Climate change: who is helping developing countries

Poor nations, which have contributed the least to climate change are among the most vulnerable to climate change today. They need some financial commitments from the developed world who have grown their economies by polluting the atmosphere. For instance Pakistan emits under 1% of global emissions but it is the eighth most vulnerable country – see graphic. It is estimated that Pakistan has had $22 billion in material damages with up to 12,000 people losing their lives with 60 million affected – 2022 saw extreme monsoon rains and the worst flooding in a decade.

It is the developed world that is most responsible for climate change – since 1850 the US has emitted more than 500 billion tonnes of CO2 which is approximately twice that of the next largest emitter China. It is vital that the richer countries assist the developing world combat extreme weather. They have the finance to do it but don’t seem to rich their target of $100bn per year year since 2020. There is a pay back here in that those got countries got rich on the problem that we now have.

1992 UN Framework Convention of Climate Change was approved and at the Conference of Parties (known as COP) and in 2009 15 developed nations committee to $100 billion each year – see graphic – to support developing countries with reducing emissions and adapting climate change. The $100 billion goal was “carefully crafted” to be deliberately vague. As a result, there’s no requirement that specific countries contribute a certain proportion of the funds. Multiple analysis have calculated that the United States, which contributed less than $3 billion of the $83.3 billion in 2020, is under delivering by tens of billions of dollars when considering its relative emissions, population size and wealth.

The IMF has also provided long-term affordable financing. The money so far has funded mitigation projects, which help developing countries transition away from fossil fuels, like building a zero-emissions transit system in Pakistan. Money has also gone toward adaptation projects, which help countries build resilience against climate risks, like restoring vegetation and reducing the risk of flooding.

Source: New York Times. Who will pay for Climate Change. Nov 7 2022

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Kaya Identity and climate change

Sustainable development is part of the CIE A2 Economic Syllabus and greenhouse emissions are significant barrier in trying to achieve specific goals. Sustainable Development Goals (SDG) requires a collective agreement and to advance towards a society which is more respectful of the environment, whilst at the same time working towards economic growth and sustainable development.
Kaya identity tries to explain the relationship between four factors:

• Global carbon dioxide emissions, in carbon dioxide (CO2);
• Global primary energy consumption, in Ton of Oil Equivalent (TOE);
• GDP, in dollars ($);
• Global population, in billions.

In other words global CO2 emissions from a human source = global population x quality of life x energy intensity x intensity of carbon in the energy mix. See the formula below:

GDP/Per Capita: represents the total value of output in an economy divided by the population
Energy/GDP: represents the energy intensity, i.e. the amount of energy used (in kWh) necessary to create a monetary unit, meaning to manufacture a product or provide a service. This intends to encourage us to rationalise our use of energy.
CO2/energy: represents the intensity of carbon in the global energy mix. This relationship demands a reduction in CO2 emissions in the production of energy, in particular through the promotion of energies low in carbon, such as renewable energy.

The focus from government and the private sector in reducing climate change has been on two of the four factors: Global carbon dioxide emissions, in carbon dioxide (CO2) and Global primary energy consumption, in Ton of Oil Equivalent (TOE). However should there be more emphasis on the other two: GDP and Global population? GDP can be influenced by government policy but there are political dangers if going down this avenue. Firstly by reducing growth you may limit the creation of jobs and the advancement of economies. Secondly developing economies depend on the demand from developed world to drive them out of poverty. Limiting population growth is not a policy that government’s can respectably push towards. Ultimately the global economy needs more than a power source without emissions but investment and innovation which can reverse the damage that emissions have already done. Below is an informative video on carbon markets from The Economist.

Fossil fuels – not going away soon.

Following on from my previous post on COP26 you have to ask if there has been any move away from fossil fuels and what is the likelihood that there will be some reduction in their use.

Thompson Clark of Mauldin Economics made some good points on his Smart Money Monday article. Even with the investment being put into green energy stocks the performance of them compared to traditional energy stocks has been interesting to say the least – see graph below.

