SIEMENS

We’re currently struggling with two crises at once — the economic crisis and the climate crisis. Is that just a coincidence, or do you see parallels?

Edenhofer: There definitely is a parallel. Both are crises of sustainability. Sustainability can be formulated as an imperative: Act in such a way that you don’t destroy the foundations that enable you to act in the long run! In the financial crisis, the banking sector destroyed the foundation of its own business.

Were people too greedy?

Edenhofer: Maybe, but a more important factor was that the banking sector worldwide was improperly regulated, so that it wasn’t possible to stop the greed. The emphasis on shareholder value made investors focus on short-term results. For the U.S., in particular, there was the added problem that the Federal Reserve Bank — through its cheap-money policy — essentially transferred the dot-com bubble to the mortgage bubble. All of that destroyed the foundations of the economy. And in the climate crisis, we’re in the midst of destroying the foundations of our existence.

Is human short-sightedness the source of both crises?

Edenhofer: I think it would be more correct to call it institutional short-sightedness. The system doesn’t permit any longer-term horizons — that’s the crucial point. Every manager has to satisfy the demands of the capital market and his or her shareholders. I think it’s naive to believe the problem can be cured just by appealing to people’s sense of ethics.

Policy-makers want a new regulatory framework for the global financial market. What regulations would they have to establish to ensure better treatment of the climate?

Edenhofer: More than anything else, we need a global emissions cap and trade system with two basic prerequisites. First, an agreement among nations that emissions of greenhouse gases must be cut by 50 % below 1990 levels by 2050. That way, there’s an 80 % probability that global warming will be limited to 2 °C. Emissions trading limits CO₂ where prevention is most cost-effective. Second, we also need a concept of fairness. We have to distribute emissions rights among countries in an evenhanded way. In my view, a fair proposal has been made in this regard. By 2050, the rights should be redistributed in such a way that every person on earth has the same right to emissions — for example, 2 t per person per year.

Will developing countries accept that? After all, up to this point, pollution has been caused mostly by the rich countries — at the rate of 19 t per person per year in the U.S. and 8 t in the EU. China is at two to three tons already, and India is at 1.5 t per person.

Edenhofer: There will continue to be considerable conflict and disagreement about the allocation, because the developing countries also want to take historical emissions into account. What is more important, though, is that we agree that we have only a limited amount of capacity in the atmosphere for more CO₂, and it has to be allocated reasonably fairly. After that, we have to achieve a carbon-free global economy. If we develop the innovations needed for that, we can also resolve the allocation conflict much more easily.

Does that mean that we will have to start living more modestly?

Edenhofer: Only if economic growth cannot be decoupled from emissions. For decoupling to occur, however, pricing mechanisms will have to set the right incentives — which is what emissions trading is designed to do.

No new moderation, in other words?

Edenhofer: No one should be prevented from exercising more moderation. But I think that the global economy can continue to grow at a rate of 2 to 3 % per year, because there is no reason why economies should be dependent on increased energy use to grow. In the last 150 years, labor productivity has risen faster than energy productivity. Now we have to reverse that relationship.

What sort of technological progress do we need to achieve a CO₂-free economy?

Edenhofer: More energy efficiency, the capture and storage of CO₂, the promotion of renewable energies, a moderate expansion of nuclear energy, and the development of more advanced nuclear power plants.

That sounds like a huge economic stimulus plan. Do you think we can extricate ourselves from the economic crisis through climate protection investments?

Edenhofer: We could indeed, yes. What is important is that we now boost the economy with investments that also make sense for the long term. That’s why we need an emissions trading system that sends a clear price signal for CO₂ — a signal for every sector that produces greenhouse gases; not just the electricity sector and energy-intensive industries, but above all buildings and cars. There are many options here that don’t cost anything and actually generate revenue through energy savings.

Is emissions trading working in the areas where it is already established?

Edenhofer: We’re not in bad shape in that regard. Emissions will surely fall in the electrical power sector. But there is a sustainability problem here too. Investors need a signal that emissions have to continue to fall after 2020. That, in my view, is the responsibility of the climate conference in Copenhagen (Denmark) in December 2009.

The climate protection discussion involves concepts similar to those in the financial sector, such as certificates, for example. Are these systems similar in structure?

Edenhofer: Yes. At some point, we will also need a central bank for climate protection. Such an institution would regulate the market for CO₂ certificates and prevent speculative bubbles. That’s similar to what a central bank does in the financial sector. In terms of global emissions trading, the U.S., together with Europe, could take the lead in creating a trans-Atlantic carbon market of the kind proposed by the EU in January 2009. The prospects for this are good. This would be a signal to India, China, and others. We need to involve these large emerging economies because they can limit CO₂ emissions much more cost-effectively than the West can, where most power plants already meet a high standard of efficiency.

How can the BRIC nations be persuaded to take part in this? After all, they still have a lot of catching up to do economically.

Edenhofer: China and India are well aware that, in the future, they will not only be the largest sources of emissions, but will also be the ones who suffer most from climate change. Many of their largest cities are located on the coasts, where a rise in sea levels could be very dangerous. In addition, these countries need new technologies to cope with their heavy dependence on coal. In this connection, we’re right in the midst of a global renaissance of coal. In light of that, it should be possible to put together a good package — with power plants that capture CO₂, which is then stored, for example.

As a member of the IPCC, you have first hand experience with global climate protection politics. Is it realistic to think that the community of nations will agree on an effective plan?

Edenhofer: We cannot afford a catastrophe. If it becomes possible to see and feel climate change, it will be too late. In the next ten years, we must create an agreement that comprises at least the six countries that produce the most greenhouse gas emissions. Maybe the chances of developing a sensible response aren’t very high. But when we are confronted by historic challenges, we should ask not about probabilities, but about necessities.

In short, climate protection isn’t optional...

Edenhofer: Exactly. Anyone who claims it is doesn’t understand the fundamentals of economics. That would be like saying we want to have a market economy, but prices will be allowed to express the scarcity of goods only when it’s convenient. That kind of thinking led to the collapse of the Soviet economy, where there was always a reason to continue with subsidies. Because of the long-term distortion of prices, the system was doomed to fail. The ability of our atmosphere to store CO₂ is also a limited asset. Environmental protection is therefore not optional; it’s about implementing price systems that express a very real scarcity.