NIB President: pricing carbon emissions the biggest challenge for COP15

The UN Climate Change Conference in Copenhagen, COP15, is approaching, and the debate on a global attempt to reduce carbon emissions has been heated.

The NIB Newsletter has interviewed the Bank’s President and CEO, Johnny Åkerholm, to find out what he sees as the main objectives and challenges for COP15.

Can we expect world leaders to reach a common understanding of the implications of climate change?
It seems that we all agree on the target, but we do not agree on how to get there. In the current situation in the world economy, many countries consider avoiding the necessary adjustment costs. Environmental investments are unfortunately high on the cost-cutting lists. Decision-makers are demanding external financial support as a prerequisite for participation in activities dealing with climate change. It is estimated that investments into renewable energy will fall by two-thirds in 2008-2009.

Is there a chance of overcoming this obstacle?
In order to see this happen, we need to understand what’s wrong in the current ways of dealing with carbon emissions. The fact that it is thought to be too expensive to invest in measures mitigating climate change and at the same time too expensive NOT to invest, as claimed in the Stern Review on the Economics of Climate Change, shows that there is something fundamentally wrong in the relative prices of emissions. They do not reflect the externalities related to climate change, and they will not until governments undertake resolute policy measures.

Some countries are trying different support schemes.
These schemes are unlikely to have a lasting effect, as they are typically temporary in nature and lack transparency. Hence, they do not provide a proper guide to R&D. It is also very difficult, if at all possible, to judge which solutions should be supported. Moreover, the cost of the subsidies is distributed in the economy in a highly opaque way.

Why is pricing so critical in reducing carbon emissions?
If no price is placed on emissions, or the price is too low, outlays targeted to reduce emissions are seen as costs and not as investments. This is also true for the situation in emerging economies, where it seems on the basis of current relative prices unfeasible to invest in best available, but undoubtedly rather expensive, techniques. The market needs a price on carbon emissions which in a relatively short period of time reflects the true external costs of emissions. This is a global task and the biggest challenge facing the Copenhagen conference.