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| Panelists: | Angel Ubide, Director of Global Economics, Tudor Investment Corporation |
|---|---|
| Adam Posen, Senior Fellow and Deputy Director, Peter G. Peterson Institute for International Economics | |
| Tom Burke, Environmental Policy Adviser, Rio Tinto plc | |
| William A. Pizer, Senior Fellow and Director for Energy and Natural Resources, Resources for the Future | |
| Moderator: | Bruce Stokes, International Economics Columnist, The National Journal |
April 23, 2008
Council on Foreign Relations
This symposium was made possible by the generosity of the European Commission and the German Marshall Fund of the United States.
BRUCE STOKES: I'd like to welcome you all to the second session of today's Council on Foreign Relations symposium.
I'd like to begin by thanking the European Commission and the German Marshall Fund to the United Statesfor helping make this symposium possible. Their support has been invaluable.
And I'd also like to ask you to turn off your cell phones, BlackBerrys, other wireless devices, your heart monitors and others things. You know, anything -- (laughs) -- right! We'll provide enough excitement and stimulation for you all. You won't need to be jolted awake here.
And I'd like to remind you, the audience -- the audience that this session is on the record, unlike many council meetings. So just to be sure you understand that.
Our session today is on economics and the environment. Our speakers: To my right is Angel Ubide, who is the global -- director of Global Economics at the Tudor Investment Corporation here in Washington, a leading global funds management company. He was formerly an economist at the IMF and a management consultant with McKinsey & Company and he also writes a bi-weekly column on international economics for El Pais, the major Spanish newspaper.
To his right is Adam Posen, deputy director of the Peterson Institute for International Economics here in Washington , where he's been a senior fellow since 1997. The institute will soon be publishing his book, "Reform and Growth in a Rich Country: Germany ." Adam has been an economist at the Foreign Reserve Bank of New Yorkand at the Brookings Institution. He himself is also a columnist for the German newspaper Welt am Sonntag, and The International Economy Magazine. And you, I'm sure, have read many of his columns in The Financial Times.
To my left is Tom Burke, currently an environmental policy advisor at Rio Tinto and a visiting professor at the Imperial and UniversityCollegesinLondon . He was, at one point in his career, an environmental advisor at British Petroleum and in 1997, he was appointed commander of the Order of theBritish Empire for his services to the environment.
To his left is Billy Pizer, senior fellow and research director at Resources for the Future. He was a lead author on the Intergovernmental Panel on Climate Change's fourth assessment report. And from 2001 to 2002, he served as a senior economist on President Bush's Council of Economic Advisors.
I am Bruce Stokes, your moderator. I'm an international economics columnist at The National Journal; former senior fellow here and a transatlantic fellow at the German Marshall Fund.
We will start, because literally we did flip a coin on this, with Angel.
Angel, give us your assessment of -- since we are in the midst, hopefully closer to the end than the beginning, but that's not so certain, of a financial turbulence -- your sense of the state of affairs in the financial world. To what extent is this primarily a transatlantic problem? How much leakage from one country to the other do you see or anticipate? And any thoughts you have on what we should do about it.
ANGEL UBIDE: Thank you very much. (Off mike) -- sorry, thank you.
Well, that's a difficult question, but I'll try to answer it making a few points.
My assessment of where we are is that, indeed, we are towards the end of the beginning. And to explain that, I'll try to explain how I see the situation unfolding. But one has to start by understanding that there is not one shock hitting the economy. There are three, right?
You have the idiosyncratic decline in the U.S.housing markets, which was created by the subprime events that we all know. There is a global credit construction that has essentially destroyed the secondary market for credit -- at least for the time being -- and that's global. And then there is the commodity shock, which is also global. So we have a very complex combination of U.S.-based shock and two global shocks that are hitting the global economy.
Now, why do I say we are at the end of the beginning? The moment where these three shocks basically collude was back in August. And back in August we were, all of us --
Policymakers, market participants, academics, thinking -- we have no idea what's going on. And it took us two or three months to understand a little bit of what was going on. And I'm saying nobody had a clue of what was going on, because markets were not transecting. Back in August, it was a liquidity crunch, because really there were no transactions among market participants.
And I guess from multiple conversations with policymakers, they were also trying to understand how we have an excessively -- an excessive liquidity situation for the last few years. All of us are in liquidity evaporated, and they -- so they had to put more liquidity in the system. So there was a little bit of irrational situation.
We moved into November and we realized that the banking sector globally was in trouble. So it became a counterparty risk crisis. All of a sudden we don't know how much money is being lost and where. And then that becomes a critical issue until we approach December. The global banking sector maybe not in a liquidity crunch, but in a solvency crunch.
Come January, and the combination of the U.S.housing slowdown, plus the credit, plus the commodity shock, basically generated the fear that the U.S.may fall into a recession. That's the third step of the crisis since August.
The final climax was, as you all know, the rescue of Bear Stearns, where essentially, the patient has been sick for nine months and gets the final attack of influenza and then we have to put the patient into the emergency unit.
Why do I say that it is the end of the beginning? Because the moment the Fed decided that it's acting as lender of last resort of investment banks, it has de facto eliminated the possibility of the catastrophic scenario.
So we've been sort of falling down the stairs until we have reached that bottom. And now, we collectively -- and when I say "we," I would venture that it includes market participants, pundits and policymakers -- we believe that the tail risk -- that catastrophic scenario where the -- (inaudible) -- banking system collapses is no longer a high probability event.
Now, after the beginning comes the middle. And the middle, given the three shocks that I mention -- all of which are negative for growth -- is probably going to mean a longer period of -- let's call it subdued growth, to use a sort of politically correct expression. Now, how does this apply to the transatlantic dimension and the decoupling versus not decoupling. We have to go back to the three shocks, and that's why I started by that.
TheU.S.is obviously suffering the brunt of this shock, because it's suffering from all three. Prices are up, credit is weak and the housing market is weakening. Where the very transmission or not depends, really, on these three shocks. The housing slowdown is not really affecting anybody else. It's only affecting if you were in CanadaandMexico . It is the global shock that is affecting the risk. So it's not really coupling or decoupling. It's a global shock affecting the global economy. And then several areas are reacting in different ways.
Now, when I see central bankers outside the U.S.raising rates -- and believe it or not, there are more central banks raising rates than cutting rates, if you take the top 30 countries right now -- it suggests to me that there isn't still too much growth out there or inflation is too high for the growth that we have. But essentially, I can see the judgment of many individual central bankers, who are sophisticated and forward-looking, as assessing that the turbulence is not strong enough to slow down growth to the point of making them confident about price stability.
So I think this is the positive part of this story. The rest of the world still feels that it can continue to grow regardless of what is happening to the U.S. This is probably an historical event. We'll see whether this has a happy ending or not, but if it does, it would mean that for the first time -- I would say in recent history -- the U.S. is no longer the dominant economic power in the world. You haveEuropethat is united for the first time also; you have Japanout of their 20-year long depression; and you have emerging markets who are no longer emerging markets. I don't think there is any major difference between BrazilorNew Zealand or Indiain many respects. And so they can hold their own ground. So it is a situation where we are really seeing a multi-polar world in action.
Let me say a couple of words about the commodity price shock, and then I'll move to some conclusions. I've seen policymakers for the last few years having deluded themselves in thinking that commodity price increases were a reflection of a strong growth in emerging markets, and therefore, they could afford to forecast every year a stabilization of commodity price inflation.
What we are seeing now is really a combination of lack of supply everywhere. An increase in cyclical demand, that's true, but more importantly, an increase in the structural demand for all type of commodities. And probably you have read The Economist already -- so all the horror stories there. But it is an increase in the energy composition of GDP of many of these emerging markets. It is an increase in the consumption of meat, and it is an increase in the, if you want, precautionary consumption of energy, given that the literal spare capacity we have in oil is in areas that are not exactly safe. So we are running, essentially, a vertical supply curve and a very strong demand.
On this, obviously, the biofuels ethanol legislation has not helped. And there is plenty of anecdotes about farmers essentially planting corn at the expense of anything else. And what we are seeing now is eventually the final impact, if you want, of that domino effect.
The final point is commodities as an investment banker. That's not a speculation. That is your pension fund. Your 401(k) is now investing, rather than 2 percent, 4 percent or 5 percent into commodities. Why? Because past experience seems to be the best indicator of future performance. So they've been doing very well and people are following that trend. And second, because now it's easier to invest in commodities. There are a lot of ETFs -- exchange rated funds -- that now you can buy if you want to invest in gold or silver, platinum and others. So it's no longer a sort of exotic issue to invest in commodities.
The problem is that's a lot of money that is going into markets that are increasingly narrow. And there have been many moments in the past where investment has been basically absorbing more than half the open interest in many of the future markets in many of these commodities. So it is also a relentless increase in demand for many of these products that cannot be serviced quickly.
