Can Everybody Win? Should Everybody Win?

We’re discussing in this lecture the structure, the shape of COP21; of the agreement and the premise of a negotiation in general as I’ve emphasized is a Pareto improvement, that the participants in the negotiation come out of the negotiation feeling that they’re better off than they were in the business as usual trajectory and the question that

I’d like to ask is can everybody really win in a climate agreement and an important second question is should everybody win? It all depends I suppose on one’s perspective. I’ve emphasized repeatedly now that there are many different divisions at the negotiating table.

There are the divisions of the rich and the poor countries. There are the divisions of the fossil rich and the fossil poor countries. There are divisions between producers of the fossil fuels and the consumers of the fossil fuels, not as countries but as players in the market, and here I’m thinking about the private companies, the big oil companies Exxon Mobil or Chevron or BP and others versus the consumers on the other side. Not only the consumers of their products but people who will then experience the results of climate change.

And another division which I’ve emphasized although only briefly is the different perspectives of the present and the future generations. Now here we have a little bit of an advantage. Only the present generation is present right now. The future generations don’t get their direct say, but they do have a strong interest. They’re not really at the table except through us, except through our logic, our moral commitments, our cultural imperatives, but we need to understand that future generations really are at the table.

They have interests and the question is, are they winners in this process? Under business as usual, they’re surely losers but how can both the present and the future generations be winners in the process? Well, let me come back one more time to this basic diagram that I introduced earlier where on the horizontal axis we had the income of one group of countries and on the vertical axis the income or the well-being of a second group and I’m imagining that these two groups are negotiating with each other for an agreement starting from inside the potential well-being line at business as usual and trying to reach the cooperative point.

Now in this final use of this curve I’m using the country one grouping to be the oil exporters. Countries like the Gulf states, Venezuela, Canada, Australia, which are significant exporters of fossil fuels. And I’m using in this case on the vertical axis the oil importing or the fossil fuel importing countries that are buying these carbon rich energy supplies from the first group of countries. And as usual, both groups are at the bargaining table and in principle one could have a Pareto improving outcome in which both the oil exporters and the oil importing countries are better off. But think about the ways that the policy choices are typically discussed.

Well, we’ve not focused in this course on the details of policy choices of how to move to the low carbon economy. At this point emphasizing mostly how does one achieve a low-carbon economy.

We know that to move from coal fire power plants to wind and solar power or to move from internal combustion automobiles to more expensive electric vehicles something has to be done through regulation or through emissions permits or through carbon taxation to tilt the balance in the marketplace towards the lower carbon option. And remember of course that the whole theory of this is that we should be willing to spend a bit more of our resources than we’re now spending on the carbon rich infrastructure to spend it on a low carbon infrastructure because we’re going to come out way ahead in the long term by avoiding climate disaster and so the idea is that while the alternatives right now may look more expensive when you add in the social cost of carbon to the market cost of carbon then these alternatives either are or through research and development could be made to be the best cost alternative.

But how do you tilt the consumers or the market behavior in that direction. You may regulate, no more coal fired power plants without carbon capture and sequestration. No more internal combustion engines after 2030. You can only buy light duty vehicles that are…have zero tailpipe emissions. That’s one way to do it. And the other way we know is to tilt the market prices through corrective pricing. For example through a carbon tax that’s levied on the use of coal, oil and gas. And suddenly wind and solar power and electric vehicles look like the better deal.

Suppose we go that second option which has been the preferred option in the European Union for example to use a tradable permit system. We know that the implication of that kind of policy or not an equivalent but closely related policy of putting on a carbon tax is to raise the price of carbon fuels to the consumer but by driving down demand for those carbon fuels to lower the price received by the producers.

So the typical strategy right now not necessarily wrong in any way but the typical strategy is let’s push demand away from coal, oil and gas by creating a price wedge between what the consumers pay, a high price, and what the producers receive, a lower price and that will move the economy to a safer, lower emitting, 2-degree C limit kind of economy of our pathways.

