Economics – Page 101 – a sibilant intake of breath

The fossil fuel industry has no long-term future

Oil, gas, and coal are all – at best – transitional sources of energy, moving us from muscle power to truly renewable non-muscle sources. To see why, there are two basic facts that must be appreciated:

Only finite quantities of fossil fuels exist on Earth.
Burning all the world’s coal, oil, and gas would cause catastrophic climate change.

It is as though there are two hard barriers to fossil fuel use out there. What we don’t know is how far away they are. The first fact is self-evident, though it is more nuanced to say that there is a finite quantity of fossil fuel that can be extracted for any particular level of price or effort. If oil cost $10,000 a barrel, we would be able to find some pretty unusual geological sources for it. The second fact arises from the basics of climatic science. We have already increased atmospheric concentrations of greenhouse gasses from about 290 parts per million (ppm) to 385 ppm. Continuing to run our economy as we have been (bigger every year, and largely powered by coal, oil, and gas), that figure will be approaching 1000 ppm by the end of the century. Based on the climatic sensitivity estimates of the IPCC and Met Office, that would likely produce 5.5 to 7.1 ° C of warming by 2100, with more to follow afterwards. That would be utterly catastrophic for humanity, quite possibly threatening our ability to endure as a species. We will either stop using fossil fuels, or we will die in the process of trying to burn them all. Due to lags in the climate system, we just might be able to burn them all and leave it to another generation to suffer the fatal consequences.

A useful analogy is that of a factory worker taking methamphetamines to stay awake. This is essentially what all of society is doing with fossil fuels: giving ourselves an unsustainable jolt that gets things moving faster. Of course, extended and heavy use of amphetamines will eventually kill you. If that lethal toxic effect is likely to be achieved before you run out of pills, you are presented with a barrier just as impassable and just as real as the difficulty of their eventual and total depletion.

As such, those who invest in fossil fuel infrastructure and equipment and processes that depend on fossil fuels need to appreciate that this is an industry that will need to peak and then be wound down, even though oil, gas, and coal remain in the ground to be extracted. Greater efficiency of use and technologies like carbon capture and storage can somewhat extend the timeline across which that will need to occur. All the same, a world with a stable climate will be a world that does not use fossil fuels for energy. If we want that stable climate to be one compatible with human welfare, civilization, and prosperity, we must hope that it is established sooner rather than later.

[Update: 8 March 2010]. BuryCoal.com is a site dedicated to making the case for leaving coal, along with unconventional oil and gas, underground.

Subsidizing Mackenzie Valley gas

It is hard to read the decision of the current government to support the Mackenzie Valley gas pipeline as anything aside from a disappointment. To begin with, it was inappropriate to have the decision announced by the minister of the environment. After all, he should be the one in cabinet demanding that the environmental impacts of the plan be fully investigated. Secondly, it seems inappropriate to offer such aid while the Joint Review Panel is still examining the likely social and economic impacts of the plan.

If we are going to successfully address climate change, we are going to need to leave most of the carbon trapped in the planet’s remaining fossil fuels underground. By the same token, we will need to develop energy sources that are compatible with that goal. At this juncture in history, I can see the case for providing government funding to help with the up-front capital costs of concentrating solar, wind, or geothermal plants. It is a lot harder to see why oil and gas companies that were recently pulling in record profits deserve financial support at taxpayer expense.

Polar bears and climate change

From the media coverage, it seems that attitudes at Canada’s recent polar bear summit clustered around two positions: that climate change is a profound threat to the species, and that the species has been doing well in recent times. While a lot of the coverage is focused on supposedly different kinds of knowledge, I am not sure if there is much factual disagreement here. The issue isn’t the current size of the polar bear population, or how it compares with the size a few decades ago. The issue is whether a major threat to the species exists and can be anticipated, as well as how polar bear populations ought to be managed in the next while.

One quote from Harry Flaherty, chair of the Nunavut Wildlife Management Board, seems rather telling:

[Researchers and environmental groups] are using the polar bear as a tool, a tool to fight climate change. They shouldn’t do that. The polar bear will survive. It has been surviving for thousands of years.

This sits uneasily beside the knowledge that atmospheric concentrations of carbon dioxide are already higher than they have been in more than 650,000 years and they are on track to become much higher still. In short, because of climate change, the experience of the last few thousand years may not be very useful for projecting the characteristics of the time ahead. This is especially true in the Arctic, given how the rate of climatic change there is so much higher than elsewhere.

