Trump is wrong on China Global Warming Hoax but right on the policy consequences

Summary

  • Donald Trump’s famous tweet that Global Warming is a Chinese Hoax is false, but the policy implications are correct.

  • Total proposed climate policies under the Paris Agreement will not stop global emissions rising, but the policy aim is to have global emissions falling rapidly after 2020.

  • The Rio Declaration 1992 exempted developing countries from a primary obligation to constrain, let alone reduce, emissions. 

  • By 2012 the exempted countries accounted for 64% of global emissions and over 100% of the global emissions growth since 1990.

  • The exempted, countries will collectively have emissions rising for decades to come.

  • The most efficient policy is a carbon tax, applied globally. But even this is highly inefficient, only working by making fossil fuel use unaffordable to all but the very rich. That is morally unacceptable in developed countries, whilst would stop developing countries developing, likely leading to civil wars.

  • Actual climate mitigation policies are less efficient and more costly than a carbon tax.

  • Pursuing mitigation policies in just the developed countries harms the poor disproportionately and harms manufacturing. Such policies may not even reduce global emissions.

  • Even if catastrophic global warming is true, the policy reality is the same as if it were a hoax. In either case they are net harmful to the policy countries.

  • Like with utterly ineffective drugs that harm the patient, the rational response to climate mitigation policies is to ban them.

 

 

President-elect Donald Trump infamously claimed on Twitter

The concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive.

I believe that statement to be totally false. The Chinese had nothing (or essentially nothing) to do with the climate alarmism that the Western intelligentsia (especially in the Anglosphere) seem to religiously accept as a series of a priori truths. But the policy implications of believing such a false position are pretty much the same for a policy-maker that (a) accepts as truth catastrophic global warming hypothesis, (b) puts their country first (but still values highly people in other countries, with an emphasis on the poor and the oppressed) (c) but understands the realities of global policy-making, along with the full economic impact of mitigation policy.

The Realities of Actual Mitigation Policy

The hypothesis is the basic form is that global human greenhouse gas emissions (mostly CO2) are resulting in rising greenhouse gas levels. This is forecast to cause large increases in global average temperatures, which in turn, many believe, will be catastrophic to the climate system. The major policy is to reduce the global greenhouse gas emissions to near zero.
The UNIPCC AR5 Synthesis Report, Summary for Policymakers 2014 tried to the maths very simple. They only looked at CO2 for the ballpark figures. Using the central assumption of a doubling of CO2 gives 3 degrees of warming, then 2 degrees comes when CO2 levels hit 450ppm. At end of 2016 it levels were about 404ppm, and rising at over 2ppm per year. Only is some warming from other greenhouse gases, so we are well beyond the 420ppm. That gives maybe 15 years tops. Somehow though figures seem to have been stretched a bit to give more time, something I will look at in a later post.
The UNFCCC – the body that brings all the countries together to cut emissions to save the planet – had an all-out bash at COP21 Paris in December 2015. In the lead-up all countries (excluding the EU countries, who let the masters in Brussels take the lead) made submissions on how they would contribute towards saving the world, or at least make a start up to 2030. Many were so vague, it was difficult to decipher the “ambition”. This was done to appear like the countries were doing something substantial, when in fact the proposals were often so insubstantial, that targets could be achieved by doing nothing at all. The UNFCCC put all the INDC submissions together on a global emissions graph.

The graph is very simple. Before the INDCs, emissions were forecast to follow the thin dark orange arrow. With the INDCs, the thick light orange forecast is still tracking upwards in 2030. The least-cost 2C scenarios is the blue arrow. This is going down by 2020, and by 2030 is substantially lower than today. The graph gives a very clear message – the whole exercise is pretty much an expensive waste of time. 40,000 people attended the meeting at Le Bourget airport North of Paris, including the vast majority of World Leaders. Rather than be honest, they went through the usual format with a breakthrough at five past midnight. Then they sent the “experts” away to think up yet more scary scenarios to get better proposals in the future.

 

Little More Policy will be Forthcoming

If they actually read the 1992 Rio Declaration, like Robin Guenier did in October 2015, they would have found out why. In particular Guenier draws attention to this statement in the declaration.

