Economic v Climate Models

Luboš Motl has a polemical look at the supposed refutation of a sceptics arguments. This is an extended version of my comment.

Might I offer an alternative view of item 30 – economic v climate models?

Economic models are different from climate models. They try to model empirical generalisations and (with a bit of theory & a lot of opinion) try to forecast future trends. They tend to be best over the short term when things are pretty much the same from one year to the next. The consensus of forecasts are pretty useless at predicting discontinuities in trends, such as the credit crunch. At there best their forecasts at little better than the dumb forecast that next period will be the same as last period. In general the accuracy of economic forecasts is inversely proportional to their utility.

Climate models are somewhat different according to Dr MacCracken.

“In physical systems, we do have a theory—make a change and there will be a response in largely understandable and calculatable ways. Models don’t replace theory; their very structure is based on our theoretical understanding, which is why they are called theoretical models. All that the computers do is to very rapidly make the calculations in accord with their theoretical underpinnings, doing so much, much faster than scientists could with pencil and paper.”

The good doctor omits to mention some other factors. It might be the case that climate scientists have all the major components of the climate system (though clouds are a significant problems), but he omits to include measurements. The interplay of complex factors can cause unpredictable outcomes depending on timing and extent, as well as the theory. The climate models, though they have a similarity of theory and extent, come up with widely different forecasts. Even this variation is probably limited by sense-checking the outcomes and making ad hoc adjustments. If the models are basically correct then major turning points should capable of being predicted. The post 1998 stasis in temperatures, the post 2003 stability in sea temperatures and the decline in hurricanes post Katrina are all indicators that models are overly sensitive. The novelty that the models do predict tend not to be there, but the novelties that do exist are not predicted.

If it is the case that climate models are still boldly proclaiming a divergency from trend, whilst economic models have much more modest in their claims, is this not an indicator of climate model’s superiority? It would be if one could discount the various economic incentives. Economic models are funded by competing in institutions. Some are private sector, and some are public sector. For most figures there is forecast verification monthly (e.g. inflation, jobs) or quarterly (growth). If a model were consistently an outlier if would lose standing, as the forecasts are evaluated against each other. If it was more accurate then the press would quote it, being good name placement for the organisation. In the global warming forecasts, there is not even an annual variation. The incentive is either to conform, or to provide more extreme (it is worse than we thought) prognostications. If the model projected basically said “chill-out, it ain’t that bad man”, they authors would be ostracized and called deniers. At a minimum the academics would lose status and ultimately lose out on the bigger research grants.

(A more extreme example is of a major earthquake forecast. “There will not be one today” is a very accurate prediction. In the case of Tokyo area over the last 100 years that would have been wrong only twice, an accuracy of greater than 1 in 10,000).

Feedbacks in Climate Science and Keynesian Economics

Warren Meyer posts of a parallel between Climate Science and Keynesian Economics. I posted about a subject close to his heart, and central to Keynesianism – Feedbacks. I have also attempted to update on the current debate on feedbacks.

Warren

There is a parallel between Keynes and the CAGW that is close to your heart – feedbacks. Pure Keynesianism is that an increase in government expenditure at less than full employment would have a positive feedback response. Keynes called the feedback measure the multiplier. (The multiplier is the reciprocal of the proportion of Government expenditure to GDP. So if government expenditure was 20% of GDP, then a $1bn fiscal boost would increase output by $5bn.)

By the 1950’s the leading sceptic was Milton Friedman who, in his 1962 book “Capitalism and Freedom”, estimated empirically that the multiplier was about 1 – that is it did not have any impact. Friedman was denounced as a denier and a dinosaur. (At the same time, mainstream economics adapted his verificationist methodology.) Indeed by the end of the 1960s it was generally agreed that the long-term feedback impact of government demand management was negative, as increased government expenditure crowded out the private sector, caused escalating inflation (as economic actors ceased to be fooled by the false signals 0f increased expenditure), slowed economic growth and generally undermined the very structures of the capitalist system. (see Friedman’s Nobel Prize lecture “Inflation and Unemployment“)

Keynesian thinking is that the capitalist economic system is inherently unstable. Stability is only achieved through the guiding hand of government. Keynes contrasted this with a caricature of neoclassical economics, with the macroeconomic system would rapidly come back into equilibrium. Similarly, the climate models assumption of chronic instability is contrasted by an extreme caricature of those who disagree with them. That is the “deniers” are saying that the climate is incredibly stable, with human beings having no influence. In both cases the consequence of this caricaturing is to automatically claim any extreme occurrence as vindification of their perspective.

