Economics – Page 77 – a sibilant intake of breath

Climate economics and the discount rate

Perhaps the most long-running debate in climate change economics concerns what discount rate ought to be used, when working out what the probable costs of future climate change mean in the present. The basic idea of a discount rate is that things are often worth more acquired immediately than they are delivered at some future time. This is reflected in the existence of positive interest rates, which compensate people for waiting.

In the context of climate, the discount rate is basically a measure of how much we care about future generations, and what burdens we are willing to accept in order to improve their lives. If a 1% sacrifice in our generation will avert catastrophe for people a few generations off, it is probably something we should do. By contrast, if a massive sacrifice now only creates incremental improvements later, we may want to hold off. The Stern Review of climate change economics attracted both praise and criticism for choosing a very low discount rate. This choice was made on the basis of the moral argument that we should be equally concerned about the welfare of all generations. Even if climate change won’t become a disaster for a hundred years, or more, we should still be willing to consider the costs imposed by our emissions as meaningful. If you choose the sort of high discount rates used for business decisions, you basically shrink the importance of anyone living more than a few decades away down to almost zero. William Nordhaus is one economist who advocates such a rate, despite how using the 3% rate he prefers makes costs in 25 years half as significant as costs now.

One problem with using formal discount rates is that they can produce strange results when applied mathematically:

Paul Klemperer, an economics professor at Oxford University, points out that very long-term securities carry very low interest rates. When the British government recently issued 40-year index-linked bonds, for instance, it did so at a 0.5% real rate. And over the very long term standard discount rates lead to strange conclusions. At a modest 2% rate, for instance, a single cent rendered unto Caesar in Jesus’s time is the equivalent of about $1.5 quadrillion (or 30 times the value of the entire world economy) today.

Another major reason for which people advocate high discount rates is because they believe that people in future generations will almost inevitably be richer than those alive now, and thus able to deal with any particular physical problem using a smaller fraction of their wealth. While building coastal defences for low-lying cities might use up a lot of our wealth now, the argument goes, people in the future will be better able to cope. Personally, I don’t think we can assume any longer that people decades from now will be richer than us. Firstly, the costs associated with climate change are going nowhere but up. Secondly, the bonanza of cheap fossil fuel energy is ending. Future generations are going to have some big hurdles to jump.

The choice of discount rate has a massive effect on whether your economic modeling tells you that mitigating climate change is a better deal than trying to adapt to it. If you have discounted away the welfare of people in 50 or 100 years, the fact that they could be put into an intolerable situation is largely unimportant. Personally, I think climate economics is given too much credibility due to the false precision it seems to offer. Rather than abstracting down to a single number and then giving it so much importance, perhaps we should think about risk management in a more qualitative way. Rather than using math to investigate the question of whether we should take the lives and welfare of those in the future seriously, we should acknowledge the strong moral case that we should not seriously damage the planet for all those who will follow us.

The cost of avoiding loss

Ken Caldiera has come up with a nice reversal of the “does it make sense to spend money fighting climate change” question:

“If we already had energy and transportation systems that met our needs without using the atmosphere as a waste dump for our carbon- dioxide pollution, and I told you that you could be 2% richer, but all you had to do was acidify the oceans and risk killing off coral reefs and other marine ecosystems, risk melting the ice caps with rapid sea-level rise, shifting weather patterns so that food-growing regions might not be able to produce adequate amounts of food, and so on, would you take all of that environmental risk, just to be 2% richer?”

You would have to be mad to say ‘yes.’

Copenhagen global editorial

Along with 56 other newspapers in 20 languages, The Guardian recently printed a front page editorial about the Copenhagen climate change conference. Apparently, the tactic of having many papers print it simultaneously has not been used previously. It seems fitting that this happen on an issue of such universal importance.

The editorial highlights the risks associated with climate change, and the inadequacy of actions taken so far. It also includes a brief response to the CRU emails issue:

The science is complex but the facts are clear. The world needs to take steps to limit temperature rises to 2C, an aim that will require global emissions to peak and begin falling within the next 5-10 years. A bigger rise of 3-4C — the smallest increase we can prudently expect to follow inaction — would parch continents, turning farmland into desert. Half of all species could become extinct, untold millions of people would be displaced, whole nations drowned by the sea. The controversy over emails by British researchers that suggest they tried to suppress inconvenient data has muddied the waters but failed to dent the mass of evidence on which these predictions are based.

