Climate Change

World Bank's Watson and AEI's Hayward discuss economics, climate change science

How can the world's economies address climate change without sacrificing growth? Should governments change agricultural and industrial policies to slow global warming? Or are private market-based trading systems more effective? World Bank chief scientist Robert Watson and Steven Hayward, a scholar and researcher at the American Enterprise Institute and the Pacific Research Institute, discuss the economics of climate change, the roles of the government and the private sector, and how to raise public awareness and involvement.


Mary O'Driscoll: Welcome to OnPoint. I'm Mary O'Driscoll. Our guests today are Dr. Robert Watson, chief scientist of the World Bank, and Dr. Steven F. Hayward, the F. K. Weyerhaeuser fellow in Law and Economics at the American Enterprise Institute in Washington, D.C., and a senior fellow at the Pacific Research Institute. Welcome to OnPoint.

Steven Hayward: Good to be here.

Mary O'Driscoll: I wanted to start with climate change. Both of you wrote reports recently, Dr. Watson you did the "Millennium Ecosystem Assessment" and Dr. Hayward you did the "Index of Leading Environmental Indicators." Both of you, your reports come from very different perspectives yet you both say human activity is causing global warming, but you have very different views on how serious this problem is. So I wanted to ask you first, Dr. Hayward, how big a problem is global warming and should we be doing anything about it?

Steven Hayward: The answers are I don't know and probably yes. I think if you sort of ask me for a label, what is thought of these days, I describe myself as a climate change agnostic, not so much a skeptic. That word's gotten sort of pejoratively loaded I think. I do think from a policymaking point of view we are a long way from knowing some important things for making large-scale policy such as how fast, how much and what are the range of effects likely to be? We have very wide ranges of estimates about this, he's worked on it a lot more than I have, and I don't fundamentally doubt the science on it at all. But I do think, as I say, before you commit the nation and world to some very expensive policies we need to get a little further down the road.

Mary O'Driscoll: OK. Dr. Watson I wanted to ask you, your study talks about, calls for increased cooperation between government and business to help solve problems like climate change. J.P. Morgan recently said that it would use World Bank standards for environmental review of development projects and will do carbon emissions analysis before approving any loans. Does this indicate businesses are starting to take significant, excuse me, significant steps toward the cooperation that you're calling for?

Robert Watson: Oh absolutely. I think the private sector is often ahead of government and I think the private sector for many reasons. One, many of them understand the triple bottom line, make a profit but be environmentally and socially sustainable. Two, there's a market for environmentally friendly goods. Three, if you're a private sector that's proactive you're likely to help set the regulations with government. You're viewed as a friend of government not an enemy of government and you always want to be ahead of regulations not behind regulations. The private sector's a key player in that have sort of, we have to have good partnerships between government, the private sector and civil society.

Mary O'Driscoll: OK. Well Dr. Hayward do you think it's a good idea from an economic standpoint for U.S. companies to address these emissions voluntarily or by regulatory fiat without the same standards applied to China or India?

Steven Hayward: Well, I had an answer until you threw in China and India at the end.

Mary O'Driscoll: OK.

Steven Hayward: What I think is, you know, I think it is a decent idea with a couple of caveats. One is, is that, and I write about this in my report this year, there's a lot of uncertainty about how you measure these things. The companies are stumbling around and figuring out what metrics to use and so forth. The second thing is I do have a slight concern that depending on how this might become formalized on the road, with what is sometimes called early action credits, you may be setting up a system for people to become big winners by being in early on forming a cartel. So, no, some companies, some of the utility companies that have a lot of, for example, nuclear power love the idea of carbon emission credits because they'd make out like a bandit that way and the companies that are heavily relied on coal, for example, are against it for exactly the opposite reason. So there's a lot of devil in the details, but in general, I think, I'm in general agreement with Dr. Watson, that it's a hopeful trend.

Mary O'Driscoll: OK. Dr. Watson any thoughts?

Robert Watson: Yes, in fact some of the private sector got ahead of the curve. Companies like Shell, British Petroleum, DuPont, Rio Tinto, very different companies, Toyota, have all recognized there is a market for new energy friendly technology. And what some of them have managed to do is they've realize they've not been as energy efficient as they actually thought and they made a profit in actually reducing their emissions, only a modest amount, up to 10 percent. Ultimately, if we do want to stabilize the Earth's climate it is going to take more like 60 to 70 to 80 percent, but clearly, the time for action is now, but there are some sensible actions and that's what's really required.

