Encuentro en México 2010 - Simon Upton

 

Palabra del Director de Medio Ambiente de la OCDE, Simon Upton

Encuentro en México 2010, 20-octubre-10

 

My father was a farmer.  He was born in a remote farming area in 1920.  His father died just a few months after he was born.  His mother was a widow but with his older brothers she managed to carry on farming sheep and cattle.  There was no electricity in the valley when my father was born.  His family and other families in the valley paid to have electric power lines extended to their district in the 1920s and 1930s. The roads were muddy tracks in winter.  He rode to his first school on horseback.  He was a great shot – there were rabbits and ducks aplenty to shoot.  When he died two years ago he was still farming – and still shooting ducks.

He lived very economically.   His two cars were 38 and 42 years old respectively.  His tractor – bought new in 1958 – was exactly my age.  He worked hard physically all his life.  He pre-dated the consumer culture.  The idea of throwing anything away was anathema.  The effects of the Great Depression followed by a world war with stringent rationing marked him for life.  I discovered two disused ovens, four disused washing machines and eight broken kettles carefully stored away amidst a mountain of other hoarded junk after he died.  (Current high prices for metals like copper and aluminium yielded me a tidy sum when I sold it all to a scrap metal dealer.)  I now own the land he farmed for fifty years.  But I live and work in Paris.  It takes me just 26 hours to be driving up my tree-lined driveway and feeling, literally, half a world away. 

This is not in any way a remarkable story.  For countless generations people have lived and died in the communities into which they were born.  If there is something remarkable about my father’s life it is the country and the century into which he was born.  My father’s way of life was not so vastly removed from his forbears who, a hundred years earlier, had raised livestock in nineteenth century Britain.  And they in turn would have been conducting an activity recognisable to their forbears two and three hundred years earlier. 

Yet even though he pre-dated the arrival of electricity in his rural valley, my father was born in what was at the time – and until the Second World War – the richest country in the world.  When he was a boy, land was cheap and food was expensive.   So were cars and houses.  Now, almost a century later, land is expensive (as lifestyle hunters place ever higher premiums on space) and food, cars and houses are cheap.  New Zealand is now only the 51st richest country in the world (on a per capita GDP basis at PPP).  New Zealanders have become richer.  But many hundreds of millions of people have become far richer still.

For that to have been possible, we as a species have had to transform vast areas of the earth’s surface.  And we have availed ourselves of supplies of energy that have transformed the way billions of people live.  There are almost 5 billion more people alive today than when my father was born in 1920.  If we had not mobilised huge additional resources, their lives – assuming they would have been born – would have been particularly hard.  But that is not the case.  Material plenty – and much less physically demanding existences – have become commonplace.   That is what cheap energy and enabling technologies have done.

Let me illustrate the dimensions of that change rather starkly with this contrast: [slide]
This person’s toil is fairly back-breaking.  But it is in a good cause – subsistence.  There are not a lot of inputs into this sort of agriculture other than time.  Modern technological societies value time much more highly.  This person in a tractor can achieve in one hour what would occupy a manual farm labourer for three weeks. 

But a world in which agriculture is no longer just about subsistence is a world in which the time that has been saved is available for other activities.  And the richer you are, the more you will be inclined to use it consuming other.  Let’s take a look at the way the rich used to live. [slide]  Here is what’s left of one of the Emperor Hadrian’s palaces.  To run an establishment like this would have needed the energy output of maybe 6000 slaves.  Slaves were cheap.  There was a high level of wastage.  Labourers in the fields had a life expectancy of 15 years.   And such were the limitations of the age, that there wasn’t room for many imperial appetites. 

Imperial appetites today are more commonplace.  The inhabitants of this house will easily mobilise the energetic equivalent of 6000 slaves – half a megawatt – by the time you count in their household appliances, cars and recreational toys.  The average American has the energetic equivalent of 100 slaves working for them 24 hours a day.  And of course there are many more emperors even if their empires are financial.  There are, today, believed to be just over 1000 billionaires, 403 of them American and already 64 of them Chinese - many of whom live in grander houses than this one. 

But without going to these extremes, the average OECD citizen still mobilises many times more energy than her grandparents and 100 times more than a subsistence farmer in Africa.  The price of this release from drudgery has been a dramatic increase in the claims we make on the so-called ecosystem services provided by our planet such as food and water. 

Now there was only so much damage the Emperor Hadrian could do.  Regarding human labour as free and easily substitutable must have made the lives of slaves pretty brutal.  The waste of human capability must have been staggering. The moral blind spot is for us hard to fathom.