IPCC & Greenpeace

The Shub Niggurath (Hattip BishopHill) arguments against the IPCC’s SSREN growth figures are complex. The Greenpeace model on which they were based basically took a baseline projection and backcast from there. A cursory look at the figure GDP figures shows that the economic models point to knife-edge scenario. The economic models indicate that the wrong combination of policies, but successfully applied, could cause a global depression for a nigh-on a generation and lead to 330 million less people in 2050 than the do-nothing scenario. But successful combination of policies will have absolutely no economic impact.

Shub examines this table :-

Table 10.3, page 1187, chapter 10 IPCC SRREN

(Page 32 of 106 in Chapter 10. Download available from here)

I have looked at the GDP per capita and population figures.


To see whether the per capita GDP projections are realistic, I have first estimated the implied annual growth rates. The IEA calculates a baseline of around 2% growth to 2030. The German Aerospace Centre then believes growth rates will fall to 1.7% in the following 20 years. Why, I am not sure, but it certainly gives a lower target to aim at. Projecting the 2030 to 2050 growth rate forward to the end of the century gives a GDP per capita (in 2005 constant values) of $56,000. That is a greater than five-fold increase in 93 years.

On a similar basis there are two scenarios examined for climate change policies. In the Category III+IV case, growth rates drop to 0.5% until 2030. It then picks up to 2% per annum. Why a policy that reduces global growth by 75% for 23 years should then cause a rebound is beyond me. However, the impact on living standards is profound. Almost 30% lower by 2030. Even if the higher growth is extrapolated to the end of the century, future generations are still 12% worse off than if nothing was done.

But the Category I+II case makes this global policy disaster seem mild by comparison. Here the assume is that global output per capita will fall year-on-year by 0.5% for nearly a generation. That is falling living standards for 23 years, ending up at little over half what they were in 2007. This scenario will be little changed in 2050 or 2100. Falling living standards mean lower life expectancy and a reduction in population growth. The model reflects this by projecting that these climate change policies will lead to 330 million less people than a do-nothing scenario.

Let us be clear what this table is saying. If the world gets together and successfully implements a set of policies to contain CO2 levels at 440ppm, the global output in 2050 will be 40% lower. There is a downside risk here as well – that this cost will not contain the growth in CO2, or that the alternative power supplies will mean power outages, or that large-scale, long-term government projects tend to massively overrun on costs and under perform on benefits.

Let us hark back to the Stern Review, published in 2006. From the Summary of Conclusions

“Using the results from formal economic models, the Review estimates that if we don’t

act, the overall costs and risks of climate change will be equivalent to losing at least

5% of global GDP each year, now and forever. If a wider range of risks and impacts

is taken into account, the estimates of damage could rise to 20% of GDP or more.

In contrast, the costs of action – reducing greenhouse gas emissions to avoid the

worst impacts of climate change – can be limited to around 1% of global GDP each

year.”

Stern looked at the costs, but not at the impact on economic growth. So even if you accept his alarmist prediction costs of 5% or more of GDP, would you bequeath that to your great grandchildren, or a 40% or more reduction lowering of their living standards along with the risk of the policies being ineffective? Add into the mix that The Stern Review took the more alarming estimates, rather a balanced perspective(1) then the IPCC case for reducing CO2 by more solar panels and wind farms is looking highly irresponsible.

From my own perspective, I would not have thought that the impact of climate mitigation policies could be so harmful to economic growth. If the models are correct that the wrong policies are hugely harmful to economic growth, then due diligence should be applied to any policy proposals. If the economic models from the IPCC are too sensitive to minor changes, then we must ask if their climate models suffer from the same failings.

  1. See for instance Tol & Yohe (WORLD ECONOMICS • Vol. 7 • No. 4• October–December 2006)

Update 27th July.

Have just read through Steve McIntyre’s posting on the report. Unusually for him, he concentrates on the provenance of the report and not on analysing the data.

Comparing Politicians to Global Warming Deniers

At CafeHayek, Don Bordeaux has a post that requires careful reading. It is an attack on politicians and overbearing government, couched in a metaphor of global warming deniers.

My comment was

Using the metaphor of global warming is apt, but like any metaphor breaks down once examined closely. I would claim that a global warming “denier” has a more tenable position once the evidence is examined in detail and from different perspectives. Conversely, a denier of the unintended consequences of interventionism, like a holocaust denier, has a less tenable position once the alternative evidence is examined.

