Economics – Page 100 – a sibilant intake of breath

The budget and federal environmental policy

The Globe and Mail has a fairly lengthy article about the recent federal budget, oil sands policy, and environmental policy integration with the United States. It highlights the speculative nature and unknown costs of emissions reductions associated with carbon capture and storage (CCS) technology:

However, this week’s federal budget provided little sense that Ottawa is preparing the country for a shift to a green economy, or even that it is concerned about the slump in the oil sands, which extends to the oil and gas industry generally.

Rather than any direct measures, the federal government provided $69-billion to ease access to credit in the economy generally — admittedly, an important problem for a capital-intensive oil industry — and vague promises of funding for carbon-capture-and-storage technology.

CCS is the fig leaf of the oil sands — an untested, hugely expensive technology that governments and industry claim will be critical if oil-sands emissions are to be reduced to acceptable levels. The idea is to divert CO2 emissions from smokestacks and store it permanently underground, but skeptics doubt it will ever be commercially viable.

A lot of talk these days surrounds a joint North American approach to climate change and energy security. Few people seem to have publicly considered the jurisdictional difficulties associated with such an approach. If I were Barack Obama, trying to get a cap-and-trade bill through Congress, I really doubt that I would want to have to deal with ten provincial governments, a second federal government, a separate legal and constitutional arrangement (including, for instance, aboriginal issues), and all the other complexities associated with jumping straight into a two-state system. That being said, having a North American strategy that is at least poised for integration could be important for securing the support of private firms worried about cross-border competition.

Without a doubt, these are interesting times for the emergence of climate policies.

Obama visiting Canada

President Barack Obama will be visiting Canada on February 19th. Presumably, that will include some sort of large public gathering, hopefully with an appearance from the man himself. In preparation, it seems fitting to contemplate what sort of message it would be most valuable to convey to the new president.

With that aim in mind, I propose that people submit their best ideas for a message that could be put on a placard for the media (and maybe even the President) to catch a glimpse of. Text versions and images would both be welcome. The former can be posted as simple comments. In the latter case, people can email images to me for possible posting. My immediate idea would be something along the lines of:

The oil sands are a trap!
Choose zero-carbon energy!

These days, it seems that the best hope for an aggressive shift towards decarbonizing the global economy comes from the possibility of new US leadership and the destruction of the reckless approach to energy the world is using at present. The challenge of expressing that general necessity in a compact statement is a considerable one.

Profiting illicitly from chance

Skimming through a local newspaper the other day, I came across an advertisement for ‘investment advice.’ Basically, it was someone hoping to manipulate random chance to make a profit. It worked like this:

You sign up and, for the next month, you get free weekly investment advice.
You are encouraged to either invest according to the advice or pretend that you have done so, keeping track of the relevant stocks and how much you would have earned if you had invested.
After the free trial period, you start paying a fee for further advice.

The system works in a pretty obvious way. The people running it either produce one weekly piece of advice or, if they are smarter, many. They then send this information to people at random. Naturally, some of the advice will lead to real or simulated losses. Those people will stop taking the advice. Some people, however, will receive seemingly good advice week after week. These people, impressed with the ‘track record’ of the financial advisors will presumably start paying for the information, perhaps giving up when things inevitably go wrong.

You could perform the same trick with any random and money-connected activity: betting on races or sporting events, commodity prices, and so forth. In every case, enough random sets of advice being distributed will lead to a subset of people winning on the basis of the ‘advice’ several times in a row.

At one level, this is a pretty simple confidence trick. At the same time, it isn’t hugely different from what a lot of legitimate financial firms do from day to day. Buying mutual funds, in particular, bears similarities. People evaluate funds based on their past performance, despite how that may have been the product of chance rather than good choices. At least some mutual funds will always do well, driving people to believe that money can be made with them. In fact, mutual funds are more insidious than the con described above. That is because they charge management fees. As a result, there are likely to be many circumstances in which fund managers are getting paid on a day-to-day basis for making trades that underperform the market.