Steven Hayward: Let me jump in on that if I might because Dr. Watson said something quite important about how climate stabilization or carbon stabilization, excuse me, require very large cuts in emissions from what the world emits now.

Robert Watson: Yeah.

Steven Hayward: I did a back of the envelope calculation about this once, of American companies, and my rough calculation was that even if every American company were to be able to cut its carbon emissions by 10 percent, it gets us a very tiny amount of the way there. So although I think it's important for a lot reasons, at the end of the day it does not get you very far down the field for those very large numbers we talk about.

Robert Watson: But it is the first step on a very long journey. It shows you what types of technology can start, but it also has to be balanced by good policy. We have to have policies that don't necessarily favor of fossil fuels and neither favor some of the other techniques, but you need to literally have a good policy framework in order to have the private sector make the right decisions so that we can realize the energy needs we need and our developing countries needs for poverty alleviation. So what policies are needed to stimulate the right sort of technologies to penetrate the marketplace?

Mary O'Driscoll: OK, well I wanted to, you brought up this, the interesting point I guess is, for lack of a better phrase, is called enlightened self interest on the part of the companies that will make out like bandits to be able to start that early, but isn't that the only way that this kind of a process can start?

Steven Hayward: Oh, I'm not sure. I do think that in general, Bob, I bet we're actually in close agreement here, one of the things that needs to happen is, however you get to advanced technologies, whether it's policy driven or market driven or some combination of the two, ultimately what needs to happen is that technology needs to be transferred, in some fashion, to China and India.

Robert Watson: Yup.

Steven Hayward: And Brazil and other emerging nations. Maybe we need to give it away in the course of time. Right now they're not interested, terribly interested in paying top dollar for our very expensive technologies that even we find kind of expensive in some cases. But I had a point about China and India since you brought it up. I've long held the view that the United States, although we're the richest country in the world, in this issue really needs to be thought of as being more like China and India than like the G8 nations in Europe that we're talking a lot about this issue. For this reason we have a, still a rapidly growing population and a pretty fast growing economy. We've grown a third faster than European countries in the recent decades and most people think we're going to continue to grow faster. So in other words, in a very dynamic sense, the United States is a developing country in some ways. That sounds completely preposterous I think to Americans or someone at the World Bank perhaps, but, you know, European countries have flat or falling populations and stable economies, stable economies, flat economies for the most part. Which means it's a different animal for them to say, "We're going to have a 10 or 20 percent reduction in emissions," than it is for the United States with such a rapidly growing population and economy.

Mary O'Driscoll: OK. Dr. Watson is the United States a developing nation?

Robert Watson: No, where we're different from China and India is simply we have incredible technology. We have strong financing and we have strong institutions and access to knowledge. Unfortunately, China and India have less of each of those. The point fundamentally is that the developed world, the OECD countries, have largely been the prime emitters of greenhouse gases. We do have this technological financial institution capability to take the first steps, but eventually, if we're going to address the climate change issue, we do need India and we do need China and the other large emitters onboard. It's really a question of who goes first and how do we bring everyone on together basically?

Mary O'Driscoll: OK. Well I wanted to kind of develop this idea a little bit between the developed world and the developing world. Your reports both indicate there's a vast disparity between the two of them. Yet Dr. Watson your study indicates that with some exceptions environmental conditions in the U.S. are stable or improving, but in the rest of the world, in the developing world, they're getting much worse. I guess that's because the poverty and pollution. Is that the primary driver of that?

Robert Watson: Well, it's a combination of factors. The pressures on the ecological systems in many developing countries are vast. They do have rapidly growing economies. They do have population increase and they don't have access to some of the better technologies that we have. So there's no question, poverty can both cause effectively adverse consequences of ecological systems and they themselves are the most affected by it. But consumption pressures, in rich countries where we have wealthy people, it's also a pressure on ecosystems. So both poverty and consumption are dual factors that both affect ecological systems and the environment.

Mary O'Driscoll: OK. So what is the answer to this? I mean, is nature development the answer to it?

Robert Watson: There's no question that if we are richer we can afford better technologies. We can afford to put the better policies in place, better institutions, but there's always the balance. The richer you are the more you tend to consume, but at the same time you have more economic ability to deal with issues. So there's a trade off basically. There's no question, we need economic growth. We do not want to stifle economic growth whether it's in the industrialized world or in developing countries. The challenge is putting in the policies and technologies to meet our basic human needs without adding significant pressure on ecological systems.

Mary O'Driscoll: OK.

