What is the top priority on climate change?

As the developing world ramps up its greenhouse-gas emissions, what should our top priority in climate-change policy be?

The critical issue is that no strategy will work unless it is consistent with developing countries' continued economic growth. So we are unlikely to be able to reduce the use of “dirty” energy enough – either through carbon taxes or through a “cap and trade” permit system – unless we can find a cheap clean substitute. And that requires innovation.

Developing countries are not going to give up the immediate aspirations of their (often growing) populations for climate-change benefits that are largely in the future. Worrying about preserving the environment for our great-grandchildren is a luxury developing nations do not have.

China, for example, stresses even in the Forward to its “National Climate Change Programme” that “economic and social development and poverty eradication are [its] first and overriding priorities” – hardly a surprise when the latest figures show 300 million of its people live below the World Bank’s dollar-a-day poverty line, and perhaps 100 million are illiterate.

Although China will this year overtake the US to become the world's number one polluting nation, its officials state that it “does not have the obligation to cut emissions”. Nicolas Sarkozy is right to suggest taxing China’s exports based on their embodied emissions, but this threat gives us only limited leverage over it.

So China will do little for which it is not compensated; this is probably the binding constraint on any deal. (India matters hugely too, of course, but its per-capita emissions are so much lower that it will probably accept any deal we offer China.)

First, whether we like it or not, China (and India and others) are going to continue to develop nuclear energy. So unless the West continues to develop it too, the safety and storage and handling issues will be resolved in environments with less democratic accountability than in Europe and the US, and with more pressure to take shortcuts than in richer countries.

Second, China (and India and others) will continue to exploit their enormous coal reserves. So we urgently need research and development on lower cost Carbon Capture and Storage (CCS) technologies to remove coal plants' emissions. The UK government is right to subsidise a demonstration CCS plant. It should probably subsidise several. It is also right to insist that the technology chosen is one that can be retrofitted to traditional plants. China is building one such plant every five days.

Crucially, however, it will always be cheaper to burn coal (and oil and gas) without CCS than with it. We can encourage developing countries to use CCS through a revised Clean Development Mechanism or – better - by including them in an Emissions Trading Scheme that allocates them enough permits that they make money by participating. But Western electorates will only be willing to transfer limited resources to the developing world. There may also be problems monitoring whether CCS technology is being used as claimed.

So CCS alone will not suffice. Only clean energy sources that are cheaper than those currently available are likely to prevent further emissions growth in the developing world.

If large-scale nuclear power is politically unacceptable, substantial investment in clean energy R&D is the only alternative. But the private sector will not do this unaided. Businesses know that when an innovation is sufficiently important, the innovator gets little of the benefit: the developers of drugs for AIDS, and of vaccines for Anthrax and bird flu were threatened with compulsory licenses in many countries (including in the United States) until they "voluntarily" licensed their innovations cheaply.

The difficulties of getting effective patent protection in the first place, the riskiness of much energy R&D, and the large scale of some of the necessary investments (for example, research into fusion) are further reasons why business is reluctant to undertake the needed R&D without subsidies.

So it is catastrophic that public expenditure on energy R&D has been falling in most countries over the last 30 years, and it is shameful that Europe spends a much smaller fraction of GDP on public energy R&D even than the USA and Japan. The UK is one of the worst offenders.

There are other priorities too, of course. In particular, curbing deforestation is cheap and cost-effective, and has the collateral benefit of preserving biodiversity.

But more R&D into clean energy is probably the highest priority of all. Finding a clean energy source that is cheaper than those currently available is the only politically-plausible way of curbing continuing growth in developing nations’ emissions.

This article is based on Paul Klemperer’s talk to the Potsdam Global Sustainability Symposium; he helped draft the Potsdam Memorandum presented this week to the UN Climate Change Conference in Bali. A longer version of this article is at http://www.nuff.ox.ac.uk/users/klemperer/ClimateChangePriority_Klemperer.pdf.
His earlier VoxEU article “Missing Answers on Climate Change” is at http://www.voxeu.org/index.php?q=node/440