Final point: This is a nightmare for monetary policy everywhere, because it's essentially having one hand in the fridge, one hand in the oven and not really feeling warm. And it's been approached in different ways. The Fed has decided to prioritize their actions and take care of financial stability today, promising us that they will take care of inflation down the road.
Other countries have decided that if they really mean to keep inflation at around 2 percent, they are failing, and therefore they have to do something about it. Maybe a matter of philosophies, but I can tell you that this is keeping everybody very unhappy in the developed world.
In the emerging market world, what I saw at the G-7 meeting a couple of weeks ago is that officials came to Washington on Friday thinking we are going to talk about the credit crisis and how to solve it. Then they met the emerging market counterparts and they left town thinking about an inflation problem and an increase in the poverty risk around the world. And I think that's very significant. The fact that this is in the corrupt economies is not just because it's the news of the day. This may be the news of the next couple of years.
And this is a problem, because there is a shock to poverty levels. Emerging markets will have to adjust fiscal policy to take care of it. That's going to increase the risk. There has been already in the last couple of weeks an increase in the spreads, increase in the prices of the credit default shocks for some of these countries, because markets are anticipating that they will have to increase their fiscal deficits to subsidize food. And this was not in the plan. The plan was that all these emerging markets could react with fiscal and monetary policies to cushion the shock. And now, it's becoming more difficult.
So I think I'll leave it there.
STOKES: Thank you.
Adam.
ADAM S. POSEN: Thank you, Bruce. Thank you all for sticking around for post-security part of the discussion.
I'm going to pick up on a slightly different set of issues -- same issues, actually, a slightly different time frame than Angel, because with his usual quiet brilliance, he said it very well -- and also because, of course, I agree with him.
I would change one spin on the current situation. I have always believed that the policymakers -- particularly at the Fed, but elsewhere in the world -- have been reacting to what economists call tail risk, meaning the small probability of a very bad outcome. And despite the fact they worked themselves into something of a lather and kept insisting that the tail risk was actually much larger, I have actually never been that convinced of it. So I take Angel's point that they've ruled out the tail risk and take it even more seriously. So frankly, nothing that bad's going to happen.
We are going to have a slowdown in the U.S. We are going to have some negative effects on other growth. Nothing terribly persistent or bad is going to happen. The place where I guess I would different with Angel is that -- to sound slightly free market for a moment -- a weird position for me, I guess -- markets have adapted. There are an awful lot of companies in the U.S. and around the world which are not banks which are getting credit through other means.
And so the impact of this financial development on the real economy is more limited than I think any of us would have guessed. I don't pretend a great prescience on this. If you had said to me in August the interbank overnight market would completely breakdown for four months, what do you think would happen? I would have run screaming into the next room. But we have proven that one thing Alan Greenspan did right, for all that he did wrong on regulation, he had one right thing on the Asian financial crisis, which is its good to have a spare tire. It's good to have more than one channel of getting finance to the real economy. And thankfully, we have that. And so for that reason I'm less concerned.
So taking mostly what Angel said as agreed that the real issue going forward is going to be dealing with the inflation, which in real terms for the poor people of not only the world, but also our countries in Europe and the U.S., is a first-order issue.
Our mutual friend Wolfgang Munchau had actually a very nice column in the FT the other day mentioning the fact of just how important this is to people's consumption and livelihood when you're talking inflation in food and energy. My colleague, Bill Cline, had a book a couple years ago estimating just how important some of these critical components are to people's lifestyle. And of course, the gentlemen at the other end of the table deal with these kinds of issues much more frequently than I do.
So where does that leave us in terms of the transatlantic relationship if the issue is financial stability? Can't do much about inflation at the moment; we've got a food crisis; we've got a huge adjustment in energy. I think there's important lessons to be taken from the last panel. I liked where Eberhard and Harry sort of ended up, which was saying agreement on ideas is not enough. That doesn't solve the problem. So let me give you two examples and then come up with a third sort of proposal.
An example of where ideas do not converge, but we do have some interesting transatlantic work going on, is in this area of financial regulation and improvement. As we all know, the U.S. has very sanctimoniously -- with good reason -- been talking about financial liberalization to the Europeans and to other markets around the world. And the argument did have a good basis, which is if you look a particularly at Western Europe -- particularly Germany and Italy -- but at other countries around the world, they save more than we do. In some ways they educate their populous better than we do. They invest as much in R&D. They still get lousy growth. What's going on? And, essentially by process of elimination, you get the fact that they do a terrible job of allocating capital. And so, the U.S. was not unreasonable -- and this is the message of the book I'm writing, that Bruce mentioned.
The U.S. was not unreasonable having a common interest and having everybody grow in a sustainable fashion, to say, "You should do a better job of allocating capital." But there's always to place against a background of, A, people in emerging markets like China, seeing the U.S. is doing Goldman Sach's work, and -- fairly or unfairly; and, B, that there were these long held beliefs that somehow these banking system relationships were much more stable, much more stabilizing than this ridiculous set of securities markets and all these things American so speculatively indulge in. And, of course, recent events with the problems starting in the U.S. tend to give more ammunition to those views in Europe.
So, we have this interesting juxtaposition where, thanks to the financial stability forum and the leadership Mario Draghi from the Banca d'Italia, and a commendable amount of restraint from shadenfroid on the part of most of the other G7 ministers, to my surprise at the recent meetings -- and I give them credit, they're better people than I would have been in the same situation -- we actually have a pretty coherent common approach starting on the financial sector reforms, even though at some ideological level, and in domestic politics, there's quite a big divergence.
And so the reforms, we have a pretty good sense of it. We have, you know, kill the ratings agencies, put some consumer protections in for mortgage markets, make sure the financial institutions have liquidity on hand as well as capital, enforce those standards, try to get derivatives on to more transparent and more market based things than tailored one-on-one deals, bring investment banks, as Angel mentioned, into the system. And basically those six or eight elements, I mean, we all sort of agree on those and they're all constructive. And they're not a regulatory overreaction. And they're relatively implementable.
So, it's very interesting -- and this is clearly a European-American -- give the Canadians and Japanese some credit, but, I mean, basically, it's a European-American agreement. And we got intellectual agreement very quickly. And to a surprising degree it looks like we're going to get some action. So it's very interesting that there's been a lot of writing of both economists and political scientists through the years about can we get agreement on these issues, especially when we've got diverging ideas. And I still think there's a risk of a back lash in Europe against liberalization in ways that would be self-destructive for Europe, frankly. But, in terms of the short term response to crisis, we've actually done pretty well. And the existing institutions, whatever their flaws, actually produced a pretty good result.
And, I'm not entirely sure that Secretary Paulson and Gordon -- Prime Minister Brown's attempts to have a separate U.K.-U.S. initiative on this does that much good. I mean, there is the simple fact that the two markets, London and New York, make up 70 percent of broker-dealer volume basically. But they won't make up that dominant role in the future necessarily. And, as we've seen, there are connections between the systems. If the system's working, meaning the system -- the whole transatlantic and G7 system's working, I don't think we need the special relationship in this area. So, it's a very interesting turn of events. It's actually -- I'm pretty optimistic. It means that all those op-eds I wanted to write are probably too late, which is too bad for me. But, for the world economy, it's actually a pretty good outcome.
Now, let's flip it around and look at this longer term issue of environment, where I'll partly defer to the gentleman on the other end of the table. Let's imagine a world where, within the next year, we've gotten rid of the current administration and we have somebody in the White House who actually recognizes the reality of climate change. And let's imagine -- and this actually isn't too big a stretch -- that our colleagues from the international panel and other sources, manage to get reasonable agreement among heads of stat that there is a certain number we want to reach in terms of global gas emissions reduction. I mean, forgive me for being vague. This isn't my area. I only take -- I take the numbers the scientists give me and try to think through what happens after that.
So let's say we get agreement on what a target should be. And, so this an instance where, I think, transatlanticly we could very rapidly have a convergence in ideas. And we have the EU putting forward their cap and trade system. And we have, I think by my colleague Gary Huffbauer's account, 13 different cap and trade bills currently underway in the U.S. Congress, and presumably one of them will get through with the next president.
Are we saved? And I think, despite intellectual convergence that's easily graspable, we are not. And I will throw out four reasons why I'm a little less optimistic, even though I think we can get to intellectual agreement, and even though I think the transatlantic relationship should work. The first is, we're going for the wrong solution. In theory, there's no difference between a cap and trade system where you auction off the quotas initially, if it's comprehensive, and putting on a global carbon tax. In practice, a single global price for carbon that is decentralized in its administration and that doesn't require all these opportunities for companies to get carve outs and initial allocations and bid for training, and then having middle men make up money on the exchanges for doing it, and having you check to see who's doing how much of their allocations -- (inaudible) -- so forth, on and on, is worse.
