Economics – Page 76 – a sibilant intake of breath

Carbon taxes v. cap-and-trade

Among advocates of carbon pricing, there is a long-running disagreement about whether a carbon tax or a cap-and-trade system is preferable. Among economists and environmentalists, there is generally a preference for a carbon tax. Politicians terrified of the electoral implications of creating a new ‘tax’ tend to favour cap-and-trade schemes (partly, because it is easy to give away permits to influential industries under such a scheme).

Economists frequently argue that the trade-off is between price and emissions certainty. With a tax, you know exactly how much more any particular carbon-intensive activity will cost, making planning easier. With a hard cap, you know exactly what your emissions will be. With a tax, you can try to tweak the level to get the emissions volume you want, but you can never be entirely sure. Conversely, a cap assures the emissions outcome selected, but does so at a cost that cannot be known in advance.

A recent letter to The Economist does a good job of laying out some of the advantages of a cap-and-trade approach, arguing that economists and environmentalists have been too eager in throwing their support behind a tax:

First, a “one size fits all” tax requires an impossible calculation of the average cost of reducing emissions over a given period of time. Compare this with an emissions-trading system that works on the free-floating marginal cost of abating emissions. Second, carbon taxes would be levied locally and so impossible to properly administer on a global scale. A global carbon-market price is perfectly pervasive. And third, taxation cannot guarantee a reduction in greenhouse-gas emissions; emitters could opt to pay the tax and continue emitting at will. Conversely, a cap-and-trade solution introduces a carbon ceiling and the price acts as no more than a useful barometer of how close we are to achieving that goal; prices will tend to zero as the requisite level of emission reductions is achieved.

Personally, I think the choice of instrument is less important than the level of genuine political will, reflected in the care taken in regulatory design. Either approach can be set up in a dodgy way, intended to produce the impression of action without actually constraining carbon emissions effectively. A well-designed tax is better than a cap-and-trade system full of giveaways and dodgy offsets. A well-designed cap-and-trade scheme is better than a tax that is too low to be effective, or one where exemptions and rebates undermine the incentive effect. Those concerned about climate change should be willing to support either policy approach, while being energetic in ensuring that the system that is ultimately designed is a fair and effective one where polluters pay for the cost of their damaging activities and the long path to carbon neutrality is started upon.

Technology silver bullets for climate change

Talking about climate change mitigation, people often make reference to the Manhattan Project: arguing that we need a massive, technology-focused governmental effort to sort out the problem. This historical example can, however, be thought about in another way. During the final stages of WWII, the United States was preparing to invade Japan. Given the fierce resistance they encountered during the island hopping campaigns in the Pacific, they expected a very difficult battle to capture the Japanese home islands. Ultimately, those preparations were rendered unnecessary when the atomic bombings of Hiroshima and Nagasaki helped to produce a Japanese surrender.

In the climate context, the equivalent of the atomic bomb might be some miraculous new set of technologies that allows us to deal with climate change at a low cost and with few real sacrifices: algae-based biofuels, next generation fission or fusion nuclear reactors, carbon capture and storage, etc. Counting on the emergence of such technologies is akin to betting on the atomic bombs ending the war, long before it was certain that they would work or would be developed in a timely matter. While we may be lucky and see some breakthrough technologies emerge in the decades ahead, we need to do what the Americans did and plan to deal with the problem through the difficult practice of old-fashioned slogging. We need to have a plan to stabilize greenhouse gas concentrations at a safe level, and do so with the technologies and technical resources that exist today, not those that may exist in the future.

The future of our planet and of all future generations of humans depends on avoiding catastrophic climate change. Presented with that burden, we cannot just invest in researching a few technological long shots and then rest easy. We need to get ready to address the problem, no matter how costly, painful, and difficult doing so may ultimately prove to be.

Heathrow’s third runway and the carbon price

I have commented before on the incoherence of how the United Kingdom plans to both cut greenhouse gas emissions and increase airport capacity. The December 8th report from the Committee on Climate Change perpetuates this mis-match, saying that the third runway for Heathrow could be compatible with government emission reduction targets, provided the price of carbon reaches £200 per tonne by 2050.

To me, this view is rather perplexing. Why build a runway, then use taxes to choke off the demand for it? Either your taxes won’t prevent the flights, making it harder to reach your carbon targets, or they will and your investment in the runway and supporting facilities will be a waste. The committee also assumes that aircraft engine efficiency will improve by 0.8-1.5% per year, that biofuels that don’t compete with food crops will emerge, and that high speed rail will displace a lot of short-haul flights in Europe. To take advantage of assumptions about the future to defend a dubious current policy is a practice all too common. Rather than pretending they can have it both ways, the UK should acknowledge that achieving its climate change goals will require reducing incredibly emissions-intensive activities like air travel.

Thankfully, the British Conservative Party – which is likely to take power with the next election – continues to oppose construction of the runway, precisely because it clashes with climate change objectives.