This brings me onto a second point. Politicians are selling themselves to get elected, which implies building up coalitions of diverse interest groups. Early Public Choice theory called this Pork-Barrel politics. A more successful approach in the television era is one based on image. That is projecting personality over policy substance. It goes against the notions of weighing up the pros and cons, learning from error in one’s past judgments, and recognizing limitations in one’s abilities and knowledge. Good government requires questioning skeptics, but has a propensity to elect the smooth-talking deniers.

An early example of image-based politics – indeed the forerunner in modern times – is JF Kennedy. A more recent example in Britain is New Labour. The image-based politics justified building up a structural deficit in the boom years. The need to save face, and the political ambitions of the key player, meant that the political business cycle did not operate after the 2005 general election. That is, according to Public Choice Theory, to boost the economy to get re-elected and then take the necessary measures to reduce the deficit immediately after.

Biofuels – a policy that is killing the poor

The GWPF reports on a new paper by Indur M. Goklany, Ph.D. that estimates the biofuels policy may be causing 200,000 additional deaths a year. This is compared to the 141,000 deaths (on a like by like basis) that WHO claims may be attributable to climate change.

This paper understates the comparison as the biofuels estimates are many times more robust than the climate change deaths estimates.

The biofuels element is a direct relationship. As real income increases above $1.25 per day, the quantity of food that people can buy increases. From mostly a subsistence existence people can trade. Variety and calorific value of food increase. Also constancy of food supply is assured as a rapidly shrinking portion is reliant on the local harvest. Push up the real cost of food rapidly and this virtuous growth cycle is reversed.

The aspect of Global Warming comes from page 72 of the WHO World Health Report 2002.

“Climate change was estimated to be responsible in 2000 for approximately 2.4% of

worldwide diarrhoea, 6% of malaria in some middle income countries and 7% of dengue

fever in some industrialized countries. In total, the attributable mortality was 154 000 (0.3%)

deaths and the attributable burden was 5.5 million (0.4%) DALYs. About 46% this burden

occurred in SEAR-D, 23% in AFR-E and a further 14% in EMR-D.”

The global warming element comes from

  1. Looking at other elements and relating the impacts to temperature and climate volatility empirically.
  2. Measuring accurately recent temperature record to show increases in temperature. The warming in recent years may have been overstated due to failure to adjust for the urban heat island effect and possible biases in the calculation.
  3. Correctly relating this a proportion of this warming to anthropogenic factors. If it is overstated, then so is the justification for policy to mitigate the climatic effects of that warming.
  4. Accurately measuring the impacts of warming on the climate factors such as floods, droughts, sea level rise, extreme heat waves etc.

If any of these issues are overstated individually, then they can significantly reduce the relationship. But compound and they make the global warming deaths insignificantly different from Zero. For instance the relationship between temperature and malaria is highly controversial and has been dismissed. This might be 10% of the deaths. If the recent rise is only 0.3 degrees, rather than 0.4 degrees, then the mortality impact will reduce more than proportionately. If half the temperature rise due to anthropogenic factors, then it more than halves the impact. Most importantly there is the influence on climate variability. If extreme weather has not increased due to global warming – for instance the hurricane impacts were based on insurance claims rather than increasing frequency and intensity of storms (they may be decreasing), then some of the factors are decreased. Let us give a minimal impact of each of these impacts. Linking each of the elements to climate change could reduce of the attribution by 10% to >90% (say 60%). Measurement actual AGW reduces by 20% to 60% (say 40%). Weather variability due to AGW is highly suspect due to separation from the highly variable natural variability, so the will reduce the attribution by 50% to >100%. Take this as an 80% reduction. The compound effect on attributable deaths is 154,000(100%-60%)(100%-40%)(100%-80%) equals around 7,400. In other words, it is statistically insignificant.

On the other hand there is no mention of the most direct and beneficial impact of increasing greenhouse gases on the health and well-being of the poorest. Higher CO2 levels are directly related to increased plant growth rates and biomass. That means increased agricultural productivity for free.

The later 2003 WHO report “Climate Change and Human Health – Risks and Responses” used this report’s findings, but had plenty of hidden warnings. For instance the final conclusion was

“The increasing trend in natural disasters is partly due to better reporting, partly due to increasing population vulnerability, and may include a contribution from ongoing global climate change.”