In reality, a global carbon tax is the far better way to go. It's far more equitable. It's far more efficient. And if we care about the allocations to the poorer countries, as with everything else, just like when we do redistribution on poverty in the U.S., and we should do more, you make the right tax and then you say, "Okay, I take out of this revenue how much I feel is justified to make up for the poor people." And we give them that chunk of the revenue.
The allocation to the poor is a separate decision from the accumulation of the revenue. We're not getting there. And we have a lot of people out there in the world who are saying, "Well, it doesn't really matter. What matters is the cap." And I believe fully what the scientists tell me about global warming. I fully believe this is a global crisis. I do not believe that immediately gets us to the idea that whatever cap is enough.
But moreover, picking up on what, I think Harry Harding said at the very end of the last panel, reconciling different cap systems and then having countries like China and India, which will, for good and bad reasons, will not have them in the immediate future, is a nightmare. There's trade work to be done on that. There's competitiveness issues. There are legal issues. There's reconciliation with WTO. And this is something where, unlike the financial markets, it's not something that can be done overnight by a few executives in the G-7 economies. It requires a wide range of economies. And where having a common front between U.S. and EU is potentially good, at least intellectually, we stop lying about climate change and we admit there's a need, but is also potentially dangerous if it's seen as a rich-world alliance to beat up against the Indians and the Chinese and prevent their products from getting it and moving global production abroad.
So, we have two very pressing issues. We have two very different solutions, two very different prospects. And I'm hoping the experts at the end of the table will give me a more promising view than I have on this.
One last word. Global inflation and food. Not wanting the economists to set the agenda, I do believe that this -- despite knowing why the economists set the agenda, I do believe that this is the single-most pressing nexus between economics and foreign policy we've seen in years. And it is shocking to me that when the U.S. and the EU have such distortionary agricultural policies, and we've all been sitting around wringing our hands for years saying, "Well, if only we could figure out some reason to get rid of these in some reciprocal fashion and could maybe get rid of our subsidies and disperse the food." You know, this is it. This is where transatlantic cooperation could really make a difference. If the U.S. and the EU stood up and said, "Bleep the Doha Round," what matters is getting the world food market and trading system in order. And in light of this crisis, we together will jointly take out all these terrible distortions we have put in the market for the last several years, that would be the single biggest think that anybody could do in the short term to try to get the global food market working. It would also be nice if we wrote a very big check for food aid but that's somebody else's wicket.
STOKES: Adam, thank you. Very provocative, as usual.
Our next speaker is Tom Burke.
TOM BURKE: Thank you very much. I'm feeling somewhat outnumbered up here as an environmentalist amongst a panel of economists. And, in a way, somewhat surprised to find myself agreeing with at least some of the things that Adam was saying, particularly the last things, only I've decided to take it wider than he did. I think there's a nexus of problems that are going to determine the fate of this century and the fate of foreign policy in this century, and that's climate security, energy security, water security, and food security. They relate to each other. They pose particularly difficult channels because you can't deal with them in silos, and governments aren't very used to dealing with problems that are each individually complex, but have enormously complex interactions with each other at a national level, let alone at an international level. So I think Adam was quite right to actually make that connection very powerfully. I'm going to stick, in a sense, somewhat to my knitting and talk a bit about climate and where it fits into this.
Climate change is a bad problem that's getting worse. Right now, it's a manageable problem. Pretty soon, it's going to not be a manageable problem anymore. It's urgent but it's not immediate. It's urgent in the sense that we have to do some pretty difficult things extremely fast, but the consequences of doing those things, or failing, more importantly to do those things, are not going to appear for some time. So it's very easy for problems that are less urgent but more immediate to occupy the mind of politicians. Nick Stern in a sense, defined what he said was where we need to get to, somewhere between 450 and 550 concentration of greenhouse gasses in the atmosphere. If we get at the lower end, that gives us about a 50-50 percent chance of avoiding dangerous climate change. We get to the higher end of that range, we're talking about a five-to-one odds against us avoiding dangerous climate change. And that was before the latest clients came in and said, "Maybe what we'd started to say was dangerous climate change was really too high." So the odds are pretty difficult and the scale of what we have to do is not really grasped anywhere, yet, in my sense.
You hear people talk about 60 percent, 80 percent reductions. Nick Stern, when he decided to say it was worse than he'd originally thought, last week said, "Well now we need to look for 90 percent reductions." That's 90 percent reductions in total emissions. That means 100 percent out of the energy system. That's what that implies. That means, by the middle of the century, we have to have a carbon-neutral energy system. That's the goal -- or we're committed to, irreversibly and irrevocably committed to dangerous climate change. So just some context of the background on which I'm asking my -- they're answering the question, "What's the importance of transatlantic cooperation?" The debate that's going on at the moment -- and I'm sorry to -- I'm going to disappoint Adam in a bit -- the debate that's going on at the moment's got wonderful head -- you know, really good raises in it. The Bali roadmap, the global deal. These are great phrases. That's what we're all trying to do. And everybody's very worried because the U.S. isn't involved and China isn't involved and that's the big focus of the debate. And it's all focused around actually trying to find some way of agreeing a global cap and trade system.
Pretty well everybody involved in that had passed at the intense negotiation seems to have forgotten that treaties are outputs of political agreements, not inputs to political agreements. And the political conditions, in my view, for actually arriving at a meaningful global deal, simply don't exist, yet. There have been an awful lot of debate and discussion about doing thing to somehow support this extremely complex negotiating process. So it had the G-20 formulations, the G-8+5. You have the (Beneagle's ?) dialogue, the MEN -- I've forgotten what major economies, I forgot what the second M stands for, the Asia pacific process. All of these things are going on, but actually they're not amounting to creating the political conditions under which we can actually achieve the goal. And in a sense, I agree but want to go somewhat further. Most people, who criticize cap and trade, do so before they say, "Let's do less." I'm going to suggest that -- I agree with what Adam had to say about the real difficulties of cap and trade, even if you can get a global carbon price. But, actually, it misdefines the task. The task is to make a very rapid transition to a low-carbon economy, to build a carbon-neutral energy system in about 42 years. That's the challenge. And that's the task we're engaged in.
And when you look at what do you need to engage that task, the idea that we're going to sit down with 120 nations and design a plan for achieving that goal is pretty clearly an impractical idea. So you're talking really about three sets of relations that matter. I'm going to say China, but I mean China and probably India and the Brits as well, but China is the organizing principal in this. And those three sets of relationships of the EU and China, that's got to move to a much more -- an opportunity trade and investment led approach to this issue, rather than a constraint driven approach to this issue. The U.S. and China, extremely important, in a sense. And then finally, the EU and the U.S. That's the triangle, which if it goes wrong ends up in the protectionism that Adam was talking about, in very defensive reactions. If it goes right, ends up actually enabling us to make that kind of transition. So, the answer, the direct answer to the question, "How important it is, is it to solving the problem?" The EU-U.S. problem relationship is central to solving the problem.
Where are we converging and diverging? A bit more bad news, really, on that. I think one of the areas on which we are converging is that we, by and large, for all the odd bits of rhetoric beginning to emerge, we basically see this as just another environmental problem to be treated with the same talk as we treated other environmental problems. And that really is a mistake. This is a core security and prosperity problem. It's not a -- just another environmental problem which, if we can afford to, we can do something about. It really is -- my personal phrase for it, "A stable climate's a system conditioned for stabilization." We're talking about what you need to do to maintain that system condition, not just dealing with something that might irritate us from time to time. And partly because of that, I think we have a convergent, overly constrained policy approach. And again, I think Adam was right to attack that.
We're simply looking at a very narrow range of policy approaches. And, climate change really, really isn't a problem in wealth of economics. It is a problem of a very different order from that. And most of the talk of wealth economics that has been applied to the problem has actually misdirected us in terms of the solutions, and where it hasn't been a distraction has been pretty unhelpful. A third thing where we're convergence, which is perhaps a bit more hopeful, is that publics are more responsive than most political leaders think. And we've seen this very clearly in Californiaand the pressure from the states and the cities here.
We've also seen it in London , for instance, with the way in which Ken Livingston was able to get re-elected having imposed a congestion charge. So I think there's an underestimation by political elites of what the public will live with. Now, I don't like that kind of convergence, but I do think that's where we're very convergent. Another way in which we're convergent is we both, in Europeand in the U.S. , for at somewhat different reasons and in different ways, have dysfunctional budget problem processes. The EU budget is still spending 40 percent of its budget on a common agricultural policy, while all the other inequities that Adam talked to that is dealing with the problem we had fifty years ago and doing nothing, literally spending nothing on a problem that's going to affect the prosperity of 450 million Europeans in the very near future. And then again, where we're convergent is very much on the speed and magnitude of our response, both in Europeand in the U.S. Much can be made of the headline differences because of the administration.