Steven Hayward: Yeah, one of the places where there has been a, I think, significant convergence between what you might call a stereotypical environmental point of view and a stereotypical critical view, which I'll be happy to represent the stereotype for this purpose, is that the old view that growth was the enemy of the planet has been abandoned, for the most part. I mean there's qualifications to that of course, but I think there's broad agreement now that wealthier is cleaner and that wealthier is necessary, for all the reasons he just stated, and that I think is something that's been going on for 15 or 20 years now. But now it's recognized much more clearly in the deliberations of the U.N.'s summit on sustainable development, two or three years ago, and in your recent report and so that's why I am guardedly optimistic that, I agree, that a lot of things are going to get worse in the developing world before they get better, but I actually think the experience of the United States in the 20th century is likely to be the experience of the world and the 21st century. You know, we went from a 100 years ago with Theodore Roosevelt worrying that we'd have to outlaw Christmas trees because we were running out of trees to, in recent decades, forest land in this country regrowing at a rate of about 1,000,000 acres a year. And by the way, we've actually stopped losing a half million acres of wetlands or are probably now gaining wetlands in this country.

Mary O'Driscoll: Well I'd like to know, what kinds of lessons have we learned from China's rapid development? I mean is that the way not to do it or is that the way it's going to happen before it gets better or what?

Robert Watson: China, probably to a large extent, is following the OECD model basically. You put economic growth first and you put the environment second basically. I think the message is we have to bring them together right from the beginning otherwise you have caused pollution which can be very expensive to clean up later. We in America still got toxic waste sites. The full clean up of the Superfund sites, if needed, is actually quite expensive and in general there's no question that when you are more affluent we do have clean water in the country. We do have clean air, although there still are significant exceedences of our ozone standards, still the one place we have not used our wealth in quite that way is on carbon dioxide emissions. They still have gone up as we've become wealthier. We haven't used that wealth to transform our energy system basically, but in general, increased wealth has led, in general, to better air quality, better water quality, better management of some of our ecological systems.

Steven Hayward: Yeah, the sort of simpleminded construct for this, which economists call the environmental cousin, it's kind of a ride, is that your environment gets worse as you develop and then it will start to turn the corner and get better. The hope is that partly by learning from our experience and using our technologies that they will be able to foreshorten that curve. One odd thing happened recently in China, this was in The New York Times about two weeks ago, there was a riot in an interior city and The New York Times story said it was not just kids, it wasn't students who usually riot, but the whole town, you know, middle-aged, elderly people and they were rioting about pollution. Well this actually gives me some hope oddly enough that we have often thought the political reform in China will come for economics or Tiananmen Square or the democracy movement, oddly enough, the environment may turn out to be a driver of political reform, in the way, by the way, that the Chernobyl accident was a driver of political reform in the Soviet Union 20 years ago.

Robert Watson: Oh and there's no question, they're trying to use their energy more efficiently. They've realized that they can't just simply burn dirty coal because the air quality in the cities, the acid deposition, is unacceptable. They also have realized that by deforesting the Yangtze Basin every time it rained they got more of a flood and that was a disaster, but the key was once they stopped deforesting the Yangtze they still needed the same amount of wood and they're now starting to get the wood from other parts of Southeast Asia. So while the pollution gets worse as you have economic growth then it gets better, is an interesting point. There is some controversy about it and it doesn't always work. It hasn't worked for carbon dioxide emissions and it hasn't worked for nitrogen pollution that comes off agricultural lands so we're really hurting the Mississippi-Missouri Basin and we've got dead zones in the Gulf of Mexico because of the extra nitrogen, completely unacceptable. So it's an interesting idea that as you get richer things get better, but you still have to work at the policies and you still have to work at the technologies.

Mary O'Driscoll: OK. Well, I wanted to switch the conversation a little bit now to public perception. I think you both would agree that public understanding of global environmental issues is pretty poor. I think there was a recent MIT survey that the public believes that nuclear power is a major contributor to global warming, but at the same time, public concern about global warming appears to be diminishing and Dr. Hayward I'll quote from you report, you said, "Last year at this time Gallup reported that global warming was a bit of a yawn to most Americans. Today one might say that the public is practically dozing. Almost half the poll respondents, 47 percent, say they worry only a little or not at all about global warming. Global warming ranks near the bottom of the list of environmental issues Gallup surveys. The proportion of respondents who think global warming is generally exaggerated in the news increased 5 percent from 2003, from 33 percent to 38 percent. For the first time Gallup notes this skeptical group out numbers those saying the issues seriousness is underestimated. The Gallup results closely tracked the BBC poll in Britain where respondents ranked global warming last among the list of typical issues including health care, crime and education." Why is this happening?