Finally, one must consider that if the global warming estimate is accurate, it is not an either/or comparison. Current climate change policies will not achieve a significant reduction in CO2 levels. So the poor will be hit with extra deaths from both sources.

 

The Economist on Corn Production over 30 degrees

The Economist gives a positive spin to the article ““Nonlinear heat effects on African maize (corn) as evidenced by historical yield trials”, Lobell et al.” in Nature : Climate Change. I posted the following comment:-

Experimental conditions must be controlled to get comparable results. But this is not real world conditions. In the real world farmers will seek to optimize output given the constraints. When temperature, or rainfall changes, farmers will adapt. It is part of the human condition to adapt, which is why there is agriculture to be found in Southern Sweden and the blazing heat of Minas Gerais. Corn production is to be found in Edinburg, Texas with 136 days a year above 30 degrees. This is achieved through both planting and harvesting earlier in the year than further north.

As well as looking to the negatives of warming, we should look to the positives. More temperate climates should, ceteris paribus, see increasing yields as temperatures get warmer. For instance, Northern Europe, the Steppes of Central Asia and the Canadian plains should benefit from higher temperatures. Also higher temperatures will be caused by higher CO2 levels. Experimental studies have shown a doubling of CO2 will increase maize biomass by around a third. Finally, according to Al Gore, precipitation increased by 20% in the last century, mostly in above mentioned areas, Southern South America and SE Australia.

One of the biggest risks for climate change is supposedly to the stability world food supplies, with possible famines. But, as Amartya Sen has shown, the biggest famines are made serious not by natural factors but by adverse terms of trade. The Bengal famine of 1943, in which more than 3 million died, was exacerbated by a ban on exports between provinces in India, at the same time as extra demand was present from those supplying the troops fighting in Burma.

 

http://wattsupwiththat.com/2011/03/14/which-group-is-smarter/

 

http://www.co2science.org/data/plant_growth/dry/z/zeam.php

Al Gore : An Inconvenient Truth pages 114-115

http://www.economist.com/node/4293198

Limits of an Economists Policy Tool Kit

Tim Worstall on the ASI Blog looks at the robust economic tools that are available to control externalities. Here I enlarge on a blog comment looking the limits of these tools in combating climate change.

Although economic solutions may be “hugely cheaper than the sort of command and control systems”, that does not mean they are a solution in every circumstance. In the area of climate change mitigation there are four practical areas where such solutions may have higher costs than the original problem.

  1. The economic policy is applied too far. The benefit to cost ratios will fall the greater the desired change. A 1% reduction in CO2 can be achieved, ceteris paribus, by economic solutions at a benefit to cost ratio of much greater than 1. The costs will rise exponentially after that, so for a given state of technology, the ratio will quickly reduce to less than one. This is the implication of Richard Tol’s 2010 paper “An Analysis of Mitigation as a Response to Climate Change” (2.5MB pdf). Looking at various scenarios, reducing the total amount spent on climate change mitigation from $2.5 trillion to a twentieth of the size increases the benefit to cost ratio from 1/100 to 3/2. I try to graph this here.
  2. Any Cap and trade or Carbon taxes will not be implemented in their purest form. Public Choice theory (or practical examples) will predict that special interest groups will seek to maximize their returns. Those businesses that will be harmed will seek to reduce the effectiveness. Those who can make easy gains (and thus have permits to sell) along with any potential administrators of the scheme will be keen to promote it. There is a long policy chain linking the pure theory and the final outcomes. These various levels of policy formulation and implementation diminish the benefit / cost ratio as I attempt to outline here.
  3. Scheme avoidance. For either a carbon tax or a carbon trading scheme, if there is competition from those outside the area of the scheme that is not proportionately shared by all emitters, then those facing the competition will have the gravest effect on their business. For instance both the steel industry and fossil-fuel power stations are huge CO2 emitters. The European steel firm cannot pass on the cost of the permits to its customers, as it is competing with firms in emerging economies with little or no carbon-trading. A British coal or oil power station does not have this competition, and its main competition comes from the more expensive nuclear power stations, the less reliable wind and the finite hydro-power stations. In the short-term it can pass on the costs. Protectionism is not a solution as it imposes extra costs.
  4. The more encompassing a cap and trade scheme, the greater the number of participants and the complexity. The greater of severity of the scheme, the greater the potential economic gains and losses. Combine these two areas and you create large potential gains from out-right corruption, or engineering biases through the political system, or having unidentified inefficiencies.