Now, the reality is, on the ground, there's not that much difference in the adequacy of the response. So where are we divergent? I think there's a couple of important ways which -- where the debates are not as -- not -- really are a bit divergent and could be more convergent. I think one of the good things that Europe 's political leaders have done is to announce what they think the threshold of dangerous climate change is. If you're going to mobilize political support and public support for the kind of change that we need to see, the public needs to know why and what for. And so, in articulating a two degree threshold of dangerous climate change, which is whatEurope 's leaders did a year ago, they have actually done something extremely important. And I think it greatly inhibits our ability to respond to the problem that the United Stateshas not yet done that, and said what it thinks the threshold of dangerous climate change is.
The second thing, I think -- and again, I was slightly conscious of it, listening to the debate in the previous panel -- I think Europehas gone further in linking. And you've sent this in the recent packages on both climate change and energy. It's gone further in linking energy security and climate security. They're two sides of the same coin. You are not going to achieve one without the other. The idea that people are going to somehow give up their energy security to achieve climate security seems to me fanciful. The idea that you can have energy security without climate security over any length of time also seems to me fanciful. So we're a shared dilemma. And I'm not sure we're focused yet on all of that.
The final thing we were asked to do was to say something about practical steps always the most difficult thing. I was at a meeting of former foreign ministers in Copenhagena month or so ago, and Liam Firth (sp) made a point. It was two-and-a-half days of former foreign ministers talking about climate change and saying, "Whoa, we've got something to contribute to this debate." It's kind of interesting. But Liam Firth (sp) was there and he made a very important point.
I think the significance of it grew, only grew on me slowly. He said I've listened to this debate, and you're not talking as if you thought policy failure could happen. And I thought at first he was talking about the kind of things I worry about, the fact that the policies are inadequate and so on. I thought more about it, and I realized that what he was saying was when we dealt with the Cold War and all of the problems there, we assumed policy failure could happen, so we worked to avoid policy failure. We're not assuming policy failure could happen here, and therefore thinking seriously about the consequences we're working as if we were going to succeed with extremely elaborate cap and trade systems.
So I think that was an important -- one of the practical steps for me, walking the talk, it's not about the conversation internationally, it's about walking the talk because if you're going to get others to do things with you, you'd better look as if you're doing them yourself, and we're not doing that.
So the most immediate practical thing is to get on with it at home. And the two things to get on with are essentially spending money -- let's just be really direct -- spend some money. Spend some money on energy efficiency which gets you the fastest, cheapest and most reliable improvement in your energy security and your climate security.
And then the second thing is carbon sequestration and storage, carbon capturing storage. And the reason for that is the world's going to burn the coal. It's going to burn the coal. Getting the growth in China , in India , in Europeand the United Statesmeans that coal is going to be burned, so you have to have a carbon neutral coal offer. We know it's technically within our reach, we can do that, we know it's economically within our reach. What we're less sure about is whether we can do it politically.
If we do that, we bring enormous benefit to that discussion by the way that we were having in the last session about Russian gas. Everything you do to create a carbon neutral coal offer takes away that kind of opportunity for breeching security.
The second thing, practical thing to do is to set some standards. The idea -- and again maybe I don't know where Adam was going -- but the idea that you can do this with a price for carbon when you think that what's happened to the price of carbon -- of carbon in the last five years that it's gone from $35 to $100, the price of oil, that's equivalent to a $500 a ton price of carbon -- 130 (dollars) whatever it is, $36 a ton price of CO2. That hasn't produced much in the way of changes in investment behavior, except it's lead to the launching of the Atabasker, here we come gold rush, which has actually intensified the problem.
So if you're got to be pretty optimistic if you think just using a price for carbon is going to achieve something that that kind of price for carbon hasn't achieved, therefore you need to focus on the use of the other instruments, and that includes, as I say, investment incentives and setting of technical standards.
Where, I think -- there are areas where we need to sort of as it were, get together, we've done very little policy analysis, shared policy analysis in this issue, and that's an issue under which we could really do a lot. There's an awful lot of policy ideas around, but actually shared policy analysis across the EU and the U.S.hasn't really been done. And most of it tends to be done in the negotiations or in the headlines, not in the kind of places where it was done in the OECD during the Cold War, which was rather important.
I think a second thing we need to do is to do a lot more political thinking, and the more of that shared. If you're basically, your core political project is that you want smaller government, lighter regulation, lower taxes, you believe in an ever expanding realm of personal choice for 6-and-a-half billion people who'll soon be 9 billion and you think that markets are always wiser than government, you're probably not going to come up with a very convincing plan for dealing with climate change.
STOKES: Gee, Tom, I'm not sure who you were referring to there, but I mean -- (laughter) --
BURKE: Actually every single government in the OECD
STOKES: Absolutely, yes. Yes, we've all drunk the Kool-Aid here.
BURKE: Yeah.
STOKES: Our final speaker is Billy Pizer.
WILLIAM A. PIZER: Thank you.
You know, it's interesting most of the time -- this is a fascinating panel, by the way, I think Jim and the other people that put this together did a really great job -- most of the time I spend my efforts working really in the weeds of this issue, thinking about design elements and how much they're going to cost and doing economic analysis for global policies and things like that. But this and a couple of other opportunities over the past few months have kind of forced me to step back and ask what do I really think the right thing to do is at the global level?
And the first time I gave that sort of a talk, about two months ago, after I gave it, everybody told me it was incredibly depressing. And the reason it's incredibly depressing at some level -- and I didn't think it was incredibly depressing, but I was told it was -- is that there is a significant disconnect between what most people think is adequate to deal with the problem and what I think myself and a lot of other people who look at the economics think is practical, at least the way we look at it today.
Tom mentioned this European goal of two degrees of warming, which I think is the right environmental goal, when you look at the environmental consequences. There's already been about three quarters of a degree of warming since the problem began. And if you look at what would be required to achieve stabilization such that two degrees would be a very low risk, we don't even know how much it would cost. Most of the analyses that were done as part of this intergovernmental panel on climate change that I worked on focused on stabilization at about half of where we're headed over the next century.
Where we're headed over the next century with no action is about -- what did I say -- three to eight degrees of warming; that's Celsius by the way so double it if you like Fahrenheit. Halving the concentrations from where we're headed which would be about 550 kind of the upper end of the range that Tom mentioned, would be between one to four degrees of warming. And those are kind of mid-level 60 percent sorts of boundaries. There's still a pretty significant probability of going above that.
But that one to four degrees of warming that is where most of the economic analysis has sat and where I think is kind of just at the intersection of where people might think this is marginally adequate and the economists might think it's marginally achievable, that's already across the global economy of 2 (percent) to 3 percent of economic output, at least according to the models we have, and who knows how good those models are.
But the critical assumption of those models is that this is achieved with global cooperation using the most efficient economic instruments possible. If you think about the kinds of policies we're likely to have and the kinds of cooperation we're likely to have, that seems perhaps like an assumption that may not be true, and the cost could be much higher.
So that's the sense in which it was depressing. I -- and I will come back to my comments, but I just want to note that I actually think that, first of all, we can make a lot of progress on this problem, even if in the short term we can't put ourselves on the track to avoid the risk of dangerous climate change. And I don't think that we want to not do anything just because we can't rule out the worst scenarios.
The other thing is that I think it's very important to have a certain amount of humility when we sit here in 2008 and try to set up policies that are really oriented toward a target in 2050. We definitely need to get on the right path -- the right path is doing something -- but we may have a lot more tools at our disposal and a lot more commitment culturally and socially to do things as time passes and as we get more resolve. So that's kind of my optimistic spin. But let me return to my prepared remarks for just a second.
So let's just think about this. As Tom mentioned, to stabilize at this one to four degrees, this 550 parts per million, which is kind of the thing that most people look at, this would require halving global emissions by the middle of the century as Tom mentioned, lower targets would be like 80 (percent) or 90 percent. The 50 percent target by the middle of the century, though, would require emissions to peak in about 15 years. So somewhere in the 2020's, global emissions -- that's the United States, Europe , China , India , everybody -- have to be peaking and then to begin going down. Right now, they're growing at between 1 (percent) and 2 percent a year. So that is a pretty tall order, I think by anybody's estimation.
But let's kind of break that down a little bit. As people are undoubtedly aware, the United StatesandEuropeare the largest economies -- they're about a fifth of the world economy right now. China 's a little bit less. The United States, the EU andChinaare each about somewhere between 15 (percent) and 20 percent of emissions each. It's kind of ironic, the U.S.is number one in terms of -- they're all about -- emissions are about the same in the U.S.andChina , about 20 percent, economy is about the same in theU.S.andEurope , about 20 percent, and then the third one in each of those two is 15 percent. But those three countries or groupings of countries are by far the dominant forces. If you take the next three countries after that, they together are about 15 percent. And then when you get below that it gets even smaller. So trying to figure out something that has the U.S. , EuropeandChinasomehow firing on all cylinders has got to be the priority.