On the matter of polar bear hunting, the appropriate course of action is less clear. Hunting in a way that does not, in and of itself, threaten polar bear populations might be considered sustainable. At the same time, it might be viewed as just another stress on a population that will be severely threatened by climate change. Given the amount of climate change already locked into the planetary system, it does seem quite plausible that the polar ice will be gone in the summertime well before 2100 and that all of Greenland may melt over the course of hundreds or thousands or years. I don’t know whether polar bears would be able to survive in such circumstances. If not, the issue of how many of them are to be hunted in the next few decades isn’t terribly important. It seems a bit like making an effort to ration food on the Titanic.

If we want to save polar bears, we will need to make an extremely aggressive effort to stabilize climate. Meeting the UNFCCC criterion of “avoiding dangerous anthropogenic interference in the climate system” would not be enough, since polar bears are likely to be deeply threatened by a level of overall change that doesn’t meet most people’s interpretations of that standard.

Planning for accidents

Over at Gristmill, there is a good article about planning in the face of possible accidents. Specifically, it discusses the massive coal ash spill in Tennessee. The article stresses how responsible planning must make a genuine attempt to estimate the probability of a catastrophic accident taking place, as well as the likely consequences of such an accident. Excluding worst-case scenarios from planning makes it likely that plans will go forward which are unacceptably dangerous. It also makes it more likely that possible defences against a serious accident will not be established.

Many of these points are similar to ones made about financial risk by Nicholas Taleb. In both cases, there are very serious risks associated with making plans on the basis of ‘ordinary’ outcomes, while ignoring the possibility that things will become far worse than you anticipated.

The oil sands and Canada’s national interest

This Globe and Mail article on the oil sands and the new Obama administration makes a very dubious assertion: namely, that it is unambiguously in Canada’s interests for the oil sands to keep expanding and feeding US energy demands. It argues that, while most of Obama’s cabinet seems serious about restricting greenhouse gas emissions, General James Jones “may turn out to be Canada’s best ally,” because he supports the continued use of fuel from the oil sands.

In the long run, I think Canada will be better off if most of that carbon stays sequestered as bitumen an boreal forest. It certainly isn’t in Canada’s interests to see a delayed transition to a low-carbon economy in the US, given the extent to which it would increase the probability of abrupt, dangerous, or runaway climate change.

This is a case where short-term economic incentives have been trumping those based on a long-term view and a risk weighted analysis. In that sense, the oil sands boom is quite a lot like the housing boom that is in the process of unraveling worldwide. Canada would do well to accept how newly prominent environmental concerns (coupled with less access to capital) should combine to curtail the oil sands initiative before it becomes even more harmful.

[Update: 8 March 2010]. BuryCoal.com is a site dedicated to making the case for leaving coal, along with unconventional oil and gas, underground.

Fishing for krill

On several occasions, I have discussed the concept of ‘fishing down’ through marine food webs: starting with the top predator species, like tuna, and moving to smaller and smaller creatures as the big ones are depleted. In the waters around Antarctica, this process has come very close to reaching its logical extreme. Fishing for krill has become a big business.

Krill are shrimp-like marine invertebrates that make up a significant portion of the world’s zooplankton: the tiny creatures that eat phytoplankton algae. They, in turn, are eaten by all manner of other creatures, ranging up to large whales. Fishing them extensively risks knocking a whole tier out of the food web, with unknown but potentially severe consequences for all other forms of life in the ecosystem.

The krill that are caught are processed for fatty acids, used to make medicine, and fed to farmed fish. In particular, they are useful for giving farmed salmon more of a red colour, in contrast to the sickly looking pale pink much of farm salmon takes on. The current annual catch is estimated to be between 150 – 200,000 tonnes: much of that taken from the waters around Antarctica. Through the use of new technology, a planned new ship (the FV Saga Sea) will apparently be capable of collecting 120,000 tonnes annually. That is nearly one 1000th of the low estimate for the total global biomass of krill, and more such ships are planned.

While it may be that fishing for krill at this scale doesn’t pose a danger to marine ecosystems, it is worth noting that we have no scientific basis for being confident of that. An experiment is simply being performed in unregulated waters, which will have unknown future consequences. As with so many other instances of humanity’s engagement with the natural world, one cannot shake the sense that we are being awfully reckless.