     

    The economic tools might be quite powerful and robust, but put into the hands of inexpert users can create a lot of harm. A bit like a hot-hatch in the hands of 17-year-old trying to impress his mates on a night out.

Climate Change in Perspective – Part 2 of 4 – The Mitigation Curve

 

The previous posting developed a simple graph showing the consensus case for climate change mitigation. This posting looks at the policy arguments, suggesting a huge gap between what is believed to be theoretically possible and what may be realistically achieved. The conclusion is stark. Mitigation policy optimization requires a political process that cannot deliver a result that will leave the world better for future generations.

The Mitigation Cost Curve

The previous posting presented in graphical form the consensus argument (UN IPCC & Stern) for stabilizing CO2 at around double the pre-industrial level, along with stabilizing other greenhouse gas emissions. That is that the costs of constraining the growth in levels of CO2 – are much less than the costs of allowing greenhouse gases temperature rises to go unchecked. Mitigation is essentially a cost minimization strategy with the Stern Review claims the benefits outweigh the costs 5 to 20 times. To put this into context, the Review states that the expected mean costs of mitigation will be annually 1% of annual global product (GWP). The costs of the actual climate change impact could be 5% of GDP or more.

The Prudent approach from this graph is to aim for point P. That is not the absolute minimum costs, but still much lower cost than the likely costs of doing nothing.

What is important to note is that the policy is not to reduce CO2 levels from the current levels of around 380ppm, but to stabilize the growth in emissions. This growth in emissions will come from the emerging economies, in particular from China where emissions per capita have recently been growing by 12% a year. The OECD countries have had largely static emissions per capita, and the population is very slow growing as well.

To turn theory into successful stabilization of CO2 at 550 to 600ppm, requires quite a extended process. I have attempted to break down this process into a flow chart showing the major steps. Next to each step is an arrow suggesting the direction the curve will move if the process is less than perfect.

 

The graph below shows the impact on the mitigation curve of a movement in the arrows.

A movement to the right will shift the curve from M to M’. This is when the marginal costs increase. A movement upwards will shift the curve from M to M”. This is when costs are incurred that totally ineffective in influencing on CO2 levels. Finally there are policy shifts upwards and to the right, from M to M”’, which is a combination of higher marginal costs and ineffective elements.

Looking at the issues in turn.

Economic Theory

I will assume that the shape and position of the curve is correct. That is, there is a set of policies or actions in the real world that if applied will achieve the outcomes desired. However, these have to be discovered. Some low-cost constraints will be quite easy to discover. Others might be more difficult, relying on estimates from self-interested parties. The optimal policies will not be given for long periods, but could change over time with relative costs and technological advances. For instance, a technological breakthrough enabling much cheaper and compact batteries could transform the viability of electric cars. Therefore the switch from gasoline and diesel could be achieved with little or no subsidies.

A second assumption is that although the right economic policies will cost money, the optimal policies will have absolutely no impact on economic growth. This is a crucial assumption of the Stern Review. The policy costs will amount to around 1% of GDP at the end of the century, against costs of around 5% of GDP of climate change impacts if nothing is done. However, if growth rates are reduced by just 0.1% then in ninety years output will be over 9% lower. It is quite conceivable that a drastic change in climate policy would reduce China’s growth rate by 0.5%. By 2100 this would mean output was a full 35% lower than without the policy change. If growth by then has slowed to 3% per annum, living standards would lag 25 years, or a generation, behind where they would have been. Even if the 0.5% growth reduction is for just the first 40 years, output is still 17% lower. There may be a preference of trading a 9% lower living standards with certainty, to possible suffering from the harmful and random effects that will costAny policy that fails to recognize this

Equity

A simplistic analysis would take into account the actual costs. The cheapest ways to constrain growth in emissions is to impose a uniform policy globally. A country like Ethiopia, for instance, has nominal GDP per capita of less than 1% of the OECD average ($330 against $39473) according to World Bank Data. The real impact of a uniform carbon tax will be disproportionately felt by the poorest. The UNIPCC and Stern recognize this, but have not made an adequate provision allowance. The proposals are for the rich countries bear the overwhelming burden of the constraint in emissions and for monetary transfers to enable the poorest to grow economically without increasing their CO2 emissions. Stern recommends that the rich countries reduce their emissions by 80% per capita by 2050. However, this split will not be totally equitable. Within countries there are large inequalities in income and wealth. For instance, the richest 10% in Brazil have far better life styles than the poorest 10% in the United States. Any split between countries will leave many of the rich and powerful untouched by the policies, whilst leaving the poor in the OECD countries worse off.