We consider ourselves much more enlightened.  We place an ever higher value on human life.    But, at least until very recently, we’ve had our own blind spot.  It is ecosystem services that we have regarded as free and easily substitutable. And it has led us to some equally spectacular waste about which we feel as morally ambivalent as the Emperor Hadrian did about his slaves.  Let me provide a few examples.

• Every year, we take about 95 million tonnes of fish from the oceans.  About 40% of that – or 38 million tonnes - is simply dumped.  Much of this occurs under the unprepossessing title of ‘bycatch’.  In some fisheries (shrimp for instance) ten times as much catch is discarded as is landed.  With fisheries targeting shark fins, 92% of the mass of what is caught is discarded.  The biomass is ‘free’ – and gets treated as such.

• There are 1 billion cars and light trucks in the world.  If you’re not caught in mind-numbing traffic jams, they’re a very convenient way to move.  The problem is that the basic technology – the internal combustion engine – hasn’t fundamentally changed in a century.  With the exception of a tiny percentage of hybrid or fully electric vehicles, even the most efficient automobiles waste about 85% of the energy in each fuel tank.  Only 15% of the chemical energy in an average litre of gasoline is converted into moving the vehicle.  The rest literally disappears into thin air.   The atmosphere is a ‘free’ dumping ground and gets treated as such.

• Global agriculture currently uses about 3 trillion cubic metres of water per year or 71% of global withdrawals.  Much of it is wasted.  Global estimates of irrigation efficiency suggest that around 60% of irrigated water never reaches the crop.  It just runs off or evaporates.  To put that in perspective, the irrigation water that is presently wasted would be enough to meet the domestic needs (around 200 litres per day) of 9 billion people – the number of people expected on the planet by 2050.  Where the water is provided ‘free’ it is liberally wasted.

• The UN recently estimated that over 50% of the food produced world-wide is “lost, wasted or discarded as a result of inefficiency in the human-managed food chain”.  Furthermore, it has also been estimated that 10% of developed country greenhouse gas emissions come from food that is never eaten.  In short, where key input costs and waste streams like emissions are regarded as ‘free’ or very cheap, food will be cheap enough to waste.

• Finally there’s wasted energy.  Sixty seven percent of global electricity supply is generated from fossil sources.  Not pricing the environmental consequences of  emissions from power production, makes wasting energy cheaper.  To take one example:  standby power used by electrical appliances like computers or televisions sets (otherwise known as parasitic or vampire load) accounts for up to 10% of electricity used in homes and an unknown percentage in industry.  The avoidable waste of electricity from this source alone equates to the energy consumption of Italy and is responsible for 1% of global carbon dioxide emissions.    

 

Now the important point to make about these numbers is not that they are shocking (which they are) but rather that they are entirely predictable.  If things are free they tend to be abused.  Hadrian’s slaves would attest to that. 

 

If resources aren’t even appreciated as being in scarce supply the question may not even be one of abuse.  In a country awash with water, economising on the last drop makes little sense.  But if the use of resources – be it the atmosphere, the oceans or the land – has harmful effects, we need to find ways to reduce the pressure of that use.    Moralising about waste would have to be one of the least helpful strategies.  Individuals can have little influence by themselves, especially if their economy and prudence is simply swallowed by the untrammelled appetites of others.

 

The OECD, for which I work, has devoted most of its existence to stating the obvious: that if socially and environmentally costly behaviour is made more expensive, it is likely to be curtailed.   And we have the evidence.  Here are a couple of examples.

 

Take water pricing.  OECD research has found that households that pay for the water they actually use will, on average, consume about 20% less water than households that do not.  A one per cent increase in the average water price across households lowers residential water use by about 0.56 per cent.

Some of the agricultural stories are even more spectacular.

 

The Murray-Darling Basin (MDB) of Australia comprises an area similar in size to Spain and France combined, and the principal bio-physical threat is overuse of water from irrigation diversions.   Recent water reforms have successfully cut irrigation water use by half without loss of output.  Notably, irrigators in the Basin pay for their water and operate under a tradable water rights scheme.  

 

The biggest environmental issue of the 1980s was acid rain caused by emissions of sulphur dioxide from power plants.  In 1990, the US Congress legislated a cap-and-trade system under which power plants could buy and sell the right to emit sulphur dioxide, leaving it up to individual companies to manage their own business within the new limits.  On the eve of the legislation being passed, the EPA estimated that the programme would cost $6 billion annually once it was fully implemented (in 2000 dollars).

 

The experience was very different.  Sure enough, over time sulphur-dioxide emissions from power plants were cut almost in half.  But the costs were much lower cost than even optimists expected around $1.5 billion or a quarter of the original estimate. 
 
