(A Workshop on the Economic Advantages of Climate Warming)
Transcript of Workshop held on January 30 2001
World Economic Forum
By Joan Veon, Businesswoman and Journalist
Jose Maria Fuentes – Managing Director, WEF – Moderator
Professor Mario Molina, MIT – one of the two founders of "climate warming"
Samuel Johnson – Chairman, S.C. Johnson Sons & Co., Racine, WI –environmentalist
Richard Sandor – Chairman, CEO – Environmental Financial Products
Jose Maria Fuentes, Former President of Costa and Managing Director of the WEF
On 12/8/97, Prime Minister Hashimoto (Japan), vice President Gore and Figueres from Costa Rica as president of Costa Rica took the stand to inaugurate the Kyoto meetings of which we had high hopes for climate change. It looks like Kyoto was the common denominator for getting out of politics. Are we addressing greenhouse challenge in responsible way? The stalemate in the Hague would argue that we are not. Are there new ways that we can make the fixing of carbon a good business opportunity through the creation of a market that would sell environmental services and at the same time transfer much needed technology and resources from the north to the south.
Professor Molina MIT
Greenhouse gas effect is an environmental issue, which is a consequence of changes in the composition of the earth’s atmosphere on the global scale. Changes which are of human origin. It is the energy balance of our planet, which is at stake. We get energy from the sun and on the average our planet uses the same amount of energy but instead of being visible radiation, we lose it in the form infrared radiation. The atmosphere is essential transparent to this radiation but it is not as hard to be seen since there are certain gases which are "greenhouse gases" which is one of the consequences at the earth’s surface. The average temperature ---- will the surface temperature do?
A group of scientists, the Intergovernmental Panel of Scientists on Climate Change is a panel of scientists which examines the atmosphere and is modeled after the Atmospheric Ozone to assess what is going on.
The ICC had a report 5 years ago in which they said, "the balance of evidence suggests that". New assessments the wording is stronger. What is certain is today that it is "virtually certain that the temperature has increased on the surface of our planet, over these past centuries, over lands and oceans probably .4 to .8 degrees Celsius. There is more certainty of this today. The first report was not of the earth’s surface. With newer technology the surface measurements are more exact.
The question then is how has the temperatures change? He showed a chart from 1000 AD to 2000AD showing warming. Molina said that the data from 1000AD to 1850AD is as a result of reconstructed temperature records, which may be a direct way to get past temperatures. He explained that part of science is to estimate uncertainties.
Why models show these result – driving force for climate change is the amount of carbon in the atmosphere. Greenhouse gas: CO2 plus, Ozone in the lower atmosphere, Ozone comes from pollution and burning forests and burning COAL, All of the above cool the planet
Prediction: Previous report – "likely in this century temperature might increase bet. 1 and 3.5 degrees Celsius now they are 1.5 to 6 degrees Celsius. This is very signification.
Sea levels would also rise.
Sam Johnson – S. C. Johnson Wax & Sons
Just so everyone knows: I have been an environmentalist for all my life and a businessman for all of my adult life. I would like to refer to Pro. Molina’s research in discovering the relationship between ozone depletion and CFCs. In the mid-70’s when that information was released it was a shock to our company because we were the largest producer of aerosol cans in the world. And the largest users of CFCs in the world. In order to eliminate that raw material was a major consideration. I took this information to our laboratory and asked if "Is this possible?" After one month the word came back that yes, it is possible. That is when we had to get rid of it. We did it on a worldwide basis and it put us out of the aerosol business in six countries of the world because they had MANDATED the use of CFCs because of its inflammability. We were able to come up with a much simpler substitute using hydrocarbons and water.
During that year I went to one of the BI-annual meetings of The Business Council Meeting and was accused by my fellow associates, "Sam you are going to wreck the chemical industry in this industry. Don’t you realize that Congress is going to pass the Hazardous Substance Act and we are all going to be in deep trouble." That transformed me and I became an activist and subsequently joined The Nature Conservancy and a founder of the World Business Council for Sustainable Development and joined some corporate boards: Mobil, Heinz and John Deere. I have seen both sides of the issue. I think I have the business sense. I served on the President’s Council on Sustainable Development and got to know Carol Browner and the head of the Sierra Club. We did a TV program in which Carol mentioned that a partnership between the business community, the environmental community
We were then fined 1.5 million for pollution. We had not polluted anything but had messed up our paperwork and were fined $1.5 million for messing up our paperwork. It was an awakening me. When I got to my Club my friends asked me about "What happened to Mr. Big Environmentalist". What they were saying is that you can’t be an environmentalist and a businessman at the same time. That is wrong. I am a U.S. industrialist who believes the world is getting warmer and we in the U.S. are a big part of the problem and we have to do something about it."