Policy Identification

There are a number of possible tools to achieve a cost effective containment of CO2 growth. These include Cap and Trade; Carbon Taxes; encouraging technological development; carbon sequestration; building (or regulating the building of) new carbon-neutral power stations; and promoting energy saving through subsidies and regulation. Minimizing the costs and maximising the effectiveness of this containment requires optimizing these alternatives in terms of extent, combination and timeliness. As we do not know when to use each of these in terms of time and place, there needs to be learning through experience. When policies or initiatives are not producing results, there needs to be quick and decisive actions in constraining, changing or abandonment. Yet these decisive decisions need to be taken in the context of often only vaguely perceiving, even retrospectively, whether we are taking the best course of actions. Are we pursuing the right sort of alternative power supply? Is funding for our favoured form of future technology the correct one? If that technological preference is broadly the best are we favouring the best approach, or disregarding a far more efficient alternative? Are we applying Cap and Trade too far, or is the design of the policy inappropriate to achieve optimal result? Are any carbon taxes delivering reductions in CO2 with our cost constraints?

If we fail to optimize then policies like Cap and Trade will generate marginal costs much higher than planned. The curve shifts to the right. If the research for new low-cost carbon neutral energy consumption fails, then the curve shifts upward as we waste money. So overall, sub-optimal policy choice will shift the curve upwards and to the right.

International Negotiation

Climate change policies need to be spread broadly to be effective. If major countries are excluded, then the burden of constraint on the others will be that much greater. Yet mitigation policy is to inflict some costs now to avoid much greater costs in two, five or twenty generations down in the future. To get

  • Overstate the urgency and the extent of the problem.
  • Understate or fudge the immediate cost implications.
  • Alienate any who raise the slightest question about the efficacy of such agreements. There are plenty of NGOs to do this.
  • Understate the alternatives.
  • Provide a world stage for the leaders, including those would normally be ostracized. (Such as here and here).
  • Leave aside the implementation problems.

 

International Polices & Targets

The fudging is likely to affect the final policy. Nation states do not accept strict targets within cost constraint, with punishments meted out to those that fail. They will not relinquish part of their sovereignty and possibly their economic growth easily. But the poorer ones, with promises of cash to help them out, will be enthusiastic. Therefore any final agreement will load costs on those keenest on the policy, and plenty of loop-holes to allow those with other priorities, or those with a weak political grasp on power, to fudge. This does not have to be a permanent fudge

National Policies

There will be a number of different approaches. Cutting or CO2 levels or constraining the growth requires long-term policies, with short-term plaudits. In Britain’s case the implementation CO2 reduction target of 80% gained much praise in the international community. But the costs are mostly left to successor governments. The favoured form of green energy is easy to promote, but the rising energy costs and the prospect of future energy blackouts on windless and frost winter nights will be blamed on later governments.

In the short-term there may be some job benefits and subsidies. Promoting Cap and Trade will create jobs for those administering the scheme and large profits for those who can easily reduce their emissions and sell on the carbon credits. There are also jobs to be had in climate research and the development of new technologies.

There is also political benefit to be had from providing a reason to raise taxes. In Britain the green taxes have mostly been loaded onto the motorist. Yet such a policy is likely to have very little marginal impact on CO2 emissions for precisely them same reason that it is a very good way of raising extra tax revenue – demand is very inelastic with respect to price. It is only with viable and cost-effective substitutes (electric to replace the internal combustion engine) that we will see a switch.

The nature of deriving and maintaining political census will be to have little project management from the top down. Therefore, there will be initiatives that were sub-optimal to start with and less effective moving forward. There will be little focus on research, but plenty on public relations. Rather than maximizing effectiveness and minimizing costs, there will be other, self-justifying matrices developed. The biggest justification will be international obligations.

Policy Outcomes and Policy Feedbacks

There may be plenty of policy and much more rhetoric, but the policy outcomes are likely to be feeble at great cost. However, to obtain and maintain the optimal policies, there must be a feedback process. This feedback needs to influence every level, including the economic theory as shown below.