Incidentally, a related trick could be performed with fake medicine: offer it to sick people for free, to begin with, then start selling it to the ones who happen to see their condition improve significantly for unrelated reasons during the ‘treatment’ period. This would work especially well with chronic conditions where the level of suffering varies significantly from one point in time to the next.

Free book on environmental economics

Jason Scorse, of the Monterey Institute of International Studies, has written a book on what environmentalists need to know about economics. He has also made it available online, free of charge.

The first six chapters consider the general approach of economists to environmental issues. The next eight chapters look into specific environmental issues, including climate change (PDF). The relatively brief climate chapter concentrates on the possibility of an international cap-and-trade or carbon tax system, rather than focusing on some of the more conceptual issues in climate change economics, such as the appropriate discount rate or the degree to which we should hedge against catastrophic risks. Nonetheless, it is a potentially useful resource for those seeking to increase their knowledge of the general subject area.

Norway: green ambitions and oil exports

This Economist article on Norway should make interesting reading for Canadians interested in questions of energy, environment, and politics. It highlights how Norway is both progressive on climate change – with a carbon tax and a grid almost completely dominated by hydroelectric power – and a major indirect emitter on account of its large exports of oil and gas. Oil and gas sales produced 413 billion kroner ($75 billion Canadian) in revenues in 2008, and such exports have allowed Norway to build up an oil-revenue fund worth 2.1 trillion kroner ($382 billion Canadian).

The challenge of being a hydrocarbon exporter at a time when future human prosperity depends on the fairly rapid abandonment of fossil fuels is an acute one. While carbon capture and storage (CCS) technologies may eventually help square the circle a bit, that is by no means guaranteed. Indeed, placing excessive confidence on the rapid and economical deployment of that technology will leave states in the lurch if it doesn’t deliver as rapidly as promised.

In addition to discussing carbon pricing instruments and oil exports, the article examines the practice of ‘offsetting’ emissions by paying to have them reduced somewhere else, then taking the credit for doing so by counting those avoided emissions against your own. As discussed before, it is an idea not entirely without merit. That being said, it must be rigorously operated, or it will risk being abused.

Norway’s considerable efforts to respond appropriately to climate change deserve to be both applauded and, where appropriate, replicated in Canada. As for balancing the desire to do what’s right against the temptation of cash for dirty fuels, hopefully Norway will opt to show other oil producers that the temptation can be restrained without destroying prosperity, and that there are big opportunities to be found in alternative, renewable sources of energy. Depressingly, it may only be with strong examples of this type elsewhere that Canada will even begin to seriously contemplate such a shift.

Climate change and the perception of threat

This David Roberts post, over at Gristmill, discusses the relationships between public awareness of climatic science and the need to take action on climate change. In short, it concludes that the general public will not understand climatic science in the foreseeable future. The critical task is not to make them do so. Rather, what is critical is altering the answers they reach when they ask themselves the two questions through which they evaluate potential problems:

“Is this a problem that threatens me/my family/my tribe? Is there an imminent threat? Is it an emergency?”
“Do the proposed solutions to the problem threaten me/my family/my tribe? Am I going to get screwed?”

It goes on to argue that scientific reports and data will not change how people answer these questions. Rather, to get action on climate change, the following must be done:

“Greens, politicians, and other communicators need to get serious about calling climate change the impending catastrophe it is, with serious, dire consequences for people now living, certainly for their children. That means risking being called “hysterics” by conservatives and their dupes in the media.”
“The same folks need to get better at showing the public the opportunities and benefits of action. It’s about expanding the winner’s circle and making damn sure everybody in it, or potentially in it, knows about it.” (emphasis in original)

This is a strategy quite different from climate change mitigation by stealth, but it does seek to respond to the same fundamental problems of selfishness and misunderstanding.

The critical flaw in thinking we can achieve a technocratic solution to climate change is a failure to appreciate the influence of those who will be harmed by effective climate change mitigation efforts (such as coal and oil sands producers), as well as their willingness to manipulate the public into demanding inaction. In order to counter the influence of such status quo powers, there does need to be a political constituency for effective climate change action. I think Roberts is basically correct in asserting that it will be through changing the public perception of risk and opportunity that such a constituency might best be constructed.