Just another couple of facts. Europe right now, as I think Tom may have noted or somebody else noted, is the only country in the world or group of countries in the world that has a policy that caps emissions, at least in part of their economies -- they have a trading scheme. There are a lot of other countries, members of the Kyoto protocol, not members of the Kyoto protocol, that are working on it, but no one has actually implemented that sort of a binding cap.
Meanwhile, in the United States, I think somebody else mentioned there are more than a dozen domestic proposals. I think it's adequate to say or it's correct to say that the United States is ripe for action, with all of these proposals in the Senate and people working very hard to try to deal with the roadblocks that exist in that legislation, as well as the commitment of all three presidential candidates to significant action, suggests that after the election there will be a real opportunity to do something.
So that's kind of a backdrop in terms of the problem and in terms of what's going on in the world. To answer the three questions that Jim put forth, let me just do that and then we can speed on to the discussion.
How important is E -- US/EU cooperation? I think obviously it's very important, I mean if the US and the EU are the two largest economies, the first and third largest emitters, and we need to get Chinainvolved, it seems like their cooperation and cooperation in gettingChinainvolved is going to be rather critical. That said, I think the first step has to be domestic U.S.action, a significant step. I think there are other things we can do, and I'll come back to that in a second. But it's very hard to see how we can really pursue the really tough tasks without a serious U.S.policy to deal with emissions. I think the Kyotoprotocol kind of showed the negotiation before we have the domesticU.S.legislative mechanisms in place is not going to be fruitful.
I think the real question here is exactly what the cooperation should look like and I think there are two important dimensions to think about that, and I'll come back to it at the end to elaborate on the details. But two dimensions are basically what is the fora for that cooperation? Are we talking about bilateral U.S./EU relations, are we talking about a small set of counties, maybe just with China, maybe with the major emitters of the United States has been pursuing, are we talking about full fledged U.N. framework?
And the other dimension is what sort of cooperation are we talking about? In some people's minds, the right answer is to have a global trading system of the sort that Adam mentioned. At the other end of the spectrum maybe each country's pursuing its own domestic policy but the cooperation is really an engagement with the rest of the world. And that may be more along the lines that I would think would make sense in the near term.
Okay. Convergence and divergence. Clearly, over the past decade, there has been a significant divergence. I think that may be ending somewhat in the next administration. And I would just highlight two areas where this divergence has occurred.
First has been the obvious reluctance to embrace and enact domestic CO2 emission reductions. Like I said, I think this is poised to end. But the other issue that's been divergent has been a difference between the EU and theU.S.in terms of willingness to pursue international agreements with limited commitments from developing countries. The EU has been much more willing to accept a framework that either had vague or weak commitments from developing countries, whereas this has been a very primary issue in the United States. It's a primary issue regardless of the administration, it was a primary issue in 1997 in the Byrd-Hagel Resolution, and if you look at the debate in the Senate right now over the form of regulation, it goes to the points that Adam was talking about, there's a lot of emphasis on trade restrictions or trade compensation to deal with the concern that China and other countries, key trading partners, are not going to take action.
So figuring out whether or not we can have a common front on that and perhaps the EU can talk us off of the plank we're walking off of in terms of, you know, trade restrictions, but perhaps if we can encourage the EU to act a little more forcibly with developing countries, I think that could be very, very profitable.
So I think once the U.S.acts, I think there'll be a huge opportunity for potential convergence on this international stuff as well.
I'll also just note that, you know, the Bush administration's efforts with the major emitters' meetings that have been taking place, I think that is a very important forum as well. I think it's a little questionable exactly how much progress that can make absent more action in the United States, but the idea of getting the major emitters to the table and thinking about sectoral as well as economy-wide policies, I think has a lot of legs.
So this kind of ends with my practical steps. Three things.
First of all, I think it's important to take advantage of all the current areas of convergence, wherever they are. Right now, there, for example, is a commitment from the Bush Administration for clean technologies funding for developing countries. This is obviously a necessary step. It may not be at the top of everybody's list of what needs to happen right now, but it is a necessary step. And trying to figure out areas where we can work together, even as there are large areas of disagreement, I think is quite crucial.
The second point is to, I think as the first panel was emphasizing, to open multiple channels of communication. Currently, in a lot of people's minds, everything has to be done through the U.N. I think that is an obstacle to progress in many ways. Dealing with the major emitters may be very important in the framework that the Bush Administration has initiated, but also pursuing bilateral efforts wherever necessary to make progress. I personally think we need to be pushing as hard as we can on every lever.
The last point is to recognize the United Statesright now is in a great deal of flux. We have a major election coming up, we have insipient legislation in Congress. And I think that means different things to the United StatesandEurope .
to theUnited States, it means as we're writing that legislation and we're thinking about the structure of our policy, we should be thinking about how we can insert hooks into that legislation and policy that give us more leverage and more opportunity when we return to the international table. Whether this is some sort of a conditional agreement like Europehas right now where it says, well, we'll do 20 percent, we'll do 30 percent if everybody else does something adequate. Putting that sort of thing into law so that Congress doesn't have to come back to revisit it would be quite valuable. A colleague of mine at RFF who, I think may have been at the Council for a little while, Nigel Pervis (sp) has work he's done recently on the idea of Congressional Executive Agreement, trying to turn climate change negotiations into something more akin to trade negotiations set at a lower hurdle in the U.S. Senate and the executive has a little bit more power could be very useful in terms of thinking about how the U.S. process can be ready for engagement.
And then on the flipside, I think the EU has to think about how it's going to constructively engage the U.S.both before, during and importantly after this takes place. I'll go back to the very first point I made, which is that I think there's a very strong tension between focusing on what the environment demands and what may be practical at any point in time. I gave a talk in Baliin November, in December I guess that was not really well-received I guess but -- (laughs) -- I'll give it here as well.
I think that arguing and pushing people to do what is environmentally required takes a lot of energy and time, and we have to decide how we're going to allocate our time where we're pushing as hard as possible for what the environment demands, and pushing people and countries and companies and other fora in practical ways that we think may actually achieve things in the near terms. And I personally fall on the side -- I recognize the importance of both margins. But I personally fall on the side of feeling like there is a lot of stuff that could happen if we try to figure out where there opportunities are to get people, for example, to reform pricing, energy pricing in developing countries. That may not get them to take a cap but that could do a huge amount towards encouraging less energy use in the near term.
And I personally fall on the -- I recognize the importance of both margins, but I personally fall on the side of feeling like there is a lot of stuff that could happen if we try to figure out where the opportunities are, to get people -- for example, to reform pricing, energy pricing in developing countries.
That may not get them to take a cap, but that could do a huge amount towards encouraging less energy use in the near term.
So I realize there's tension, but I think that there's an importance in not trying to push the United Statestoo fast and too hard once it comes out of its shell in terms of domestic policy. And I think that goes -- that holds true for other countries as well.
So thank you.
STOKES: Thank you. That was, again, very provocative.
I'd like to take the prerogative of the chair and ask a panelist two questions and ask for very short answers.
One, Adam, you talked about this convergence??, and actually quite rapid convergence -- (inaudible) -- convergence?? in terms of what should be done in the financial crisis.
There is a distinction, though, it seems to me, between regulatory convergence?? -- in other words, an agreement about what in law should be enacted, or in bureaucratic practice should be enacted, and supervision. In other words, is there the necessary conversion?? In terms of how we enforce whatever regulations we agree to, or is that still going to be so nationalistic as to be problematic?
POSEN: You're an astute observer, Bruce.
Quick answer. TheU.S.andEuropeboth have supervisory problems in their structures. Remember, supervision is how you monitor the banks and implement the regulations, which requires a certain amount of interpretation, et cetera, as opposed to just the literal rules.
And one way around this is to make it more and more rules-based and give supervisors less and less leash. That's something I would be sympathetic to.
But theU.S.has the problem, as identified by Secretary Paulson, that we have a lot of supervision fractured along functional lines -- insurance versus certain types of banks versus other types of entities. And Europetends to have supervision fractured along national lines. I shouldn't say fractured; fragmented along national lines.
And so the ECB and the EC do the best they can, but you have cross-border institutions who have a home in one country and operations in another. So there is a problem there. That said, I think we can be confident that for at least the next couple of years the supervisors will actually do their job.
It's very interesting to note our friends in Japan . Their banks, which were essentially horrifically supervised in the late '80s and early '90s, suddenly their supervisors were held accountable and their banks bought almost no toxic waste and made perfectly good credit assessments in the last few years because they were so badly burnt before. So we can at least hope for that.
But on a structural basis, there is room to improve.
STOKES: Great. And one question to Billy.
You talked about the need for Europe , China , and the U.S.in particular to work together. Certainly there -- it seems to me at least there is some disagreement about how one accomplishes that, and you alluded to that at the end of your remarks.
