Second in a series of posts on climate policy. Find Part 1 here.
According to scientists, climate damages are deeply uncertain, but could be ominously large (see the previous post). Alternatively, according to the best-known economic calculation, lifetime damages caused by emissions in 2020 will be worth $51 per metric ton of carbon dioxide, in 2018 prices.
These two views can’t both be right. This post explains where the $51 estimate comes from, why it’s not reliable, and the meaning for climate policy of the deep uncertainty about the value of damages.
The damages expected from climate change seem to get worse with each new study. Reports from the IPCC and the U.S. Global Change Research Project, and a multi-author review article in Science, all published in late 2018, are among the recent bearers of bad news. Even more continues to arrive in a swarm of research articles, too numerous to list here. And most of these reports are talking about not-so-long-term damages. Dramatic climate disruption and massive economic losses are coming in just a few decades, not centuries, if we continue along our present path of inaction. It’s almost enough to make you support an emergency program to reduce emissions and switch to a path of rapid decarbonization.
But wait: isn’t there something about economics we need to figure out first? Would drastic emission reductions pass a cost-benefit test? How do we know that we wouldn’t be spending too much on climate policy?
In fact, a crash program to decarbonize the economy is obviously the right answer. There are just a few things you need to know about the economics of climate policy, in order to confirm that Adam Smith and his intellectual heirs have not overturned common sense on this issue. Three key points are worth remembering.
In light of the uncertainty caused by the US-China trade war, the IMF expects the US economic growth to slow from a three-year high of 2.9 per cent in 2018 to 2.5 per cent in 2019, while China’s expansion has already slowed in recent years, albeit from much higher levels.
Trump stimulus dissipates
US President Trump and the previous GOP-controlled US Congress claimed to be breathing new life into the US economy with generous tax cuts. The US economy is now overheating, with inflation rising above target, causing the Federal Reserve to continue raising the federal funds rate to dampen demand.
As most families hardly gained from the tax changes, US purchases of houses and consumer durables continued to decline through 2018. Instead of investing in expanding productive capacity, US companies spent much of their tax savings on a $1.1 trillion stock buy-back spree in 2018.
Hence, the positive impacts of tax cuts were not only modest, but are also diminishing. Nearly half of 226 US chief financial officers recently surveyed believe that the US will go into recession by the end of 2019, with 82 per cent believing that it will have begun by the end of 2020. Wall Street’s biggest banks, JP Morgan and Bank of America, are also preparing for a slowdown in 2019.
As if to confirm their concerns, both the Dow Jones Industrial Average and the S&P 500 had their worst ever December performance since 1931, when stocks were battered after the Great Crash.
On December 17, the United Nations General Assembly took a quiet but historic vote, approving the Declaration on the Rights of Peasants and other People Working in Rural Areas, by a vote of 121-8 with 52 abstentions. The declaration, which was the product of some 17 years of diplomatic work led by the international peasant alliance La Via Campesina, formally extends human rights protections to farmers whose “seed sovereignty” is threatened by government and corporate practices.
“As peasants we need the protection and respect for our values and for our role in society in achieving food sovereignty,” said Via Campesina coordinator Elizabeth Mpofu after the vote. Most developing countries voted in favor of the resolution, while many developed country representatives abstained. The only “no” votes came from the United States, United Kingdom, Australia, New Zealand, Hungary, Israel, and Sweden.
“To have an internationally recognized instrument at the highest level of governance that was written by and for peasants from every continent is a tremendous achievement,” said Jessie MacInnis of Canada’s National Farmers Union. The challenge now, of course, is to mobilize small-scale farmers to claim those rights, which are threatened by efforts to impose rich-country crop breeding regulations onto less developed countries, where the vast majority of food is grown by peasant farmers using seeds they save and exchange.
The notion of the BRICS (Brazil, Russia, India, China, and later, South Africa) was concocted by Goldman Sachs’ Jim O’Neill. His 2001 acronym was initially seen as a timely, if not belated acknowledgement of the rise of the South.
But if one takes China out of the BRICS, one is left with little more than RIBS. While the RIBS have undoubtedly grown in recent decades, their expansion has been quite uneven and much more modest than China’s, while the post-Soviet Russian economy contracted by half during Boris Yeltsin’s first three years of ‘shock therapy’ during 1992-1994.
Unsurprisingly, Goldman Sachs quietly shut down its BRICS investment fund in October 2015 after years of losses, marking “the end of an era”, according to Bloomberg.
Growth spurts in South America’s southern cone and sub-Saharan Africa lasted over a decade until the Saudi-induced commodity price collapse from 2014. But the recently celebrated rise of the South and developing country convergence with the OECD has largely remained an East Asian story.
RICHARD KOZUL-WRIGHT:Here’s a big question that I think needs to be honestly and frankly addressed. If state ownership, technology transfer agreements and subsidies work to sustain growth and eliminate poverty and these policies have taken 500 million people out of poverty in China, and by implication, because of China’s connections to other developing countries, another 100 million people out of poverty in other parts of the developing world: Why do advanced economies want to deny their use to other developing countries? Given their success, given what they have achieved in terms of economic performance and social performance, why would you want, why would you want to eliminate these options from the policy toolkit of developing countries? It’s a very serious question that needs to be, I think, asked in a more frank and honest way than has so far been the case.