TAN = solar and green energy stocks – dropped 20%
XLE = traditional energy companies (Exxon, Chevron) – increased by 44%

Oil prices have risen to over $80 a barrel (see graph) which in turn has led to the US releasing 50m barrels of oil — about 2.5 days worth of US oil consumption. This comes as Saudi Arabia, Russia and other members of OPEC have rejected pleas to pump more supply into the market. Furthermore with the drilling bans in the US this summer this will only further limit the supply and therefore push up the price. For the move to a more green energy environment there needs to be more available supply of solar etc to quell the demand for fossil fuels.

Today 83% of the world’s energy supply comes from oil, gas and coal and there is no real change in consumption patterns. With supply pressures (no drilling) and demand (people coming out of lockdown) stocks in oil companies should continue to perform well.

COP26 – a summary

Another good video from CNBC looking at the recent COP26 meeting. COP26 – Conference of the Parties – is the specific name of the annual United Nations Climate Change Conference in its 26th year. The first meeting was in Berlin in 1995. Main points from the video are:

• 2015 Paris Climate Agreement – committed countries to limit global warming to no more than 2°C above pre-industrial levels with an aim for 1.5°C
• Global warming is 1.1°C – on track for 2.4°C increase by end of the century
• Rather than phasing out coal they would phase down – opposition from China and India
• USA, EU and others stated that they would cut global methane levels by 30% by 2030
• India to cut its emissions to net zero by 2070
• Richer nations need to help finance emerging economies to cope with climate change
• Present policies will see the temperature rise by 2.7°C.
• If National Determined Contributions (NDC) targets are implemented then by 2030 temperature rise will be approximately 2.4°C.
• If all targets are fulfilled the best case scenario is 1.8°C
• GFANZ – Glasgow Financial Alliance for Net Zero – hope to raise $130 trillion from private capital to fight climate change.

COP26 – useful interactive

With COP26 conference underway the FT has produced a very good interactive graphic where you can select 193 countries’ historical emissions and future climate targets, as well as information on the energy mix that indicates their progress on renewable energy – below are screenshots of China and New Zealand. NZ having 0.14% of world’s annual CO2e and China coming in at 23.9% with fossil fuels being 70% of electricity production in China.

Although New Zealand’s emissions are small it has been a poor performer – between 1990 and 2018 emissions rose by 57% which is the second highest increase of industrialised countries. 2018-2019 increased by 2%. New Zealand’s nationally determined contribution (NDC) is to reduce net emissions by 50% below gross 2005 levels by 2030 which is a 41% reduction using an ‘emissions budget’ approach.

What is an emission budget?
An emissions budget is a total quantity of emissions that is allowed to be released during an emissions budget period. Each emissions budget covers a period of  five years (except the first emissions budget which will cover the period 2022 – 2025). Emissions budgets will act as stepping-stones, or interim targets, to reaching our 2050 emissions reduction targets. New Zealand’s legislated targets are for net zero greenhouse gas emissions (except biogenic methane), and a 24 – 47% reduction in biogenic methane, by 2050. Source: NZ Ministry for the Environment.

Natural Resources v GDP

The Economics of Biodiversity by Sir Partha Dasgupta was published in February this year and was a wake up call for all of us. Sir Partha says nature must be recognised as an asset and that our traditional measure of economic prosperity – Gross Domestic Product – is no longer fit for purpose. Basically all 7.8 billion of us is on a collision course with the planet.

“The problem with GDP is that it doesn’t include the depreciation of capital and one of the natural capital, or nature, which is somewhat different from buildings and roads in that you can really depreciate it very fast.”

Between 1992 and 2014 there was a 40% fall in the stock of natural capital per person – water, food, air etc. See graph below.