But you also criticized the proposed provisions in much of theU.S.legislation which, in essence, is a stick. To say to the Chinese or the Indians or whoever if you do not participate in a post-Kyoto agreement, there will be consequences.
As someone who is more familiar with trade negotiations than environmental negotiations, there is certainly a trade negotiator's philosophy that you have to hit people upside the head occasionally to get their attention. Why do you seem to reject that as a way -- as at least a tool in gettingChina , the U.S. , and Europeto work together?
PIZER: I should clarify. I don't reject it; I just worry about it a lot. And I think it is one of those tools that could be used to hit the wrong person upside the head and to beat them to a pulp and not leave anything left.
MR. : Just to carry a metaphor --
PIZER: Yeah, just to carry the metaphor as far as possible. (Laughter.)
So my view is that we need as many points of leverage as possible, and my concern is that the -- there just be some bridle, some control over where this goes. I think it's -- it is actually valuable.
It would be more valuable if it were a multilateral instead of unilateral in the U.S.legislation. But I think that -- first of all, I think it's almost a done deal that there's going to be something in theU.S.legislation to this effect.
I think the original provisions that were very narrow in terms of the industries and the way they were applied, in the time horizon that they were applied was probably the right model. The tendency now is to be immediate and indiscriminatory, and I think that's where you really have to draw some important lines.
STOKES: Okay. We're going to throw this open to discussion and questions. If you could, I'd like to ask you to wait for the microphone and speak directly into it. We'll start here at the end. If you could give your name and your affiliation at the beginning, please.
QUESTIONER: Bob Blake. I'm a retired -- (inaudible).
I've been pretty much involved in the -- on the Hill looking at where we're going on legislation. And I think it's going to move pretty far within the next year, but not near far enough.
There are a couple of assumptions that they're working on. One is, and one that has a lot of importance, is that a lot of the solution is going to be in technology. You haven't talked enough about that.
Where there's a lot of money (flowing ?) already behind that and more coming in terms of -- (inaudible). And that it'll be, at least in the first instances, a marginally?? A national -- U.S. , rather than -- (inaudible) -- we have to get ourselves in order.
But there's also, with the --
STOKES: A question, please. Yeah.
QUESTIONER: Yeah. How do we make it possible for when none of this works, when the market doesn't work, and it begins to be clear that the -- what is happening is a lot worse than the models project, which is already beginning to be -- (inaudible) -- how do we take the next step? Do we scare the hell out of people? Do -- how do we politically and otherwise organize that?
STOKES: Okay, what we're going to do is take several questions and then I'll distribute the questions among the people.
Way in the back. And again, if you could state your name and affiliation and make the question concise, please.
QUESTIONER: Sure. I'm Ruth Greenspan, Bill -- I'm losing my voice -- and I was previously with RFS and I'm a consultant to the U.N. Foundation on some climate issues. And I just wanted to ask for a bit more information from two of the panelists.
One of them is on the carbon tax, and I'm curious how you would set it. You know, Tom suggested there are some problems and I know from the literature nobody quite knows how to set it. But I just wondered if you might address that.
And then to Billy, a couple times in your talk, and I may have misheard you, you kind of suggested that this -- we should be doing things now, but maybe we could defer a lot to the future.
And I assume this comes out of your views on discounting and the notion that future generations are going to be richer than present generations and better able to assume the burden of this. And I would like you to just talk a little bit more about that and explain to me -- and maybe I'm be a little challenging here -- how future generations would put back the melting Greenland ice sheet, for example.
We have limited options in climate change that are different from other kinds of situations, and I would really like that to be addressed. Thanks.
STOKES: And one -- we'll take one final question here. Back in the back, here.
QUESTIONER: David Speedie, KennedySchoolof Government.
A question for Professor Burke. It's on the issue of -- both you and Mr. Pizer stressed the urgency of this. My question is on the residual skepticism.
There's definitely, I sense, in this country a growing nostra culpa when it comes to this that may or may not translate quickly into the kind of action the last questioner just posed.
But the most recent sort of informed skeptic that I've read about was a fellow Brit, Nigel Lawson, former chancellor, who's just produce a book that received, pardon the expression, a warm review in the (AFT ?). Could you comment a little bit from the European side about the state of the influential skeptic?
STOKES: Okay, we're going to start, I think, with -- Tom, if you could answer two questions. One is the question of the influential skeptic, but the first question is, well, you were the one who talked about the possible need -- the possible -- (inaudible) -- barriers?? and the need for regulation. But how do you get there? How do you politically get there, in terms of, in essence, regulating the economy in ways that we spent years trying to deregulate?
BURKE: Let me take the easy question first. There aren't any influential skeptics. There are skeptics --
QUESTIONER: Including Lawson?
BURKE: Including Lawson. There are skeptics (have ?) good stories for the newspapers to create an artificial idea there's a conflict about these things. There's nobody in the political world and in Europeor in the policy world that pays any attention to Nigel Lawson. He's a very good argument for sticking to his knitting -- (laughter) -- which was running an economy, not actually talking about climate change.
I think, if I'm asked, if I have to try to explain why is he doing it, it's because of the points I was making in my final remark, that he's understood something that in some sense the environmental community has not understood, which is that dealing with this problem is a challenge to his core political project.
And in that sense, I think that skeptical community from the right has thought harder about the politics of this issue than the people who just want to get a solution to the problem. This is partly why I've been saying we need to think pretty hard about the politics of this.
How do you make it work? I wish I knew. I mean, I'd be a lot happier and probably a lot richer if I knew how to make it work. It's a collective act, anyway. It's not an individual act, and part of what the challenge of climate change is, at whatever level you scale it, it's an attack on radical individualism, which has become a sort of dominant part of the Zeitgeist, and it's time we got that together. We can't solve this problem on our own.
There are sort of practical bits to making it work that would get very detailed, but -- and you have to do a lot of it. And actually, my core message was you start nationally. In that sense, it's not that different, in a way, from trade policy.
The reason why we should do something is because it's in our benefit. And it's in our benefit in two ways. One, because even if it's a small bit that we do, it makes the problem (less ?) if we do something. Two, how are earth are we going to get other people to do something for our benefit if we're not prepared to do it for ourselves?
So I get kind of irritated by this sort of Chinastuff and the Indian stuff. I get pretty irritated by that.
STOKES: Actually, as someone who is writing as we speak a piece for the National Journal on India and it's role in this -- I mean, that's the most self-evident point. The Indians should do this because they are already going -- they are already suffering from climate change and will suffer greatly from climate change. And whether it's on a per capita basis or whether (you get into these ?) huge political debates, but they should do it for their own self-interest.
Adam, how do you set the carbon tax?
POSEN: Well, I appreciate the question, because it also allows me to respond to a couple of things Tom said and just as he was, I hope, pleasantly surprised, we agree on a very large number of things. There are a couple of things in the implementation where we do disagree. (Laughter.) So let me explain about the tax.
The point of the tax, the reason you do a tax rather than a cap is nothing to do with the fact that your goal is (quantity ?) -- I mean, in the end, the scientists or the panel or whoever's going to tell us two degrees, one degree, three degrees. And as I said, I -- my parents were physicists. I believe that scientists come up with the best possible answer. It may not be perfect, but we can take that, we don't debate it, and then we work from there.
So the issue of a tax is not to say that the goal ultimately is quantity control. The question is how do you achieve that quantity control. And the idea with the tax is you pick a number and you make your best guess. And if it turns out it's not getting you the results you want, you keep raising the tax. I mean, put very simply.
And the whole advantage of this is that raising the tax is a unitary -- (inaudible) --decisions could be done, say, at the U.N. level or at some international convention, as opposed to if you've laid out all these caps with all kinds of industry cut-outs and all kinds of games, then how do you decide oh, that's not enough, because new scientific information comes down the pike, or it turns out there's more rent-seeking and bribery and divergence from the caps than you expected.
Either way, we're not going to get it right out of the box. So the question is how do you achieve that outcome? And this is why I have to pick up on one point where I was concerned, two points I was concerned with Tom, just real quickly.
He says well, why didn't the 100-dollar, 115-dollar oil lead to the results that we expected, if -- (inaudible) -- so confident about a price (effect ?) and there's two reasons, and this goes to actually in the same philosophy he said about government intervention.
If you get 115-dollar oil because people aren't sure -- as Angel said, there's a number of factors going into where the resource cost comes from. Some people will say it's speculative; some people will say it's the business cycle; some people will say it's manipulation by OPEC, some people will say it's just a spike in demand.
The point is people are not making investment decisions on that, because there is no fundamental commitment or relative certainty that the price will stay there. If you achieve, through international treaty, a commitment that there will be a minimum price on carbon that, if anything, will only go up in the future, then you are compelling people to make more rational investment decisions.