This needs to be a continual and dynamic process. For this to happen there needs to be objective and honest analysis of results to better refine and amend our view of the optimal policies at both national and international level. The size of the arrows indicates my personal assessment of the importance of each aspect. The biggest feedback is in the continuous altering of national policies, to bring into line with optimal policies. But there must be an ability to easily change course at all levels. This requires not just openness and flexibility, but surrender of policy in this area to an international body. But countries will not easily agree to shoulder more of the burden, or lose subsidies. They will not easily be told that they must change course. Vested interests in the environmental matters do not have a unique humility and objectivity that is absent in other groups. Neither will politicians easily admit that they have made errors of judgment, or that there are areas where they have neither the competency nor power to act upon.

Conclusion

The process of implementing an optimal policy, requires an openness and flexibility that does not exist. The whole policy process works against this. Politics is about negotiation and compromise between competing interests. It is about jostling for power, rewarding supporters and undermining the influence of opponents. It is also about other priorities as well, which in the short-term are more pressing. In the section on economic theory we I showed how a small reduction in economic growth can more than offset the worst consequences of the policy.

The problem now becomes two-fold.

  1. Guaranteeing how the revised optimal policy P”’ will be less costly than doing nothing and letting the total climate impact costs reach CCImax.
  2. Justifying to the developed nations why they should be significantly worse off than doing nothing.

In the next posting I will look at the validity of the estimation of the costs of climate change.

 

Climate Change Policy in Perspective – Part 1 of 4

Introduction

In the Climate Change policy there lacks a simple framework to assess the policy. There is a large consensus of scientists telling us that a large rise in global temperature will occur, and that the only policy in offer is to constrain the growth in greenhouse gas emissions globally. Presented below is a simple graphical model to encapsulate the central policy arguments of the UNIPCC and the 2006 Stern Review. That is, there are policies that can be implemented that though costly, will be an order of magnitude less than the disastrous consequences of letting global temperatures rise unchecked. These consequences will not only affect the human race and for the rest of the planet. Use of this model allows analysis of the relative importance of various issues in devising policy and implementing global policies needed to achieve the consensus objectives.

The starting point for the analysis is to assume that two propositions are correct. First, that if we do nothing in two centuries global average temperatures will be at 5-10oC warmer than at present. Second, that there exists in theory a set of policies that will comfortably constrain CO2 emissions to prevent the atmospheric CO2 levels going above 600ppm and thus preventing global temperatures rising more than 2oC above current levels. I also start from a moral basis for policy that few will disagree with. Political action should only be taken if there is a reasonable expectation that the resulting outcome be a better situation than if no action was taken at all. The treatment, if not a full cure, should at least be expected to leave the patient in a better condition than without treatment. This, I would claim, is an absolute minimum requirement for action, as it can still leave moral dilemmas. For instance, if the policies cause the deaths of a million people, but prevents a 10% chance of 11 million people dying, then it is justified on this rule.

There are four parts to this explanation, which I will divide into separate blog postings. Part one, below, develops a graph replicating the standard consensus argument of the overwhelming consensus case for action. Part two addresses the issues with policy, relating this through movements in the policy curve. Part three evaluates the impacts of that warming, showing how changing the analysis of risk and time can radically change our perception of the costs. Part four brings these together for an overall conclusion, with indications of areas for further research.

The basis of the model is that global warming will create costly consequences, both for the human race and for the rest of the planet. Proposals to resolve this we also be costly. It is therefore to economics that we must turn to understand the issue from the top-down.

Part One – The Consensus Argument for Mitigation in Graphical Form

The following aims to replicate the mainstream consensus case of catastrophic climate change and the mitigation policies deemed necessary to combat it.

The Costly Consequences of Global Warming

We are already seeing some of the minor consequences of increasing greenhouse gases through disrupted climate. But the scientists tell us this will be as nothing compared to what will happen if greenhouse gases continue to increase unchecked for the next century or more. The large increases in temperature – around 4oC to 7oC or higher – would cause massive disruption to the climate system. It is fair to say that as global temperatures increase, these costs would increase exponentially. These “costs” are in the broadest sense. They are not just the human costs of property damage, failed harvests, population migrations and land being submerged by rising seas. These include the damage to the eco-systems and species extinction. Graphically it would look something like this.

There is no scale on this graph. It cannot be predicted how far temperatures will increase if the growth in anthropogenic greenhouse gas emissions are not curtailed, nor at what point the catastrophic consequences will set in. What is essential to recognize is that allowing temperatures to increase will be many times worse than stabilizing that increase at lower temperatures. Without a check, it is near certain that the planet’s temperatures will climb to the top end of the graph with the level of costs predicted.