“The extent to which developing country Parties will effectively implement their commitments under the Convention … will take fully into account that economic and social development and poverty eradication are the first and overriding priorities of the developing country Parties.” [My emphasis]

These non-Annex 1 developing countries have had phenomenal economic growth, with driven by rapid development of cheap energy from fossil fuels. Guenier quotes some CO2 emissions figures. Instead, I have used the broader estimates of greenhouse gas emissions from the European Commissions’ EDGAR database, grouping the figures into the Annex I countries (the rich OECD countries, like the USA, Japan, European Union, Canada, Australia etc.); the Annex I Transitional economies (basically the ex-Soviet bloc in Europe); International air and shipping; and the Non-Annex, rest of the world.


The figures are quite clear. The growth in emissions in 22 years was greater in the Non-Annex developing countries than the world as a whole. But this is just the developing countries starting to catch up. The breakdown of the Non-Annex developing county emissions is below.

This “developing” part of the world now has 84% of the global population, but in 2012 was just 64% of the greenhouse gas emissions. India and China each have more than 4 times the population of the USA, Africa 3.5 times and S&E Asia 3 times. Whilst in China emissions growth will peak soon, in India emissions growth is only recently taken off.  In S&E Asia and Africa emissions growth has yet to really take off. No matter what the USA and a few other developed countries do, it will not make a big difference to the long-term outlook for GHG emissions. Now compare the global emissions to the UNFCCC graph of INDCs of the target emissions reductions for 2030. The UNFCCC scale is in billions of tonnes, whilst the scale I use is in millions. The least cost 2C scenario is lower in 2040 that the total non-Annex countries in 2012. Even without emissions growth in the non-Annex countries, the Annex countries could cut emissions by 100% and still the 2C limit will be breached by the 84% who live in countries with no obligation to cut their emissions.
But maybe the USA should cut emissions anyway? After all it will not cost much, so these developing nations will be brought into line. I only recently realized how wrong this view was. Economics Prof Richard Tol it one of the World’s leading climate economists, who (unlike me) happens to believe in the moral case for cutting greenhouse gas emissions. In a recent paper, “The Structure of the Climate Debate”, Tol explained how a global carbon tax was theoretically the most efficient means to reduce global greenhouse gas emissions. Use regulation, or rationing, or subsidies of renewables, and it will be more expensive – less bang for your bucks. However, I objected. He seemed to be saying that the carbon tax necessary to cut global emissions worked out at less than the taxation on gasoline in Britain. At over $3 (a level that is similar in much of Europe) there are still quite high levels of fuel usage. I can still remember my high school economics teacher, in teaching about elasticity of demand, said that a good example of inelastic demand were the “sin” taxes on booze, alcohol, tobacco and petrol (gasoline). You could have quite high taxes without impacting on demand. Well, after a few exchanges at cliscep blog turns out Tol (in the more technical Tol 2013 paper) was recommending a $210 tCO2 tax to be imposed in 2020 globally, plus an escalator of 5.5% a year forever. It would eventually make fossil-fuelled energy use unaffordable to all but the Hollywood A-listers. I showed British readers in GBP would that would mean, but for the US readers $210tCO2 is about $1.83 per gallon of gasoline. There would be uproar if it was introduced, and people might get more fuel efficient cars. With the escalator that would rise to over $3 a gallon in 2030, $9 2050, $35 in 2075 and$132 a gallon in 2100. There would also be similar hikes in electricity from coal and gas. This might not be fast enough to achieve the reductions required by the UNFCCC, but would not be sustainable in a country with democratic elections every few years.

But actual climate mitigation policies, are far less effective that the carbon tax. This includes subsidies or loan guarantees to speculative and unsustainable businesses, or flash renewable technologies that fail to deliver,

The carbon tax might be harmful to the poor and middle classes in America, but think of what it would do to the living standards of the poorest half of the world. Countries where parents are hoping that their children might enjoy cheap energy for cooking, lighting or heating, would see those hopes dashed. For billions of people their children or grandchildren would never have a family car, or be able to travel by plane. If the Governments of India, China or Indonesia tried to impose such high and escalating taxes there could be economic collapse similar to that of Greece, and likely civil wars.

Should the Rich countries still do something?

