It’s the numbers, stupid

The climate change debate over most of the world has been hijacked by those who want to continue business as usual. They have done this by relentlessly focussing on the claimed enormous costs of mitigating what they say may not happen. On the other hand, those who want to change the world have allowed a bunch of ex hippies and daft economists to try and reinvent the world as one where the rich give to the poor, we chuck away our cars and powerboats for bicycles and sailboats, and move from 5,000 square foot McMansions to Manhattan studios. We are debating dollars and cents versus Net Happiness Indexes.

The status quo has won; the world’s press is colluding by not pointing out that the ‘costs’ that are being debated are not costs, in the sense of an ice cream bought on the street - a few licks and only the memory and a few extra fat cells remain. The money that has to be spent is all capital, and given the longevity of energy assets, it is 20 and 30 year capital.

There is a return to this capital and that return in many cases is very high. The easy stuff, especially where it is a new build in a country like India, can have an incremental return of over 30%. That’s quite good, and it is easy enough for governments to mandate by imposing and policing efficiency and building standards.

Assume I have to air condition a factory or an office building. The most common compressors used in India use 1.5 units of electricity per tonne; the most efficient use .5 units per tonne. The difference in cost between the 1.5 unit system and the .5 unit system pays for itself in about 3 years. Most Indian businesses do not choose the efficient system because capital is scarce and the incremental capital can be used to expand the business instead; an entrepreneur cannot lose a march to his rivals. This dilemma is not confined to air conditioning; it affects virtually every capital goods choice a business or a household makes. The short term financial rewards of the efficient system are greater than can be achieved in most businesses in India but in a capital constrained society they clash with the market imperative or the household budget.

A Mercedes C220 CDI is much more powerful and safer than a Maruti Dzire, and it is a little more efficient as well; but the Dzire is miles ahead of an Ambassador, which is the analogue for the state of most Indian industry. Let’s dump our Ambassadors and develop the equivalent of our competitive car industry for industrial machinery, appliances and building products. If we succeed in this there is huge gain to be had for India. We are becoming the small car manufacturing capital of the world. Why not add machines, windows, heaters et al to that industrial base?

And any financing we may get from the developed world is also easy to target to efficiency, easy to monitor and easy to leverage because it has a high commercial return so the borrower will repay the money. The incremental cost of a highly efficient appliance should be refinanced at 3% over its life by the government using its own or, preferably, developed country dough, with repayment enforced by the tax man.

As for the nonsense amongst our chattering classes about how Jairam Ramesh has given away the goods before arriving in Copenhagen, it is just that, nonsense and nonsense that is giving the game to the Americans and the Chinese, who are coming out smelling like roses, despite being the two polluters par excellence.

The Chinese have walked away with the PR debate. They are being lauded for the fact that they will cut the carbon intensity of their economy by 40% to 45%. Lost in all this nonsense is the fact that their emissions will rise from the current 5.5 MT per capita to some as yet unspecified number which I suspect will be around 8MT per person.

The current 5.5MT per capita is about what France emits per person, so the world is praising the Chinese for promising to pollute more than the French, who are signing up for a 20% to 30% reduction from their already low levels.

India, meanwhile appears to be signing up to a 20%+ reduction in carbon intensity, which means that its per capita levels will rise from about 2MT per person to between 3.5MT and 4MT per person. The calculation is simple: assume our GDP today is 100 and energy usage is X then in 2010 (at 9% growth – optimistic) our GDP will be 237 and energy use will be .75X*2.37; substitute the current estimate for per capita emissions of 2MT and you get about 3.5MT per person. This ignores population growth, fuel mix and so on but it is close enough for government work.

If one makes the simplistic assumption that all our power growth will be in electricity one has to realise that we will easily beat this goal, if only because the electricity supply will not increase 80% in 10 years, which is what the above calculation implies. It never has, no matter what the planners say and our useless electricity boards will not change their tardy habits in the next 5 years, which is when the die will be cast for what India will look like in 2020.

Instead of making the most of our inefficiency, India continues to make a fool of itself, with its own negotiators turning on the government in yet another instructive lesson on the dead weight of the bureaucracy. We must! we must! tie pollution to per capita numbers chant our 'experienced' negotiators. Take one look at their resumes and you see that they have been at this since Kyoto, in which they felt they got a great deal. They did, but a most unrealistic one. They will stick to their old position because it was such a triumph. They do not see it as empty even though the US, who along with China holds the key to reducing GHG's, walked away from Kyoto.

Both China and India also have another dodge at hand; the measurement is to be in GDP per capita in purchasing power parity terms while carbon is carbon, in this case immutable. If the exchange rate rises we will automatically make the grade because we will be using less carbon per unit of GDP. Tra la lala la.

Therefore, the goals to 2020 are a joke for both India and for China but they are real for the US in particular because of entrenched habits and the energy industry, and for many parts of Europe that are already very efficient.

The key to our future lies in using the 10 year free ride that Mr. Ramesh appears to be negotiating to get ourselves into a position where we can make a real dent in emissions beginning in 2020. Because that is the tough stuff; that is when we will be staring down the barrel of a gun like the US and Europe are doing now.

And that is the reason they are buying this eyewash from us, and even more from China. Our agreeing allows them, especially the Americans, political room to try. And, if they can do it we can follow along and copy from them. We may have to pay a bit for the privilege, but we pay for German cars and Swiss machines today based on what they do for us. We will pay then because we will know the stuff will work, we will be richer, we will know the cost benefit, so we will be able to finance the next step.

Should we do it for us? I look outside my window and see the pall of pollution that requires daytime foghorn use by ships in the harbour in a tropical country.