Global Wealth Per Capita, 1992 to 2014

Source: The Economics of Biodiversity by Sir Partha Dasgupta

Since 1950 the global economy has grown 14 fold and with the increase in prosperity has come the cost to our natural environment. With our current consumption we need an earth that is 1.6 times larger. Although there has been moves to slow the rate of climate change the progress needs to be accelerated. Larry Elliott in The Guardian looked at three ways:

• Firstly you could simply stop the burning of fossil fuels or international travel now or in the near future.
• Secondly you leave the issue of climate change to the markets: governments could stop subsidising the use of fossil fuels but otherwise leave it to inventiveness of the private sector to come up with solutions.
• A third approach is to have a partnership between the government and the private sector. A previous example of this was the announcement by President Kennedy in 1961 that the US would put a man on the moon by the end of the decade. Larry Elliott quotes Mariana Mazzucato’s new book ‘Mission Economy’ in which she states that by focusing on the immense power of governments to shape markets, capitalism itself can be remade. Mazzucato aims to infuse capitalism with public interest rather than private gain.

Below is a recent video from CNBC about climate change which is already taking a financial toll on the planet, with extreme weather events costing the global economy $146 billion in 2019, according to insurer Swiss Re. Also an interview with IMF Managing Director Kristalina Georgieva about how governments and business can fight back.

The paradox of Norway – fossil fuel giant and leader in renewable energies

In 1969 the discovery of oil off the coast of Norway transformed its economy with it being one of the largest exporters of oil. A lot of countries in similar positions have succumbed to the ‘resource curse’ in which countries tend to focus on a natural resource like oil. The curse comes in two forms:

With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly. This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.

However it is the fall in commodity prices that is now hitting these countries that have, in the past, been plagued by the resource curse. As a lot of commodities tend to be inelastic in demand so a drop in price means a fall in total revenue since the the proportionate drop in price is greater than the proportionate increase in quantity demanded.

Norway – has a different approach.

In Norway hydrocarbons account for half of its exports and 19% of GDP and with further oil fields coming on tap Norway could earn an estimated $100bn over the next 50 years. Nevertheless there is a need to wean the economy off oil and avoid not only the resource curse that has plagued some countries – Venezuela is a good example as approximately 90% of government spending was dependent on oil revenue – but also the impact on climate change. Norwegians have been smart in that the revenue made from oil has been put into a sovereign wealth fund which is now worth $1.1trn – equates to $200,000 for every citizen. This ensures that they have the means to prepare for life after oil.

The Economist – Ecowarriors bankrolled by oil – 8-2-20

What are they doing?

• 98% of electricity is from renewable energies and technologies
• Heating with oil is to be banned this year
• 50% of new cars are to be electric
• Oslo has set a ceiling every year for its greenhouse gas emissions
• Oslo removed nearly all parking spaces from the city centre – now bicycle docks / benches
• Norway is hoped to be completely emission-free shipping fleet over the next couple of decades – this accounts for almost all of Norway’s oil consumption
• Sovereign wealth fund will sell its shares in companies dedicated to oil and gas exploration

Norway and Liberia – Coarse Theorem

Coarse Theorem – Ronald Coarse argued that bargaining between parties could produce a mutually beneficial and efficient solution to problems like pollution.

An example of this was the a deal between Liberia and Norway. Norway will give $150m in aid in return for Liberia stopping the destruction of its forests. The stick approach of trying to force Liberia to stop cutting down its trees might give way to a more effective carrot approach by paying Liberia to do so. This makes both sides better off. Liberia still gets the aid and Norway gets to preserve biodiversity and take a small step against climate change.

Norway’s challenges

This being said there needs to be more emphasis on the service sector as an earner of GDP – this sector already accounts for 55% of GDP. According to The Economist Norway faces 4 challenges:

• Reduce it focus on gas and oil
• Increase its productivity through the use of technologies
• Reduce carbon emissions to meet the Paris agreement goals on climate change
• Create 25,000 jobs a year so that oil workers can find meaningful employment

Source: The Economist – Ecowarriors bankrolled by oil – 8-2-20

Climate change = higher interest rates for developing countries

A significant number of developing countries are located in and around the equator which also means that they are more exposed to the extremes of climate change. As the world gets hotter these countries will suffer the most which makes their ability to advance their standard of living even harder. Temperatures in tropical climates will become far more variable and soil near the equator will dry up reducing its ability to dampen temperature swings e.g. Amazon rainforest, Congo, Indonesia etc.