I have been selling a product and I know about marketing and that Kyoto is a very bad product to try to sell. From my own marketing experience it is going to be uphill to get housewives to get them to change their habits. You can’t do it very easily. The U.S. public isn’t even close to changing their lifestyle. Their perception is that there is no crisis. Kyoto was a hard sell to start with and the specifics are even worst. Everybody perceived its bias towards the U.S. and giving us loopholes. It is so complex that it is mind-boggling and so vague that it tries to enforce something that is unenforceable. The worst is that it is top down and does not involved all the stakeholders that should be involved.
"People are happy to do the right thing if it makes sense or has incentives but by forcing people to do something that doesn’t make sense it makes them mad. So what is the US going to do? We have to educate people. It isn’t just a fringe theory.
Bush has an opportunity to establish a task force of scientist, business, and environmentalists to use this task force to really begin to develop a plan of action.
Bush needs to: set goals, forces us on the biggest sources of sources of greenhouse gas. Fund vast research and development, put incentives for Co2, establish a framework for emission trading. The US needs to put incentives where its objectives are. Move beyond questioning the science.
Dr. Frankel, Professor, John F. Kennedy School of Government, Harvard and who worked on Kyoto Protocol and were a member of Clinton’s Counsel of Economic Advisors.
The Problem is real and can be addressed if think clearly about what the objective is the constraints in the world and the best ways of achieving our goals. 5 points:
- It is a very long journey to reduce greenhouse gases into the atmosphere. Need to set targets that involve leveling off emissions in various countries and to reduce it by 6% of 1990 levels in industrial countries according to the 1997 Kyoto agreement. The target is 2012. If the U.S. had to attain these targets by reducing emissions domestically it would be very costly.
Showed slide of predictions of eight different models. The average cost is that the goals in Kyoto involved a shadow price of carbon of $241 oz. For the U.S. That would feel like the oil shocks of the 70’s. (Dollars per ton of carbon)
- We can do this at relatively costs by using market based systems, particularly international and domestic trading in emissions permits. This allows us to achieve the identical environmental goal at much lower costs and can bring the costs down to reasonable levels.
After Kyoto the U.S. Congress was interested to hear from us. If you allow trading, the affect of one ton of carbon emitted into the atmosphere has the same affect no matter where it is emitted. Therefore it makes a lot more sense to pay Russia to cut back some of its very dirty coal power plants than to the US to tear down its coal-fired plant. Trading among countries would reduce the cost by 57%. If you bring in the developing countries, then can reduce cost by 80-87% in which case it brings the cost down to $14-23 dollars per ton which would raise the price of gas by 5% and fuel oil by 9%, gasoline 2% per gallon and electricity by 4%. This is reasonable and affordable to pay for such an affordable project. If you are trading permits, this is the right to pollute.
- Climate change is the first big environmental problem, which is completely global and individual countries, let alone firms cannot solve it on their own. Everybody has to get together in a treaty like Kyoto to avoid free riding.
- International trading permits of permits is necessary to bring the costs down.
We have Stu Eizenstat in the audience who was the lead negotiator in Kyoto. I was expecting that we were not going to get an agreement. We did get an agreement by including certain "flexible mechanisms" which the Europeans call loopholes which in a sense just post-pone the problems for three years. It was not surprising that at The Hague in November we did not come to an agreement because of the gaps so wide. The five political chasms which have to be bridged. We need to bridge the following gaps: 5. Kyoto Protocol is not going to be ratified. President Clinton signed it but the Senate position so far is 95-0 and it has not improved since.
RICHARD SANDOR, Chairman and CEO, Environmental Financial Products
- Chasm between environmentally concerned scientists and activists and the Congress and businessman who are skeptical of the science. Many congressmen have said they don’t believe the science. Not long ago many businessmen said they did not see a problem but we are now seeing a change.
- Between what people say—public opinion polls and what they are willing support. While most Americans say they think climate change is a serious problem then they ask what kind of economic cost are you willing to bear and they say NONE.
- Between the technology engineers – don’t worry – I have a way to solve the problem – free: wind, solar, nuclear, fuel cells, from which there may be merit. People don’t think you can solve something this big that cheap. WE NEED TO GET THE PRICE OF ENERGY UP TO ENCOURAGE PEOPLE TO ADOPT THESE NEW TECHNOLOGIES. THERE IS A REASON WHY THEY ARE NOT DOING IT NOW AND THAT IS BECAUSE THERE IS NOT ENOUGH INCENTIVE TO DO IT. GOT TO GET THE PRICE UP IN ORDER TO GET THEM TO DO IT.
