A personal resume of the Senior Economist Seminar, 12 June at Festetics Palace

Ever since Climate Change has become a UK foreign policy priority, the British Embassy in Budapest has been seeking opportunities to work with various Hungarian stakeholders in climate policy and action. This work includes a range of issues of which the climate negotiations in the UN (post - Kyoto Protocol) and the economics of climate change have acquired particular importance economic crisis had set in.

Earlier this year I learnt of a few reports that are milestone studies in this field with the potential to have a major influence on economic decision-making and climate politics.

An outline for the case of a green stimulus

• McKinsey & Company: Pathways to a low-carbon economy
• London School of Economics and Political Science, publications

I also learnt that Ecofys, Netherlands was about to finish compiling a study, for the Hungarian Ministry of Environment, called HUMIT that was aiming to assess CO2 mitigation potentials and related costs up to 2025 in all economic sectors of Hungary.

These reports were dealing with the need for greening the economic stimulus packages or setting out methodology for analysing the costs of carbon abatement measures, as well as assessing the emission reduction potential in various sectors. I contacted the authors to find out if they could come to Budapest in early June to present their findings and recommendations to the economist profession. Although they are in high demand across the globe and have a busy travel schedule, finally they all said yes. I was euphoric for having secured the attendance of these experts and we have set the date of the seminar on Low Carbon Economy.

In this endeavour, I have received help from a few excellent people such as Jozsef Feiler, Tomasz Terlecki, Tamas Halm,  Kornel Varsanyi and Akos Eger. The Embassy has teamed up with the Hungarian Association of Economists and the Office of the "Green Ombudsman" to attract the target audience. We have decided to hold twin seminars on two subsequent days, one in Hungarian and one in English with the first dealing with greening the state budget and the other presenting the above mentioned state-of-the-art studies in climate economics.

My colleague, Daniel Faber secured media interest for our distinguished speakers. Among others, MR1 radio’s 168 óra, and Corvinus University’s Köz-Gazdaság interviewed the speakers. Other media also covered the event e.g. Echo TV and Alternative Energia on-line. I was glad that these reports managed to generate more attention to low carbon economic issues, competing with party politics and the economic downturn, issues which dominate the media these days.

You can find the programme and the presentation on the Embassy website. Those with solid economics knowledge might want to go straight to the above links to master the exciting new models in detail. For all other interested I have tried to highlight what I have found most illuminating from the abundance of information brought to us at the event. Below is my summary.

Transition to a low carbon economy is the right way out of recession. Green economic recovery provides for sustainable growth not just in the short run and creates more jobs than traditional stimulus packages. The costs of inaction are significantly higher than taking early and collective action at international level. Green recovery also has additional benefits in the form of improved energy efficiency and energy security.

Fiscal stimulus is more efficient if monetary policy stops interest rates rising in response and if action is taken internationally. Activist fiscal policy is coming into fashion and the increase of Government investment has the greatest effect.

In fact, the stimulus packages put forward by many countries are either very small or the share of green measures in them are not sufficiently high, especially if we compare it with the given country’s carbon intensity. An estimated one fifth of the global stimulus should be devoted to low carbon measures plus other policies should not lock in high carbon development.

The audience asked the speakers what are the factors which make low carbon initiatives work well in a country and what Hungary could do better. Both the UK Ambassador and the Ombudsman pointed out the importance of environmental democracy and its institutions, the role of civil society, politicians and media.

There is a 19 Gt (gigaton) abatement opportunity by 2020 world wide at a cost under 60 euro per ton. Reduction potential in agriculture and forestry alone are huge. On the other hand, people have unrealistic expectations in terms of payback period when it comes to low carbon investment. In fact, we should calculate with real estate timeframes. Further difficulties include providing the up front capital when loan supply is seriously constrained or getting access to areas with high potential e.g. Amazonas or Asia. A number of factors affect the cost curve, e.g. maturing new technologies or feed in tariffs in the power sector.

All Green House Gas reduction commitments up till now is only half of what is needed. It is a challenge, but feasible. 17 Gt  per year less emissions than the business as usual scenario is similar to undergoing a new industrial revolution  - even if we consider the dramatic increase in the productivity of labour and capital goods since then. The world needs 5 to 6% carbon productivity growth per annum to maintain growth and at the same time reduce emissions, i.e. low carbon pathways should not be at the expense of economic growth.  

Low carbon is a huge business opportunity arising from investments, their ripple on effects down the value chain as well as through creating new businesses and services. The majority of the infrastructure to exist in 2030 is still not done thus we do have a choice between low carbon or high carbon development. The technologies are available, although in different phase of maturity. However, learning curves are dramatic. What is only affordable with support today, will be the norm in the not too distant future. Opponents to low carbon often threat with "carbon leakage", i.e. high emitting sectors moving from the EU to other countries with less restrictive emission regulations. The McKinsey study found that only a small number of sectors are affected. The problem needs to be addressed, but the competitiveness argument against low carbon does not stand if we take the economy as a whole, and a global climate deal would address both carbon leakage and the regulatory uncertainties as well.

