Category: Economics

Matters of money

The frogs in the coal mine

A recent study conducted by the Zoological Society of London concluded that half of Europe’s amphibians could be extinct by 2050. There are two obvious ways to consider the news. Firstly, it is evidence of the enormously destructive effect human beings have on vulnerable ecosystems. Secondly, it raises questions about whether humanity itself will be able to survive the catastrophe is it creating. Amphibians have been around for 400 million years. While there have certainly been times in which a large proportion of them have died off, those times have been been listed among the catastrophic extinction events that have punctuated the history of life on Earth.

In short, the impact of the global economy is becoming comparable to that of major meteor strikes, mass volcanic events, large changes in sea level, and severe changes in atmospheric composition that have occurred in the past. For those who do not believe that humanity inhabits some special protected position in the cosmos, that seems like cause for very significant concern.

Keeping Our Cool: Canada in a Warming World

Canadian climatologist Andrew Weaver’s Keeping Our Cool provides an excellent and accessible introduction to climatic science. It also provides a great deal of useful information specific to Canada. As a result, if I had to recommend a single book to non-scientist Canadians seeking to understand the science of climate change, it would be this one. On the matter of what is to be done, the book is useful in a numerical sense but not particularly so in a policy sense. The discussion of economic instruments is superficial and the author basically assumes that a price of carbon plus new technology will address the problem.

The book covers climatic science on two levels: in terms of the contents themselves, such as you would find in textbooks and scientific papers, and in terms of the position of science within a broader societal debate. He accurately highlights the degree to which entrenched interests have seriously muddled the public debate, creating deep confusion about how certain we are about key aspects of how the climate works. Topics well covered by the book include electromagnetic radiation, time lags associated with climate change, the nature of radiative forcing, the nature and role of the IPCC, ocean acidification, the history of human emissions, the general history of the climate, climate modeling, aerosols, hurricanes, climate change impacts in general, permafrost, and the need for humanity to eventually become carbon neutral. One quibble has to do with the sequencing: while the narrative always flows well, the progression through climate science looks a bit convoluted in retrospect. That makes it a bit hard to find your way back to this or that piece of useful information. The book features some good numbers, graphs, and analysis that I have not seen elsewhere – such as a calculation of how much more carbon dioxide humanity can emit in total, given the desire to keep temperature change to less than 2°C above pre-industrial levels and various plausible values for climatic sensitivity. A second quibble is that the graphics are all black and white and printed at a fairly low quality. Sometimes, that makes them hard to interpret.

On the matter of international and intergenerational equity, Weaver comes to appropriate conclusions (that we should be concerned about future generations and that the rich states that caused the problem need to act first in solving it), but he fails to examine the ethical and policy issues in great depth. That is a minor failing, given the major purpose of the book, but it would probably leave someone who read only this book with a somewhat mistaken impression about the scale of changes being advocated and the ease with which they might be achieved. The book exaggerates the difference between a carbon tax and a cap-and-trade system with 100% auctioning, and doesn’t pay sufficient attention to areas in which regulation have the potential to be more effective than taxes (building codes, transport standards, etc).

In general, Weaver’s book is a strong and useful introduction to climatic science. When it comes to the big questions about climate ethics, and the policy and technological measures that will permit the emergence of a low-carbon society, other authors have done better.

Ethics embedded in economics

I recently attended a presentation on economic modeling, climate change, and the social cost of carbon. Initially, this was presented as a process where we took our best scientific information, fed it into our best economic models, and ended up with our best projections about how much harm climate change would do, and thus what the ‘social cost’ of carbon really is. The point I raised was that this approach is in no way divorced from ethical assumptions. Indeed, they are deeply ingrained in the economic models and have profound effects on how they turn out.