And this is whyJapanandEurope , for example, are so much more carbon-efficient than theU.S.to begin with, in terms of emissions per unit of GDP. Because they saw the permanent rise of price. They transmitted it through taxes to their people, and they adapted.
STOKES: Well, you know, there was a question here about discounting the present value, and when you're dealing with the environment -- (inaudible) -- question about whether that concept applies when you're (dealing ?) -- (inaudible) -- some environmental destruction which, at least to the layman, looks like it may be irreversible. So if you delay action, you foreswear the ability to ever affect that environmental consequence. Any thoughts on that?
MR. : Yeah. First of all, I've spent a bit of time doing work on discounting and how to think about the benefits side of this. I actually think that's, at best, an interesting calculation.
I mean, you can do the calculations of the marginal benefits and you can try to allow for the irreversibility, you can try to allow for uncertainty and things like that. And my best guess is a price of maybe $25 -- (inaudible) -- CO2. I don't think that -- that's a useful piece of information, but I don't think that is what defines the problem.
And in response to Ruth's question about whether this was kind of -- whether what I was saying is we could defer because of this discounting, I actually don't think we can defer. And I should apologize if I wasn't clear on this.
My tension is between what I think the science and the environment demands that we do and what seems to be achievable right now. And maybe I'm just kind of narrow in how I look at what's achievable and the opportunities I think that we might be missing.
But we passed -- we had the Framework Convention in 1990, we had the Kyoto Protocol in 1997. The only mandatory controls on CO2 in the world right now are in Europe . And so my fear is that we lose more time waiting to get the strongest possible policy in place, rather than getting a policy in place that will begin to send signals.
I ought to mention the importance of sending long-term signals. I don't really put a lot of faith in a treaty or even a single action of Congress to convince people that the world has changed and CO2 is going to be priced for the next half-century. I think what'll convince people that CO2 is going to be priced for the next half-century is CO2 being priced just for a quarter of a century, and people beginning to feel like the institutions are growing up that support that commitment over a long period of time.
So to me, I put a high price and a high value on getting started, and I'm less concerned about whether we're starting with a level of effort that's consistent with the stabilization we need. But I do believe we need to get started now. If it were up to me, I'd be starting with a pretty high price.
I have to say something about the tax versus cap, because this is something else I've spent a little time thinking of.
I think the overriding priority has to be domestic circumstances, and countries need to figure out what policies are going to work best in their own domestic circumstance. And over time we can evolve those toward some sort of global harmonization.
But I think the idea that one size fits all and the same policy is going to work in China and the United States and Europe is just not going to be -- and I don't think Adam's necessarily arguing that, but I think it's important to state that.
And the other thing to note is that while I basically agree with the point that taxes would be better, I don't think the difference is enough to really be arguing this all the way to the bank.
Two reasons: one is you can actually put them together. I thought this was kind of a crazy idea, but if you put a tax on top of a cap, you could actually take a lot of the revenue out of the carbon market and put it into the government's hands, which might be desirable, and at the same time you have your cap in place.
And the other possibility is you can take a cap and turn it into a tax, in the sense of having price stability and (auction ?), as Adam also mentioned.
So I don't want -- I don't think people personally should get too hung up on which mechanism is being pursued. I think the important thing is to pursue the mechanism that seems like we can get into place as quickly as possible.
STOKES: Tom, did you want just a two-finger here?
BURKE: Just a two-finger, yes.
You know, practicable and achievable are very beguiling words, because they sound so reasonable. I doubt very much the United Stateswould have become the great country it is if the people who built it had been (really ?) constrained by the notion of what's practical or achievable at the time when they were doing that.
And the task we face --
STOKES: Sounds like an Obama voter here, eh? (Laughter.)
BURKE: Exactly -- if I was able to, I would be.
But exactly what -- and most Europeans would too, by the way.
MR. : (Off mike.)
BURKE: Oh, that's awful. (Laughter.)
MR. : I'm sorry.
BURKE: That now completely threw the point I was taking, or -- (inaudible).
You know, we -- yes. As (Bowie?) said, you know, what we've got to do is time constrained. It's very difficult to put the time constraints into traditional, conventional economic analyses. It's no good getting to the right place too late, with climate change. It's no good. So you have to think about what you've done.
In some sense, that does mean a bit -- (inaudible) -- do all the things that you can think of doing. At another level, you've got to be awfully sure you're not kind of just trying spread yourself so thin that in the effort to do everything, you don't do anything properly.
STOKES: Thank you. We're going to now go back to the audience here.
Right here.
QUESTIONER: Thank you. My name's Karen Johnson (sp). I'm an economic consultant.
This question goes back to some things that Angel said about the food crisis, which has just exploded into this global situation that had been unfolding in different terms, starting probably a year ago, but certainly in August, and in particular today remarks made about supply.
Whether or not you think supply has some capacity to -- (inaudible) -- because of the time frame over which you're talking. So there are the kind of issues Adam raised about the debate last year, renewing the U.S.agricultural bill or the debate at Dohaabout agricultural policy, and that sort of has one time frame to it.
But I'm just astonished at how much has happened to food prices since, say, January 1st. And in that time frame, supply is a given, that we -- whatever food was being produced, whatever food was in the pipeline, it's pretty much what we're dealing with.
So I'm asking myself what is capable of changing as much as has caused price to move in a time frame of three to four months. And it seems to me psychology and demand are the only things that move that fast. We haven't learned things about supply we didn't know before. We haven't suffered huge losses of supply through some kind of disaster that came along unexpectedly.
The story behind this has to start on the demand side for these most recent events. So that leads me to ask is this in fact some kind of a bubble? And if it is a bubble, what (does ?) that -- that is to say, speculative price, buying which has the effect of causing the existing supply to disappear into inventories of many different sorts in the expectation that price will be even higher tomorrow? And then tomorrow you do the same thing and you keep doing it.
What does that say about the sort of policies that might be followed by E.U. officials or U.S.officials? What does that say about what the ECB and the Fed should be doing in response to this food price inflation?
STOKES: Good question.
Harry?
QUESTIONER: Thanks, Bruce. Harry Harding, GeorgeWashingtonUniversity .
Two related questions on the economic side. First, Angel said that we were at the end of the beginning in the sense that the Fed-organized dealing with the Bear Stearns issue has basically indicated that central banks will be the lenders of last resort here.
Several people have raised the question, however, especially in the light of the Financial Times headline today, which says that now commercial banks are at greater risk of failure -- have raised the question about the -- are there limits on the capacity of central banks to service lenders of last resort, and at what point might we have a crisis, not just of the investment banks and commercial banks, but of, indeed, the central banks themselves.
Then, for Adam, you said that up until now the effect of all of this financial institution turbulence on the real economy has been limited because firms in the real economy have been able to get credit from elsewhere. I assume you meant credit, not capital.
What are these other sources of credit? In other words, lending, as opposed to investment, say, equity shared, new public offerings. What are these other sources of credit, and how reliable would they be if, indeed, we have a even greater implosion for the reasons that I've just postulated?
STOKES: One other question, and hen we'll go back to the panel. Right here.
QUESTIONER: Thanks. Rebecca Bonner (sp), Goldman Sachs.
Back on cap-and-trade versus tax, or maybe some other well-designed climate change regime. Adam like the tax and Obama's in favor of cap-and-trade. And Tom mentioned best interests of the major emitters fueling the need for this, in addition to raising questions of whether or not this is a social welfare issue and questions relating to distributive justice.
And taking Billy's point that all of this may be moot if we don't do it in the next 15 years, or at least within the next 15 years we have to top out on emissions. I'm wondering if there is a rationale favoring one regime versus the other with respect to not America , not Europe , not the major emitters, but the rest of the world, with respect to the following problem:
If we were, for example, like Obama wants to do, cap-and-trade. And we each have, as countries, set initial allocations. What happens to the rest of the world? Not China , not India , not the United States, but say, you know, some tiny African country that's still major agrarians, likeTanzania , right? where all of a sudden the major emitters gobble up all of the credits and trade amongst themselves and sure do the lion's share of reducing what our global output of carbon is, but almost exacerbating the disparity between the haves and the have-nots, right? and leave further behind the economies that haven't quite gotten there yet and aren't -- not necessarily grown up or even adolescent, with respect to their industries.
How would one versus the other policy more effectively address the problem of bringing everyone along and not necessarily freezing making worse the status quo of those who are far along and those who haven't quite gotten there and may then have a further hurdle of not being able to get over the hump, due to our best intentions with respect to addressing something like climate change.
STOKES: Okay, we're going to go back to the panel. There's two questions here; one is is the spike in food commodity prices merely a bubble. But I think inherent in that question was because it's food -- it's not copper, it's not zinc, it is something that is certainly morally of a different nature and arguably politically far more important.
Should that kind of bubble be subject to some kind of controls that other bubbles aren't, but then the question would be what in the world -- how in the world would you do that? So we'll start with that question.