So maybe the United States, and other rich countries, should still adopt policies regardless. After all, they should pay for the (alleged) harms that are leading to disaster. But if the proposers had any understanding of the real world, they would know that just as economic growth has been propelled by abundant supplies of cheap, available and reliable energy. In international trade what is “cheap” is a relative concept. In the nineteenth century steam power was very expensive compared to electricity today. But at this point in time, when developing countries are make power more available and driving their unit energy costs down. Steam power was much cheaper, and more available than water power, which in turn was cheaper than human or animal power. Yet implementing emissions reduction policies, the rich countries are driving those unit energy costs up just as developing countries have been driving unit energy costs down and making power more available. The USA and EU countries are generating a comparative disadvantage. But, as the developed nations tend to be more energy efficient, the net effect on global emissions may be to increase them, despite the policy countries decreasing theirs. That net effect is unlikely to be as large as any actual savings in the policy countries. What is more, the costs of policy will fall on the poor, and those areas of employment with high energy usage and that compete internationally.

An argument for climate mitigation is that it is to make small sacrifices now to save future generations from the much larger costs of future catastrophic climate change. That is only true if global emissions are cut significantly, at a cost lower than the actual harmful impacts that would have occurred without policy. As policy to cut emissions will makes very little difference to global emissions, then the sacrifices could be of a small benefit in non-policy countries, but be to the net disadvantage of future generations in the policy countries. The biggest burden of the costs of policy will fall on the poorer sections of society and manufacturing in the policy countries.

The Moral Case Against Climate Mitigatiom

If the medical profession insisted on patients taking drugs that did not work and had harmful side effects, then in litigious America they would be sued for all they had, and likely jailed. But when the climate alarmists, back by the liberal establishment, insist on policy that cannot work and causes substantial harms they are not held to account. Indeed, so pervasive are the beliefs in climate alarmism, it is an act of heresy to even question this false policy. Now the tables are turned.

The first thing that should be done with harmful drugs that cannot work is to ban them from sale. For an incoming President, the first thing to do with harmful and useless policies is to rescind them.

Kevin Marshall

 

Update on a Global Carbon Tax

In a previous post I looked a statement made by Richard Tol in his recent paper The Structure of the Climate Debate

Only a modest carbon tax is needed to keep atmospheric concentrations below a high target but the required tax rapidly increases with the stringency of the target. If concentrations are to be kept below 450 ppm CO2eq, the global carbon tax should reach some $210/tCO2 in 2020 or so (Tol 2013).

Tol, to his credit, replied to me (and others) in the cliscep comments. In particular

Note that these climate policies consist of two components: An initial carbon tax, and its rate of increase (4-6% a year).

The $210 carbon tax in 2020 is just a starting point. With a 5% escalation, it would double every 14 years making the carbon tax $910 in 2050, $3070 in 2075 and $10,400 in 2100. The escalator is the far more important aspect in reducing demand for fossil fuels through a combination of reducing energy use and switching to more expensive (and often less convenient) renewable sources. The escalator was not clear in the original article, and Richard Tol has agreed to make a correction.

Consider again just imposing a fixed $210 carbon tax. From the British perspective the additional tax on petrol (gasoline), with 20% VAT applied, is equivalent to 47p a litre added to the retail price. The tax is already nearly 70p a litre, so unlikely to have the impact on motorists of reducing their consumption by 90% or more. Even with the tax at 200p a litre implied by a $910 t/CO2 tax (making petrol £3.13 a litre) may not achieve this objective. For a car doing 15000 miles at 39mpg, this would generate an additional cost to the owner of £3500 per year. It would still be less than the depreciation on a family car averaged over the first three years. It might also be less than the full costs of converting to electric cars, particularly if the roll-out was not subsidized on the purchase cost and provision of charging points. Within the UK, the carbon tax would also replace the current renewables policy. Here the escalator would really hit home. For coal-fired power stations producing 400kg CO2 per megawatt hour, the carbon tax would be £70Mwh in 2020 and £300Mwh in 2050. Gas-fired power stations would have a tax of about half that level. Even wind turbines, backed by massive pump-storage schemes would be much cheaper. Nuclear power would be the cheapest alternative of all. But British voters are hardly going to keep on voting for a Government that imposes real increases in taxes of five percent a year until they become unaffordable except for the very rich.

However, it is from the global perspective that the cost of the carbon tax really hits home. In another comment Tol says

The big worry for climate policy, studiously avoided by the majority of its advocates, is that you need lots of cheap energy in the early stages of economic development.