The Economist on the dire state of the world’s oceans

A recent issue of The Economist features a leader and a special report on the state of the world’s oceans. As with a lot of their environmental coverage, it sits awkwardly beside the rest of their analysis. It is astonishing that the newspaper can argue that “the mass extinction, however remote, that should be concentrating minds is that of mankind” while not doing a lot more to advocate effective action. Like most of the policy-making community, they haven’t really internalized the fact that climate change is an issue of over-riding importance, and that nothing else can be durably achieved until it has been addressed. In addition to highlighting the dangers of climate change, their coverage includes discussion of how overfising risks rendering sharks and tuna extinct; how the oceans would require tens of thousands of years to recover from the pollution already released into them; how the Greenland is “on track” to melt completely, raising sea levels by seven metres; and how acidification, pollution, and climate change threaten to eliminate coral reefs.

Clearly, it is one thing to have accepted the collective judgment of the scientific community. It is quite another to have fully incorporated the consequences of that judgment into your structure of beliefs and behaviour.

A human spider, climate change, and economic systems

Alain Robert – a man famous for climbing absurdly tall buildings with his bare hands – is also something of a climate change campaigner. A website he runs endorses a three-stage plan for dealing with the problem:

Stop Cutting Down Trees. Plant More Trees.
Make Everything Energy Efficient.
Only Make Clean Energy.

What this speaks to is a central question of the climate change debate: how much do the economic and philosophical bases of society need to change in order to deal with it? Can climate change be successfully addressed through targetted policies that do not fundamentally alter liberal capitalist democracy, or is it only possible to address it through something more ambitious, such as switching from an economic system based on growth to one based on a steady state of wealth?

In some ways, this debate is reminiscent of other debates about capitalism. It certainly seems as though some of the harmful aspects of capitalism can be curbed through good laws, without eliminating the capitalist system itself. Such problems include things like local air pollution and child labour – if we really care about eliminating them, it is entirely possible within our current general economic approach.

For the oil sands, PR is not the problem

In a bizarre story, The Globe and Mail is reporting on how representatives of the oil sands industry are claiming to have “‘dropped the ball’ in engaging with the public about the environmental effects of its energy developments.” This is a bit like saying that the industry has thus far been unsuccessful in deceiving people about the environmental impacts of oil sands operations, which definitely deserve the filthy image they have earned.

The problem with the oil sands certainly isn’t their public relations: it is their greenhouse gas emissions, their destruction of the boreal forest, their contamination of water, and so forth. Altering those aspects of the industry cannot be achieved through media messaging. It is dispiriting – though unsurprising – that the companies involved are keener on giving people the sense that their operations are clean (or at least improving), rather than actually raising standards. While oil sands production cannot be made into an environmentally benign activity, having all facilities adopt the best standards in other existing facilities could make a significant contribution towards reducing the level of harm they produce.

Dutch auctions for selling photography

Contemplating the economics of selling photographs in coffee shops and small galleries, I had an idea about how such a sale might be conducted. Selling by means of a Dutch auction could be an effective approach: combining a mechanism to encourage a reasonable return for the photographer with a mechanism allowing buyers to express their preferences through their response to falling prices.

It would work like this:

The total cost associated with producing each print would be tallied, inclusive of printing, framing, etc.
The display period for the prints would be broken down into a number of periods: say, three.
During the first period, prices would be the highest. If, for instance, a print costs $20 and a frame costs $25, the price during the first third might be $90 (cost +100%).
During the second period, the profit margin would be reduced – perhaps to cost +2/3 ($75).
During the third period, the profit margin would be further reduced – perhaps to cost +1/3 ($60).
The periods and costs would all be announced at the outset, and displayed along with the prints.

What the system does for buyers is balances the advantage of waiting for a lower price against the risk that someone will buy at the current price. People will be encouraged to buy on the first day when the print is available at whatever price they consider acceptable. For the seller, the system decreases the risk of losing money on the exhibition. The falling prices make it more likely that most images will be sold, and the high initial profit margins make it more likely that the costs of any unsold prints will be covered by the profits on those that are sold.

Of course, this approach doesn’t consider all the costs associated with the photography. When one factors in equipment costs and the photographer’s time, higher prices (via thicker profit margins) may be justified. That being said, a lot of the photography that gets sold in coffee shops would probably have been taken anyhow, even if the photographer never expected to sell it. As such, the objective of breaking even on the prints themselves and perhaps earning a bit for future equipment purchases might be a realistic one.