All fine and good; absolutely right from a climate point of view but what I’m illustrating here is one absolutely plausible outcome that the world thereby moves to a higher aggregate level of well-being by avoiding climate disaster but it does so with a big improvement of the oil importing countries because they not only have a safer climate but they now pay a lower market price, not as consumers but the price that is actually net of tax paid to the oil exporters. They get a double benefit.

Whereas the oil exporting countries, say Saudi Arabia or Australia or Canada would face a lower world market price because demand for their products from other countries has gone down. Yes, they’re compensated by a safer climate, but maybe they’ve taken a big hit in their revenues and the way that I’ve drawn it here is that instead of reaching a Pareto improving outcome, that is along an arrow that goes from the southwest to the northeast, maybe the arrow goes to the northwest, that the oil importers are way better off but the oil exporters while living now in a safer climate also have seen their market really, really cut sharply and therefore they would say that’s not a mutually beneficial outcome, that’s just a punishment of the oil countries.

Now what could be done? What could be done for example would be a transfer of income. Let’s say that the oil importers impose a carbon tax and that has the effect of shifting us to a safe energy system but the losers are the oil exporters and the oil importing countries that have collected this tax on oil use could transfer some of the revenues to the oil exporters.

That probably would seem a little bit shocking to a lot of people. Indeed, when I once proposed it they said you’re heretical. How dare you give money to the oil exporters, they’re damaging the world. We’re not going to pay for them, we’re not going to compensate them. I mention this to raise the point. Can everybody benefit from an agreement? Should everybody benefit from an agreement?

Should is on the basis of principle, ethics, morals, legal judgment, responsibility, can is more of an economist’s question. I can tell you it’s possible to compensate oil exporters, even oil companies for a loss of their market income that may come from putting on a carbon tax. The should is another question. Is it really true that every party to the negotiation should walk away feeling better off? Maybe some of the oil exporters should walk away a bit unhappy that well, there goes our market, only compensated by the fact the climate will be safer and they were the polluters in the first place. My point is that there are different standards of outcome.

You might say a Pareto improving outcome is what we’re after. You might say no, no, polluter pays, I’m not interested in the polluter being compensated in any way. They’re both absolutely pragmatic and sensible standards. They contradict each other. And from a practical negotiating point of view it’s complicated. Because it could be that the oil exporting countries become a blocking coalition to say well, these negotiations are all fine and good in saving the climate and saving the world along with it, but why should we be the big losers in all of this? We’ll stop that until we’re compensated.

This is for us to discuss and debate in the global online negotiations next semester. This is for the world to discuss and debate. But as a practical matter, let me make a point. The oil exporting interests have been a blocking coalition in practice. Maybe not in the literal way that I’ve just described it, but there’s no doubt that the resistance to strong climate action has been greater among the net fossil fuel exporting countries than it has been among the net fossil fuel importing countries.

By and large, with exceptions within the European Union, most of the European Union is a net fossil fuel importing region and it’s also a region experiencing a lot of climate devastation. On both counts, the European Union is the world leader in saying we must take climate action. But in other parts of the world where countries are fuel exporters, for instance Canada and Australia, the politics is much, much less interested, let’s put it that way, in a climate agreement because the real weight of the politics is powerful interests of the fossil fuel industry who are saying why should we bear that cost?

I’d say the same is certainly true in the case of Russia. A massive fossil fuel exporter and so far not so interested in a strong, low-carbon climate deal, perhaps because of the specific interests involved.

And so it’s worth us to ask the question who are these big fossil fuel entities, what kind of role do they play in the negotiations, are they a blocking coalition, what kind of sharing of the costs and benefits would be a reasonable approach to reaching a full deal and I just want to share with you a few tables showing how concentrated in fact the fossil fuel resources are.

Coal, for example, is so concentrated that five countries alone have about three-quarters of the total world’s coal supply, the U.S., Russia, China, Australia and India. And you can imagine within each of those five countries there are very, very powerful lobbies, politically influential that say don’t go there to a low-carbon agreement.

On the next graph, I show the oil reserves. Same story, actually. If I take groupings of countries, the five big groupings constitute in fact the three-quarters of the total proved oil reserves. These are the Gulf countries, the Gulf Cooperation Council (GCC), that’s Saudi Arabia, United Arab Emirates and neighbors, it’s Venezuela with its vast oil and unconventional, both conventional and unconventional oil reserves, it’s Canada with its massive unconventional heavy oil, the oil sands of Alberta, it’s Iran and Iraq. And these countries obviously also have very, very strong interests in the market price and the future use of petroleum.