It is worth stating again that a Global Carbon Tax needs to be Global to achieve the desired objectives. From the UNIPCC AR5 Synthesis Report Summary for Policy Makers is graphic SPM11(a). This shows the non-policy or Business as Usual RCP8.5 scenario, where emissions in 2100 are projected to be over 2.5 times the level of 2010. The 2C warming target is the RCP2.6 scenario. I have inserted a big arrow to show the difference that the global carbon tax needs to make. It can be demonstrated that most of the emissions growth will come from the developing countries, following the pattern from at least 1990.


The scale of the harm of policy is by assuming that the $210 carbon tax is applied without any change in demand at all, using the estimated CO2 emissions from fossil fuels for 2013 from CDIAC and the IMF 2015 GDP figures for ballpark estimates.
Global CO2 emissions from fossil fuels were about 33.8 billion tonnes (two-thirds of total GHG emissions). A $210 carbon tax without any effect on demand would thus generate $7100 bn. This represents nearly 10% of global GBP of $73500bn. If we assume 2% emissions growth and 3% economic growth, then the carbon tax would represent 9.6% of GDP in 2020 without any drop in emissions.
Here is the same calculation for selected countries using 2013 emissions and GDP data.

30-33% Iran, Russia, South Africa
19-20% India, China
16-18% Thailand, Malaysia, Vietnam
11-14% Poland, Czech Republic, Pakistan, Egypt, Indonesia.
7% Bangladesh, Philippines
6-7% USA, Japan, Canada, Australia
4-5% Spain. Germany, Nigeria
UK 3.4% France 2.9%

The highest tax rates are a result of inefficient economic systems. Iran has subsidised petrol, effectively a negative carbon tax. South Africa’s high emissions are as a result of apartheid. Oil embargoes caused it to convert coal to liquids, a process that generates 4-5 times the CO2 of burning coal alone. Russia, in common with its neighbours, still has the legacy of the economically-inefficient communism.
The carbon tax would also be high as a proportion of GDP for the rapidly emerging economies. It highlights the Tol’s comment about needing lots of cheap energy in the early stages of economic development. With higher fossil fuel emissions per $1000 of GDP the impact on output would be relatively greater in the emerging economies than in the OECD. A globally uniform carbon tax would end up transferring back some manufacturing back to the more energy efficient economies, slowing economic growth and thus emissions growth.
More importantly, emerging countries have large parts of the population with very low energy consumption. Even those with access to gas and electricity have much lower energy consumption than is typical in the West, whether from heating, air conditioning, cooking, or private transport. Pushing up the cost of energy will massively slow down the spread of consumerism and consequent improvements in living standards.

Three years ago I looked at the takeaway policy quote from the Stern Review.

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.

I largely agree with Richard Tol when he states that a carbon tax is the optimal policy in terms of maximum effect for minimum cost, at least with respect to fossil fuel emissions. Yet a high, and rapidly increasing, carbon tax would cost far more than 1% of global GDP each year, even if the additional tax revenue was spent efficiently and/or used to reduce other taxes. But the most pernicious effects would be felt in the effects on long-term economic growth – the very growth that is moving billions of people out of poverty towards the far better living standards we enjoy in the Western World. The  carbon tax does not present a feasible policy even in theory to achieve the objectives desired. Yet is, in theory, the best policy available.

Kevin Marshall

Richard Tol on a Global Carbon Tax

Richard Tol, one of the World’s leading economists on climate, has just had published The Structure of the Climate Debate, a paper that makes some very good comments on the gulf between optimal policy and the reality of ineffective policy backed by a great army of bureaucrats, rent-seeking politicians and environmentalists who exaggerate the issues. It is this optimal policy  – a global carbon tax to constrain warming to 2C – that I take issue with. Both economic theory and the empirical evidence contradict this.  The following is a comment posted at cliscep

Richard Tol states in his paper

Only a modest carbon tax is needed to keep atmospheric concentrations below a high target but the required tax rapidly increases with the stringency of the target. If concentrations are to be kept below 450 ppm CO2eq, the global carbon tax should reach some $210/tCO2 in 2020 or so (Tol 2013).