- The chasm between the US and EU
We were supposed to work out details left out at Kyoto regarding international trading the EU wanted to limit trading and sinks: planting trees TO TAKE THE CARBON out of the atmosphere. If you leave out sinks you can bring the costs back further but on the other hand, another three years have gone by and emissions are still rising—another 20% above 1990.
- We cannot do it without the lesser-developed countries. The reason why we need LDC’s because it is necessary to bring down costs. It is far cheaper to pay China when they are just about to build a coal fired plant to do something else instead, than it is to tear down our perfectly good coal fired plants. Power plants have a 40-year life span and t is very costly to shut them down. It is much cheaper to pay someone else. We also need them because we won’t achieve the target goals if we don’t have them. We need the LDC’s to reduce the emissions. They are going to pass us as emitters. China will pass the U.S. in the next 20 years. The good news is that it does not have to be costly for them. They should be given targets, which involve continued growth. It would be completely unreasonable to ask them to cut down to 1990 levels. They should be allowed to grow but to limit it to no greater to "business as usual."
If we take a look at markets they obey very simple markets. Amsterdam stock exchange in 1605, the Mortgage backed market in the 1960s, etc. They all follow the same pattern. There is a structural change. Somebody has to invent some standards, you then have legal questions of warehouse receipt, property rights and evidence of ownership. I was involved in the SO2 program. The mortgage back product I was involved in. The same factors are involved with CO2.
The forecasts were the same. Low was $300 ton; High $900 ton and medium was $600 and for seven years, the average was $137 or 80% below where we thought it would be. What was thought to be $10-15B a year was only $1B last year. The risk reward for a trader was fabulous.
In markets get to the applied. The forecasts used to be $250 ton and now is at $100. I had the privilege of trading. WE bought some tones 1000 – for under $20 ton. This past Friday, we closed a deal with Ontario Power which has self-imposed caps and were looking for another alternative and rather than cutting it which was too expense. He went on to describe the deal and players. We invented a structured financial deal and the trade was for 1 million tones and it wasn’t $20 or $10 but was below $10. I can’t tell you because of client confidentiality. We are looking at $5 billion or $8 billion on a $9.5T economy. IF we can discover price, the program will be diminimus.
We are also doing: (1) organizing the Chicago Climate Exchange at www.chicagoclimatex.com
Our advisory committee includes people like Maurice Strong, the 3-time governor of Illinois, Joe Kennedy Jr., Tom Lovejoy and developing the protocols and the verifications and we are going to trade it. We are going to ask companies to take a modest cap and reduce slowly so that we can discover and let the private sector lead the process and the government will follow. We have Brazil in the pilot, hopefully Costa Rica, and reforestation as a key commodity.
Another way markets can be used:
One year ago worked with a Swiss company and developed a metric to the sustainable development of a company: looked at financial, environmental and social sustainability. You received points for employees owning the company, etc. Worked with Dow for 2 years and last year launched the Dow Environmental Index. Intel is not only the best financial performer, it is also the environmental and social in its class. Shell and Honeywell as well.
In the short 12 months, we have collected $1B to $1.5B dollars. Now our argument is "MR. CEO you are environmentally and social insensitive, you might have your stock price increase in an environmentally responsible areas. " Trying to bridge the gap between the environment and the capital markets. One is by commodity and the other by tape turned over.
We are trying to bring in agriculture – above/below ground, using carbon and low till. 30 senators who recognize that they are winners under a carbon trading scenario. We think if you get pharmaceuticals, energy, utilities and critical mass of 15-20 companies you will get a meaningful. Once you get meaningful prices – The UK is well ahead of the curve and have a program by the end of the year and I service on the Board of the London Financial Futures Exchange and we are designing some standards so we will be cross-border pollugenity? So that English trades can be flipped into U.S. Trades and visa versa. We already have one comparable set. Easy and simple paper work and other structural in change. Come join us.
Question from Iain Conn-BP (Group V.P.-Downstream): I want to echo some of the notes of optimism expressed by the panel. BP committed to the full Kyoto reduction of 10% of the 1990 levels and has embarked on a full program of emissions trading to see if it works across national boundaries and if you can get 150 business units across the world to trade. If you can, you can get 150 corporations, and so on. We have had a lot of success. I personally have been involved in designing it and all of our business units worldwide have targets and they are trading credits. Interestingly, the cost per ton of CO2 has fallen from $21 ton to $12 ton over the last 18 months and we are seeing the units were the biggest bang for buck actually making reductions and those units where it costs more are buying credits. So the system appears to be working. We have faced some issues like base lining and taxation. When you start moving real dollars around between fiscal regimes, there are taxes. This is major corundum as to how best to stimulate that process.
