Oil price is a sign of global health for the environment

Russia has signed up to the Kyoto agreement and oil now costs $50 and more a barrel. But counter-intuitively, the Russian decision is bad news for the world’s long-term environment, health and economy – while the oil price is actually rather cheering.

The media coverage of Russia’s long debate on Kyoto reminds me of the 1962 apocalypse movie, The Day the Earth Caught Fire, which closes with a printworker at the Daily Express waiting to learn whether the front page should read “World Doomed” or “World Saved”. After months of saying “World Doomed”, the papers this week were suddenly saying “World Saved”. Or at least, that the world would be saved, if only those anti-social Americans and Austalians joined in.

The reality is not so plain. Kyoto is vastly expensive – perhaps $150bn (£84bn, E123bn) a year, three times what the world spends on overseas aid. But it will make a difference to global warming? If we spent as much on problems that we could do something about – delivering clean water and sanitation to the billions of people without them, tackling starvation, Aids or malaria, say – we could certainly save more lives, more quickly and more cheaply.

The European Union has blackmailed Russia into signing Kyoto for two reasons. First, Kyoto is seen as a benchmark of political correctness, so even if it achieves nothing, the more countries we get to sign, the better we feel about ourselves.

Second, Russia is full of cheap, abundant energy. That gives it a big competitive edge over Europe – or in the looking-glass language of Brussels, an anti-competitive edge. So in return for a Kyoto signature and a hike in gas prices, they dropped a demand for cuts in Russia’s farm subsidies. (The EU’s own extravagant farm subsidies mean it cannot be out-competed on that front, anyway.)

But now that all the big industrial countries have signed up, America and Australia will come under increasing blackmail to join the Kyoto crowd, too. The stock argument is that America is immoral to hold out because it is the world’s biggest polluter, producing 24% of the world’s CO2 emissions. Of course, it generates 30% of the world’s output too, so its pollution-to-product performance is better than those doing the criticising. But it seems rude to point that out.

Global warming is a serious problem, but it needs a measured response, not a pointless, frenzied one. Politicians do not understand the science any better than the rest of us. But it is the loudest and most strident interest groups who catch their attention and that of the media. So the papers report, and politicians accept, that we are heading at great speed towards a cliff and that we need to do something. Anything. But if you think you are heading at great speed towards a cliff, it is hard to act rationally. Our response has not been rational.

The scientists agree there is a problem, but not that there is a cliff edge. The Intergovernmental Panel on Climate Change thought that average surface temperature might increase by 1.4 degrees to 5.8 degrees Celsius by 2100. But all such predictions depend on a zillion assumptions, and most of the estimates making up this figure are on the lower end of that, about 2 degrees or 3 degrees. That could cost us (on more heroic assumptions) between $5 trillion and $8 trillion, which is a few months’ worth of total world gross domestic product.

This is hardly trivial; but as I say, the world has lots of other non-trivial problems. We need to order our priorities. And the threat of global warming is, in important ways, a limited and indeed self-limiting problem.

A rise of 2 degrees or 3 degrees would have a net impact of about zero in the developed countries. They have good technology to deal with it; and being located largely in the cooler regions, their agriculture, tourism and trade might all benefit. But the developing world, already mostly hotter and with poorer technology, would suffer a large negative impact. Rather than dashing around wildly, we should focus our response there.

We also have to understand that countries get dirtier before they get cleaner. Thanks to the environmentalist hype, everyone assumes wealthier countries pollute more. The opposite is true. Take particulates in the air, caused by burning wood, coal and oil. It’s nasty pollution, claiming many lives through respiratory diseases – remember the notorious London smogs? But on the basis of hard measurements since 1935 and informed guesses before then, it is plain that this form of pollution got worse and worse up to 1890 and then started to decline. Today, it’s lower than in the time of Queen Elizabeth I.

This is a curve that everyone has to go through. Hungry people do not have the time or the energy to care much about environmental damage. They are prepared to cough a bit more, or hack down a few acres of rainforest for pasture, if it means they can feed, clothe and educate their families. Only when they grow wealthy enough to stop worrying about their urgent basic necessities can they start thinking about buying themselves better environmental quality.

China is now the world’s second-biggest economy in purchasing-power parity terms. Its industrialisation will be very dirty. But its people will only be wealthy enough to join the rest of us in cleaning up the planet when they have gone through that growth episode.

And when they have, they will almost certainly end up rich and more technologically advanced. Which will make them much better allies in fighting global warming than they could ever be if we were to impede their rapid growth.

Oil has not gone over $50 a barrel because Iraq has made it scarce. Every decade since 1920 we’ve been told that the world’s oil reserves will run out soon, and every decade we discover more of the stuff. Today we have more oil (and gas and coal) than we have ever had.

Our known shale oil reserves would keep us going for millennia. The trouble is that, after we have drilled the easy stuff, the rest becomes more difficult and more expensive to extract. So the cost rises. While on the demand side, China and others are soaking up vast oceans of the stuff to fuel their dash to development. It’s simple supply and demand.

The oil age is ending – not because we will run out of the stuff, but because other forms of energy are becoming cheaper. The cost of renewables has halved for three decades in a row. That cost does not have to keep falling so steeply for renewables to become competitive with fossil fuels by 2050.

We don’t need politicians or regulators to tell us to switch – market prices will tell us clearly enough. It is the market, not misplaced regulation, which will set the limit to the global warming problem.

Wasting billions now on Kyoto, or on vast uneconomic offshore wind farms, will not bring that turning-point any closer. Indeed, it will only make us poorer and less able to grapple with the world’s many problems.

Dr Eamonn Butler is director of the Adam Smith Institute. This article was originally published in The Business on 10 October 2004.