The 450 ppm CO2eq, would produce 2C of warming from pre-industrial levels if a doubling of CO2 on its own produces 3C of warming. The UNFCCC produced a graph for COP21 to illustrate the global emissions pathway needed to ensure 2C limit :-

Whereas even with the all the vague policy proposals fully implemented global emissions will be about 10% higher in 2030 than in 2010, the 2C pathway has emissions 10-30% lower. That means a carbon tax of $210/tCO2 (now £170) would have to turn around the global relentless rise in emissions and have them falling rapidly. I am deeply sceptical that such a global policy would achieve anything like the that difference would be achieved even with an omnipotent, omniscient, and omnipresent planner to impose the tax. The reasons for that scepticism can be found by applying the tax to real world examples.
First let us apply a £170/tCO2 carbon tax to petrol, which produces 2.30kg of CO2 per litre. With 20% VAT applied is equivalent to 47p a litre added to the retail price. (Current excise duties with VAT are equivalent to £300/tCO2, the diesel £250/tCO2). For a car doing 15000 miles at 39mpg, this would generate an additional cost to the owner of £820 per year. Maybe a 15-30% increase in the full costs of running a small car in the UK. There is plenty of empirical visence of the effect of the oil price movements in the last couple of decades (especially in the period 2004-2008 when the price increased) to show that costs increases will have a much smaller effect on demand, whereas for the carbon tax to be effective it would need to have a much greater impact than the percentage cost increase.
Second, let us apply a $210/tCO2 carbon tax to coal-fired power stations. They produce about 400kg of CO2 per megawatt, so the cost would rise by $84MWH. In China, coal-fired electricity will retail at less than $30 MwH. China would rapidly switch to nuclear power. Even so, its power generation emissions might not start falling for at least a decade. Alternatively it might switch to gas, where the carbon tax would be half that of coal.
However, there is another lesson from oil prices, this time over the last three years. A small fall in demand leads to large falls in price, in the short term. That is the market responds by offsetting the cost of the global carbon tax. To use terms of basic economics the demand for fossil fuels is highly inelastic with respect to changes in price, and the supply of fossil fuels in the short term is highly inelastic to changes in demand.  Emissions reductions policies have not just turned out to be pretty useless in practice, they are pretty useless in theory (with real world political constraints removed) as well.

Kevin Marshall

 

How Skeptical Science maintains the 97% Consensus fallacy

Richard Tol has at last published a rebuttal of the Cook et al 97% consensus paper. So naturally Skeptical Science, run by John Cook publishes a rebuttal by Dana Nuccitelli. It is cross-posted at the Guardian Climate Consensus – the 97%, that is authored by Dana Nuccitelli. I strongly believe in comparing and contrasting different points of view, and winning an argument on its merits. Here are some techniques that Dana1981 employ that go counter to my view. That is discouraging the reader from looking at the other side by failing to link to opposing views, denigrating the opponents, and distorting the arguments.

Refusing to acknowledge the opponents credentials

Dana says

…… economist and Global Warming Policy Foundation advisor Richard Tol

These are extracts from Tol’s own biography, with my underlines

Richard S.J. Tol is a Professor at the Department of Economics, University of Sussex and the Professor of the Economics of Climate Change…. Vrije Universiteit, Amsterdam. Formerly, he was a Research Professor (in), Dublin, the Michael Otto Professor of Sustainability and Global Change at Hamburg University …..He has had visiting appointments at ……. University of Victoria, British Colombia (&)University College London, and at the Princeton Environmental Institute and the Department of Economics…….. He is ranked among the top 100 economists in the world, and has over 200 publications in learned journals (with 100+ co-authors), 3 books, 5 major reports, 37 book chapters, and many minor publications. He specialises in the economics of energy, environment, and climate, and is interested in integrated assessment modelling. He is an editor for Energy Economics, and an associate editor of economics the e-journal. He is advisor and referee of national and international policy and research. He is an author (contributing, lead, principal and convening) of Working Groups I, II and III of the Intergovernmental Panel on Climate Change…..

Dana and Cook can’t even get close – so they hide it.

Refusing to link the Global Warming Policy Foundation

There is a link to the words. It goes to a desmogblog article which begins with the words

The Global Warming Policy Foundation (GWPF) is a United Kingdom think tank founded by climate change denialist Nigel Lawson.

The description is the GWPF’s website is

We are an all-party and non-party think tank and a registered educational charity which, while open-minded on the contested science of global warming, is deeply concerned about the costs and other implications of many of the policies currently being advocated.