Answer from Sandor: BP has done a fantastic job with regard to price discovery. Their stock is in the Index as best of class. I would like to answer very specifically because what we are trying to do in Chicago, and I hope we can get you involved as well. We are talking to several of the major utilities in the area. I am on the Board of Directors of American Electric Power and we are talking to Synergy and other forward-looking companies like Baxter. We are trying to develop these protocols now. We are trying to also bring in the agricultural sector because changes in soil practices allow farmers to have two sources of income: one above the ground and the other below the ground by sequestering carbon and actually and using less fertilizer and low till. We also think that has political benefits and it has not gone UN-noticed by the Senate Agriculture Committee and 30 senators in the Midwest who now recognize they are winners under a carbon trading scenario. We think that if you get pharmaceuticals, energy, some utilities and a critical mass of ten to twenty companies, and agriculture, that we will get a meaningful price. Once we get a meaningful price, we will try to work—you may know that the UK is well ahead of the curve and may have a program by the end of the year. I sit on the board of the London Financial Futures Exchange and we are designing some standards so there will be cross-border homogeneity so English trades can be flipped into North American trades and visa versa. We will be using one-page contracts, we are getting rid of the lawyers, and we have one or two reports on verification and we are working with PWC in developing some monitoring protocols. Please come join us we need plenty of help.
Question: We have a huge problem. When I ask my CEO’s what they know about climate change, they don’t know anything. How to deal with this? How on earth, in the absence of crisis, are we going to get any serious commitment if governments do not profoundly change both their attitudes and their strategies to get people on their side? That is my question. Also, I am a huge admirer of Professor Molina, perhaps he might tell us in the absence of dealing with this situation, is there a case to be made for adaptation? A positive case for climate change?
Answer - Molina – Have to have adaptation as part of the solution. More needs to be done. So far what works is if we take single issues—climate change—its cause is pollution. If you put them together you can make a stronger case. In poor countries, they have visible pollution issues and there is much in common if they have higher energy efficiency. There is one more, which is the difference in terms of sinks between US/Europe. From my point of view, it is very important to worry about land use/reforestation, not because it is the dominate solution for climate change, if you consider the enormous value from forests from the standpoint of biodiversity, it is foolish of destroying forests and not increasing them. Perhaps society would be more easily convinced if you take all these issues into account, then it is imperative that we move. It is not about solution to be gin to have these deals between the developed and lesser developed countries to make sure that forests are not further deteriorated rather than worrying about which country is or is not doing something.
STATEMENT - Mr. Robert Carr, Premier of New South Wales – Australia - establishing carbon credits as property right
I’d like to talk about carbon sinks. I heard on the BBC someone talking about a "ice free world." Carbon sinks I put forward as one part of the solution. Two years ago, we passed legislation for establishing carbon credits as property right, which is a new law in New South Walls, and we are the only state to have done it. Carbon is a property right. The next step to energy companies and invest in forests in New south Wales—we have the land, we are talking land cleared before 1990 according to the Kyoto Protocol. Lay out the forests, our expert forestry organization would plant trees, run the forest, and manage them, you own the timber so you have a guaranteed rate of return but you also have carbon rights.
The first investor was the Tokyo Power Electric Company, which is the world’s biggest privately owned energy company. They put $130m Australian dollars into this, which enables the laying out of 40,000 hectares of plantation forest. We plant, we run the investment for them and they get carbon credits in anticipation of a carbon trading system.
Sandor: Well done. We will have full-fledged markets in 7-8 years and liquid markets in 2-3 years.
Sam Johnson: As Chairman of The Nature Conservancy, we have saved in carbon sequestration programs in the past 10 years over 11 million acres and the on-going part of what we do is to get the power companies who need the credits, and we find the land –this is a principle activity. In other parts of the world, this is our principle activity—one of the things that made us the largest conservation organization in the world, people are beginning to throw money at us to do this and so that is optimistic from our point of view. The main purpose is to preserve habitat but we do not mind taking rainforest or any other kind of forest and using it for carbon sequestration.
JV Question: (1) Molina: You had charts which back 1000 years, where did you get the information for years previous to 1850. (2) Professor Frankel – Please outline the taxes and the costs – tax on carbon, trading permits—what does that mean for the Average America if the cost of energy is going to rise and we are going to pay more at the pumps, and for heating then a carbon tax, and then we are going to pay China not to develop a coal fired plant—this all comes out of our pocket, give me an understanding economically of what we are going to pay. (3) Mr. Johnson—what kind of changes are you looking for us housewives to make?