UBIDE: Thank you for the easy question. (Laughs.) I don't know. I don't know why prices have gone up so quickly in the last three months. My first instinct is to think that I guess the (Hotaling ?) theorem applies. The world has realized that we are going to be living in -- (inaudible) -- and therefore you -- (inaudible) -- commodities. That could be one way to think about it. And I think Jeff Frankel has put out a piece talking about it.
I think there has been also the realization after a couple of years that there is really very little supply out there. And you know that markets all of a sudden wake up one day. And they woke up perhaps in the last couple of months, and what made them wake up, I don't know.
I can tell you I was incredibly shocked when I saw the chart of the price of rice a couple of -- you know, back in January. I had no idea. But when I realized that, I said we are in trouble. And it was the kind of thing that -- rice is not in the commodity industries out there. It's traded, but it's not heavily traded. When I realized that a commodity like rice was also going up in price, then I convinced myself that we had a fundamental dislocation there.
I have a feeling that countries have realized that food independence may be important. And I have the suspicion that we have been saying the opposite; not the opposite, but that in the last few years we have been talking about -- you have global markets, you shouldn't worry about being self-sufficient and therefore it's no big deal.
And at some point in the last couple of months, countries realized that you need to have your own supply of food, or else. And so I have a feeling too that precautionary demand has increased, and that may be part of the reason why we are seeing this.
Now, if we have the policy response of subsidies for food, what we are doing is breaking the price mechanism. I'm not saying we shouldn't be subsidizing food when people cannot eat, but what I'm saying is that the price is not reacting to demand or supply and, therefore, we are sort of perpetuating this problem. So the answer, I guess, is the standard one -- we need more investment, but that is going to take a long while. So I don't see an obvious answer to it.
Now, what should monetary policy do about this? I guess nothing, in the sense that this could still be a relative price change and not an increase in inflation. Assuming we don't get the (famous second ?) -- (inaudible).
Now, what I know that some central bankers are telling their governments is please do not allow an increase in wages. Please give subsidies, but don't allow for an increase in wages, because increasing wages will generate a price-wages spiral. The subsidies will not. And I don't necessarily disagree with that. I think it might be the least bad answer to the current situation, until we can put investment to work again.
Now, on this investment thing, if I may, I think that the reason why supply is not reacting to $117 a barrel is because we don't know if it's going to be here or not. I can tell you OPEC is not (investing ?) more, because they believe prices are going to collapse. And they believe prices are going to collapse because everybody -- IMF, OECD, the Treasury, the Fed and everybody -- is telling them -- (inaudible). So they simply don't believe it. It's been five years in a row; they don't believe it. But that's -- (inaudible).
However, when the ethanol mandates were announced, people thought that that was going to happen. And then supply did react -- (inaudible) -- in corn and in other -- (inaudible) -- commodities.
So I think if you were to announce a carbon tax, that it's going to happen for sure, it's going to be permanent, and it's going to be global, so there is not a -- (inaudible) -- and we know that it's very -- if it's not -- (inaudible) -- will simply -- (inaudible). Then at some point supply would react.
On the Fed, the Fed can just cut rates to -- (inaudible) -- balance sheets in a limited fashion, so they can bail out as many banks as they want, in theory. I know -- (inaudible) -- the consequences of that, but potentially they can do whatever they need to do.
STOKES: (Off mike) -- is there a limit to what the central banks can do? Because I know you've done a lot of work on central banks.
MR. : Yeah. I mean, as usual, I'm largely in agreement with Angel and Angel explained better my point about the carbon tax.
But in terms of Harry's point, there really isn't that much difference between capital and credit. They're partial substitutes. In fact, in some instances, they're very close substitutes; in some instances they're not.
And usually the way you distinguish companies is between -- is their ability to access a wide range of capital or credit sources. And so traditionally, what happens when the banking system goes down -- and this is what actually Bernanke did his dissertation on in the Great Depression, is that you have small- and medium-sized companies who can only get credit by bringing collateral to a local lender and building a relationship. And so if something goes wrong with their bank, they have no other way of getting credit.
If you're a big company and you're publicly listed, Merrill or Chase may have a problem. I mean, I don't know. I'm just picking names at random. But you can go -- your (G.M. ?), whatever your problems are, you can go to London , you can go to Tokyo , you can get trade credits from other people, you can issue commercial paper. And frankly, the commercial papers for the non-financial firms have not broken down as much as the commercial paper, for example, for financial firms.
So essentially what you worry about when you have a credit crunch is that the firms or the businesses that have a small -- are reliant on one particular lender don't -- (inaudible). And this is, for all the talk about the problems of the financial deregulation and securitization we've undergone, this is the plus side that is real -- that you can go much further down size-scale in the U.S.businesses, and they have alternative ways of getting financing than they used to.
There used to be a cutoff at a pretty big business level and then small businesses just got crunched. So if you think of the New Englandreal estate bubble in '91, there was a crash, Bank of New England, Bank of Boston both lost capital. There was the classic cycle, they had all these bad loans on local real estate. They couldn't lend locally, there was very little alternative for the businesses there to get, and you had a regional real heavy downturn.
And we're seeing -- frankly, we're seeing less of that. And I think that's the victory of the securitization, for whatever -- (inaudible) -- faults, that we're seeing less of that this time through.
On the central bank issue of how much they can bail out, I largely agree with Angel. But it goes back to a point -- in Billy's excellent presentation, he mentioned a number just to throw out one, and he's very cautiously correct, saying we don't know that the number is. But 2 (percent), 3 percent of global GDP, for example, without adjusting the costs.
Now, these numbers get bandied around, but let's try to remember what the scale is. We are estimating -- if you look at the IMF estimates, which are probably on the high side, or the OECD estimates, which are probably about right or a little low -- we're estimating that we're going to lose 4 (percent) or 5 percent of U.S. GDP in terms of bad loans in the recent financial turmoil. U.S. GDP is roughly 25 percent of the global. So we're losing 1 (percent) to 1.25 (percent of global GDP just dealing with this financial crisis. And we're able to absorb it, frankly, between a combination of private savings moving into the banks and some -- eventually some public injection of money -- we can absorb that.
So in addition to Tom's very welcome references to political willingness perhaps being higher than we think, I don't want us to get too caught up in how costly this will be. We can mobilize several percent of GDP if we have to. I mean, it is not the end of the world.
STOKES: We have time to -- for one more answer here. So I'll throw this up to either Billy or Tom, and it has to do -- the question that was asked here about how do any of these proposed regimes accommodate the problems of the least developed countries? And -- I mean, I would amplify that a bit. I mean, in many of these least developed countries, the principal source of greenhouse gases are methane, which come from free-running herds of animals, flood irrigation of rice -- I mean, things that are going to be very difficult to control. They aren't some plants someplace generating stuff and you can put a price on its carbon and maybe can get them to invest in new technology. So how do you -- how are we going to -- or are they irrelevant and we could keep them out of the system?
BURKE: Let be very quick and then maybe Billy can get a bit in, too.
I think that you're talking about what goes on in 20 countries and they're not the countries that are -- were being described as the least developed countries. And I'm not bothered about what happens in those countries. I might be in 10 (years), 15 (years), 20 years' time, but right now I'm bothered about what happens in 20 countries. The bigger problem is that price mechanisms are always aggressive. When I talk about a carbon tax, I'm not interested in what that will do on behavior because I don't believe it'll do very much on behavior.
I'm interested in what you can use the revenues to do and that's a much more important thing. So my sense of why you want to use a carbon tax is -- actually, you can limit the amount of price pressure that you might put into the system in order to get the outcomes you want. Otherwise you end up not just with inequity at global level, you end up with a lot of inequities at the national level. And I think politically, if you think it was difficult to do that in an area when everybody thought growth was going to go on forever and they were going to -- try figuring out how you're going sell that at a time when -- when you might be losing 4 (percent), 5 percent of GDP. So I think one should avoid regressive measures, if one can.
PIZER: Yeah, I'll just say very quickly. I mean, I think there is a problem down the road of figuring out how to deal with these countries. I agree with Tom that it's not a critical issue right now. At some point, it's going to have to be dealt with. I don't think their emissions are significant enough that they cannot be accommodated. I mean, emissions are driven by, fundamentally, population. And so -- you know, unless these countries end up being ChinaandIndiain terms of their population at some point, you know, it's not going to be -- it should not be as big of an issue. The methane issue actually ends up being a little bit easier because methane doesn't stay in the atmosphere as long. So we could have methane emissions now and just deal with methane emissions down the road. So --
STOKES: Okay, this is great. This has been a very informative panel on two very disparate topics. I really want to thank the panelists and thank the audience -- (applause.)
I would -- I've been asked to tell you that lunch is in the hallway. You are asked to go get lunch in a timely fashion, bring it back here so we can have the luncheon speaker on time.
Thank you.
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