Obviously, for us least in terms of the TDR, it’s about rethinking multilateralism in progressive ways. It’s a plague on both your houses This is not an issue of do we support regressive nationalism, which we’ve already seen in various formations. Nor is it a support for the kind of corporate cosmopolitanism that has dominated the multilateral discussion for the last…We need some kind of alternative that is neither of these options. And I’ll finish here. We, in the Trade and Development Report this year, have gone back to the Havana Charter, which as many of you know, was the forerunner of the GATT, indeed more ambitious of the multilateral discussions in 1947 and 1948 than the GATT, that was signed up to by 50 odd countries, both developed and developing. Indeed, the majority of countries that signed up the Havana Charter were from the developing world. It was eventually rejected by the U.S. Congress and was shelved, but it is a remarkable document.
On 24 October 1945, the world’s most inclusive multilateral institution, the United Nations, was born to “save succeeding generations from the scourge of war, … reaffirm faith in fundamental human rights, … establish conditions under which justice and respect for the obligations arising from treaties and other sources of international law can be maintained, and to promote social progress and better standards of life in larger freedom” (UN Charter: Preamble).
Thus, one major purpose of the UN is to foster international cooperation to resolve the world’s socio-economic problems and to promote human rights and fundamental freedoms (UN Charter: Article 1.3).
Hence, all Members are obliged to “refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state” (Article 1.4), and to give the UN “every assistance in any action it takes in accordance with [its] Charter” (Article 1.5).
For many, however, the world today is increasingly at odds with the ideals of the UN Charter. Wars and conflicts are causing unprecedented humanitarian crises, worsened by rising intolerance and xenophobia.
Important international organizations and treaties are being threatened by unilateral withdrawals, non-payment of dues, virtual vetoes and threats of worse. Meanwhile, bilateral and plurilateral trade and other agreements are undermining crucial features of the post-Second World War order.
RICHARD KOZUL-WRIGHT:We know that debt fueled booms tend to end badly. We don’t know when they end, and we don’t exactly know how they end. But we do know that they’re not sustainable. And that, I think, should cause pause for very serious thought in terms of the stability and sustainability of the current global growth path. For us behind that is a series of policy measures that have come to dominate the post crisis period which have not produced inclusive and sustainable growth. That began with a major effort to save the banks after 2008, 2009. One can justify that, although there are issues about exactly how that was done. But that was far too quickly followed by a push for austerity.
We talked about that in last year’s Trade and Development Report, the toleration, as I said, of shadow banking, the encouragement of mega-mergers which have hit, again, historic highs in recent months, and the endless beating of the free trade drum has provided what we see as the economic beat for- and I will use the term from the Chicago economist Luigi Zingales, the “Medici vicious circle” in which growing economic power and rent-seeking behavior has reinforced and captured political power, reinforcing economic power.
Against a backdrop of public protests, on 25 October the Argentinian government approved the 2019 budget including US$10 billion worth of cuts in essential areas such as education and public works. The next day, the Executive Board of the International Monetary Fund (IMF) completed the first review of a loan agreement paving the way for the disbursement of a tranche of US$5.7 billion to the debt-stricken country. At the same time, the Board gave the green light to increase Argentina’s bailout loan to US$56.3 billion. However, this loan comes with a significant price tag.
The higher the bailout, the greater the austerity
The IMF review calls for stronger and faster fiscal consolidation in Argentina. The budgetary targets for the short and medium term were tightened compared to the initial agreement. Initially, the IMF allowed Argentina to maintain a 1.3 per cent deficit for 2019. Following the first review, the Fund is now demanding a zero deficit, which must be turned into a surplus above one per cent from 2020.
A range of budget cuts and increased taxation will seal the deal, while the insurance policy is provided by new structural conditionalities that promise to lock in these fiscal targets for the foreseeable future. For instance, the Argentinian government was required to present a budget in line with the zero deficit target to Congress to secure the next tranche of the IMF bailout loan. Unsurprisingly, one new conditionality gave Congress a November deadline for approving this budget – which it did last Thursday, representing a clear restriction on the parliament’s budgetary rights.
To satisfy the terms of the agreement, Argentina also has to pursue a restrictive monetary policy, complemented by keeping interest rates above 60 per cent as long as inflation is high. The bottom line is that Argentina will get more funding in exchange for more belt-tightening measures.
On July 26, 2018, farmers in Xai-Xai, Mozambique, achieved a milestone. They met to formalize their new farmers’ association, elect leaders, and prepare a petition to the local government for land. The association, christened Tsakane, which means “happy” in the local Changana language, was the culmination of six years of resistance to a Chinese land grab that had sparked protest and outrage. The association now has a request pending for its own land.
With the Chinese rice plantation floundering, the Tsakane farmers offer a vivid demonstration that perhaps the best way to grow more food is to give poor food producers more land.
The rise and fall of a land grab
I first visited the vast rice fields of Xai-Xai, three hours up the coast from the capital city of Maputo, in 2017. Since 2008, Mozambique had been one of the leading targets of large-scale agricultural investment projects, widely denounced as land grabs by critics. Community resistance had halted most such projects in Mozambique, including ProSAVANA, the controversial Brazil-Japan initiative, which was intended to be the largest land grab in Africa.