- Molina: First of all, I must explain that it is very hard in six minutes to give a very clear understanding. Those are called "reconstructed temperature records" because there were no direct measurements. There are many indirect ways to get past temperatures from what we call proxies. The simplest one to explain is the ice record. We can tell what the temperature was 100,000 years ago. That has to do with measuring isotopes—a chemical composition of the snow where one can calibrate and do experiments that also shape them with average global temperatures. There are uncertainties in the technologies and ways to look at these records. Part of the scientific method is to establish what the uncertainties and we can do it more than one way. There is relatively little controversy as to what the temperatures actually were.
- Frankel – Let me clarify what it would cost to pay China. Under the treaty, any country would have the right or ability to do it any way they want as long as they achieve their targets. The position of the Administration is that this is not to be done with taxpayer money. Create the ability for private firms if they find it cost-effect to do it by buying emission permits from China rather than cutting back on emissions themselves. This is not a cost that would be paid by the public and would bring the cost down quite a bit but still we are not talking about doing the entire target through paying other countries. It would involve reducing carbon use domestically which would show up as a higher price for fuel and for energy but also for products that are energy-intensive like electricity. The bottom line would be the kinds of numbers I put up, that is supposed to be for everything. For the overall cost the 5% in the cost of energy which would be 10 times that if we did not use and flexibility trading mechanisms. We have heard a lot of ideas here which are great projects that are going on by individual companies like BP or New South Wales and this is really important. These are demonstration projects. Year after year emissions rise. By 2008, it will be 35% higher. But these are demonstration projects to point the way for activities in the future which would point the way. In a few years from now, Kyoto will be a dead letter because it will be so clear that we can’t achieve those goals. My hope is that with a few hot summers and a few melting glaciers that people will get energized on this issue. When we start over again in Johannesburg in 2005 that there will be a more serious attempt.
- Sam Johnson - I would try to move her away from the SUV into the idealized auto—hydrogen powered fuel cell, direct drive electric automobile that is technically possibly. The fuel cell is there for hydrogen. It would make it more exciting for her and attractive for her because they accelerate faster than a gasoline automobile and make it the in thing for the brilliant young housewife to drive. Those gas-guzzlers are bad.
Outgoing Deputy Secretary Treasury of the US and the lead negotiator at Kyoto and Buenos Aires. I would like to build on some of the comments. Mr. Johnson, with all respect to what you are doing Kyoto is not a perfect instrument but a very imperfect instrument. The notion that individual companies will simply collectively do enough to deal with the problem is also not correct. There has to be some kind of international framework whether it is Kyoto or not. Let me start there. Second. I want to build on what Jeff Frankel said. What has been missing understands the politics of this issue within the United States and between the US and Europe and the developing countries. We came into Kyoto with one tied behind our back. At Berlin there had been already an agreement to exempt developing countries to take any obligation. We were already dealing with half the problem. What was the trade off at Kyoto? It was a very, very complicated one to negotiate. The trade off was simple: the U.S., because of the huge costs and our inefficiency would be permitted to have unlimited emissions trading and in return the EU would be given a bubble. The EU is considered one unit so the fact is that the UK, because of their almost total shift to natural gas, gives the EU a tremendous advantage of allowing other countries within that bubble to go way over Kyoto so long as the EU stays within a limit. We do not have a bubble. That was an enormous tradeoff. Third, the second trade-off is that sinks would be permitted. We have a lot of force and we wanted to use those sinks as a way of reducing costs. What the argument has degenerated into and The Hague came close to an agreement was a competitiveness ____ The Europeans and the Commission feel that unless the US bears a heavier share of the burden by making domestic reductions and limits the amount of emissions trading and limits the amounts of sinks, that we can use, that we will be at a competitive advantage in terms of our industry development to theirs. Frankly I don’t think European companies and MNC’s share that view but that is very fundamental to the difference between the US and EU. Fourth we are not going to get Kyoto until developing countries take on their own targets. They have an incentive to do so. Argentina did it in 1998, their incentives permit them to trade. If they are outside the system, they can’t trade. There was a suggestion to create a fund but that is not going to be enough. If we have to throw Kyoto, we should not throw the baby with the bath water. If you look at the WTO 10 – 15 years ago, the developing countries were insistent that they could not cut their tariffs or open their system up. It took a decade of education to convince them to do so and maybe it wills decade to convince them now. Until the India’s and China’s are willing to reduce growth, there will never be a ratifiable agreement with the U.S.