The Costs of Mitigation

The solution to the problem of climate change is to remove the cause of that change. To remove anthropogenic greenhouse gas emissions totally would be hugely costly. The economic wealth of the rich countries is based upon fossil fuel energy consumption. Stop the energy consumption and you not only stop economic growth, but potentially cause economic collapse. Instead, there must be a rapid but orderly switch in energy use to clean energy sources. This may actually spur economic output as the switch is made, but is more likely to be costly, but have at most a negligible but negative impact on economic growth. Similarly, in the emerging BRIC (Brazil, Russia, India & China) economies, satisfying their rapidly-rising energy demands from carbon-neutral sources need not constrain their economic growth. Indeed for China and India real living standard could rise more rapidly, as the cities suffer less from the choking effects of the pollution from burning fossil fuels. How will these costs map out? To stop climate change now and reverse the impacts would be hugely costly. Even to stabilize emissions at current levels globally would be hugely expensive. In particular with China and India increasing their emission levels rapidly, to stabilize globally would require huge cuts elsewhere. Far less costly would be to stabilize at some higher level than at present.

The shape of the cost of mitigation graph can be represented like this.

The costs of doing little are very small, whilst those of stopping global warming in its tracks, or even reversing the warming that has already occurred, are huge. We are able to choose the policy to pursue.

The Combined Costs of Climate Change and Mitigation

Climate change will incur costs of CCI. Combating climate change involves mitigation costs M. For any temperature that stabilization is reached, the total costs TC will be CCI+M.

The question as to which level of policy to pursue now becomes clearer. A highly aggressive policy could be just as damaging as doing nothing. However, we are left with a large middle ground. By stabilizing the temperature increase from pre-industrial levels at around 2-3oC is generally thought to be where this middle ground lies. However, as there is some uncertainty as to what average temperature the worst effects of climate change start to come into play, a prudent policy is to aim at stabilization at the lower end of the temperature range. Prudent policy is at around point P.

Climate Change in Perspective Part 2 – The Mitigation Curve

Boris Johnson spoils a good polemic on Fuel Costs

Boris Johnson is in great form in today’s Telegraph on the escalating cost of fuel. However, he is wide of the mark on the costs side.

The cost of the fuel for deliveries does not impact not through greatly price of goods in the shops. Our distribution systems are fairly efficient – though the low volumes to small shops proportionately big impact than deliveries to Tescos or Sainsburys.

It is on the consumer that this pays a larger impact, but less than you might think. Take somebody with a 1995 petrol Toyota Previa living in London and doing 5000 miles per year at around 18mpg. That is 278 gallons per annum, or 1264 litres. With petrol at £1.29 per litre, that is £1630 per year. That seems a lot. But add in £1000+ for maintenance and the MOT, £1000+ for insurance (if a VIP it gets quite steep), £200 tax, and £200 for depreciation, then it is not a huge cost. Trading in for a more modern monster could make out jolly Mayor worse off. Spending £15,000 on a secondhand Galaxy Diesel will save on fuel, the occasional big maintenance bills, maybe nothing on the insurance, but will cost £2000+ more on depreciation.

Consider also

The electric revolution is happening, but it will not be overnight. The up-front cost of the vehicles remains high, and there is still no electric people carrier. For the foreseeable future, millions of people will have to invest not just in a car but in an overpriced lagoon of fossil fuel.

The reason that the costs of fuelling electric cars are so much cheaper is that the only taxes for domestic customers are the additional 5% VAT.  The excise duty and petrol, plus the 20% VAT add more than 100% to the cost. They may be more fuel efficient because they are so much lighter. Furthermore, a new electric car can only have a comparable cost to an efficient diesel with huge subsidies. If you look at the true cost per mile excluding tax and subsidies, then it would be twice the cost. And the cost distinction will get worse not better. The chemicals in the batteries are scarce, so the phenomenal push for electric cars will push up the costs of the chemicals exponentially. And this government does not help – the ConLib Coalition one. The government’s plans for new “alternative” electricity supplies will push up real costs by at least 30% in coming years and even more when it cannot keep up with the extra demand.

       The worst part is the government finances. When Mayor Johnson gets his electric people carrier, he will deny his government £800 a year in taxes, have a subsidy of £5,000 from the worse off to help pay for it and still be out of pocket. Oh – and the people carrier will be more Meriva than Previa in size.