Failing to allow reader to understand the alternative view for themselves

The Guardian does not link to Tol’s article. The SkS article links to the peer-reviewed paper, which costs $19.95. Bishop Hill blog also links you to Tol’s own blog, where he discusses in layman’s terms the article. There is also a 3 minute presentation video, created by the paper’s publishers, where Tol explains the findings.

Distorted evidence on data access

Dana says

The crux of Tol’s paper is that he would have conducted a survey of the climate literature in a slightly different way than our approach. He’s certainly welcome to do just that – as soon as we published our paper, we also launched a webpage to make it as easy as possible for anyone to read the same scientific abstracts that we looked at and test the consensus for themselves.

Tol says

So I asked for the data to run some tests myself. I got a fraction, and over the course of the next four months I got a bit more – but still less than half of all data are available for inspection. Now Cook’s university is sending legal threats to a researcher who found yet another chunk of data.

The Mystery, threatened, researcher

The researcher is Brandon Shollenberger.

Dana says

In addition to making several basic errors, Tol cited numerous denialist and GWPF blog posts, including several about material stolen from our team’s private discussion forum during a hacking.

Brandon gives a description of how obtained the data at “wanna be hackers?“. It was not hacking, in the sense of by-passing passwords and other security, but following the links left around on unprotected sites. What is more, he used similar methods to those used before to get access to a “secret” discussion forum. This forum included some disturbing Photoshop images, including this one of John Cook, complete with insignia of the Sks website.

A glowing endorsement of counter critiques

Dana says

An anonymous individual has also published an elegant analysis
showing that Tol’s method will decrease the consensus no matter what data are put into it. In other words, his 91% consensus result is an artifact of his flawed methodology.

So it must be right then, and also the last word?

Failing to look at the counter-counter critique

Dana, like other fellow believers, does not look at the rebuttal.

Bishop Hill says

This has prompted a remarkable rapid response from an anonymous author here, which says that Tol has it all wrong. If I understand it correctly, Tol has corrected Cook’s results. The critic claims to have worked back from Tol’s results to what should have been Cook’s original results and got a nonsense result, thus demonstrating that Tol’s method is nonsense.

Tol’s reply today equally quickfire and says that his critic, who he has dubbed “Junior” has not used the correct data at all.

Junior did not reconstruct the [matrix] T that I used. This is unfortunate as my T is online…

Junior thus made an error and blamed it on me.

Demonstration of climate science as a belief system

This is my personal view, not of Tol’s, nor of Sks.

Tol in his short presentation, includes this slide as a better categorization of the reviewed papers.

My take on these figures is that 8% give an explicit endorsement, and two-thirds take no position. Taking out the 7970 with no position gives 98.0%. Looking at just those 1010 that take an explicit position gives a “97.6% consensus”.

I accept Jesus as my Lord and Saviour, but I would declare as bunkum any similar survey that scanned New Testament theology peer-reviewed journals to demonstrate the divinity of Christ from the position taken by the authors. People study theology because they are fellow Christians. Atheists or agnostics reject it out of hand. Many scholars are employed by theological colleges, that exit to train people for ministry. Theological journals would be unlikely to accept articles that openly questioned the central tenets of Christianity. If they did many seminaries (but not many Universities) would not subscribe to the publication. In the case of climatology, publishing a paper openly critical of climatology gets a similar reaction to publishing views that some gay people might be so out of choice, rather than discovering their true nature, or that Vladimir Putin’s annexation of Crimea is not dissimilar to Hitler’s annexation of Sudetenland in 1938.

The lack of disagreement and the reactions to objections, I would interpret as “climate science” being an alternative belief system. People with a superior understanding of their subject area have nothing to fear from allowing comparison with alternative and inferior views.

 Kevin Marshall

 

 

Stern’s flawed opinion of Energy Stock Valuations

There is an interesting response by Profs Richard Tol and Roger Pielke Jnr on the latter’s blog to an article in the FT by Lord Stern on energy companies being overvalued

Have Markets Misvalued Energy Companies?

Roger Pielke Jr. and Richard Tol

Writing in the Financial Times (Dec. 9) Lord Stern of Brentford suggests that the financial markets have grossly misjudged the valuation of companies that produce fossil fuels, writing, “the market has either not thought hard enough about the issue or thinks that governments will not do very much.” Stern argues that the misjudgment poses a “risk to the balance sheets of large companies – or to the planet, or both.”