Here are a few of the most important aspects of that:

1) The discount rate: Nicholas Stern took a lot of flak for setting this value so low. Basically, it pertains to how much we value the welfare of future generations. The lower you set it, the more the welfare of future generations will affect your calculations. In financial planning, discount rates are often in the neighbourhood of 8%. That means we would be indifferent to having $X today or $X + 8% in one year. The trouble is, with a value that high the welfare of distant future generations becomes almost completely unimportant in your calculations. If we knew that climate change would instantly kill everyone alive in 100 years, using an 8% discount rate would make this fact largely unimportant in terms of working out what the ‘social cost’ of one tonne of carbon is today.

Of course, there are problems with using a very low discount rate as well. If we care as much about all future generations as about our own, we are compelled to put all of our wealth towards investments for them. After all, current spending only benefits us, whereas investment could increase the welfare of a potentially infinite chain of future generations.

In any case, the discount rate selected has a massive effect on what social price for carbon you end up with. Stern worked it out as about $85 per tonne. William Nordhaus, another economist, came up with a figure of $7, largely because he used a higher discount rate. This one choice has the power to massively affect any economic analysis of climate change.

2) The marginal utility of income Take $100 per year from Bill Gates and he will never notice. Take it from everyone living in Sub-Saharran Africa, and you would probably kill millions. Despite this, most economic models assume that a dollar is a dollar is a dollar. If melting permafrost makes us abandon a northern community, at a cost of $20 million, but the cost to Canadian industry of avoiding the emissions that caused it would have been $21 million, the economically optimal outcome would be to allow the community to be destroyed.

To some extent, this can be built into economic models. We can create a mathematical function for how useful each extra dollar a person gets is. If we use that ‘utility’ measure in place of a dollars measure, the impact of different choices on the least well off becomes more important. Actually doing so on climate change would almost certainly hugely increase the social cost of carbon, since the welfare of those threatened by sea level rise in Bangladesh and drought in Sudan would be considered on more equal terms to wealthy Floridians with property threatened by hurricanes and oil company employees hoping to exploit new fields in the Arctic.

In addition to having economic importance, this has massive ethical importance. An approach based on potential Pareto optimality supports any move that improves overall welfare. It doesn’t matter if the people gaining are residents of suburban Toronto while those losing live in villages in Ghana. In everyday life, we recognize that we cannot go around harming people just because we gain more from doing so than they lose.

3) Valuing catastrophic risks If we manage to turn the world’s carbon sinks into net sources, we will have created self-sustaining climate change. If that occurs at an accelerating rate, we will be facing runaway climate change, which threatens to cause enormous physical changes and mass extinctions – possibly including humanity itself. Integrating such possibilities into economic models requires a number of ethical assumptions. Even a very small possibility of such an outcome can have a giant influence on certain kinds of models; likewise, choosing to ignore such outcomes has highly ethically relevant effects.

In short, we cannot combine scientific and economic models and produce a technocratic answer about how much climate change should be permitted. We need to acknowledge and consider the ethical implications built into and arising from those models, we need to choose what kind of world we want to hand over to future generations, we need to consider how important we think responsibility for the problem is when allocating costs, we need to consider the special circumstances of the very poor, and we need to consider how big a risk of catastrophe we should really tolerate.

I think an honest examination of those issues, alongside the best climatic science we have, creates a powerful and immediate ethical and economic argument for change. It is virtually certain that – if they could speak to us – people fifty or one hundred years in the future would be screaming at us to do dramatically more than we are doing now.

Am I a ‘conservative?’

The other day, a friend of mine somewhat surprised me by referring to me as a ‘conservative.’ Pressed to define myself, I would say that I am a pragmatic libertarian who is willing to recognize that our freedoms need to be constrained in many ways in order to live decently together.

The Political Compass test categorizes me as follows: moderately left wing on economics (-3.00) and strongly slanted towards libertarianism rather than authoritarianism (-6.67).