And if I turn to the next of the three resources, natural gas reserves, once again there is tremendous concentration of the proved reserves f natural gas. Again, the Arabian peninsula is so central to this story of course, next comes Iran, Russia with its vast natural gas deposits, Turkmenistan and Venezuela. Combined these five countries, the top five holders of natural gas reserves, account for two-thirds of the total reserves. So we see that this is going to be complicated, these negotiations, and there is a question about what these countries will demand, that’s perhaps more evident.

What they might receive, what they should expect on a practical and on an ethical basis in a worldwide transition to a low carbon economy. One thing we can say for sure, and I would like to point it out to all of the oil countries and oil exporting countries and companies, if carbon capture and sequestration works, then the space that is opened up in the carbon budget is expanded and this is why all of the fossil fuel producers have an enormous stake in proving and from their point of view demonstrating if it’s right, the feasibility of large scale carbon capture and sequestration.

And it’s why that group of countries and the companies that I’m going to introduce at this moment also should be major financiers of the testing, the research, the development, the demonstration and if successful the diffusion of carbon capture and sequestration. Now I’ve talked about the oil reserves and production in terms of countries but of course there’s some very, very major players in the world. Those are big oil companies. Some are privately owned, others are state owned and they are extraordinarily powerful actors in the world scene. They’re among the major largest countries it’s almost right because of their scale, but companies in the world and they are absolutely in my opinion the most powerful political lobby in the world.

They’re an enormously successful industry. Massive in scale, massive in wealth, massive in technological capacity, massive in determination for more than 100 years the oil companies have basically gone anywhere to the most remote places to the…to Siberia, to the middle of rain forests, to absolutely difficult terrain to the deep oceans to extract oil and sell it and they’ve made vast fortunes doing it but one has to marvel at the technological might and fortitude of this industry.

But when you look at the bottom line, the bottom line is absolutely amazing. Fortune 500 has its list of the top companies in the world measured by revenue and take a look at the top ten. Wow. Of the top ten, number one, number three, number four, number five, number six, number ten are oil companies. Extraordinary. And number seven is the power distribution company of China, so you have Royal Dutch Shell, Exxon Mobil, Sinopec, China National Petroleum Corporation, British Petroleum, the State Grid Corporation of China, and Total. Giants in the world, the biggest companies in the world. Seven of the ten Fortune 500 companies are in the oil sector.

They have a voice, believe me. Two of the remainder…remaining countries…there I go again…two of the remaining three companies in this top ten list are automobile companies. Major users of petroleum. We have number eight, Toyota, and number nine, Volkswagen. It’s fair to say that nine of the ten companies in the top ten of the Fortune 500 are therefore basically in the petroleum sector and it’s not surprising how powerful this sector has been and continues to be. It has to be at the table in my view in these negotiations, it absolutely has to put its vast financial might into the research and development of carbon capture and sequestration because that is ultimately its long term license to operate.

The tenth remaining company on this list is Walmart a retail giant of phenomenal reach. It’s interesting that Walmart has been pursuing a strategy of trying to press tremendous energy efficiency through its supply chains and it’s been involved very much in…in trying to bring its supply chains in agriculture as well and there as a consumer facing company where consumers are saying what are you doing for the environment? Walmart perhaps feels that more directly than the big oil giants. Here is a…an undeniable story and reality that we absolutely need to face and to understand in the coming months of negotiation. We’re talking about the core of the world economy when we talk about the energy system. We’re talking about the very biggest companies in the whole world.

We’re talking about major countries that have strong national interests, reasons of state and a massive part of their economies involved in energy production and in the export or import of primary energy resources. In other words, the stakes are very high if the logic is of finding a way to create an agreement in which there is widespread benefit shared in a way that is…that enables us to get to that agreement, we’re going to have to face the realities of this concentration of fossil fuel resources and fossil fuel economic and political power in the coming months.

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