Unfortunately, for every success story like this one, there are many instances of damaging environmental waste that continue because pollution is ‘free’.  Greenhouse gas emissions from energy and agriculture represent arguably the most difficult long-term global challenge facing the world economy. The emission of carbon dioxide and other greenhouse gases is a classic negative externality — the “biggest market failure the world has ever seen,” in the words of Nicholas Stern.

 

If we don’t act, rising greenhouse gas emissions will significantly increase the risks of global warming with the potential for a global environmental disaster of immeasurable consequences. On a business-as-usual basis, global emissions will rise by about 70% by 2050, pushing world temperatures up 4°C - 6°C by 2100.

 

There is, inevitably, uncertainty about the costs of inaction.  We’re no better at estimating the costs of extreme, low probability environmental events than we were at estimating the likelihood that serious economic imbalances would lead to the financial sector crisis that dragged the world economy down.  It is tempting to leave difficult, hard-to-quantify risks for another day.  But how can we ignore potential consequences as far-reaching as reduced agricultural yields, sea level rise, extreme weather events and the greater prevalence of some infectious diseases? 

 

Furthermore, these risks are potentially large, planet-wide and irreversible. Stern estimated that the economic and welfare costs of policy inaction could equate to as much as a permanent 14.4% loss in average world consumption per capita when both market and non-market impacts are included.

 

Compare that with the much smaller costs of taking actions today.  The upper range of actions countries have said they are prepared to undertake (following the Copenhagen conference) would cost, by the OECD’s estimate, around 0.3% of global GDP per year in 2020.  While those promises of action aren’t enough to get us on the right track, the work we have done suggests that provided efficient tools are used (like putting a price on emissions), the costs of taking action are significantly less than the costs we would bequeath to our children and grandchildren.

 

It makes it all the more distressing then that countries continue with policies that fly in the opposite direction.  Total subsidies to the consumption and production  of fossil fuels are estimated to be somewhere between $500 and $700 billion per annum.  That’s up to $700 billion being spent making fossil fuels cheaper than they otherwise would be.

 

Even some policies that are promoted as helping to reduce greenhouse gas emissions have perverse and expensive consequences.  Take biofuels, for instance.  Biofuels seem green.  We suck carbon out of the atmosphere through photosynthesis and put it back when we use the fuel.  The net effect could in theory be neutral.  But it depends how you make the biofuels – and what the cost is compared with the much simpler solution of putting a price on emissions.

 

For instance, biofuel production in OECD countries requires huge amounts of support from governments. In 2006, this support in the United States and the European Union totalled almost 11 billion dollars. And when we look ahead, we see this growing to some 25 billion dollars by 2017.

 

While competing with food crops, biofuels don’t much of an impact on reduced fossil fuel use.  The most optimistic estimates suggest a reduction of no more than 3%. This relatively modest effect comes at a projected cost of paying anywhere from $200 to over $1000 for each tonne of CO2-equivalent avoided. And that is not even counting emissions from direct or indirect land-use change. Include those, and many crop-based biofuels come out looking worse, in terms of life-cycle GHG emissions, than the petroleum fuels they replace. In the face of this, the experience of the sulphur dioxide scheme is all the more compelling. 

 

Cap and trade schemes place a price on emissions and leave it to businesses to find the least expensive solutions.   

I hope I’ve made my point.  We know how to discourage waste that undermines our planetary environment.  Treating a large number of things the planet provides as free guarantees that they will be degraded.  The costs are already starting to have economic and social impacts.  With global population set to rise by a further two billion people or more by the middle of the century, the urgency of the challenge is mounting.

Let me finish by returning to my father.  I mentioned that his lifetime habits were formed by war and the Great Depression.  His inability ever to throw anything away was a response to scarcity.  Two generations later we are living through what is being called ‘The Great Recession’.  It is a very different phenomenon and its effects differ widely from country to country.  But there is an almost universal concern that getting back to a growth path cannot be a return to business as usual.  Nowhere has this been more painfully realised than in the financial sector.

The question I have in my mind is this: in what way will the exit from the Great Recession shape today’s children.   My father’s generation were frugal because plenty had vanished before their eyes.  Even when it returned in the fabulous post war years, they never felt comfortable with the throw-away society.  So are we going to resume the growth path of the past, in which soaring wealth is matched with soaring waste?  Or are we going to find a way of pursuing growth while being frugal with scarce environmental assets?

I inherited a large amount of scrap metal for recycling thanks to my father’s frugality.  I would like my children to inherit clean water, a planet still stocked with diverse life forms and a benign climate.  Being much more frugal with our planet’s resources through pricing them properly is what a green growth recovery is all about.