They acknowledge that a comprehensive deal is unlikely in Copenhagen, but propose that one be adopted in next year’s June meeting in Bonn.

The whole piece is worth reading.

A page for waverers

[Image removed at the request of a subject (2019-10-01)]

This page is intended for those who (a) don’t believe that climate change is happening, (b) don’t think human beings are causing it, or (c) don’t think it’s something we need to take action on. You may believe that nothing is changing at all, or that the problems associated with adapting to climate change would be a lot more manageable than those associated with stopping it in the first place.

Those in your position should consider a few things. First, there is the matter raised by Greg Craven. In the face of something potentially threatening, we cannot always wait indefinitely to make a decision. Indeed, we are making a decision implicitly in every day when we fail to take action. What we need to do is make the most intelligent choice based on the information we have, not decide definitively who is right: those who think climate change is an enormous problem, or those who think it is a manageable or non-existent one.

Consider the decision to take some precautionary action. While that does leave us facing the risk of taking more action than eventually proves to be justified, we also need to be aware of the risk that climate change is just as serious a problem as those who are most concerned about it have been claiming. If they are right and we do nothing, the future of civilization could be at risk. Precautionary climate policies may also produce other benefits, such as less dependence on imported fossil fuels and reduced emissions of air pollutants.

I recommend that you have a look at some of the high-quality sources of information linked on my climate change briefing page. I also recommend that you give some serious thought to risk management, the credibility of various sources, and the potential consequences of making the wrong choice.

It may be worth noting that, when I first started reading about climate change seriously back in 2005 or so, I was sympathetic to the argument that it might not be all that serious a problem, and perhaps we should aim to adapt to it rather than stop it. The understanding of climate science I have accumulated since then has left me deeply concerned that climate change is an enormous problem, about which we need to take decisive action quickly. I think many fair-minded people who take the time to look through the credible information available will read the same conclusion.

If you take a fair shot at that and still want to argue against climate action, at least you will be doing so from a more nuanced and well-informed perspective.

Last updated: 10 December 2009

Copenhagen underway

The Copenhagen climate change negotiations are now underway, and there already seems to be a fair bit of rancour:

The UN Copenhagen climate talks are in disarray today after developing countries reacted furiously to leaked documents that show world leaders will next week be asked to sign an agreement that hands more power to rich countries and sidelines the UN’s role in all future climate change negotiations.

The document is also being interpreted by developing countries as setting unequal limits on per capita carbon emissions for developed and developing countries in 2050; meaning that people in rich countries would be permitted to emit nearly twice as much under the proposals.

Hopefully, both developed and developing nations will appreciate the vital importance of producing a workable international agreement soon. If this cannot be accomplished this December, hopefully the talks will at least establish the foundation for future success.

What’s the Worst That Could Happen?

Written by a high school science teacher, Greg Craven’s What’s the Worst That Could Happen? A Rational Response to the Climate Change Debate is a worthwhile and unusual addition to the catalogue of books on climate change. Craven’s chosen task is not to determine whether climate scientists are right in their projections of what human activity is and will do to the climate; rather, he is trying to prepare readers to make the best choice, given the uncertainty that will always exist.

This is the same basic message he popularized in a series of viral videos, the first and last of which are especially worth watching:

I do have one slight quibble with both. Craven’s decision grid suggests that we will eventually be able to look back and know if we made the right choice. I don’t think that’s true. If we take aggressive action and stop climate change, we may never know with certainty just how bad it would have been if we had ignored it. No matter how sophisticated they become, simulations can never give us total certainty, and we don’t have another planet with which to run an experiment. Similarly, if we take no action and climate change proves catastrophic, we will never know for sure what level of action would have been sufficient to stop it – or whether doing so was still possible at any particular point in time.

Craven’s approach is based around heuristics: examining the ways in which people make decisions, taking into consideration pitfalls like confirmation bias, and then developing an approach to make an intelligent choice. In this case, it involves developing a way to roughly rank the credibility of sources, look at who is saying what, and complete a decision grid that shows the consequences of climate change either being or not being a major problem and humanity either taking or not taking major action. His own conclusion is that taking action unnecessarily isn’t likely to be exceptionally economically damaging, and can be considered a prudent course for ensuring that the worst does not happen.