The additional cost to poor countries in avoiding the damage caused by climate change is estimated to be between US$140bn – US$300bn each year on measures such as costal defences, strengthening buildings etc. This is according to the UN Environment Programme which assumes that global temperatures will be only 2°C above pre-industrial levels by the end of the century – unlikely according to The Economist. Not only are these countries suffering from climate change‑related drought, which will lead to a consequent drop in agricultural production and rise in food insecurity, but it also means higher interest payments than similar countries that are less exposed to climate change.

Climate Change = Higher risk of default = Higher Interest Payments

The V20 countries
The Vulnerable Twenty (V20) Group of Ministers of Finance of the Climate Vulnerable Forum is a dedicated cooperation initiative of economies systemically vulnerable to climate change. The call to create the V20 originated from the Climate Vulnerable Forum’s Costa Rica Action Plan (2013-2015) in a major effort to strengthen economic and financial responses to climate change. Originally 20 countries it has now expanded to 48 and the membership is mostly from poor countries that make up less than 5% of global GDP. They include the following:

Afghanistan, Bangladesh, Barbados, Bhutan, Burkina Faso, Cambodia, Colombia, Comoros, Costa Rica, Democratic Republic of the Congo, Dominican Republic, Ethiopia, Fiji, The Gambia, Ghana, Grenada, Guatemala, Haïti, Honduras, Kenya, Kiribati, Lebanon, Madagascar, Malawi, Maldives, Marshall Islands, Mongolia, Morocco, Nepal, Niger, Palau, Palestine, Papua New Guinea, Philippines, Rwanda, Saint Lucia, Samoa, Senegal, South Sudan, Sri Lanka, Sudan, Tanzania, Timor-Leste, Tunisia, Tuvalu, Vanuatu, Viet Nam and Yemen.

Research has estimated that V20 countries pay 1.2% higher than comparable countries which raises the V20’s borrowing costs by about 10% which is equivalent to an extra US$4bn each year in interest payments. It has also been estimated that of corporate debt a significant amount is held by countries who are the most at risk of climate change. This equates to 3% of total debt in more than 60,000 firms in 80 countries. These high risk countries were charged 0.83% higher interest on loans which equates to roughly a 10% premium. Therefore credit rating agencies are including climate change in their risk models and what makes it worse for developing countries is that they tend to be primary based economies which are the most susceptible to climate change. Moody’s, the credit rating agency, has suggested that of the 37 countries that are most vulnerable, farming accounts for 44% of employment on average.

For developing countries to counter the impacts of climate change sovereign parametric insurance has been prevalent. This insurance is pooled amongst countries in close proximity and makes the premium more affordable. This insurance relies on risk modeling rather than on-the-ground damage assessments to estimate the cost of disasters. Parametric insurance policies pay out automatically when certain pre-agreed conditions, such as wind speed, rainfall or modeled economic losses, meet or exceed a given threshold. Examples of areas where countries have pooled insurance are:

• Caribbean Catastrophe Risk Insurance Facility
• African Risk Capacity
• Pacific Catastrophe Risk Insurance Company
• Southeast Asia Disaster Risk Insurance Facility – under development

Like any insurance although it might be under used it does mean that countries can access money to recover and rebuild their economies – ideally with greater resilience.

Source: The Economist – ‘Costing the earth’ – 17th August 2019

China and Pollution

Interesting video from Al Jazeera about pollution in China.

