Shock tactics to get your attention. I know it sounds unlikely. But really, he is.
He is calling for a "new framework" to replace the Kyoto Treaty (which comes to an end in 2012). David Miliband helpfully clarified on Radio 4's The World Tonight, that he didn't really mean it in the sense of a replacement for Kyoto, because he had acknowledged that the new framework would also be under the auspices of the UN. I'm sorry David - you might want to look for signs of continuity, but in no sense does this imply the continuation of Kyoto, any more than your second wife would imply continuation of your first marriage, just because you are still living in the same house.
What Bush means, in particular, is that any replacement for Kyoto must not be based on the failed cap-and-trade approach, as embodied in the European Union Emissions Trading Scheme (EU-ETS). And it is this that he is right about. Cap-and-trade is the wrong approach, in principle and in practice. What follows is a long and technical paper I have prepared (PDF version here) explaining why it is wrong, but let me first summarise it for those of you who have got better things to do with your time.
- The reasons why Phase 1 failed have not gone away. The EU-ETS is failing to deliver sufficient savings from the sectors and countries covered by it to make their contribution to a target which, if achieved, might reduce temperatures by 0.06°C relative to what it would otherwise have been in 2050.
- Is it anyway possible to devise a rational basis for allocating emissions-rights? Looking at the current allocations, there is (presumably) method to these allocations, but not logic. This is a central-planner's wet-dream, and a libertarian's worst nightmare.
- One of the problems with the EU-ETS is its failure to deliver long-term price signals. It is typical hubris of politicians to imagine that they can reduce this uncertainty by declaring their intentions for a time when they will almost certainly not be in power, and for a market over which they have only partial control. It is likely that not even increased federalism would be sufficient to deliver greater certainty, and only a Napoleonic solution would suffice.
- Even if the EU-ETS could be made to work efficiently, fairly and on a long-term basis, it would disadvantage European nations for as long as other nations did not impose similar costs of carbon on themselves. We will be suckers in a rigged global market for hot air.
- The allocation of emissions rights to existing players rewards dirty incumbents and disadvantages their cleaner and newer competitors. The role of government, almost the only real role in the anti-trust/competition area, should be to prevent incumbents from erecting barriers to entry, not to institute those barriers for them.
- All carbon emissions have an equal impact and should be valued accordingly. Our incentives are upside down, and they are largely so because there is not a single carbon-price applying equally to large and small installations and to the fuelling of electricity, heat and transport. And the reason that we do not have such a simple, integrated pricing mechanism is largely because we fetishize a discredited cap-and-trade system that is not only wrong in principle and practice, but cannot practically be expanded to cover all sectors.
- Even if cap-and-trade mechanisms like the EU-ETS could be broadened to cover all emissions sources from all locations and tightened to provide meaningful savings through tight and strongly-enforced targets, they would be the wrong approach:
- Cap-and-trade produces an irrational, discontinuous demand curve.
- All current cap-and-trade schemes focus only on gross emissions, and usually only from particular sources.
- They apply a positive price to non-carbon rather than a negative cost to carbon, which has unavoidable ramifications for the misvaluation of the contribution of various solutions.
- Cap-and-trade assumes that there is any rationale for an arbitrary cap. The balance between investing in adaptation and mitigation should not be decided for us by scientists, but discovered in markets that establish people's preferences and perceptions of the balance of risks.
There is no way of adapting cap-and-trade mechanisms to satisfy these objections. We should carry through with Phase 2 of the EU-ETS, because the market had a reasonable expectation that it would be implemented. But we should agree now to put it out of its misery after that, and to use the period before 2012 to negotiate an alternative system to replace Kyoto – one that provides a more rational price, reflecting all sources and sinks, and taking account of adaptation as well as mitigation, and that is agreeable to all nations, or at least all major emitters. There are alternatives, if Europeans are prepared to open their minds.
Anyway, the full paper follows below. You might want to make yourself a cup of tea before you set to work on this.