Climate Change Summit Paris 2015

The 2015 United Nations Climate Change Summit is underway in Paris now. At the previous summit in Copenhagen in 2009, it was agreed to control carbon emissions to the point that the temperature rise is below 2 degrees celsius. There were no legally binding agreements signed by the participating nations. A carbon trading system was proposed and global carbon trading market was stated as one of the goals of the COP15 summit.  

Controlling global warming by reducing carbon emissions is important to sustain life on this planet. High levels of pollution have made cities in China inhabitable and people have to wear face masks on their daily commute to work. The rate at which plant and animal species become extinct has increased post the advent of the industrial age.  Studies are showing that human productivity  is decreasing in nations having heavy increases in temperature. 

In the run up to the Climate Summit 2015, America has pledged that by 2025 it will cut its greenhouse-gas emissions by 26-28% below 2005 levels. South Korea says that by 2030 its emissions will be 37% below where they would be if the recent upward trend in emissions were projected forward. 

What makes it difficult to get countries to a consensus on emissions reduction is the fact that the cost at face value of sustainable environmentally friendly business practices is more than that of more polluting practices. However, the recent advances in technology have made this argument turn on its head. As we had noted earlier on this blog, rising cost of coal imports and inflation in India have increased the costs of coal based thermal power plants to a point where wind energy is competitive without subsidies and solar power has come very close to break-even. The indirect benefits of a cleaner power source are also many, primary one being the healthier life of the citizens of the country.

Apart from this, carbon trading to offset the emissions is also gaining ground around the world. The revenue from taxing the emissions is used to fund environmentally friendly energy sources. I think it would be advisable to target areas where eco friendly technologies have reached free market pricing and have agreements on the use of these technologies. For example, electric cars, high speed rail, nuclear and wind power are some of the technologies that are at market potential and there should be agreements on the use of these technologies and their increased adoption. Instead of focusing on how much to reduce the emissions, the discussions have to now move to how to reduce emissions since several environmentally friendly alternatives are available which are competitive on the free market.

A global market for trading carbon offsets could be a good idea and carbon credits could potentially become an international currency. The price of a carbon credit would be low in a country which pollutes less and high in a country which pollutes more. Industries could purchase carbon credits from such countries that pollute less and get a license to pollute to that extent. The money earned by selling a carbon credit would be invested in developing eco friendly technologies and solutions. The carbon credit system could be internationally regulated and have a single controller such as the United Nations. The UN could then set quantitative targets on how much emissions are permissible over a given span of time and enforce it with a fine (carbon tax) on industries that don't have the required carbon credits. An Agreement on such a carbon cap and trading system should be the aim of the 2015 Climate Summit in Paris.

A Japanese Decade for China

There are many parallels between yesterday's Chinese equity market crash and the Japanese equity market crash of 1990. The Japanese crash in 1990 was led by a crash in real estate prices and the same happened in China almost a year ago, following which Chinese government started an aggressive stimulus. Read full details here:  These 5 charts link the Chinese stock market crash to problems in property. Source: WEF   The market patterns too are exactly identical for both the crashes as can be seen in the attached figure.

Details of the Japanese market crash can be found on Wikipedia here: Japanese Asset Price Bubble  Reports on the Chinese market crash are available here: Chinese stocks plunge to a 3 month low 

China and Japan are both industrial economies dominated by the exports sector. Leading into the crash, both the economies were being driven largely by exports of manufactured goods. The demographic trends in Japan and China are also very identical because of the fact that they are pretty closed economies with respect to immigration and the population ages are tending to increase. In China this is partly due to the one child policy of the government.

Given the identical demographic, economic and financial trends, it seems as if China is headed towards the Japanese Lost Decade of the 1990s. The equity markets did not give any net returns over the 1990s in Japan and the economy was plagued with deflation and lowering corporate profits. Only the Japanese export powerhouses were able to grow in this period. Details of this are also available on the previously shared Wikipedia link. Many efforts were made to revive the economy and produce inflation and growth and they all failed.

This changed with the economic policies of Shinzo Abe, popularly known as Abenomics. He introduced a quantitative easing program and starting injecting money into the system through government and corporate bonds. This rapidly devalued the Yen and started increasing the demand, leading to the first recorded inflation of prices since the crash of 1990. The Japanese stock markets too have been seeing a rising trend since Abenomics have started.

In light of this, I think China can draw a number of valuable lessons from the policies of Shinzo Abe in Japan. Here are few articles on the same:

Investing in Japan: The Impact of Abenomics

What the 1990 Japanese stock market crash can teach us about the Chinese stock market crash

If history is a lesson, the future for China can be different from that for Japan.