Smog levels in Beijing were almost seven times the maximum exposure recommended by the World Health Organization. That makes the smog a matter of life and death. In the first quarter of this year more than 90 percent of Chinese cities failed to meet the government’s own air-quality standards.

Air pollution contributes to 17 percent of all deaths in China. As many as 1.6 million people died this year as a result of air pollution, the Berkeley Research Group estimates. That’s about 4,400 people dying every day. But what is the government doing to tackle the issue? And why has it failed to strike a balance between economic growth and public health?

Coal remains one of the easiest and cheapest form of energy and this is very apparent in India where usage is about 62% of energy needs. India is the second largest consumer after China and ahead of the USA. Also coal consumption is growing about 7 percent a year to power the country’s economic catch-up. As China is going through a growth period similar to Europe many years earlier, their argument will be that European countries polluted the environment by a similar amount

Climate change activists have highlighted concerns of rising temperatures by 2100, however are rising temperatures as significant when you consider the long-term implications of much higher unemployment?

Repeated games may help climate change negotiations

Reading a post from Michael Cameron’s blog reminded me of how repeated games of the prisoner’s dilemma may help climate change negotiations.

The Paris Agreement came in to effect on 4th November this year and it brings all nations into a common cause to undertake take ambitious efforts to combat climate change and adapt to its effects, with enhanced support to assist developing countries to do so.

The main issue with tackling climate change is the cost to countries of implementing it. To be successful it will need profound transformation of energy and transport organisations, and changes in the behaviours of billions of consumers. Research has suggested that it will likely cost 1% of GDP – even though it doesn’t seem much, it is double the amount currently spent on development aid worldwide.

A successor treaty? 

According to Michael Liebreich, the prospects don’t look good when you consider the following:

• The US sees a cap on carbon emissions as a threat to competitiveness, and hence to its global supremacy. Add to this the rhetoric of President elect Donald Trump which has dismissed global warming.
• The developing world denounces any calls for a cap on emissions as an effort by former colonial powers to hold back development;
• Europe has been making encouraging though patchy progress towards targets, driven mainly by a one-off switch from coal to gas.

The issue here is how countries can expect to make cuts in emissions when their economic competitors refuse. This in turn leads to The Tragedy of the Commons which occurs when a group’s individual incentive lead them to take actions which, overall, lead to negative consequences for all group members.

Climate Change as Prisoner’s Dilemma
The initial impression from the discussions over climate change is that of a typical Prisoner’s Dilemma. As mentioned previously, the cost of tackling climate change is approximately 1% of annual per capita GDP. However, if nothing is done about the issue the cost is estimated to be between 5% to 20% of GDP. So that defines what happens at the extreme of cooperative or non-cooperative behaviour.

Form the table above, a country that refuses to act, whilst the other cooperates, will experience a free-rider benefit – enjoying the advantage of limited climate change without the cost. On the flip side, any country that imposes limits, when its competitors do not, incurs not just the cost of limiting its own emissions, but also a further cost in terms of reduced competitiveness – estimated here at an additional 3.0%.

From the table it seems predictable that countries should prefer to be self-interested: the best national policy, if others reduce emissions, is to defect; likewise, if other countries are not taking action, then it is pointless to be the only sucker to take action, and one should again defect.

Repeated Prisoner’s Dilemma and Cooperation 

The dynamics of the prisoner’s dilemma do change if participants know that they will be playing the game more than once. In 1984 an American political scientist at the University of Michigan, Robert Axelrod, argued that if you play the game repeatedly you are likely to see emerging is cooperative rather than defective actions. He identified four elements to a successful strategy which is this case can be applied to climate negotiations:

1  Be Nice – sign up to unilateral cuts in emissions, as deep as your economy and financing capacity allows.

2  Be Retaliatory – single out countries that have not commenced action and, in collaboration, find ways of pressurising them until they do so.

3  Be Forgiving – when non-compliant countries come onboard give them generous applause; signal that good behaviour
will be rewarded with even deeper cuts in your own emissions.