I do object to some of the questions they pose. For instance:

  1. If economic globalisation is inevitable, it should primarily serve humanity rather than the interests of trans-national corporations – It is a bit silly to say that globalization serves one or the other, or that corporations are purely abstract entities whose welfare has nothing to do with individual people.
  2. The only social responsibility of a company should be to deliver a profit to its shareholders – This seems like an oversimplification of a complex question. Clearly, corporations have a general obligation to obey the law (though those in them may sometimes be morally obliged to break unjust laws). It certainly isn’t clear that the directors of corporations should undertake charity using shareholder wealth.
  3. First-generation immigrants can never be fully integrated within their new country – This clearly depends on what constitutes integration. For instance, when there are societies that have multiculturalism and inclusiveness as important features, people can be integrated without being assimilated.

The test also features a number of confusingly worded multiple-negative items. “Is X not true? No.” There are also a few questions seemingly designed to establish whether you are a racist. It seems to me that there have probably been racists of all possible political affiliations.

Personally, I would say my political philosophy is a combination of some classically liberal ways of viewing the world coupled with a libertarian concern for the individual and a utilitarian concern for group welfare. I would say that I am also unusually aware of the extent to which seemingly private decisions (what to eat, how to travel, etc) have significant and morally relevant impacts on other people.

May on the train

Kudos to Green Party leader Elizabeth May for using her campaign to draw attention to the unsustainable character of air travel. Rather than fly all over the country to court voters, she has opted for a far less carbon-intensive train based approach. One round-trip journey from Toronto to Vancouver emits about 1,700 kilos of carbon dioxide equivalent. A train journey emits about 730kg: about 60% less. That is not enough of a reduction for trail travel as presently undertaken to be genuinely sustainable, but it is a significant step in the right direction. People would also probably think more about long-distance transport if it took a few days rather than six or seven hours.

The linked CBC article does get one thing wrong, however. It says: “Other observers have pointed out it is probably cheaper than flying, too.” As discussed here before, taking the train seems to be more expensive. At present, a return ticket between Toronto and Vancouver is running for $1,390.20 plus taxes. WestJet provide the round-trip transport for $439.25 after taxes.

Forget targets

The big picture on climate change is one of the composition of the atmosphere and the thermodynamic balance of the planet. It is a very complex and long-term story, some of which requires considerable scientific knowledge to grasp. The basics of it come out to this:

  • Humans are changing the climate.
  • Further change is profoundly threatening for humanity.
  • We need to stabilize how much greenhouse gas is in the atmosphere, and do so at a safe level.
  • This requires fast, deep cuts.

A lot of attention has rightly focused on emission targets and timelines: where we need to be by when to achieve the kind of outcomes we want. The trouble with this debate is that it is largely artificial. Candidate X might say: “Cut to 50% below 2000 levels by 2050” and Candidate Y might say: “Cut to 65% below 2000 levels by 2050.” The difference between the two outcomes would be important for the climate. At the same time, the difference between the candidates is actually much less about the targets and much more about the means of implementing them. Candidate Y might say: “Voluntary measures, technological progress, and magical future technologies will do the job” while Candidate X might say: “We will limit total emissions from our economy to 3% below this year’s level next year. We will charge firms for the right to emit this much. We will use that money to foster a transition towards a low-carbon economy.” Needless to say, the results of each plan will differ significantly by the time you get to 2050.

The critical thing right now is to bend the path of global emissions. Rather than moving ever-upward, it needs to turn downward and start the long decline towards a low-carbon economy. Achieving that is all about immediate measures, not about emission projections that delay most of the reductions for decades. While it is certainly cheaper to cut a notional tonne of emissions ten years out, it is also the case that starting the transition will be more difficult than maintaining it. As such, it would be good to see states and political parties competing over who will cut emissions more in the immediate future, rather than across timespans during which today’s leaders will be enjoying their retirements.

Of course, the political risks of cutting emissions now are comparatively large. When it becomes evident what that will involve, it might prove expensive and politically unpopular. Protecting the welfare of present and future generations might evoke the wrath of voters during the next election. Unfortunately but honestly, no politician can be expected to show such bravery. Even so, there is an opportunity to recast the narrative. Firstly, we need to stress that this transition simply needs to occur. The alternative to acting now is simply delaying to the point where the transition will cost more and the impacts of climate change will be more severe. Secondly, this is an epic opportunity for humanity and for individual states. We can finally move beyond a post-Industrial Revolution economy based on constantly borrowing from the welfare of future generations. We can create states and a global society than run on sustainably produced climate-neutral energy.