May you live in interesting times

In Vancouver, I had a conversation with Tristan about some of the major energy and environmental changes we are likely to witness in our lifetimes. These include:

Very significant amounts of climate change, very substantial climate change mitigation efforts, or both.
The probable collapse of most or all commercial fisheries globally.
The peak of global oil production, and progressive subsequent decline.

In some ways, the significance of all three is the same – humanity now has the capability to reshape the planet in very substantial ways and no political or economic arrangement to date has been sufficient to stave off some of our most dangerous and damaging behaviours.

Personally, I think this is a poor time to be bringing children into the world. While the loss of fisheries will be tragic, climate change threatens to undermine the ability of global civilization to feed and support itself, if it continues unchecked. Before I would feel confident that future generations will live reasonably good lives, I will need to see global emissions reach a plateau (very soon, if we are to avoid more than 2°C of warming) and begin the long and determined decline that is necessary to restabilize the climate on human timescales.

Within fifty years, we should have a pretty good idea of whether humanity will put in a solid effort in jumping over the various hurdles before us. Given the feedbacks in the climate system, there is no guarantee that even vigorous effort can prevent abrupt or runaway climate change. That being said, there is a big difference between devoting ourselves to making a real effort to overcome the obstacle and simply ploughing along blindly (accelerating all the while) until we hit it.

Military fuel use and climate

One of the organizations taking possible future fossil fuel scarcity most seriously is the American military. The Air Force is investigating how to make jet fuel from coal or natural gas. Meanwhile, the other branches of the military are looking for ways to reduce their fuel bills and vulnerability to fuel shortages. There is plenty of reason to do so, given that American forces are using about one million gallons of fuel per day each in Afghanistan and Iraq, and the cost per gallon in the most remote locations can run as high as US$400. The average cost for a gallon of fuel at a forward operating base is about US$15.

Some efforts being made include insulating tents, installing ‘smart grids’ on military bases, increasing usage of renewable forms of power, and investigating ways to use wastes for energy. As with other attempts to reduce fossil fuel dependence, there is no guarantee that these efforts will prove to be beneficial overall from a climatic perspective. If the Air Force manages to produce biofuels that are suitable for use in aircraft, have a decent energy return on investment, and do not compete with food crops, they may develop products and processes with considerable civilian applicability, and potential to mitigate greenhouse emissions. If, instead, they just perfect the oil German and Japanese trick of turning coal into liquid fuel, they may end up making the problem much worse. The very last thing humanity needs is another excuse to burn coal, when we really ought to be working out strategies to leave all that planet-warming carbon safely underground.

Of course, militaries are fundamentally hugely wasteful and destructive things. If we do manage to make a global transition to zero-carbon forms of energy, it seems probable that the world’s various armed forces will be the most resistant to accepting any restrictions on their emissions or fuel use. Much will depend on whether we can find energy sources that are actually cheaper and better than fossil fuels, or whether we manage to content ourselves with inferior options that don’t generate the same sort of climatic risks. In the first case, militaries may largely shift to low-carbon technologies on their own accord. In the latter case, prodding them into environmental responsibility may prove extremely difficult, especially if ongoing climate change has helped to make the world a less geopolitically stable place.

The credit crunch and climate change

The credit crunch reveals at least one important thing about major policy decisions: once they are taken, one way or another, it becomes impossible to fully evaluate what the world would have been like without them.

Plenty of people claim that it was terribly necessary to bail out the banks and car companies, cut interest rates, and wreck the public finances by splashing out on every sort of tax cut and government spending program. They argue that doing so made this into a minor recession compared to a decade-long global recession. Having taken those actions, our ability to know what the world without them would have been like is very limited. The unknowable costs of inaction can always be used to respond to examples of cases where action currently seems unnecessary: “Yes, it was regrettable for the investment bankers to pay themselves off with taxpayer money, but the alternative to all this would have been a terrible global depression!”

The same will eventually be true of climate change mitigation policy. Say we eventually make it a real priority – setting a high price on carbon and really focusing on de-carbonizing our infrastructure. At some point in the distant future, we will look at our efforts and at how much climate change occurred. Provided it was a non-catastrophic amount, we will be in the same situation as we are now in relation to the credit crunch. We will be unable to know how bad things would have gotten if we had not taken action,

That being said, the stakes are enormously higher with climate change than with the credit crunch. While global economic turmoil would hurt, climate change risks destroying or severely degrading the capability of the planet to sustain human life. The risks associated with allowing it to occur to an extreme extent are practically incomparable.

It should also be noted that the credit crunch bailouts served a purpose that we must look on with increasing suspicion: maintaining economic growth. While we should certainly hope that human welfare will continue to improve, it is tautologically the case that we will eventually need to move to an economy in a steady state, when it comes to the resources it extracts from the atmosphere, lithosphere, hydrosphere, and biosphere, and in terms of the wastes it ejects into those places.