Have markets misvalued energy companies? While markets are of course not perfect, for two reasons we believe that in this instance there is no evidence to suggest that the valuation of fossil fuel producers has been grossly misjudged.

First, let us assume that governments around the world decide to take swift and effective action to reduce emissions. Would this mean that fossil fuel companies would go out of business in the near term? No.

Consider the case of Apple. Apple’s revenues depend upon selling products that will be obsolete within years and historical relics in a generation. That does not stop the company from being among the most highly valued in the world. If the world transitions to carbon free energy supply, the big energy producers of today are likely to play a big role.

Under all scenarios for future energy consumption the world is going to need vastly more energy and – whether governments act to decarbonize or not – vastly different types of energy too. Energy majors are so highly valued not simply because of the fossil fuel reserves they own, but because they have the expertise to supply energy at a massive scale along with a track record of successful and rapid innovation, with the ongoing shale gas and ultradeep oil revolutions as the latest examples.

Second, what if governments fail to deeply cut emissions? Might the impacts of unmitigated climate change lead to a dramatic reduction in the valuation of fossil fuel companies?

According to the work of Nick Stern himself this seems highly unlikely. In his famous review of climate change Stern argued that unmitigated climate change might reduce global GDP by as much as 20% by 2100. Using Stern’s own numbers for the most extreme impacts would mean that instead of growing by 2.5% per year to 2100, GDP would grow by 2.24%, with the largest effects occurring at the end of the century. This hardly seems cause for a dramatic revaluation of fossil fuel companies today. 

The impacts estimated by Stern on behalf of the British government are very pessimistic compared to the estimates found in the academic literature. Furthermore, changes in the growth rate of the economy have a muted impact on the growth in energy demand.

Indeed, future demand for energy is largely insensitive to whether governments decide to act on climate change. The more than 1.5 billion people without reliable access to electricity will demand access regardless. A world with unmitigated climate change could in fact be more energy intensive, for instance if more people demand air conditioning. In either case the future for energy companies would be bright.

Humans affect the climate system and it is important for policy makers to respond. But it is unlikely that efforts to second guess the market valuation of energy companies will contribute to such responses. Of course, if Nick Stern really believes that energy companies have been grossly over-valued he could put his money where his convictions lie. Who knows, he may one day be the subject of the sequel to the Big Short.

Roger Pielke Jr. is a professor at the University of Colorado. Richard Tol is a professor at the Economic and Social Research Institute in Dublin and at the Vrije Universiteit in Amsterdam.

My own comment is

The Stern review was not only criticized for being too concerned with the more extreme scenarios, but for applying a near zero discount rate. Whatever the economist’s policy-related arguments over discount rates (and Prof. Tol uses 3% plus), the market valuations of share prices are based upon much, much higher discount rates. This is for good reason. Suppose at the end of 1911 someone could have known that there would be an oil embargo in 1973, resulting from a cartel of oil-producing nations usurping the considerable power of the oil companies. What should have been the discount factor on the 1911 price of oil stocks considering in the interim there were two world wars, between which there was a massive global depression? Even if this was the case the local market factors (such as the emergence of the car industry, global growth, the development of the internal combustion engine and the relative fall in the oil price against coal) were far more important than the historical events. I would contend that in 1911, even if were highly likely that an oil company would be rendered bankrupt 60 years later, the discount factor on the share price would be approximately zero.

Furthermore, since the Stern review the scientific evidence has consistently failed to support the more alarmist scenarios resulting from any further warming (e.g. rapid melting of the Himalayan Glaciers or increased severity of hurricanes), nor for extreme temperature rises resulting from positive feedbacks to the CO2 induced warming. To the outsider looking at the emerging evidence, the cost impact of do-nothing scenarios (weighted by risk) is many times lower than when the Stern Review or AR4 were being published.

I fully realise that your comments were moderated to increase the chance of publication. However, if a more balanced version of Stern were done on today’s evidence, I firmly believe that (like Prof. Tol has concluded) current proposed mitigation policies do not have any form of benefit-cost justification.

Lord Stern might be a distinguished climate change activist, but he falls into the same trap of the amateur armchair activist. By seeing the world from their own narrow perspective, they misread the wider opinions and the facts of the real world. It is when such people acquire positions of power, with immoderate views not softened by political experience, that they can become deniers of reality and haters of sections of the community.