On the question of why action has not yet been taken, Craven focuses primarily on human psychology. We respond to threats that are immediate, visible, and have a hostile agent behind them. Since climate change is none of these things, it doesn’t trigger strong responses in us. Cognitive factors also help explain why people are so confused about the state of climate science, though individual failings in information assessment are accompanied by the failure of the media to pass along good information effectively.

Craven concludes that raising political will is the key action that needs to be taken, and that cutting individual emissions is of very secondary importance. Like many others, he draws on the analogy of WWII to show what the United States is capable of achieving when it has the determination.

Some readers may find the book’s informal style and fill-in-the-blanks exercises a bit annoying, or feel that they trivialize the issues at hand. That being said, Craven has produced a very accessible book that recasts the climate change debate in a valuable new way: evaluating what choice to make, under uncertainty, rather than trying to determine authoritatively who is right. For those wishing to grapple with the practical question of what ought to be done about climate change, this book is well worth reading.

Gore on CCS

In Our Choice, Al Gore adopts a position on carbon capture and storage (CCS) that is rather similar to my own. Namely, that there are big uncertainties, and little reason to expect CCS to emerge as a silver bullet that lets us mostly carry on with business as usual. Gore does, however, argue that the safety issues associated with CCS are not terribly significant.

One statistic he quotes seems especially notable:

If all the CO2 now being vented into the atmosphere by U.S. coal electricity plants were captured and converted into its liquid form, the volume would be equivalent to 30 million barrels of oil per day – three times the volumes of all the oil imported by the United States each day. If the CO2 were then transported by pipeline to repositories, as proposed, the amount (by volume) would be one third of that of all natural gas now being transported in pipelines throughout the U.S. (p. 136 paperback)

Think about the infrastructure associated with moving those quantities of fossil fuels, and you can better appreciate that CCS won’t be cheap and easy, even if it does eventually prove workable.

One surprising thing is that Gore doesn’t seem to mention how CCS could be used in combination with biomass-fuelled power plants to actually reduce the amount of CO2 in the air

The Globe and Mail on fossil fuels and the oil sands

In an editorial that is reasonably good overall, The Globe and Mail is nonetheless too quick to assume that the oil sands are good for Canada: “A vital resource, the oil sands, are an economic advantage to Canada, indeed to North America as a whole. Sixty per cent of our natural gas is exported, and Canada is the U.S.’s largest source of crude oil. The fruits of emissions here are often enjoyed elsewhere” and that fossil fuels “remain vital assets that will serve as reliable sources of energy for the foreseeable future.” They also claim that: “Products from the oil sands are necessary and desirable.”

I have argued before that, when all the associated costs are taken into consideration, the oil sands may be net destroyers of human wealth and welfare. The most important of these costs is the degree to which extracting, processing, and burning fuels produced from the oil sands increases the risk of catastrophic climate change. If we use a very high but possible estimate for how sensitive the climate system is to greenhouse gas emissions (8°C of warming for each doubling of CO2 concentrations), burning the 1.7 trillion barrels of oil estimated to exist in the oil sands would alone be sufficient to increase mean global temperatures by 2°C. Even using the probable estimates of 3.5 – 4.5°C of warming, the oil sands represent a contribution to total cumulative human emissions that is seriously out of proportion to Canada’s population, or even the population of those who ultimately consume the fuels produced.

The oil sands represent the last gasp of a fossil fuel powered economy. Either because of hydrocarbon depletion or because of climatic concerns, we are inevitably going to have to give up fossil fuels anyhow. Given what we now know about the climate system and the potential impact humanity could have on it, we should be working on developing zero-carbon sources of energy – not on extracting the oil that is the hardest to reach, or which requires the most processing to be turned into usable fuels or products. Rather than picking at the bones of the fossil fuel carcass, we should be seeking out new forms of sustenance.

The Globe and Mail has a history of assuming that oil sands development is good for Canada. In fact, the best thing we could do for future generations of Canadians (and others around the world) is to leave that dangerous carbon in the ground, while pursuing the development of sustainable forms of energy.

What if you’re wrong?

Whatever your position on climate change policy, this question is a good one to ask. It drives you to do two important things: consider what it would take to change your mind, and consider the risks associated with making the wrong choice.

I would change my position on what action we should take in response to climate change if any of the following was adequately demonstrated:

The Earth’s climate is not changing.
Greenhouse gas emissions are not the cause of warming.
Warming will not be dangerous.

Exactly what level of evidence would be required is difficult to pre-judge, but the definitive rebuttal of any of those positions would be sufficient to prompt a major change in the policies I would advocate.