Fishing, weather, and uncontrolled experiments

New Scientist recently published an interesting article discussing the importance of weather for fisheries. Specifically, it examines some of the ways in which weather and climatic phenomena affect the stocks of individual species and the balance of species within an ecosystem. Important mechanisms through which effects are transmitted include changed ocean temperatures and the aggravated mixing of nutrient-rich deep waters and sunlight-rich surface waters. Where they are persistent, such upwellings produce some of the world’s most fertile marine habitats, such as those off the west coast of Africa.

When it comes to the ocean in general, humanity is in the midst of an overlapping series of massive experiments: bumping the temperature and acidity by emitting CO2, altering salinity by melting ice, aggressively fishing for creatures of all kinds, dumping plastics into the oceans, and so forth. Given the scale of these actions, the unknown linkages between them, and our poor level of overall knowledge about the chemistry and biology of the oceans, it would be surprising if all this did not produce major unexpected changes in the biological makeup of the seas within the next half-century or so.

Geothermal in Alberta

In Canada, at least, Alberta is synonymous with fossil fuel production. As such, it is nice to see that the Pembina Institute has produced a report (PDF) looking into possibilities for sustainable energy production in the province. The Clean Break blog has a summary.

In particular, the report discusses ways in which geothermal power could be an ideal match to the skills and research already present in the province. They already know how to drill deep holes into rock. Further, they are investigating new techniques in the context of carbon capture and storage. Given the province’s excessively high per-capita emissions, and ongoing dependence on coal for electricity, it would be especially appropriate to see some aggressive renewable deployment there. Doing so would also generate technologies and experience that Canadian firms could export to others: a good example of leveraging existing skills to move from a fossil-fuel backed economy towards a truly renewable one.

Obama on car standards and building upgrades

Quite sensibly, Barack Obama has directed the Environmental Protection Agency (EPA) to overturn the Bush-era decision denying California the right to set higher automobile standards. This is clearly a big deal, since the Californian market is large and important enough to affect the decisions of carmakers around the world.

Higher vehicle standards are definitely a good idea, but another initiative may have a stronger long-term impact: upgrading the energy efficiency of 75% of federally-owned buildings. Not only will the direct effects be large, but such an investment might drive overall green construction investment.

Of course, the real challenge will be getting an effective carbon pricing system into operation. Hopefully, the tougher decisions will be tackled with the same urgency as these easier ones.

Fossil fuels and industrialization

Given our present energy and climate predicament, it is interesting to contemplate how human history would have progressed in the absence of large supplies of coal, oil, and gas. Before efficient steam engines existed, heavy industry depended on mechanical water power to grind flour, saw wood, and so forth. Steam engines and coal helped kick off the path of development that leads to the present world, in which fossil fuels play critical roles as energy sources, inputs for agriculture, and feedstocks for chemical manufacture.

On a planet without fossil fuels, industrialization would probably have made use of mechanical water and wind energy for far longer. It is an open question whether such a society could ever have reached the point of being able to build current-generation renewables, such as electric wind and hydro turbines, solar photovoltaic panels, or concentrating solar arrays. It is possible, then, that only planets with ample and accessible supplies of fossil fuel are compatible with the development of things like spaceflight or computer networks. That could even be one explanation for the Fermi paradox: the question of why the vast observable universe hasn’t yet provided any signs of life outside our solar system.

The challenge now is to move beyond fossil fuel dependency, without losing the beneficial new capabilities that have largely arisen due to the use of those energy sources. Eventually, we need to reach a point where the whole lifecycle of energy production – including construction and dismantling of generation equipment – is accomplished in a zero carbon and sustainable way. We will also need to re-make global agriculture in a way that isn’t dependent on fossil fuels or fertilizers derived from them, as well as find ways to use biomass feedstocks in chemical manufacture. The fossil fuel era must be a one-off transition period in human history; at least, it must prove to be so if human history is to extend much longer.