Cloudy With a Chance of Chaos

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Turning Down the Heat

How business can take action--and why it needs political backup. As businesses begin to recognize the dangers of climate change, markets will help economies adjust, pricing the risks and shifting resources. Yet markets have blind spots: They typically underprice long-term or novel risks. In the case of climate change, where large-scale actions must be taken lest change hit with full force, a purely market-based response would be too little, too late. To address the risks, governments need to get involved.

With the Earth's atmosphere already warming dramatically, we are probably stuck with some form of climate change. Yet the energy economy is still in the process of squeezing, rather than easing the pressure on, the trigger. China and other emerging economies are ramping up their consumption of fossil fuels, while the U.S., which is the world's largest producer of greenhouse gases, continues to resist international efforts to rein them in.

In November and December, delegates from scores of nations convened in Montreal to negotiate emissions-control goals for greenhouse gases in the years following the expiration of the Kyoto treaty in 2012. But days of haggling produced nothing more than a resolution to discuss the issue further in coming years. (The U.S. and Saudi Arabia were the last to agree even to that.)

By itself, the Kyoto treaty will have minimal impact on the global-warming threat. Very few of the 160 countries that ratified the treaty (which went into force last February) will meet the targets of reducing emissions 5% below 1990 levels by 2012. The U.S. rejected the treaty, and China, which is likely to surpass the U.S. as a greenhouse-gas producer in the coming years, is not governed by its provisions. Says Elliot Diringer of the Pew Center for Climate Change: "Unless there is continued action after Kyoto expires, it will have been nothing more than a blip" in the buildup of carbon in the atmosphere.

Up to now, the primary objection by the Bush administration and other opponents of reducing greenhouse gases has been economic impact. The unknowns of climate change have made projecting costs and benefits an economist's guessing game. For instance, in 2002 the White House Council on Environmental Quality cited estimates by the federal Energy Information Administration that achieving Kyoto's goals would erode U.S. economic output by $400 billion in 2010. That estimate was the worst of 7 scenarios examined by the EIA; another put the cost at only $7 billion to $12 billion by 2010. Other studies, like a recent one sponsored by HSBC and entitled "Carbon Down, Profits Up," cites dozens of companies, cities, and regions that have found reducing carbon emissions to be profitable, in part because carbon reduction is often synonymous with increased efficiency.

But as the weather grows worse, such exercises will become moot. The ambitious proposals that BP's John Browne has been talking about--building nukes by the hundreds, for example--would stabilize the concentration of CO2 in the atmosphere at 500 parts per million by 2050, vs. 380 ppm today. Yet even that might not be enough to prevent climate chaos. Says Chris Mottershead, a distinguished advisor at BP: "Nobody knows whether climate's tipping point is at 400 ppm, 700 ppm, or if there is a tipping point." Science does know, however, that today's concentration of CO2 is higher than any in 650,000 years; past climate flips took place with far less carbon in the air. What's more, BP developed its proposals with physicist Robert Socolow and ecologist Stephen Pacala, professors at Princeton University who worked with models of gradual, not abrupt, climate change.

Despite the daunting gap between present actions and what's required, plenty more can be done. Politics enables markets: an international agreement limiting carbon, that includes the U.S. and the developing nations, would supply the discipline necessary for carbon markets to flourish. (Carbon trading lets developed countries achieve emissions-reduction targets by paying to reduce emissions in developing countries.) According to an upcoming study of carbon markets by Ecosystem Marketplace, a website devoted to popularizing environmental derivatives, the carbon market in Europe has already surpassed $4 billion in trading value as utility, industrial, and insurance companies experiment with this new tool.

If U.S. politicians eventually conclude that action on the scale of the BP plan is necessary, they could jump-start change by redirecting the purchasing power of federal, state, and local treasuries--more than $1 trillion a year. Once government at all levels commits to purchasing clean technologies, making efficiency improvements, and using alternative energy where possible, this massive spending would provide economies of scale that would help speed the commercialization of new technologies, as well as prepare society for the shift away from fossil fuels. Equally sensible would be to reduce subsidies and tax advantages that abet the waste of fossil fuels.

Such proposals have been on the table since the early 1990s. Many are even more salient today. By not taking action on greenhouse emissions, we are betting our well-being that climate change poses little threat. If we are wrong, we will meet our fate.

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