On the question of risks, there are two major kinds of error we could make: over- and under-reacting. If we over-react to climate change, we would sacrifice wealth and other opportunities in order to cut out emissions, achieving no good purpose. At the very worst, we would seriously damage the global economy for an indefinite span of time, and delay the emergence of many people from extreme poverty. If we under-react, the very worst outcome would be the undermining of the capability of the planet to support human life. This is clearly a much worse outcome, though it is not an easy task to determine how probable it is, relative to the ‘overreact and go broke’ possibility. Clearly, I think that the risks of climate change as it is now understood justify much more action than we have taken to date.

Another thing to bear in mind is that there are co-benefits to shifting the energy basis of our society from fossil fuels to zero-carbon and renewable options. In his response to the Munk Debate, Tyler Hamilton lays out a few: “I mean, even in the unlikely event that climate change science shows us we overreacted, is it such a bad thing that we also acted to reduce air pollution, mercury emissions, the use of water in thermal power plants, and the other environmental footprints caused by our addiction to fossil fuels. That’s a pretty nice consolation prize.” In a situation where we took aggressive action, we would also be better protected from the distinct but related challenge of peak oil. Fossil fuels are inevitably going to run out anyhow, so the real cost here is of making the transition away from them earlier than we otherwise would. Climate change or not, a fossil fuel based economy simply cannot keep going forever.

Ultimately, the choice we make on climate change policies is a matter of risk management. Being able to hedge against a potentially catastrophic risk, and secure co-benefits, while simultaneously running some risk of overreacting seems much more prudent and sensible than doing the opposite.

Military assessments of climate change

In his scrupulously evenhanded book What’s the Worst That Could Happen? A Rational Response to the Climate Change Debate, Greg Craven makes reference to four different assessments of climate change conducted by organizations with a link to the American military. All conclude that climate change is a serious problem, and that actions must be taken to mitigate it.

The first is the 2008 National Intelligence Assessment, drafted by 16 U.S. intelligence agencies including the CIA, FBI, and NSA. While the report itself is classified, the chairman said that climate change could disrupt US access to raw materials, create millions of refugees, and cause water shortages and damage from melting permafrost.

Another is a 2003 Pentagon study: An Abrupt Climate Change Scenario and Its Implications for United States National Security: Imagining the Unthinkable. It considers a worst-case but plausible scenario, and concludes that abrupt climate change could destabilize the geopolitical environment:

In short, while the US itself will be relatively better off and with more adaptive capacity, it will find itself in a world where Europe will be struggling internally, large number so [sic] refugees washing up on its shores and Asia in serious crisis over food and water. Disruption and conflict will be endemic features of life.

It also argues that “with inadequate preparation, the result [of abrupt climate change] could be a significant drop in the human carrying capacity of the Earth’s environment.”

The third report is from the Center for Naval Analyses. Their “blue-ribbon panel of retired admirals and generals from the Army, Navy, Air Force, and Marines” produced the report National Security and the Threat of Climate Change. It calls climate change “potentially devastating” and advises that the risks to national security will “almost certainly” get worse if mitigation action is delayed. It also stresses how we don’t require 100% certainty about the precise seriousness of a threat before it starts making sense to address it.

The last report was drafted by two national security think tanks: the Center for Strategic and International Studies and the Center for a New American Security. Their 2007 report is titled: The Age of Consequences: The Foreign Policy and National Security Implications of Global Climate Change. Their team included the head of the National Academy of Sciences, one Nobel laureate economist, a former CIA director, a former presidential chief of staff, climatologists, and others. They concluded that current projections from climate models are “too conservative” and that “at higher ranges of the [warming] spectrum, chaos awaits.” The authors conclude that an effective response would have to occur in less than a decade “in order to have any chance” of preventing irreversible disaster.”

The only fair conclusion that it seems possible to reach about these reports is that they have been ignored. If American policy-makers and members of the general public accepted these conclusions – and interpreted them with the seriousness accorded to matters of national security – we would not be seeing so much doddering around before meaningful action is taken. While the military does have an incentive to scare people, since doing so likely increases their funding, Craven is probably right to claim that the overall bias of these organizations is towards economic strength rather than environmental protection. That, and the calibre of the individuals associated with these reports, seems to provide good reason for taking them seriously.

Note that the issue of climate change and security has been discussed here previously.