and technical progress already today seems to be exhausted to a large extent. Nuclear power can be a solution. In any case, it is more reliable and, most likely, also cheaper in the long term.

WiWo: Some experts believe that it costs less to adapt to climate change instead of stopping it. Are they right?

Tol: We should do both. In order to prevent that rising sea levels flood coastal areas, the building of dykes is an inexpensive solution. But we should not let global warming proceed unconstrained, otherwise we risk that one day the water in the oceans evaporates.

WiWo: Next year, the IPCC, the scientific committee of the UN in charge of assessing climate change, will issue its next report. Is there sufficient economic expertise readily available in the IPCC?

Tol: Unfortunately, not at all. Over the years, the IPCC has become ever greener and the few economists, who were previously involved, have been pushed out. Obviously, this casts doubt on the quality of the results.

WiWo: On a personal note, how confident are you that the climate can be still salvaged?

Tol: I do not see any reason to panic. We’ve got enough time to act in response. And, it would appear that the Americans and Chinese, the two biggest climate sinners, will soon invest much more in modes of climate protection. The results of the American elections will strengthen climate activists in the USA so that I envisage new concrete climate programmes in the next three years. The Chinese will follow suit in the next decade, not least because otherwise they will be threatened by catastrophic environmental damage. That will generate a huge drive.