4 Be Clear – let everyone know in advance exactly how you are going to behave – that you will work with them if they take action on emissions, and that you will retaliate if they do not.

It is the belief of Michael Liebreich that this research by Axelrod should be put into practice by the world’s climate negotiators. As treaties on climate change are on-going and therefore become part of the game.

Final thought 

Repeated Prisoner’s Dilemma provides valuable insight into how countries should act away from the negotiating table and over the longer term. This analysis also highlights the fact that the negotiations themselves are not the game. Diplomats and politicians don’t reduce emissions, engineers and consumers do. However, there are errors in the resemblance as governments can form alliances, which makes the dynamics of the game a great deal more complex. Furthermore, they can act inconsistently and irrationally, and their willingness to act is most probably associated with the harshness of global warming. Ultimately, for the planet’s sake, one hopes that everyone will play the game.

Sources: 

• The Economist – Economics Focus: Playing with the planet. 29th September 2007 
• New Energy Finance – How to Save the Planet – Michael Liebreich– 11th September 2007 

Weaning countries off coal won’t be easy.

Germany, the greenest of green countries, and probably the world’s most enthusiastic investor in renewable energy, is finding it very hard to breakaway from coal fired plants. The German government were all set to impose a levy on the coal industry but instead gave a subsidy of 1.6 billion euros to mothball eight coal-fired plants and shut them down permanently by 2023. The main cause of this change of policy was that there was significant pressure from labour unions and local governments in the coal industry. The resistance in the greenest of green countries is indicative of workers and retirees, local economies and communities still depend on coal.

So from Germany to India, strategies to increase the share of renewable energy in the power mix have relied on a coal base. Although governments worldwide are focused on cleaning up energy sources that cause significant emissions, there needs to be some regard for displaced workers from traditional energy sources like the coal industry. Coal miners skills will hardly be transferable to other occupations – structural unemployment.

Nevertheless, coal remains one of the easiest and cheapest form of energy and this is very apparent in India where usage is about 62% of energy needs. India is the second largest consumer after China and ahead of the USA. Also coal consumption is growing about 7 percent a year to power the country’s economic catch-up. As China is going through a growth period similar to Europe many years earlier, their argument will be that European countries polluted the environment by a similar amount

Climate change activists have highlighted concerns of rising temperatures by 2100, however  are rising temperatures as significant when you consider the long-term implications of much higher unemployment?

Source: New York Times – 30th August 2016

Climate Change and Economic Growth

There has been research to suggest that climatic conditions can have a significant effect on economic growth although they tend to be inconsistent. A paper published by the journal Nature suspects that researchers in the past have been looking at the directly relationship between temperature and economic growth. In this paper they approached the research looking for an optimal temperature, on the assumption that both extreme cold and extreme heat can harm growth. Researchers found that:

Hotter-than-usual years benefit countries, rich and poor alike, up to an average annual temperature of 13°C, after which hotter weather begins to reduce growth.

This data allowed them to deduce the likely effect of climate change – see chart.

Brazil – an increase in temperature of 3°C (from 22°C to 25°C) = GDP 3% down

Germany – an increase in temperature of 4°C (from 9°C to 13°C) = GDP 1% up

As countries like Germany and France are on the colder side of the optimum (13°C) they tend to grow faster in hotter years in contrast to the USA and Australian whose normal temperature is the hotter side of 13°C. Some economists have argued that with global temperatures changing there is no firm baseline for comparison. However in the primary sector the growing of agricultural produce is most productive at particular temperatures. In the US those involved in jobs such as  construction and manufacturing tend to leave work an hour earlier when the temperature rose above 29°C. Therefore in order to maintain the hours worked either more people have to be employed or employees are paid extra. It is estimated that 28% of the US workforce are exposed to the weather so this may mean higher costs for businesses.