The action required to start doing so is needed immediately. Choose someone who promises to change something by next year, and turf them out if they don’t.

Comments? Counter-arguments?

Spremberg clean coal plant

In Germany, Vattenfall is in the process of constructing a 30 megawatt (MW) ‘clean coal’ power plant. The plant will separate pure oxygen from air, burn coal in it, then ship the resulting CO2 to an injection facility 150 miles away by truck. The liquified CO2 will then be injected 3,000 metres underground in a depleted gas field.

The best thing about this project is that it will provide some real data about the feasibility and costs of carbon capture and storage (CCS). A 30 megawatt plant is a pipsqueak compared to the 500 and 1,000 MW coal facilities that are operating and planned. Nonetheless, this smaller plant should provide some useful information about timelines and cost structures. It will also establish how much of the total energy produced by the plant will be needed to produce the oxygen stream, as well as liquify, transport, and bury the CO2.

Too often, governments and industry groups blithely assert that they will sequester 10% or 20% or 50% of emissions by year X. At present, that is a bit like the Wright Brothers describing the economics of a major airline. It is only with the successful deployment of pilot plants that we will discover if ‘clean coal’ is actually a viable low-carbon source of energy or (as I suspect) a high-cost distraction from superior alternative approaches focused on renewables, efficiency, and conservation.

$700 billion ‘debt rescue plan’

In response to the subprime mortgage crisis, President Bush has called for an $700 billion bailout: buying toxic debt from the firms that now hold it. That’s about $2000 for every American citizen, being used to buy assets that may end up being worth far less than the price the government is paying.

The whole thing is disturbing for a number of reasons. There is the constant moral hazard problem that emerges when government bails out people who behave in risky ways and lose. Then there is the degree to which this will further worsen the overall economic position of the American government: already badly strained by costs associated with wars in Afghanistan and Iraq, as well as tax cuts that were never matched with reductions in spending.

If there is any justice in the world, the bonuses paid to the current and former executives who ran the financial firms at the centre of all this will be clawed back in one way or another. This whole thing started because of financial instruments that let the top tranches of the riskiest loans be sold as low-risk assets; of course, the inevitable downside of bundling the safest portions of those loans was causing the riskiest portions to accumulate elsewhere. It remains to be seen what the full and final effects of all that uber-toxic debt will be.

Visualizing the credit crunch

So far, the credit crunch has wiped 1.86 trillion dollars off the balance sheets of investment banks, commercial banks, financial services companies, asset managers, and investors.

This graphic, produced by the New York Times, visualizes the losses, showing how unevenly distributed they are. The whole thing is really quite dramatic, even for those of us with a limited interest in finance.

Price stability and energy investments

It is frequently argued that ever-rising oil prices will encourage good climatic outcomes. They make people cut back on flying and buying SUVs, and thus reduce emissions through destroyed demand. One counter-argument highlights how consistently high prices encourage the use of fuels even filthier than oil: such as coal and hydrocarbons produced from the oil sands. Arguably, uncertainty and instability actually produce the best climatic outcomes, since they leave the profitability of huge hydrocarbon investments uncertain.

This piece in The Globe and Mail argues that the recent fall in oil prices, combined with constrained access to credit due to the financial turmoil in the United States, is threatening the development of the oil sands.

Of course, uncertainty about future energy prices and restricted access to capital are also likely to hurt the development of renewable sources of power, such as concentrating solar plants in the American southwest that retain enough thermal energy overnight to produce electricity continuously. The ideal option is a predictable, ever-increasing price for carbon emissions. That would give clean sources of energy the confidence to invest, while simultaneously discouraging the development of amply available yet climatically disastrous sources of energy – at least until such a time (if ever) when effective carbon sequestration emerges.