Climate finance is key to unlocking the international deal and ensuring implementation. Some public finance must come from new sources, but there will still be a shortfall. Other options should be devised to fill the gap. The Stern Review established in 2006 that early action would require 1% of the global GDP per annum, but delay in combating climate change it can cost as much as 20% from 2050 on.

A strong international deal would secure not only the avoidance of dangerous climate change, but would also help accelerate the transition to low carbon economy, provide clearance for investors about long-term returns, business opportunities would be predictable and it would provide incentive to unleash innovation. To the contrary, a weak international agreement would result in losing the economic prize of low carbon and would lengthen the transition period.  This would cost more for business and society as a whole, as well as having regulatory disadvantages.

It is the role of policy-making to create the framework which will determine how countries can realise their mitigation potentials. There is a need for EU level agreement because stand alone measures are not too useful. Hungarian examples of what need to be improved included: penalties for not complying with the new law on building energy efficiency, stopping subsidies for fossil fuels, and using those funds for driving efficiency instead, plus windfall profits to be given back to customers. At present, only a small portion of the EU funds are used to improve energy efficiency and the use of renewable sources.

I liked the comment by a participant who emphasized that there are a number of behavioural changes which cost nothing, yet make a real difference, such as eating less meat, putting on a jumper instead of turning on the heating, etc. On a daily basis I see that people are very good at complaining that energy efficient investments are expensive, but we are not so good in saving energy and resources. Wasting resources is still widespread especially outside our homes. In public places nobody cares. Do they leave the lights on unnecessarily and litter in their own property as well? Why we put on air conditioning on maximum in the office? Just because we do not have to pay that bill and we deserve it?

The HUMIT model is a great tool to help decision-making. It is a product by a consortium led by Ecofys. It includes a reference baseline, 600 technical GHG mitigation measures, an algorithm to account for the merit order of these measures and their linkages, a user interface which allows to select measures, adjust the baseline and change energy prices, tax rates, etc. The authors have paid special attention to sensitivity analysis to check how these measures react to any changes in the model. They have found that the mitigation potential in 2025 can be as much as 40% in Hungary below the 2005 level. The breakdown of the potential identified huge potential in transport alone. The cheapest measures to realise this potential are in industry and buildings. This does not mean however that the non-homogenous household sector with its masses of low income owners will take action without proper policies. Realisation costs are very sensitive to factors such as global market prices, tax rates, discount rates, and the assumed CO2 emission factor.

Findings also confirm the huge potential in behavioural change: A reduction in electricity demand is most cost-efficient in the ETS sector. The CO2 reduction potential in ETS (Emission Trading System of the EU whereby CO2 emitters under the scope of the ETS system purchase and sell their CO2 emission allowances/units thus not exceeding the overall national level cap on CO2 emissions) sectors depend on the efforts of the end-users. Savings by end-users will reduce the need for additional effort needed in the power sector.

The study also compared the quantified mitigation targets and the identified potential for Hungary and concludes that there is a significant surplus saving in ETS and no-ETS sectors while Hungary’s Renewable Energy Source target is rather ambitious compared to the potential. Saving potential in non-ETS sectors offer a scope for using flexible mechanisms in the form of domestic offsetting projects (these offset CO2 emission in one place by investing in CO2 reducing projects elsewhere in the value equivalent to the CO2 emitted). Saving potentials in district heating and electricity may lower burden for ETS sector, but without them the burden for the ETS sector will increase.

This interdependency shows clearly what used to be the obstacle of the world agreeing an ambitious deal so far. Climate change requires collective action not just pointing at each other and waiting to see. Dangerous climate change will affect all, but especially the most vulnerable, i.e. the poor will suffer more as they have less means to protect themselves. No wonder the proponents of urgent and collective action - from Lord Stern or UK Climate Envoy, John Ashton – all highlight that climate change is an imperative whether we approach it from a moral, an economic or security point of view.

I hope that through professional exchanges such as the Low Carbon Economic Recovery Seminar, climate change – which is the biggest challenge humanity ever faced –will receive more political time and we can shift the debate on climate change to an integral part of all decision making at all levels. There are some very promising signs, because in the meantime Hungarian Parliament has passed a resolution to draft a Climate Law for Hungary.

If this summary has not made you tired of this subject completely, and you are interested in the other, perhaps even more exiting aspect of the climate/energy agenda, i.e. the political considerations, I recommend reading The Politics of Climate Change, a new book by Anthony Giddens.

• An enticing review of the book by Tamas Bodoky on Index

I will try to get the book.

Kriszti Kocsis
1 July 2009