Steven Hayward: Well, a couple of reasons. Let me put it in a broader framework, which is, the public, I think, generally does not get worked up about, to use very common language, about long-term problems that are hard to see or discern. Let me put it that way. When we're talking about the effects of climate change, we're talking, I mean the really big effects that are hypothesized, we're talking at least 20 years and more like 50 or 75 years off. Most people are more worried about getting their kids school bill paid for next year and the crime rate in the community and is their health insurance going to last? That carries across the board for a lot of environmental issues. The environmental issues that really galvanized, I think, the first Earth Day, 35 years ago, was things like the Cuyahoga River catching fire, the great Santa Barbara oil spill where, I'm from Southern California, you could see the oil lapping up on the beaches and all the dead birds or the television footage of the Exxon Valdez. So climate change, to be terrible about it, is a whole different kind of problem that neither public perception nor institutions are very good dealing with.

Mary O'Driscoll: Well Dr. Watson, what does this say about the challenge you face in getting public support for addressing these kinds of issues like climate change?

Robert Watson: Well, climate change primarily will affect poor people in developing countries, reduced agricultural productivity, reduced rainfall in all of the aridal summit, increased instances of vector born diseases like malaria and dangee, sea level rise potentially displacing millions of people and therefore in developing countries there's more awareness of the issue of climate change, how it will affect the tropics and subtropics, far more than the temperate area of the U.S.A. Therefore, their challenge is how can they actually manage their system with today's climate variability and the projected change when they do have a lack of financial institutional resources, a lack of new technologies, a lack of knowledge basically. So the U.S., for example, in counterpoint, we are not the most vulnerable country. There will be adverse effects of climate change in the U.S., but we are a rich country. We've got more ability to adapt than most people in developing countries. One global issue that did grab the United States was stratospheric ozone depletion that led to ultraviolet radiation and people such as ourselves, with light skins, were vulnerable to skin cancer. That was a long-term issue, and it was hitting home right to our human health, there was action. On climate change it's not the U.S. that is the most vulnerable, vulnerable yes, but not the most vulnerable, it's developing countries. Therefore we in the bank are working with developing countries to both try and produce the energy cheaper and cleaner and learn how can they adapt to climate change. It's a real challenge.

Mary O'Driscoll: Well what are you saying then? Is there going to have to be some major economic, environmental crisis, in some far corner of the world that affects American point of view before something happens?

Robert Watson: I hope not. I hope that what we'll realize is that climate change can provide some opportunities for new technology. For example, there's a technique called carbon capture and storage. That is, you still burn fossil fuel, but you capture that carbon dioxide before it's liberated to the atmosphere and you direct it either into a depleted oil well, a depleted gas well. If that technology comes along there's no longer the same threat to the fossil fuel industry. So we need to look at our technologies as well as our policies to see how can we actually change our energy system, which really isn't very much different from 20 years ago, 50 years ago and 100 years ago. If you look at communication technology or the biosciences revolution you can't even recognize those industries from 10, 20 years ago. So I'm hopeful that with commitment to research, plus good policy, we can solve the problem. But I do believe, where we might be slightly, I think we need some actions now because there are some technologies that can start us along the path and then we'll need new technologies to take us to where we really need to go.

Mary O'Driscoll: OK. Dr. Hayward?

Steven Hayward: I'll actually switch places with him in an odd way for a minute. You'd like to think it wouldn't take a crisis to generate action, but look, I mean, this is on everybody's mind, there were warnings before September 11 that airplanes could be used as weapons and of course, nothing was really done about it until it happened. That's sort of, you know, a lot of public policy is crisis driven. On the other hand, where I'm somewhat optimistic is that, look, there's lots of complaints about American policy and other policies, but you mentioned yourself what corporations are doing, what other countries are doing, that this is where the game is. There's so much energy and thought going into this problem, whether it's super efficient energy technologies or sequestration, to use the fancy word for carbon capture that you used, maybe I'm just too much of a sunny disposition, but I actually think that this problems going to look very different 15, 20 years from now in terms of what menu is out there of what we see confronting us and also what we think we can do about it.

Mary O'Driscoll: OK. Well maybe you'll come back in 15 or 20 years and we can have an update or maybe before then. That's going to have to be it for today. I'd like to thank our guests, Dr. Robert Watson and Dr. Steven Hayward. I'm Mary O'Driscoll. We'll see you next time on another edition of OnPoint.

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