Sea-level rising

Global warming also means that the sea-level will rise and countries and cities face the decision as to whether to build costly flood defences or accept the consequences. Moreover, even if rich countries manage to fend off the worst effects of global warming, they will still feel its repercussions. Trade with more vulnerable places would decline; refugees would proliferate.

Final thought

If the global economy continues to function in a smilier vein to the recent past. climate change is expected to reshape the global economy by substantially reducing output and amplifying inequalities relative to a world without climate change. Innovation or defensive investments might reduce these effects but social conflict or disrupted trade – either from political restrictions or correlated losses around the world – could worsen them.

Sources:

Nature- Global non-linear effect of temperature on economic production – 15th September 2015

The Economist  – Putting Goldilocks to work – 24th October 2015

El Niño and Commodity Prices

Below is a very good video from The Economist outlining the effects of the El Niño weather pattern. It was first called El Niño – the boy (Jesus) – by Peruvian fisherman over a century ago because it became noticeable at Christmas time.

In parts of south east Asia, southern Africa and Australia it produces drier-than-average weather and even droughts. Research has shown that El nino tend to reduce global cocoa production by 2.4% which can lead to a price rise of almost 2%.

In South America heavy rain could threaten zinc, nickel and copper supply. Drought in South East Asia could lead to power shortages and higher prices in those countries that rely on hydropower.

Cash on Delivery – a better approach to aid.

Foreign aid programmes have been criticised for encouraging dependency and wastefulness amongst developing countries. All too often there is little to show for the spending that has eventuated in these countries. Furthermore there seems to be a mismatch between what donors are prepared to pay for and what recipient countries feel is a priority. Money, in a lot of circumstances, is given to firms who have close links with the government but the end product is not used e.g. schools, roads and other infrastructure. Although donors can be stringent at how the money is spent, it is very difficult to monitor commercial activities in the developing world. For example “The Economist” reported that laying a square meter of road costs the World Bank 50% more in countries where firms report paying bribes above 2% of the value of contracts than ones where such payments are reported to be lower.

In order to combat this donors are now looking at giving aid only if outcomes improve – “Cash on Delivery”. Under this system recipients decide what they would like to develop in their economy and starts to use its own money and existing aid. This has also been referred to as the Stick and Carrot approach.

Coarse Theorem – Ronald Coarse argued that bargaining between parties could produce a mutually beneficial and efficient solution to problems like pollution.

Norway and Liberia
An example of this was the a deal between Liberia and Norway. Norway will give $150m in aid in return for Liberia stopping the destruction of its forests. The stick approach of trying to force Liberia to stop cutting down its trees might give way to a more effective carrot approach by paying Liberia to do so. This makes both sides better off. Liberia still gets the aid and Norway gets to preserve biodiversity and take a small step against climate change.

UK and Ethiopia
The UK has agreed to pay Ethiopia up to US$157 for each extra pupil sitting its school-leaving exam, compared with numbers before then, and another US$157 for each pupil who passed. Two years later nearly 45,000 extra students have taken the exam and 42,000 extra have passed.

I suppose now the onus is on the recipient country to avoid failing which has been the case with some conventional aid programmes where it is easy to proclaim assets as accomplishment.

Norway and Liberia – Coase Theorem

A recent article in the New Yorker by James Surowiecki addressed the issue of Coase Theorem – Ronald Coase argued that bargaining between parties could produce a mutually beneficial and efficient solution to problems like pollution. An example of this was the a deal between Liberia and Norway.

Norway will give $150m in aid in return for Liberia stopping the destruction of its forests. See cartoon from the New Yorker.

Stick and Carrot

The stick approach of trying to force Liberia to stop cutting down its trees might give way to a more effective carrot approach by paying Liberia to do so. This makes both sides better off. Liberia still gets the aid and Norway gets to preserve biodiversity and take a small step against climate change.

