The current climate talks in Copenhagen have exacerbated the controversy between climate skeptics and environmentalists. The arguments used by both denialists and supporters of the anthropogenic climate change idea have hardly changed since the late 1980s when the effect of greenhouse gases on the atmosphere first hit the headlines.
The truth is that no matter how much we know about climate change, there never will be an agreement among scientists on all the aspects. When there is a full agreement and absolute truth about something, this cannot be science; it can only be religion. Therefore, economists and politicians have to handle the issue under circumstances of uncertainty — a typical but not unique feature of climate change policies.
An excellent example of addressing probabilities of unfavorable outcomes is buying airbags for your car. Airbags reduce the risk of an injury or death in a car accident, even though there are chances that the people who have airbags do not get into accidents and that the airbags do not always help if there is a car crash.
In decision theory, this approach is known as a “minimax solution,” or assessing the maximum possible losses and trying to minimize them usually at a cost much lower that the value at risk. In the language of the United Nations Framework Convention on Climate Change, “minimax” is explained as the “precautionary principle”: “Where there are threats of serious or irreversible damage, lack of full scientific certainty should not be used as a reason for postponing such measures, taking into account that policies and measures to deal with climate change should be cost-effective so as to ensure global benefits at the lowest possible cost” (Article 3). But while the threat of a car accident is immediate, most of the severe climate change risks are projected to mature in several decades.
This explains why urgent individual and collective actions and expenditures on climate change are much more frequently called into question than those on car safety. In this context, the ups and downs of the current climate change controversies can be largely explained by a rough division of the stakeholders into three large, internally heterogeneous categories: those who are guided, respectively, by short-, medium- and long-term interests.
While the politicians in the first group wear the election-cycle blinders, for the businesses, sight is limited by what is known as “the tyranny of discount.” If calculated at the market rate (for example, 10 percent), the present value of any long-term benefits is insignificant. That is why most private businesses do not think of their operating environment more than two or three years ahead. Moreover, while benefits of any kind of mitigation measures taken by companies are mostly external and distributed across different groups and continents, the cost is directly internal and immediate. Therefore, representatives of this group see immediate expenditures on climate change mitigation measures as “giving away money” rather than as investment, especially compared with other needs currently reinforced by the financial crisis. Furthermore, climate change measures such as carbon taxes and quotas directly restrict business-as-usual operations of companies producing carbon — in the form of oil, gas, coal and cement — or businesses with a considerable carbon footprint — steel manufacturing and transport, for example. That is why it is not unusual to hear this group’s claims that measures to mitigate climate change are designed by their competitors to destroy carbon-based companies and economies.
The second group comprises both businesses and governments that are interested in leadership through innovation. They see the medium-term need for energy-efficiency and renewable energy development not only for the reasons of climate change mitigation, but also in a competitive context. This includes depletion of energy in other resources in traditional deposits and the political, technological and economic cost of dependence on new oil and gas exploration and production in frontier areas such as tar sands of Canada or the Barents Sea. Furthermore, energy efficiency requirements create a market for high-tech solutions where European and some other companies can compete more favorably than in labor- or resource-intensive industries. This group has been consistently working on bringing down the cost of climate-friendly technologies and is already earning profits under the Emissions Trading, Clean Development Mechanism or Joint Implementation Projects of the Kyoto Protocol.
Scientists and “greens” belong to the third group that argues that decisions on global challenges such as climate change can be made using long-term considerations only and a very low or even negative discount rate. This approach is well-known through the definition given by the UN Bruntland Commission to sustainable development. Following similar logic, the UN Convention on Climate Change aims at “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.” The majority of scientists represented through the Intergovernmental Panel on Climate Change now consider this level to be the rise of the global average temperature by no more than 2 degrees Celsius from the pre-industrial levels, while a rise of about 0.74 C has already occurred over the past 100 years.
Which group is the real driving force behind the international climate talks? The actual impeller is the second group. They are going to take the lead because the innovators have always done so throughout the entire history of humankind. General Motors, which helped develop a prototype of all electric cars in the late 1980s, curtailed the program to keep the mainstream production line competitive. Now, the company is nearly bankrupt. In contrast, Toyota and Tesla Motors have taken the lead in entering the new market of climate-friendly cars and are currently performing better than many of their competitors under circumstances of the financial crisis. In Copenhagen, Bonn or Mexico, the innovators will succeed in building coalitions with factions within the first and third groups, and install an improved version of planetary airbags replacing the Kyoto Protocol. Next time you select a driver, make sure you choose the right one.
Ivetta Gerasimchuk is senior adviser at the World Wildlife Fund in Russia. Theodore Panayotou is professor and director of the Cyprus International Institute of Management.