Generation IV nuclear

The Economist has an article summarizing a few possible next-generation fission reactor technologies. They include the Supercritical water-cooled reactor (SCWR), the Very High Temperature Reactor (VHTR), the Sodium-cooled fast reactor (SFR), the Gas-cooled fast reactor (GFR), the Lead-cooled reactor (LFR), and the Molten-salt reactor (MSR). Most promise higher efficiency than conventional pressurized water reactors, largely because they run at a higher temperature. Some are also capable of using more esoteric forms of fuel. For instance, the MSR can use thorium once it has been ‘seeded.’

The article doesn’t give too much consideration to the many challenges facing the nuclear industry: cost, chief among them. Given how opaque the costs of nuclear are, it is hard to know whether existing reactor technologies are really cost-competitive with renewables now, much less untested new variants.

India’s voluntary climate actions

In international climate negotiations, India has been one of the states asserting most forcefully that developing countries should not have mandatory emissions caps applied to them. It argues, quite rightly, that states that are now rich largely became that way on the basis of fossil fuel use, and that it still has high levels of extreme poverty to address. That being said, all global emissions will eventually need to be cut. Approaches like contraction and convergence seek to address these practical and ethical issues, by giving states like India and China a bit of space in which to keep increasing emissions, before theirs peak at a level far below where rich states are now, and eventually fall to zero.

While India isn’t signing on to such schemes now, they are taking some voluntary actions unilaterally: “a proposed $20 billion investment in solar energy; a plan to return a third of its area to forest; and many energy-efficiency measures.” These are the sorts of win-win measures that generate positive secondary effects. Solar power doesn’t cause air pollution, and can help countries reduce their dependence on imported fuels. Reforestation protects watersheds and decreases erosion. Energy efficiency might be the single area where it is most possible to actually save money while reducing emissions.

Eventually, India will need to be brought into a binding global emissions reduction regime. For now, whatever actions that can be taken to drive their development process towards a low-carbon course should be undertaken.

Gas by gas, or all together?

The various chemicals that cause the climate system to warm vary considerably in their characteristics:

How strong a warming effect they have
How long they remain in the atmosphere
What processes produce them
Whether they have other positive or negative effects
Etc

For instance, methane is a much more potent greenhouse gas (GHG) than carbon dioxide (CO2), but it stays around a lot less time. CFCs and HCFCs are very powerful greenhouse gasses that are produced by a relatively small number of companies for specific applications; CO2, by contrast, is produced by most forms of economic activity everywhere.

Faced with these sorts of variation, some people have argued that having one regime for all GHGs is not the best approach. Because of the damage they cause to the Earth’s stratospheric ozone layer, CFCs are covered by the Montreal Protocol to the Vienna Convention. That limited agreement has produced about 175 billion tonnes of CO2 equivalent in emission reductions, compared to just a handful from the partially implemented Kyoto Protocol.

The advantage of putting all GHGs into the same legal instrument is that it could allow for mitigation to be balanced in the most efficient way. If Gas X is five times more problematic than Gas Y, the value of the carbon tax paid or auctioned permits purchased would also be five times greater. That way, people would focus on cutting emissions where it is cheapest and easiest to do so. The major disadvantage of bundling the GHGs together is that doing so can distort markets. One gas – HFC-23 – is so powerful and so cheap to get rid of that it has seriously skewed prices in global carbon markets. Rather than paying people huge sums of HFC-23, we should just be sharply limiting how much of the stuff people are permitted to make in the first place.

In an ideal world, it should be possible to have a well designed system that incorporates all GHGs. It should also be possible to have a series of overlapping agreements that do so. In practical terms, what the latter possibility allows is an alternative route that might be taken, if efforts to produce one big treaty continue to prove unsuccessful.

The IEA on peak oil and climate policy

The International Energy Agency (IEA) has recently charged its public position on peak oil. It now claims that output of conventional oil will peak in 2020, if demand continues to grow in a business-as-usual way:

After analysing the historical production trends of 800 individual oilfields in 2008, the IEA came to the conclusion that the decline in annual output from fields that are past their prime could average 8.6% in 2030. “Even if oil demand were to remain flat, the world would need to find more than 40m barrels per day of gross new capacity—equal to four new Saudi Arabias—just to offset this decline,” says Mr Birol.

A daunting task. Peak-oil proponents point out that the average size of new discoveries has been declining since the mid-1960s. Between 1960 and 1989 the world discovered more than twice the oil it produced. But between 1990 and 2006 cumulative oil discoveries have been about half of production. Their opponents argue that long periods of relatively low oil prices blunted the incentives for exploration. A sustained period of higher prices, they argue, should increase discoveries. They point out that the first half of 2009 saw 10 billion barrels of new discoveries, an annual rate higher than any year since 2000. The pessimists retort that recent discoveries are still not enough.

Insofar as climate change mitigation policies could help control demand growth, they could thus extend the timeframe during which humanity will address fossil fuel depletion.

The IEA argues that coordinated action to prevent more than 2°C of climate change would reduce global demand for oil in 2030 from 105 million barrels per day to 89 million.