5 or 6 more China’s

The reality is that the planet can’t stand another 5 or 6 China’s but developing countries still need to grow and, like their developed country counterparts, it will involve greenhouse gas emissions. If we are to curb global emissions developing countries will have to leapfrog to new technologies as the burning of traditional fossil fuels will just exacerbate the problem. However developing countries have neither the resources nor the incentive to reduce dependence on fossil fuels on their own as their main focus is economic growth. Whilst developed countries have a lot to lose from developing-world emissions it is in their interest to pay the latter to curb emissions e.g. Norway paying Liberia not to chop down its trees. Although this looks a simple enough policy politicians will not be so enthused by it as money that is paid overseas to cut climate change is not very popular with the electorate and therefore the government.

Demand↑ and Supply↓ = Food Prices↑

Paul Krugman has simplified the recent increase in global food prices. On his blog he had the following graph which shows the % declines in grain production.

Demand Pressures
With the exceptional growth in China and a change in diet, there is more pressure on imports of food. The US Grains Council, which in October pegged China’s 2011 corn imports at 2m-3m tonnes, said that the figure could reach 3m-9m. However, as Krugman, points out the demand for grain is highly inelastic. For the United States, they put the price elasticity of demand for breads and cereals at 0.04 — that is, it would take a 25 percent rise in price to induce a 1 percent fall in consumption.

Supply Pressures
Most of the decline in world wheat production, and about half of the total decline in grain production, has taken place in the former Soviet Union — mainly Russia, Ukraine, and Kazakhstan. As you may know this was due to unique heatwave that was prevalent in the area. I blogged on this on 5th September last year – Wheat Prices – what’s driving them up? And it’s not just the FSU (Former Soviet Union): extreme weather elsewhere has played a role in bad harvest around the world.

Climate Change – we must act.

Hot on the heels of Nicholas Stern’s lectures at the University of Auckland comes Greg Craven a high school science teacher who posted a ten-minute video, The Most Terrifying Video You’ll Ever See, predicting dire consequences without strong measures to stop global warming. That video attracted millions of viewers; his focus now is not “what” to think about global warming, but “how.” Using clear language and charts, Craven sketches not just the cost/benefit analysis of over-reacting and failing to act, but the fundamentals of sound science. Well worth a look

Lord Nicholas Stern at The University of Auckland

On Friday night I attended the last of 3 lectures given by Lord Nicholas Stern at The University of Auckland. In front of packed house he talked of a new industrial revolution and countries that did not invest in renewable energy and cleaner innovation risked falling behind technologically, or being excluded from trade markets.

“All countries have to embrace [the industrial revolution] … or countries will be reluctant to trade with them. Ten or 15 years from now, those that produce in dirty ways are likely to face trade barriers.”

According to Stern, New Zealand needs to reduce CO2 equivalent per person from nearly 20 tonnes to two tonnes by 2050. “We know that New Zealand has half of its emissions from agriculture. But the possibilities of technical change in agriculture to move to the low-carbon economy are very strong. New Zealand could lead the world in that sort of change.”

A significant number of countries in the world argue that they cause only 1 or 2% of emissions so why should they make cuts. Stern takes the view that the action reduce emissions must be colaborative “as poorer countries could look at the richer countries, like New Zealand, and say ‘well if they’re not getting on with it, if they’re finding it difficult, how can we, so much poorer, be expected to get on with it?’. One country has a big effect on others.”

“But this has to be collaborative. Poorer countries could look at the richer countries, like New Zealand, and say ‘well if they’re not getting on with it, if they’re finding it difficult, how can we, so much poorer, be expected to get on with it?’. One country has a big effect on others.”

Stern questions
To avoid a 50/50 chance of catastrophic temperature increase of 5C early next century we need to reduce worldwide greenhouse gas emissions in the atmosphere from the current 50 gigatonnes to: 35 gigatonnes – 2030
20 gigatonnes – 2050

Stern answers
*High emissions reduction targets for rich countries
*Lesser targets for developing countries
*An international emissions trading regime
*Combating deforestation
*Technological advances to reduce emissions
*Financial assistance for developing countries to help adapt to climate change.